Author Topic: Is a traditional IRA still worth it with high income?  (Read 4130 times)

handsnhearts

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Is a traditional IRA still worth it with high income?
« on: December 15, 2016, 10:51:26 PM »
Hi Wise Moustachians,

I understand about the tIRA being one of the ultimate FIRE savings plans, and the conversion ladder. 

My DH and I jointly made way too much income this year to be able to take the deduction.  That is how it works to effectively reduce taxable income, right?  Meaning if we can't take the deduction, then it doesn't affect our MAGI?  Basically I am asking if it still gives a pre-tax advantage if you can't take the deduction.  No, right?

Is it still worth doing or does a Roth make more sense since it is more flexible and I will never pay taxes on it then? 

And same question for 529 plan.   It is only deductible for some states, and not ours.  It doesn't have a federal benefit, right?

Thank you.  Trying to do our best for 2016 before making more changes for 2017. 

JLee

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Re: Is a traditional IRA still worth it with high income?
« Reply #1 on: December 15, 2016, 11:02:39 PM »
If you're within the income limits for a Roth IRA, do that.

http://www.fool.com/retirement/iras/2015/06/18/what-is-a-nondeductible-ira.aspx

cincystache

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Re: Is a traditional IRA still worth it with high income?
« Reply #2 on: December 16, 2016, 07:00:22 AM »
handsnhearts:
If you AND your spouse were NOT covered by a retirement plan at work, you can take the full deduction regardless of your income level.
https://www.irs.gov/retirement-plans/ira-deduction-limits

If one of you have access to a retirement account through work and the other does not, the spouse that does not have access can take the deduction as long as the total income is below 184k.

If you are both covered by retirement plans at work, you can't deduct if you made over 98k.

You are correct in your assumption that if you cannot deduct the IRA amount, it will not give you a tax benefit upfront. You can still contribute to a "non-deductible IRA" and defer taxes on the growth portion of the account. When you take withdrawals down the road, you will only have to pay tax on the growth, not the original principle. This requires good recordkeeping. Others might recommend a "backdoor Roth IRA" where you contribute to a non-deductible IRA and then convert that IRA to a Roth IRA. This is applicable for married couples who make more than the 184k income limit for Roth IRAs. I'd do some research and maybe meet with a CPA if you want to go this route.

If you make less than 184k, I would def. do a Roth for both of you. (5,500 each or 6,500 if over age 50)

I would put 529 plans last, you are correct, there is no federal deduction for 529, you are only saving taxes on the growth component of the account. I think these work best when you have a large lump sum to contribute and a long time horizon for the account to grow. However, you do not get a federal tax benefit upfront from these account.

Hope this helps and good luck with your tax planning! Congrats on the high income. That is certainly a good problem.


handsnhearts

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Re: Is a traditional IRA still worth it with high income?
« Reply #3 on: December 17, 2016, 11:30:49 PM »
Thank you. 

We have maxed out our 401k for both of us this year.  I wish I had used my FSA more, but I was scared I would lose it.  Little did I realize I could have maxed it out this year!  Oh well. 

I think our gross will total about $215k with our FICA base about $205k (if I can trust the worksheet from this site :)
I think our MAGI is about $181k, but it is possible it could be a bit more if I have forgotten something or one of the adjustments we have done to our rentals impacts something differently this year. 

So likely Roth, but maybe not.  I guess we have until April 15 to figure it out for sure. 

definitely a good problem to have. 

I just want to make sure there are no other tax deductible options to take this year to lower our taxable income. 

JLee

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Re: Is a traditional IRA still worth it with high income?
« Reply #4 on: December 18, 2016, 12:08:12 AM »
Thank you. 

We have maxed out our 401k for both of us this year.  I wish I had used my FSA more, but I was scared I would lose it.  Little did I realize I could have maxed it out this year!  Oh well. 

I think our gross will total about $215k with our FICA base about $205k (if I can trust the worksheet from this site :)
I think our MAGI is about $181k, but it is possible it could be a bit more if I have forgotten something or one of the adjustments we have done to our rentals impacts something differently this year. 

So likely Roth, but maybe not.  I guess we have until April 15 to figure it out for sure. 

definitely a good problem to have. 

