Author Topic: tIRA or Roth?  (Read 495 times)

lbonga1

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tIRA or Roth?
« on: June 10, 2018, 03:20:15 PM »
I recently started a new job, which came with a significant increase in income; salary went from $50k to $95k. I'm trying to figure out if I should continue investing in my Roth IRA or switch to a traditional. My gross income for this year will be about $78k. Related info: I have three kids, single parent, and I file as head of household. I'm in school half time for my masters degree. I am contributing 15% of my after-tax income to my employer's ESPP, and shares are purchased every pay period. I plan on selling the shares every other pay period. I contribute 4% to my 401k with employer match, and I have an additional $400 per paycheck in pre-tax deductions between health insurance and dependent FSA.

I was trying to use this calculator: https://www.mortgagecalculator.org/calcs/marginal-tax-rate-calculator.php to calculate my tax rate, but I'm not sure whether to use my average tax, tax bracket, or marginal tax rate to base my decision on tIRA vs Roth.

MDM

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Re: tIRA or Roth?
« Reply #1 on: June 10, 2018, 05:30:34 PM »
You should use the marginal tax rate for the contribution amount in question.  See also Traditional versus Roth - Bogleheads.

You may want to put your numbers into the case study spreadsheet because that can give you a picture of marginal rates for a range of contribution amounts, not just a single point.  When looking at IRA choices, it also matters how much your gross income has been reduced by 401k and pre-tax insurance deductions, which the web site calculator appears to ignore.

You might direct money to traditional accounts when it saves you 22%, but use Roth if it would save only 12% in traditional.

MustacheAndaHalf

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Re: tIRA or Roth?
« Reply #2 on: June 11, 2018, 08:47:42 AM »
Probably the Roth IRA, for a reason that might surprise you: Traditional IRAs are not tax deductible contributions at your income level.  You would have to fund a Traditional IRA with after tax dollars, since you are above the $72,000 income limit.  If your 401(k) contributions plus standard deduction bring you within $62,000 - $72,000 range, your contributions will only be partially tax deductible.  So for now, go with the Roth IRA while your income is still below the limit allowed for it.

IRS information on Traditional IRAs for those with a retirement account at work:
https://www.irs.gov/retirement-plans/2017-ira-deduction-limits-effect-of-modified-agi-on-deduction-if-you-are-covered-by-a-retirement-plan-at-work

MDM

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Re: tIRA or Roth?
« Reply #3 on: June 11, 2018, 09:15:17 AM »
Traditional IRAs are not tax deductible contributions at your income level.
True if the 401k contribution remains at 4%.

A $10,200 401k contribution, together with the $4800 in pre-tax insurance deductions (assuming that $400 is per month, and no other income or deductions), would allow a fully deductible tIRA.

This is a good example of if you need the 401k deduction to be eligible for a tIRA deduction, swap #4 and #5 (see link for context).

robartsd

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Re: tIRA or Roth?
« Reply #4 on: June 11, 2018, 09:40:26 AM »
I contribute 4% to my 401k with employer match
4% of $95000 is $3800. You should be contributing the maximum allowed (I believe it is $18500 this year - about 19% of your 95k salary) before contributing to Roth IRA.

lbonga1

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Re: tIRA or Roth?
« Reply #5 on: June 12, 2018, 09:32:10 PM »
Traditional IRAs are not tax deductible contributions at your income level.
True if the 401k contribution remains at 4%.

A $10,200 401k contribution, together with the $4800 in pre-tax insurance deductions (assuming that $400 is per month, and no other income or deductions), would allow a fully deductible tIRA.

This is a good example of if you need the 401k deduction to be eligible for a tIRA deduction, swap #4 and #5 (see link for context).

Unfortunately, I have to keep my 401k contribution where it's at right now. A huge chunk of my income is being taken up by childcare expenses....$3200/month for 3 kids. Also, the $400 pre-tax deductions is between health insurance and dependent care FSA, and it's every other week. I started this job in April and did not have any pre-tax deductions previously.
If I'm understanding correctly, marginal tax rate is calculated by subtracting the standard deduction (since I'm not itemizing), as well as other deductions, such as child and education credits, correct? If so then I'll be in the 22% bracket this year. It is almost certain I'll be in a higher tax bracket for the remainder of my career, as I'm 2 years into a software engineering career and will be graduating with a masters degree from a top school in about a year.

MDM

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Re: tIRA or Roth?
« Reply #6 on: June 12, 2018, 10:09:46 PM »
If I'm understanding correctly, marginal tax rate is calculated by subtracting the standard deduction (since I'm not itemizing), as well as other deductions, such as child and education credits, correct?
Sort of, but not really.

Marginal tax rate is defined as (change in tax) divided by (change in income or contribution). 

Your taxable income is your gross income minus pre-tax deductions (401k, insurance, FSA, deductible tIRA, etc.) minus [standard or itemized] deduction.

Your tax is calculated from the taxable income.

What you owe is the tax minus any credits.

Have you tried using the spreadsheet suggested earlier?

lbonga1

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Re: tIRA or Roth?
« Reply #7 on: June 12, 2018, 10:19:45 PM »
I got started on it, and will have some more time to work on it this weekend. Thanks for the link :)