Author Topic: Income Level and IRA Types  (Read 1500 times)

clayreed

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Income Level and IRA Types
« on: July 09, 2017, 11:37:17 AM »
Hi there,

Just starting out.

My question is I believe answered indirectly here but I want to make absolute sure I understand correctly.

Assuming my gross income for this year will be about $78,000.

(I got that number by taking what I've earned so far this year, and adding the product of the my weekly paycheck and the number of paychecks left in the year, then rounding up to the nearest thousand.)

Assuming my contributions to my HSA will be around $2,700, estimating based on current contribution levels, or even that I max them out ($3,400). (HSA is the only kind of deduction to MAGI I understand I have except maybe some moving expenses.)

Assuming I'm not off in my calculations by -$2,000 or so, my MAGI would still exceed the level where any IRA contributions are deductible.

 ($78,000 - $3,400 = $74,600) > $72,000

I plan on maxing out my 401(k) and an IRA of some kind this year. But which IRA should I use?

The standard line around to T-IRA or to Roth IRA is will your tax bracket will be lower now or in retirement. We assume it's in retirement, so we say use a T-IRA (but convert to Roth later).

But in my case would it not be so that:

If I contributed to a T-IRA, I would pay taxes on that cash now and then again upon withdraw, as well as upon any growth.

If I contributed to a Roth IRA, I would only pay the taxes I am already having to pay on it, and not on any growth.

Am I missing an important factor here? Roth looks like a clear winner in this scenario.

GizmoTX

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Re: Income Level and IRA Types
« Reply #1 on: July 09, 2017, 12:12:49 PM »
Maxing out a traditional 401K ($18K for 2017) allows your MAGI to be lowered by that amount, which is significant. However, when contributing to a t401K, I believe you no longer can contribute to a tIRA the same year.

I'd then max out your HSA contribution ($3340 for 2017); it too lowers your MAGI.

Note that neither a 401K or HSA contribution lowers your FICA & Medicare taxes.

If you still have funds to save, put them in a Roth IRA ($5500 for 2017); your income is less than the $118K income ceiling for singles. This does not have to be a payroll deduction; you can contribute existing savings to the Roth. While the Roth does not lower your MAGI now, its proceeds won't be taxed unless you take it out early for an unallowed purpose.

Any remainder should go in tax friendly investments, assuming you already have an emergency fund in a money market account equal to at least 3 months of your current expenses.

seattlecyclone

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Re: Income Level and IRA Types
« Reply #2 on: July 09, 2017, 02:43:17 PM »
Assuming I'm not off in my calculations by -$2,000 or so, my MAGI would still exceed the level where any IRA contributions are deductible.

 ($78,000 - $3,400 = $74,600) > $72,000

I plan on maxing out my 401(k) and an IRA of some kind this year. But which IRA should I use?

Traditional 401(k) contributions also lower your MAGI. This could easily push your MAGI below the $62k threshold where you would be able to deduct a full traditional IRA contribution.

Quote
The standard line around to T-IRA or to Roth IRA is will your tax bracket will be lower now or in retirement. We assume it's in retirement, so we say use a T-IRA (but convert to Roth later).

But in my case would it not be so that:

If I contributed to a T-IRA, I would pay taxes on that cash now and then again upon withdraw, as well as upon any growth.

If I contributed to a Roth IRA, I would only pay the taxes I am already having to pay on it, and not on any growth.

Am I missing an important factor here? Roth looks like a clear winner in this scenario.

In general, your conclusion is correct: Roth contributions are better than non-deductible traditional contributions. The current vs. retirement tax bracket comparison only matters if deductible traditional contributions are an option to you. If they aren't, go with Roth.


Maxing out a traditional 401K ($18K for 2017) allows your MAGI to be lowered by that amount, which is significant. However, when contributing to a t401K, I believe you no longer can contribute to a tIRA the same year.