I just want to make sure there are no other tax deductible options to take this year to lower our taxable income.

FSA or HSA? 

handsnhearts

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Re: Is a traditional IRA still worth it with high income?
« Reply #5 on: December 18, 2016, 12:53:33 AM »
Put too little in the FSA this year from fear, and opted out of HSA plan ( I know, I know, face palm!).
Next year I am opting in, but just trying to make the best of this year as it closes up...


Sent from my iPhone using Tapatalk

MDM

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Re: Is a traditional IRA still worth it with high income?
« Reply #6 on: December 18, 2016, 09:49:53 AM »
Others might recommend a "backdoor Roth IRA" where you contribute to a non-deductible IRA and then convert that IRA to a Roth IRA.
Yes, see Backdoor Roth IRA - Bogleheads.

I think our gross will total about $215k with our FICA base about $205k (if I can trust the worksheet from this site :)
I think our MAGI is about $181k, but it is possible it could be a bit more if I have forgotten something or one of the adjustments we have done to our rentals impacts something differently this year. 
AFAIK the worksheet is trustable for that calculation. ;)

With a gross of $215K, $10K in pre-tax medical insurance, etc., and $36K in 401k contributions, that's $169K.  If your income from dividends, interest, rentals, etc. is $12K then the $181K MAGI looks correct.

handsnhearts

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Re: Is a traditional IRA still worth it with high income?
« Reply #7 on: December 24, 2016, 02:12:10 AM »
Emailed with CPA, and she gave an estimate that was similar to mine with few changes.  However she said one thing that really bothered me. 

She said we weren't eleigble for a ROTH IRA because we had contributed to our 401k.  Now it is my understanding that if you have a traditional 401k, you can't do a ROTH 401k, but a ROTH IRA is based on income.  Which is why I was talking to her about it before the end of the year. 

I am right about this, yes?

Also she suggested some charitable donations to reduce AGI, but didn't give any ballpark about how to go about this to make the correct impact.  Any thoughts?

Lastly, she said based on the estimate, we needed to pay estimated taxes for our state, unless we adjusted our withholding.  Well we had not adjusted our withholding as last year was strange tax-wise (first time owing taxes and a penalty too!), but this year we didn't have any self employment or major capital gains.  Our salaried incomes did go up though.  I know I should have discussed this already with her and that is my responsibility, but I think she should have mentioned that we may need to do this also.  Would anyone else agree?

We may get another penalty because of this!  although it looks like we have until Jan 17, so probably ok???? I don't know yet.

MDM

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Re: Is a traditional IRA still worth it with high income?
« Reply #8 on: December 24, 2016, 05:58:07 AM »
She said we weren't eleigble for a ROTH IRA because we had contributed to our 401k.  Now it is my understanding that if you have a traditional 401k, you can't do a ROTH 401k, but a ROTH IRA is based on income.  Which is why I was talking to her about it before the end of the year. 
I am right about this, yes?
You may do any combination of t401k and R401k as long as the total is not over $18K.

The RIRA contribution limits are based on income only.  If you haven't already followed the link from cincystache, see https://www.irs.gov/retirement-plans/roth-iras.

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Also she suggested some charitable donations to reduce AGI, but didn't give any ballpark about how to go about this to make the correct impact.  Any thoughts?
If you understood her correctly, my primary thought is "get a new CPA."  AGI is calculated on the front page of Form 1040.  Charitable contributions don't enter the picture until the back page (and even then, only if you have more itemized deductions than the standard amount).

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Lastly, she said based on the estimate, we needed to pay estimated taxes for our state, unless we adjusted our withholding.  Well we had not adjusted our withholding as last year was strange tax-wise (first time owing taxes and a penalty too!), but this year we didn't have any self employment or major capital gains.  Our salaried incomes did go up though.  I know I should have discussed this already with her and that is my responsibility, but I think she should have mentioned that we may need to do this also.  Would anyone else agree?
Don't know enough about your state taxes, nor your contractual relationship with the CPA, to comment.

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We may get another penalty because of this!  although it looks like we have until Jan 17, so probably ok???? I don't know yet.
That depends on your state's "safe harbor" laws.
« Last Edit: December 24, 2016, 02:10:44 PM by MDM »

yachi

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Re: Is a traditional IRA still worth it with high income?
« Reply #9 on: December 24, 2016, 11:42:06 AM »

The RIRA contribution limits are based on both income and whether you participate in an employer-sponsored retirement plan (e.g., a 401k).

