Author Topic: Traditional IRA- How to fund?  (Read 2616 times)

drudgep

  • 5 O'Clock Shadow
  • *
  • Posts: 66
Traditional IRA- How to fund?
« on: December 23, 2015, 01:23:52 PM »
Hello all and merry xmas!

I have discovered MMM this year and it has changed my life. I am trying to setup my 2016 investments right now, and I am trying to open a Traditional IRA since I have read MMM and MadFientist and I know I would like the $5,500 in tax deductions!

However my employer doesn't offer a way for me to put the money in Pre-tax, they would tax it first. So if I have it taxed first and put in a tIRA, why wouldn't I just put it in the Roth? Does it even serve any purpose going in the tIRA with after tax dollars?

What would be the best tax strategy?

Thanks!

mlejw6

  • Stubble
  • **
  • Posts: 223
  • Age: 43
  • Location: Alexandria, VA
Re: Traditional IRA- How to fund?
« Reply #1 on: December 23, 2015, 02:23:18 PM »
I have just been researching this. I can't answer how to get it in pre-tax, but I can tell you about why to do it post-tax.

If you make too much to take the Saver's Credit, and make under a certain amount, you can claim your contribution as a deduction on your tax return. It's Line 32 on a 1040:

https://www.irs.gov/pub/irs-pdf/i1040gi.pdf

I'm not sure about how it works with the Saver's Credit if you do qualify for that (I don't).

It helps if you think you will owe money, because you can contribute to your IRA up until April 15, 2016 for your 2015 return. This way, instead of giving money to the government, you can add to your retirement accounts.

AlwaysLearningToSave

  • Bristles
  • ***
  • Posts: 459
Re: Traditional IRA- How to fund?
« Reply #2 on: December 23, 2015, 02:45:22 PM »
You are talking about "pre-tax" and "post-tax" but those terms are imprecise and giving you confusion.

There are two things you need to worry about. 

The first is whether you are eligible for a deduction on traditional IRA contributions.  As mlejw6 points out, you can claim a deduction on your tax return for contributions to a traditional IRA if your modified adjusted gross income falls below a certain threshold.  See this for more information: https://www.irs.gov/Retirement-Plans/IRA-Deduction-Limits

"But," you ask, "what good is a deduction if my employer withholds the same amount from my paycheck each pay period?" 

That is a good question and brings us to the second thing to worry about: how much your employer withholds from your paycheck each pay period to pay to the government.

Most people don't realize it, but you control how much your employer withholds from your check every month.  You tell the employer by giving the employer a Form W-4 that specifies a certain number of withholding allowances.  Most people sign a W-4 when they are hired (without understanding what they are signing) and never think about it again.  But the W-4 is an important tool for you to learn how to use to make sure you don't have too much money withheld from your paycheck each month.  Adjusting your withholding could free up extra cash, making it easier for you to put money into your traditional IRA. 

One of the other forum members, MDM, recently walked me through how to understanding the relationship between allowances claimed on a Form W-4 and the amount withheld from your paycheck.  Check out this thread for more information:  http://forum.mrmoneymustache.com/taxes/best-way-to-calculate-w-4-exemptions-for-2016/

Hope this helps. 

Edit to add:  One word of caution.  You also should not have too little withheld from your paycheck.  If you do, you may have to pay a penalty.  See: https://www.irs.gov/taxtopics/tc306.html

Welcome to the forum!
« Last Edit: December 23, 2015, 03:00:35 PM by AlwaysLearningToSave »

ShoulderThingThatGoesUp

  • Magnum Stache
  • ******
  • Posts: 3053
  • Location: Emmaus, PA
Re: Traditional IRA- How to fund?
« Reply #3 on: December 24, 2015, 09:22:52 AM »
1. Make sure you're within the income limits
2. Open a Schwab tIRA on their website
3. Transfer in $5500
4. Buy SCHB
5. Report $5500 in tIRA contributions on your taxes
6. Get $5500 * your marginal tax rate back on your tax return

younggunner

  • 5 O'Clock Shadow
  • *
  • Posts: 59
Re: Traditional IRA- How to fund?
« Reply #4 on: December 24, 2015, 09:45:43 AM »
1. Make sure you're within the income limits
2. Open a Schwab tIRA on their website
3. Transfer in $5500
4. Buy SCHB
5. Report $5500 in tIRA contributions on your taxes
6. Get $5500 * your marginal tax rate back on your tax return


You mentioned Schwab... How bout others?  Such as TDameritrade or Fidelity? 

seattlecyclone

  • Walrus Stache
  • *******
  • Posts: 7266
  • Age: 39
  • Location: Seattle, WA
    • My blog
Re: Traditional IRA- How to fund?
« Reply #5 on: December 24, 2015, 11:08:23 AM »
For tax purposes any brokerage will be the same. I happen to favor Vanguard. Put $5,500 in the account and deduct $5,500 from your income on your tax return.

drudgep

  • 5 O'Clock Shadow
  • *
  • Posts: 66
Re: Traditional IRA- How to fund?
« Reply #6 on: January 03, 2016, 09:20:11 AM »
Thanks everyone! Your responses are super helpful, happy new year!