[USER]

Hoping for some quick thoughts on this question…

I am in a transition period between work and retirement. Just starting to take social security at 62 and still continuing self-employment (within income limits).

I have qualified income from last year in the 22% bracket that I could contribute $7500 to my IRA and save roughly between $1000-1500 on taxes. And I have the cash available- no problem.

This may be the last year that I will have enough eligible income to contribute. I do believe I already have enough in the IRA now for some sort of FI.

I’m not sure when I will need/want to take distributions from this IRA but suspect that my tax bracket may be as high or higher when I do.

It also makes it even more difficult when that cash is currently earning 5+% in a HYSA and my managed IRA (I know, I know more changes are in order) isn’t doing much better!

And I’m a bit of a DYI type who likes to have options with my $, which I feel like I lose once it’s in there. But I don’t want to have regrets about this last chance.

I’ve entered new territory! How should I be looking at this? Recommendations?

[Bill]

Relax. $1000 in tax savings now to pay $1000 later isn’t going to make or break your retirement.

Without knowing anything about the rest of your tax situation, I’d call the ira a no brainer though. At very worst, you contribute this year and then take all the money out, and it’s a total wash. At best, you do Roth conversions once you retire and pay the same tax, but all the future growth is tax free.

[Joel]

I’d make the contribution, unless you think you’ll need the cash soon. I don’t like paying taxes on earnings and retirement accounts avoid that entirely.

Whether to make a Traditional or a Roth IRA contribution depends on answers to other questions.

Also your IRA can definitely get at least 5% on cash. Most brokerage accounts offer money market mutual funds that are paying that kind of rate right now. Even if you don’t have a good money market fund, you can buy shares of an ETF called TFLO.

TFLO is an ultra short bond fund that only invests solely in US Treasury Floating Rate Notes (FRNs). Those FRNs pay the current 3 month T-Bill rate plus or minus a small adjustment. The rate it pays resets weekly, which keeps it’s market value close to par. TFLO is currently paying 5.40% APY. Since the payments are from Treasuries, they are also exempt from state income taxes. Since FRNs are issued by the US Treasury, they’re about as safe as you can get. These characteristics make TFLO a pretty decent substitute for a money market mutual fund.

Also, 5% on $7,500 is $375 in interest this year. Making the contribution avoids paying taxes on that even if you just use the money market fund in the IRA and you contribute to a Roth IRA. Why would you want to pay additional taxes?

It might be too late now, but if you’re still working why are you drawing Social Security? Why are you trying to fit under the income limits? Delaying increases how much you receive in Social Security for the rest of your life and those increases also include inflation-adjusted COLAs. Also while if you continue to work and make more than the income threshold, the SSA will withhold some of your benefits, but when you get to Full Retirement Age (FRA), the SSA recalculates your Primary Insurance Amount (PIA) to include the withheld benefits. This results in sort of a hybrid delay of benefits … though mathematically it’s almost always better to just delay the benefits if you can.

Suggested: Why Vanguard doesn’t provide cost basis for IRA accounts?

[Jason]

Why start SS now vs delaying for higher benefit? If spouse has a substantially higher benefit or you have lower life expectancy, it may make sense.

Managed account isn’t necessarily a bad thing. There are many reasonably priced options or you could have a fiduciary advisor who’s actually giving comprehensive advice in return for a managed account fee.

I’d consider long term tax savings. Maybe choosing Roth (if eligible) or non-qualified account gives you some tax diversification if your assets are heavy on pre-tax.

[Author]

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