This caller, who will retire in 2 years, asks if she should continue to invest in her 403b or start a Roth IRA.  Pat and Scott explain that it is time to start diversifying with an Roth IRA.

Read Full Audio Transcript:

Scott: Sylvia, you're with Hanson McClain.

Sylvia: Yes, hi. I'm so happy to speak with you. Thank you.

Scott: Well thank you, Sylvia. Glad you're joining us.

Sylvia: Yes, I'm a teacher and I'm thinking of retiring by January 2018, and I had a question. I was wondering if I am too old to open a Roth IRA, a Roth I-R-A?

Scott: Well, there's no age limit. It has to do with whether you have income or not.

Pat: And how much income you have.

Scott: Yes. So are you married or are you single?

Sylvia: No, I'm married.

Scott: Okay, and so if your family income is north of about $175,000, somewhere in there, if it's above that, you lose the ability to contribute to a Roth IRA.

Pat: Directly to a Roth IRA.

Sylvia: Really?

Pat: Directly to a Roth IRA. But if you're in...

Scott: What's the ballpark family income?

Sylvia: Oh, I want to say it's probably close to over $180,000.

Pat: All right, good for you. So that is a good number. Let's talk about...

Scott: Well...

Pat: ...possibly getting money into it. She has some.

Scott: Depending on what you've been contributing in your tax in 403(b) or 401(k), your adjusted gross income might be low enough that you can qualify for a Roth contribution. So the qualification is that you have earned income, some sort of wage or self-employment income. As long as you've got that and your income is below the limit, you can contribute to a Roth IRA. Now, if your income is above that, you can't.

Pat: Can't.

Scott: It fades out at about roughly $200,000 or so, you can't contribute.

Pat: So, let's go through...

Sylvia: Right, right. Well I would...

Scott: But you could always contribute to a nondeductible IRA.

Pat: And then convert it to a Roth IRA.

Scott: Assuming you don't have any IRAs.

Pat: Assuming you don't have any IRAs.

Scott: But it sounds like there's a good change that if you've been saving in your retirement accounts, that you'll be able to qualify, your income will be below those. You've got 'till April 15th of this year to make a contribution for 2015.

Sylvia: Right. You know what I was going to do is I think I contribute only about $300 to a 403(b), but I'm just going to take that 300 bucks and stick it in the Roth IRA.

Pat: All right, let's slow down, let's slow down for a second here. Your husband, does he have a 401(k) or 403(b) or 457 available to him, Sylvia?

Sylvia: My wife has a 403(b) as well.

Pat: Oh, okay. And is your wife contributing in the maximum to the 403(b)?

Sylvia: I don't think so, no.

Pat: Okay, so...

Sylvia: We're both in STRS.

Man: Yeah, which is great, which is absolutely great but your pension, let's assume you...so you're retiring in 2018, is your income going to be the same in retirement as it is today?

Sylvia: I think my take-home income is going to be I think, you know, before taxes are taken out, it's probably going to be somewhere around $75,000 maybe.

Pat: Okay.

Scott: Okay and your spouse the same thing?

Sylvia: Well she's not going to retire for a few years but she, at one point, made way more money than I did so she's going to probably bring home a little bit more.

Scott: Okay.

Pat: So this is...

Scott: I'm...

Pat: I'm trying to think whether the Roth actually makes the most sense for you or whether the 403(b).

Scott: Yes.

Sylvia: Oh, well.

Scott: That's we're both kind of...

Sylvia: That's the question.

Scott: So the question really is this. If you were going to have lower income in retirement than you have today, you're better off contributing to your 403(b). On the other hand, if in retirement your income is going to be higher than today, you're better off to contribute to a Roth, all things being equal.

Pat: Assuming that you're going to stay in the State of California when you retire. Do you plan on living in the State of California when both of you retire?

Sylvia: Yes, I don't know. I really don't know.

Pat: Have you ever talked about leaving the State of California?

Sylvia: Yes. Yes.

Pat: Okay. So...

Sylvia: Depending on where our kids end up.

Scott: Okay. How much is...?

Pat: Which is not uncommon.

Scott: How much do you...

Pat: Which is pretty common.

Scott: Absolutely, yeah. How much do you guys have set aside in retirement plans, 401(k)s, 403(b)s, 457s, IRAs?

Sylvia: Well I have about close to $265,000 and I'm not quite sure how much she has. She has a lot less than that, I think.

Scott: In a perfect world if your income is going to be the same, whether it's today or in retirement, whether you contribute to a Roth or not is not going to make much difference. Here's the thing. The $300 a month that you're putting in your 403(b), you're getting a tax deduction on it. You're saving a 100 bucks on taxes.

Sylvia: Right.

Scott: So if you switch and put this into a Roth IRA, your tax bill is going to go up by about a 100 bucks.

Pat: Which is fine.

Scott: Which is...all things being equal I'd rather you five years down or two years down the road have let's call it 10,000 bucks sitting in a Roth than $10,000 sitting in a 403(b).

Pat: Because you get more net spendable income out of the Roth than you do out of the 403(b).

Sylvia: Yes.

Pat: So I like the Roth.

Scott: Yeah, I think you should do the Roth.

Pat: I think the Roth is a good idea.

Sylvia: [Inaudible [00:05:04]

Pat: So who prepares your taxes?

Scott: So here's the thing Sylvia, the only time we're going to know the right answer is in the future. No one has a crystal ball, right? So all we can do is look at all the variables out there and make the most educated guess that we can today.

Pat: And what drives us to the Roth is you've already got $265,000 in sheltered dollars. So that is...

Sylvia: Yes.

Pat: Now in saying that, you said your children, are they children from a previous marriage for both of you?

Sylvia: No.

Pat: They're not. Okay, they're your children?

Sylvia: Yes.

Pat: And the reason I ask is because the biggest concern we have from children from previous marriages is the creation of a trust.

Sylvia: Right. No, they are our children.

Pat: Oh, beautiful, beautiful. So in both your situations, both you and your wife probably need an Roth IRA.

Scott: Yeah.

Pat: For both of you.

Sylvia: Okay.

Pat: Because if it makes sense for one of you.

Scott: It's going to make sense for both.

Pat: It's going to make sense for both of you because it's community property money, you're going to spend it as it is one.

Scott: Yeah.