Spousal IRA, My IRA, deductible limit and Roth vs T-IRA

[tysg14]

Hello,

This is my first post on the boards. I am new to a lot of this and trying to get my financials in order. I've spent much time advancing my career, but very little time managing the retirement portion and looking to turn that around. I am early 30s. I have done a lot of reading on the subject and have search the forums, but at the end of the day I think I might be overcome with information overload and can't quite figure out the rules/best action when it comes to my personal situation. I would appreciate a few more sets of eyes.

I am working, 135k Salary/Yr, and have a 401k.

My wife is not currently working, but earlier in the year she was working as a teacher (had to leave due to health reasons). She was ~42k/Yr. She left in June, so about half of that was earned. She did have a state retirement account with this job. We file taxes jointly.

I'd estimate we're saving ~80+% of our total income, and have quite a bit of funds to direct. After reading Simple Path to Wealth and many of the MMM/MadFientist posts and forums, I am going through the recommended investment order, and have 401k maxed, Family HSA maxed, and now looking at IRA options through Vanguard. I have 2 old 401ks that were not rolled over, so I started a roll-over IRA with Vanguard and going through the process to move those funds to this account.

My questions are around these IRAs:

1) I read about a Spousal IRA that you can contribute to, as long as your wife is not working and your combined MAGI is below $189,000. So we opened her an T-IRA account on vanguard, and moved over $5500. But then I read closer on the IRS site, I don't think this will be deductible, because she worked part of this year which qualifies her as working the whole year, and now the combined MAGI must be less than $101,000 ($121,000 for partial), which I am almost positive we will not be under due to my salary and her already earned income for the year. Can I convert this new T-IRA to a Roth IRA and avoid a tax hit? Is this the best thing to do?

2) Since we are (blessed) to earn too much to get the deductible from the IRAs (sub $121,000 MAGI) but our MAGI is still low enough to contribute to Roth IRAs (sub $189,000 MAGI), does it make the most sense that the next step for our funds would be for each of us to get a Roth IRA and put 5500/Yr? And then any remaining funds after 401k, HSA, Roth IRAs would simply be put towards a taxable account? In the end it would look like this:


 - I would have the T-IRA with the 2 401k's rolled over, and a Roth IRA for the $5500 contribution a year.
 - My wife would have the Roth IRA for the $5500 contribution a year.
 - We would have a joint taxable account for the remaining after-tax, after personal savings contributions.

I appreciate any advice.

[terran]

1) Yes, your wife will need to call vanguard and ask to recharacterize the traditional IRA to Roth.

2) See https://forum.mrmoneymustache.com/investor-alley/investment-order/msg1333153/#msg1333153. Invest in that order. If you have low fees and good investment options in your 401(k) I would max that before Roth IRA, so switch steps 4 and 5. If your 401(k) isn't great then sticking with the default listed there is fine. An IRA and spousal IRA are the same thing, there's just a rule that you don't have to have your own earned income if your spouse has enough to cover the contribution, so your wife has already maxed her limit for the year.

For next year once your wife is no longer covered by a retirement plan at work, but you are, she will be able to contribute to a traditional IRA as long as your MAGI is under 189k (probably a little higher once 2019 numbers come out) unless she gets another job during the year and is covered. See https://www.irs.gov/retirement-plans/ira-deduction-limits

[tysg14]

Hi terran,

thank you for the reply. Going through the investment order I found the case study spreadsheet, and a section on the forum this post I think is better suited for. I will go through this information and possibly make a further post there. Thanks again.

[terran]

You're welcome. Putting up a case study is a great idea if you want a full review of your situation.