Author Topic: Roth IRA or tIRA? How to choose?  (Read 3059 times)

forthwith

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Roth IRA or tIRA? How to choose?
« on: October 08, 2014, 07:51:59 AM »
Morning everyone -

I know this is a fairly basic question about IRAs, but I've completely confused myself as to which is the better choice when income is higher. This year, I will take home $117,000 before taxes. I'm currently maxing out a non-matched 401(k) and would also like to contribute the limit into an additional IRA account. In my lower income days, a Roth was a simple choice. But what about now? I'll barely squeak by the limits (according to IRS.gov, an AGI of $114,000 or less can still contribute the max), which is great because I have the option; but, would a tIRA be better for me? I do not own a home, so I get pretty hard on taxes, if that's of any use to know.

When I do contribute, I will divide the contribution between VTSMX and...well, I have to read more first.

Thanks in advance for the help!

dandarc

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Re: Roth IRA or tIRA? How to choose?
« Reply #1 on: October 08, 2014, 08:05:51 AM »
Traditional if you qualify for the deduction.  Sounds unlikely that you do - MAGI for this is basically pre-tax income less health insurance, HSA / FSA, and 401K (and a few other things, but these are the big 3).  Phase out of the deduction starts at 60K, and finishes at 70K for singles.

So your MAGI should be no more than $99,500: 117,000 (gross) - 17,500 (maxed 401K)

So you can go into a Roth IRA.  Doesn't matter for this year (unless you've got additional income you're not telling us about), but under current laws, income limits basically don't apply to Roth IRAs, if you're willing to do a little extra paperwork - research "backdoor Roth IRA" to learn how.

forthwith

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Re: Roth IRA or tIRA? How to choose?
« Reply #2 on: October 08, 2014, 08:33:08 AM »
Thanks for your thoughtful reply. I'm still reading in the forums and found this recent conversation (http://forum.mrmoneymustache.com/investor-alley/roth-401k-or-traditional-401k-24700/) - I'm sure one of 10,000 on the same topic. It reads to me here that everyone is recommending tIRA for this poster, assuming that post-retirement income levels will be much lower/lower tax rate. Would the same logic apply to me?

dandarc

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Re: Roth IRA or tIRA? How to choose?
« Reply #3 on: October 08, 2014, 08:54:38 AM »
That poster is asking about a traditional 401K vs. Roth 401K - income limits don't come into play in this decision, so you should probably be going traditional in your 401K.  And that poster only makes 53K / year gross - well under both the Roth IRA limit, and the limit for making deductible traditional IRA contributions.

On the IRA front, you've got 3 choices (most people think it is only 2 - Roth or Traditional, but there are 3 distinct possibilities):
1.  Roth IRA - you qualify here this year, no question
2.  Traditional IRA without deduction - you could also do this, but if you're not getting the deduction this year, the Roth IRA is better.  When you make even more money in a few years, this is step one of a backdoor Roth IRA.
3.  Traditional IRA with deduction - this you may not qualify for at your income, but if you do, it is probably the best choice.  Your MAGI for this purpose needs to be below 60K to be able to contribute the full amount.

Form the Roth IRA limit posted, I gather you file single - is that the case?  Because the limits are higher if you're married and filing jointly.  Based on the info presented, and assuming you're single, option 3 (tIRA w/ deduction) is likely not an option, so the choice is between a Roth IRA (1) and a non-deductible traditional IRA (2).  Roth IRA is objectively the better choice of those 2 - you pay taxes today, but don't pay them in the future ever vs. paying taxes today and also paying them in the future on earnings.

dandarc

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Re: Roth IRA or tIRA? How to choose?
« Reply #4 on: October 08, 2014, 08:59:00 AM »
Short answer - a traditional IRA looks better and better compared to Roth the higher your marginal tax rate gets, if you qualify to take the tax deduction for the contribution.  If you don't qualify for the deduction, Roth IRA is the correct IRA choice.

Chrissy

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Re: Roth IRA or tIRA? How to choose?
« Reply #5 on: October 08, 2014, 08:59:49 AM »
Dandarc nailed it.  ROTH.

forthwith

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Re: Roth IRA or tIRA? How to choose?
« Reply #6 on: October 08, 2014, 01:09:02 PM »
So helpful. Thanks very much.