I've never heard the underlined portion.  Can you paste the paragraph where it says this?

I found this:
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Can I contribute to an IRA if I participate in a retirement plan at work?
You can contribute to a traditional or Roth IRA whether or not you participate in another retirement plan through your employer or business. However, you might not be able to deduct all of your traditional IRA contributions if you or your spouse participates in another retirement plan at work. Roth IRA contributions might be limited if your income exceeds a certain level.

There's also a section here: https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-ira-contribution-limits that explains that the limit applies to the sum of IRA and Roth IRA contributions, but I find nothing about 401(k) participation reducing Roth IRA contribution limits.

yachi

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Re: Is a traditional IRA still worth it with high income?
« Reply #10 on: December 24, 2016, 12:19:29 PM »
Also she suggested some charitable donations to reduce AGI, but didn't give any ballpark about how to go about this to make the correct impact.  Any thoughts?

Charitable donations can reduce your taxable income if your itemized deductions in Schedule A total more than the standard deduction, but they don't reduce your AGI.

If you donate appreciated stock in a taxable account that you intended to sell anyway, you could avoid the capital gains being added to your AGI.  You would need to find a charity that would accept the type of investment you want to sell, or you could fund a Donor-Advised Fund thru Vanguard, or others that would liquidate the investment and disperse the funds as you see fit.

MDM

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Re: Is a traditional IRA still worth it with high income?
« Reply #11 on: December 24, 2016, 02:12:02 PM »
The RIRA contribution limits are based on both income and whether you participate in an employer-sponsored retirement plan (e.g., a 401k).
I've never heard the underlined portion.
Mea culpa.  Trying to say too many things at once - fixed in the original.

handsnhearts

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Re: Is a traditional IRA still worth it with high income?
« Reply #12 on: December 25, 2016, 01:30:00 AM »
Thank you all.  very useful info.

I was sure that contributing to Roth IRA was based on income limits only.  Definitely understand about the 18k limit for combined Roth or T 401k, and we have already maxed out both DH and my t401k. 

as to the charitable donations, I double checked and she did say it would lead to savings on taxes, not AGI, and it would only help a bit.  We did have a schedule A last year, and I see the charitable contributions portion.  I need to dive a bit deeper in the Schedule A to understand how this may or may not help me.

Thanks again.  Much appreciated.  I will update here if I have further questions as I muddle through the tax code.

2Birds1Stone

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Re: Is a traditional IRA still worth it with high income?
« Reply #13 on: December 25, 2016, 05:50:41 AM »
Thank you all.  very useful info.

I was sure that contributing to Roth IRA was based on income limits only.  Definitely understand about the 18k limit for combined Roth or T 401k, and we have already maxed out both DH and my t401k. 

as to the charitable donations, I double checked and she did say it would lead to savings on taxes, not AGI, and it would only help a bit.  We did have a schedule A last year, and I see the charitable contributions portion.  I need to dive a bit deeper in the Schedule A to understand how this may or may not help me.

Thanks again.  Much appreciated.  I will update here if I have further questions as I muddle through the tax code.

I was in a similar boat this year.

Jan 1st I maxed out my Roth, then I found out I made too much money to do that.

I had to recharacterize the funds back to Traditional IRA, and then convert to a Roth (Backdoor Roth)

You should just put $5,500 each in tIRA, and then a day or two later convert it to Roth.

The caveat is if you already have a tIRA with funds in it, you will trigger Pro Rata (mixing pre/post tax $ in the tIRA)

bryan995

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Re: Is a traditional IRA still worth it with high income?
« Reply #14 on: December 27, 2016, 03:50:42 AM »
Yes - I also think you should get a new CPA :)

We max out two traditional 401ks at work.

Then dump $5500 into 2x tIRA on Jan 1. On Jan 2/3 we convert to ROTH IRA.
This avoids any contribution issues if close to ROTH income limit.
No deduction for doing this (after tax money) but it is a path to get $ into a ROTH vehicle.

After this, taxable accounts come into play.