Tax-advantaged accounts can provide greater long-term benefits than taxable accounts.
In the military, the Thrift Savings Plan is a great first step toward saving for retirement. However, as you depart the military, you should learn more about the non-TSP options that are available to you.
You can contribute to either a traditional or Roth individual retirement account (IRA), regardless of other workplace-retirement plans, such as a 401(k) or civilian TSP. Both IRAs have their benefits, so you’ll need to consider your situation when you weigh the benefits of each option. Here are five reasons you may prefer a traditional IRA over a Roth IRA.
Many military families make more money after separating or retiring than they did during their time in uniform. If you’re looking for every tax break you can get right now, a traditional IRA might be a place to start.
You might fit this category if:
- You make more in the civilian workforce. While you may have received professional pay, incentives and retention bonuses in the military, you may find that your civilian salary outperforms your military pay within a few years of leaving the service.
- You and your spouse earn an income. Dual-income couples may earn more, particularly if one spouse has a lucrative career.
- You have a successful side gig. Self-employment income can increase your tax burden.
Reason #2: You Think You’ll Be in a Lower Tax Bracket in Retirement
While the tax-free benefits of Roth IRA withdrawals are appealing, there’s a lot to be said for saving today’s money on taxes. Every dollar you save today is a dollar you can put to work for decades. This is especially true if you are in a high tax bracket and pay state taxes.
For example, California’s highest tax bracket has a 13.3% tax rate. If you’re in the highest federal tax bracket (37% in 2023), you could pay half your income in taxes. In other words, if you wanted to set aside $1,000 in your Roth IRA, you’d have to earn about $2,012 to do so. Since this income bracket is above the Roth IRA limits, you’d have to contribute to a nondeductible IRA first, then convert it to a Roth. However, it illustrates that getting your money tax free at retirement is poor consolation for having to more than double it just to get back to your starting point.
If you think you might be in a higher tax bracket now than in retirement (generally, above the 15% bracket for most filers), you might want to consider the tax benefit of putting your money in a traditional IRA.
Reason #3: You Don’t Have an Employer Plan, and You Make Too Much Money for a Roth IRA
Your modified adjusted gross income (also known as modified AGI or MAGI) determines whether you’re eligible to contribute to a Roth plan. Below are the Roth IRA contribution limits for 2023.
| Filing Status | Modified AGI | Allowable Contribution |
|---|---|---|
| Married filing jointly or qualifying widow(er) | $218,000 or less | Up to the annual contribution limit |
| More than $218,000 but less than $228,000 | Partial amount | |
| $228,000 or more | No contribution | |
| Married filing separately and you lived with your spouse at any time during the year | Less than $10,000 | Reduced amount |
| $10,000 or more | No contribution | |
| Single, head of household or married filing separately and you did not live with your spouse at any time during the year | $138,000 or less | No contribution |
| More than $138,000 but less than $153,000 | Partial contribution | |
| $153,000 or more | No contribution |
If your modified AGI is above the contribution limits, you have two options:
- Contribute to a traditional IRA
- Contribute to a nondeductible IRA, then convert it to a Roth IRA (also known as a back-door Roth IRA)
Reason #4: You Plan to Contribute to Charity in Your Retirement Years
Traditional IRA owners must take required minimum distributions (RMDs) beginning at age 72. Adding the additional RMD income may present a tax challenge. However, under the IRS’s qualified charitable distributions (QCD) rule, you can directly contribute up to $100,000 annually from your traditional IRA to a qualified charity to satisfy all or part of your RMD. You must be at least 70½ to make a QCD, and you must make the QCD directly to the charity – you cannot withdraw the money and then give it to the charity. The deadline to make a donation through a QCD is the same as the RMD deadline, which is generally Dec. 1.
To report a qualified charitable distribution on your Form 1040 tax return, you generally report the full amount of the charitable distribution on the line for IRA distributions, according to the IRS. On the line for the taxable amount, enter zero if the full amount was a qualified charitable distribution and enter “QCD” next to this line.
Talk to your financial advisor to see if making a QCD is right for you.
Reason #5: You Aren’t Certain What the Tax Laws Will Be When You’re Retirement Eligible
Changes to tax laws and tax brackets can affect your retirement savings. You may be worried that Roth IRAs will not continue to exist according to today’s rules.
The president’s 2016 budget proposal included a provision that effectively dismantled back-door Roth IRAs. While that proposal didn’t pass, future proposals could chip away at Roth IRA benefits.
The older you are, the less of a concern this might be. If you’re in your 50s, you might see some changes, but most of your contribution years are behind you. If you’re in your 20s, you might want to consider that you will have gone through as many as 20 different congressional elections before you’re eligible to withdraw from your IRA. You also still have decades of contributions (and potential tax deductions) ahead of you. If you’re not confident that tomorrow’s promise holds the same benefits as today’s, you might consider contributing to a traditional IRA and taking the current tax savings.
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