Author Topic: Traditional IRA - Do we qualify?  (Read 1809 times)

SCP

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Traditional IRA - Do we qualify?
« on: May 16, 2016, 02:49:11 PM »
Dear MMM Community,

We would greatly appreciate your help in figuring out whether we may qualify to contribute to a Traditional IRA and benefit from the tax deduction. We read the following regarding qualifying to contribute to a Traditional IRA:

- If you have a workplace retirement plan (i.e. 401k) the deduction for your traditional IRA contribution is phased out completely if your AGI is $118,000 or more (married couple filing jointly).

- If you're not covered by a workplace retirement plan but your spouse is, your contribution is fully deductible if your combined income is less than $184,000.

Here is the situation:

- My husband and I have an AGI of a little over $160,000, and we file our taxes jointly.

- My husband works at a large company and has a company 401k plan with a company match up to 3%.

- I work at a small company, and I had a company 401k plan where my employer put in 5%, and it immediately vested. However, in February of this year, my employer suspended contributions to all our 401k plans because of a major market downturn. My employer has not closed the plan, but has stopped all contributions to the plan.

Considering the above, would I be eligible to contribute to a traditional IRA and benefit from the tax deduction? Does my situation count as not being covered by a workplace plan?

Thank you in advance for your time and advice!



dandarc

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Re: Traditional IRA - Do we qualify?
« Reply #1 on: May 16, 2016, 02:56:26 PM »
Can you still contribute to the 401K?  I can understand the employer ending company contributions, but they wouldn't save much by ending employee contributions.

dandarc

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Re: Traditional IRA - Do we qualify?
« Reply #2 on: May 16, 2016, 02:58:51 PM »
Also, betting no on the deduction:

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You’re covered by an employer retirement plan for a tax year if your employer (or your spouse’s employer) has a:
Defined contribution plan (profit-sharing, 401(k), stock bonus and money purchase pension plan) and any contributions or forfeitures were allocated to your account for the plan year ending with or within the tax year;

https://www.irs.gov/Retirement-Plans/Are-You-Covered-by-an-Employer's-Retirement-Plan%3F

seattlecyclone

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Re: Traditional IRA - Do we qualify?
« Reply #3 on: May 16, 2016, 05:40:13 PM »
Yeah, all it takes to get the lower AGI limit is to be covered by a workplace plan for part of the year. You can still make Roth IRA contributions.

catccc

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Re: Traditional IRA - Do we qualify?
« Reply #4 on: May 17, 2016, 08:08:50 AM »
It sounds like you are out of luck, I think.  Are you already maxing out both of your 401Ks?

SCP

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Re: Traditional IRA - Do we qualify?
« Reply #5 on: May 17, 2016, 08:51:11 AM »
Thank you!!!

Just an update... I called the plan to double check if I can continue contributing, and I can contribute even though my employer has stopped contributing. I had not contributed in the past since all the fund options have high fees/expenses (1%+). The plan is actually quite unimpressive, especially when I compare it to the options in my husband's 401k plan (he even has VINIX as an option).

Thank you to everyone! We greatly appreciate the help. Even though it looks like we do not qualify for a Traditional IRA - you guys are all totally right - we can use a Roth IRA and/or increase our 401k contributions.

Thanks a million!!!


dandarc

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Re: Traditional IRA - Do we qualify?
« Reply #6 on: May 17, 2016, 10:23:26 AM »
Remember that a 401K is not forever - you'll roll the money out when you leave.  Also remember that the funds have to be really terrible to outweigh the tax benefits.

With a high income, you'll often come out ahead funding the 401K even if the funds are not great.

SCP

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Re: Traditional IRA - Do we qualify?
« Reply #7 on: May 17, 2016, 02:12:38 PM »
Hi dandarc - Thank you! You make a great point re: rolling over the 401k's in the future.

We're actually taking a step back right now and re-evaluting how we have been investing and saving, which has raised a lot of questions for us - both technical questions (i.e. qualifying for a Traditional IRA) and post-FIRE life questions.

We are happy with what we have achieved so far... we are savers, live well below our means, and we help financially support our parents. We hope to achieve FIRE in about 4 or 5 years' time (we'll be in our late 30s by then), but that timeline may be reduced or extended depending on improving our investment model, reducing our tax rate, and generating more passive income (the classic 3!). 

Let's say we reach FIRE in 5 years, both leave our jobs at that time, and then roll over our 401ks to IRAs. Let's say the IRA accounts generate dividends. Can we have the dividends from the IRA accounts deposited into our checking account so that we may use that money to pay for our living expenses at that time?

If not, then what do FIRE achiever's recommend doing for passive income?

Do you think investing 50/50 in a retirement account (401k/ Roth IRA) and non-retirement account for the next 4-5 years is the way to go? 


seattlecyclone

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Re: Traditional IRA - Do we qualify?
« Reply #8 on: May 17, 2016, 02:24:26 PM »
Let's say we reach FIRE in 5 years, both leave our jobs at that time, and then roll over our 401ks to IRAs. Let's say the IRA accounts generate dividends. Can we have the dividends from the IRA accounts deposited into our checking account so that we may use that money to pay for our living expenses at that time?

You can withdraw whatever money from your IRA that you want, whenever you want. Do be aware that traditional IRA withdrawals prior to age 59˝ will be taxed at your current marginal rate plus a 10% early withdrawal tax, so withdrawing dividends as they come in may not be the best way to go about things.

A common tactic for getting around the 10% early withdrawal tax is the "Roth conversion pipeline," explained in more detail in http://forum.mrmoneymustache.com/investor-alley/how-to-withdraw-funds-from-your-ira-and-401k-without-penalty-before-age-59-5/ and https://seattlecyclone.com/accessing-your-retirement-accounts-early-yes-you-can/.

 

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If not, then what do FIRE achiever's recommend doing for passive income?

Do you think investing 50/50 in a retirement account (401k/ Roth IRA) and non-retirement account for the next 4-5 years is the way to go?

It really depends on a lot of things, including your current income, your current balance of investments between tax-advantaged and taxable, your expected retirement spending, and more.

If you are planning to utilize the Roth pipeline for the majority of your early retirement spending, saving a bit of money in a taxable account to help bridge the first five years of your early retirement may be a good idea.

However if you do plan to retire into a tax bracket at least 10 percentage points lower than current, putting money in a pre-tax retirement account and paying the 10% early withdrawal tax will be better than paying tax now at your current rate, putting that money in a taxable account, and paying tax on the dividends every year from now until you retire.

Direct contributions to your Roth IRAs (since your income is too high for traditional IRAs) can also help for the first five years because direct contributions always can be withdrawn tax-free and penalty-free.

SCP

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Re: Traditional IRA - Do we qualify?
« Reply #9 on: May 17, 2016, 02:55:35 PM »
Hi seattlecyclone,

Wow, I was just reading about Roth conversion ladders/pipelines when I saw your post - serendipity!

You have given us great food for thought, and thank you for for explaining it so clearly and for sharing the previous thread. This is incredibly helpful. Thank you!