This is not true. Anyone with income from employment can contribute to a traditional IRA. People with a retirement plan at work (such as a 401(k)) have an income limit for deducting their traditional IRA contributions. That limit is $62k for a single person.
I made a blog! https://seattlecyclone.com/

The Roth IRA was named after William Roth, who represented Delaware in the US senate from 1971-2001. "Roth" is a name, not an acronym. There's no need to capitalize the final three letters.

ender

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Re: Income Level and IRA Types
« Reply #3 on: July 09, 2017, 04:12:08 PM »
This is not true. Anyone with income from employment can contribute to a traditional IRA. People with a retirement plan at work (such as a 401(k)) have an income limit for deducting their traditional IRA contributions. That limit is $62k for a single person.

Keep in mind it's a phase out of deduction, too, so it's not like you cross $62.1k and cannot deduct any, you just can deduct less.

As a single the amount you can deduct is 55% less of every dollar of MAGI over $62,000. So, if you have a MAGI of $63k, you can only deduct around $5.5k - 0.55*(63k - 62k) or around $4,950.

So, in that case, you could make a $4,950 tIRA contribution (which would be fully deductible) and a $550 Roth IRA contribution.

https://www.irs.gov/publications/p590a/ch01.html#en_US_2016_publink1000230549

clayreed

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Re: Income Level and IRA Types
« Reply #4 on: July 15, 2017, 03:06:42 PM »
Taking into account that 401k contributions do indeed lower your MAGI, my MAGI should remain well under the limit, with around $3,000 of wiggle room before hitting the phase out point.

tIRA it is then. Thanks, everyone.

DavidAnnArbor

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Re: Income Level and IRA Types
« Reply #5 on: July 16, 2017, 05:54:21 PM »
Good that you checked. When figuring out the MAGI definitely take into account your 401k contribution. You can lower the MAGI by 18,000 if you're under 50, or 24,000 if you're 50 or older.

Heroes821

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Re: Income Level and IRA Types
« Reply #6 on: July 18, 2017, 06:07:39 AM »
Note that neither a 401K or HSA contribution lowers your FICA & Medicare taxes.

This is incorrect. HSA contributions are BEFORE Social Security and Medicare. They lower your FICA taxes.  The only caveat I'm aware of them not doing that is if you are a greater than 2% over of an S-corp.

MDM

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Re: Income Level and IRA Types
« Reply #7 on: July 18, 2017, 11:38:31 AM »
Note that neither a 401K or HSA contribution lowers your FICA & Medicare taxes.
This is incorrect. HSA contributions are BEFORE Social Security and Medicare. They lower your FICA taxes.  The only caveat I'm aware of them not doing that is if you are a greater than 2% over of an S-corp.
With the HSA, "it depends."

If the employer withholds the HSA amount as part of a cafeteria plan, the amount withheld is not subject to FICA.

If an individual makes an HSA contribution separate from payroll withholding, that contribution can be deducted from income on form 1040 but does not affect the FICA taxes.

Heroes821

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Re: Income Level and IRA Types
« Reply #8 on: July 18, 2017, 01:00:28 PM »
Note that neither a 401K or HSA contribution lowers your FICA & Medicare taxes.
This is incorrect. HSA contributions are BEFORE Social Security and Medicare. They lower your FICA taxes.  The only caveat I'm aware of them not doing that is if you are a greater than 2% over of an S-corp.
With the HSA, "it depends."

If the employer withholds the HSA amount as part of a cafeteria plan, the amount withheld is not subject to FICA.

If an individual makes an HSA contribution separate from payroll withholding, that contribution can be deducted from income on form 1040 but does not affect the FICA taxes.

Thanks MDM I knew there were more caveats, but with the wording of "current contribution levels" it's probably safe to assume it's an employer plan.

a1pharm

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Re: Income Level and IRA Types
« Reply #9 on: July 19, 2017, 01:07:20 PM »
If I contributed to a T-IRA, I would pay taxes on that cash now and then again upon withdraw, as well as upon any growth.

If I contributed to a Roth IRA, I would only pay the taxes I am already having to pay on it, and not on any growth.

Am I missing an important factor here? Roth looks like a clear winner in this scenario.

You deduct your traditional IRA contribution, so you DO NOT pay taxes son that money now.  You will pay taxes on whatever you withdraw when you withdraw it.

Your understanding of the Roth IRA is correct.

If I expected to pay less in taxes during retirement, I would choose the traditional IRA (if I were eligible for the deduction).