Author Topic: Yet another tIRA versus Roth question  (Read 2300 times)

overwhelmed

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Yet another tIRA versus Roth question
« on: December 11, 2016, 08:51:37 AM »
I read a bunch of posts this morning & clicked on a lot of links. I was looking to confirm my plan made sense. I'm not completely sure I accomplished my goal and might have ended up confused.

Basics:
49 - retirement range 5-9 years
Filing HOH
My MAGI will be over the 71k limit for any tIRA deduction.
My MAGI will be under the 117k limit for a Roth deduction.
I do have a 401k.
Plan - Fund a Roth for 2016 to take the deduction.

Most of what I read tends to lean toward tIRA over a Roth & considering tax rates now versus later. If I understood the guidance & articles I read, I am still leaning toward a Roth but wonder if I am missing something.

It seems that if I went the non-deductible tIRA route, there is no tax rate benefit for me, since none of it is deductible. With no pre-tax benefit what would the appeal be? Choosing a Roth will give me a deduction.

I am concerned that I am over-simplifying or missed a benefit of going the non-deductible tIRA route.

Thanks


FI by 2035

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Re: Yet another tIRA versus Roth question
« Reply #1 on: December 11, 2016, 08:58:11 AM »
I do not have an answer, but following for more info on this topic.

terran

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Re: Yet another tIRA versus Roth question
« Reply #2 on: December 11, 2016, 09:37:32 AM »
I didn't look into the numbers for HOH as I'm more familiar with MFJ, but if what you found, that you are not eligible for a deductible t.IRA contribution but are eligible for a direct r.IRA contribution, then the Roth is the clear winner. Non-deductible t.IRA contributions are really only useful in as much as you can roll them over into a r.IRA (the so called backdoor Roth contribution), so if you can contribute to a roth directly, just do that.

If you were eligible for a deductible t.IRA contribution then that would be a different discussion.

Remember, a Roth contribution, by definition, is not deductible. You still pay income tax on that income, but then everything that comes out of the Roth (original contribution and earnings) is tax free in contrast to a t.IRA where you don't pay income tax on the income and you do pay income tax on everything that comes out.
« Last Edit: December 11, 2016, 09:40:17 AM by terran »

MDM

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Re: Yet another tIRA versus Roth question
« Reply #3 on: December 11, 2016, 09:41:35 AM »
The "traditional vs. Roth" question is, practically speaking, always between a deductible traditional account and a Roth account.

You are correct that a non-deductible traditional account is not worthwhile - except as a stopping point along the way toward a backdoor Roth.

If your income is too high for a deductible tIRA, then you want a Roth IRA (whether you get there with a straightforward or backdoor contribution).

If you have a Roth option for your 401k, then the "traditional vs. Roth" question is pertinent, and the likely answer for most is "use traditional".

overwhelmed

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Re: Yet another tIRA versus Roth question
« Reply #4 on: December 11, 2016, 10:01:02 AM »

If you have a Roth option for your 401k, then the "traditional vs. Roth" question is pertinent, and the likely answer for most is "use traditional".

Thanks terran & MDM -

I appreciate the replies, it is encouraging to find out my logic made sense & I wasn't missing something obvious.

Both my previous & current 401k plans are pre-tax (traditional) plans.

MidWestLove

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Re: Yet another tIRA versus Roth question
« Reply #5 on: December 11, 2016, 10:57:29 AM »
your original question was somewhat confusing - what 'Roth deduction' you were thinking about as there is none.

Generally
-> if you can lower your income (get deduction) by using traditional IRA -> use traditional IRA.
-> if your income is higher than that but still within Roth allowed limits -> use Roth
-> if you make too much to contribute to Roth in specific year -> tIRA and its 'tax free growth'


MDM

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Re: Yet another tIRA versus Roth question
« Reply #6 on: December 11, 2016, 11:13:43 AM »
Generally
-> if you can lower your income (get deduction) by using traditional IRA [and your tax bracket is higher now than you expect in retirement] -> use traditional IRA [otherwise use Roth].
-> if your income is higher than that but still within Roth allowed limits -> use Roth
-> if you make too much to contribute to Roth in specific year -> tIRA [and then Backdoor Roth IRA] and its 'tax free growth'

Don't know if you were assuming the edits above.

overwhelmed

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Re: Yet another tIRA versus Roth question
« Reply #7 on: December 11, 2016, 11:25:40 AM »
your original question was somewhat confusing - what 'Roth deduction' you were thinking about as there is none.

Generally
-> if you can lower your income (get deduction) by using traditional IRA -> use traditional IRA.
-> if your income is higher than that but still within Roth allowed limits -> use Roth
-> if you make too much to contribute to Roth in specific year -> tIRA and its 'tax free growth'

Hey MidWestLove -

Basically I planned to fund a Roth for 2016 because my MAGI was too high for a traditional IRA to be deductible.

In an attempt to answer my own question, I read a bunch of posts & links this morning & landed in information overload. It caused me to question if I had the right plan in place.

MidWestLove

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Re: Yet another tIRA versus Roth question
« Reply #8 on: December 12, 2016, 09:12:01 AM »
"Hey MidWestLove -

Basically I planned to fund a Roth for 2016 because my MAGI was too high for a traditional IRA to be deductible.

In an attempt to answer my own question, I read a bunch of posts & links this morning & landed in information overload. It caused me to question if I had the right plan in place.
"

Awesome - you have time until you tax filing (at least until April) to do it for 2016 and you are on the right path. Remember, taking action is much more important that being perfect in that action - a dream of perfect plan is useless without follow through.

MidWestLove

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Re: Yet another tIRA versus Roth question
« Reply #9 on: December 12, 2016, 09:19:28 AM »
Quote from: MidWestLove on December 11, 2016, 10:57:29 AM
Generally
-> if you can lower your income (get deduction) by using traditional IRA [and your tax bracket is higher now than you expect in retirement] -> use traditional IRA [otherwise use Roth].
-> if your income is higher than that but still within Roth allowed limits -> use Roth
-> if you make too much to contribute to Roth in specific year -> tIRA [and then Backdoor Roth IRA] and its 'tax free growth'


Don't know if you were assuming the edits above.

.... I don't disagree with edits jut I don't think it matters much - I consider helping people take action much more important than sending them many many disclaimers (your situation may wary, contact your licensed professional, etc.) because that is exactly  how people believe they get overwhelmed.  Who knows their tax rate decades down the road? who knows what laws may or may not pass before then? who knows what other systems would run in parallel and how they would treat specific income streams (see ACA for example of how income is treated or see special rules for child credit or for earned income ,etc.)? point is that certainty does not exist, be directionally correct, have an idea of where you are going, adjust, but above all MOVE. without movement and forward steps you take, spending time on the above is waste of it.

Whether you convert your tIRA to Roth right away or a little later or years later - matters less (same paperwork, may or may have small tax item) than having tax year contribution to begin with (without funding something the question is academic as there is nothing to convert). However, if you miss specific tax year for your whatever contribution (401k, 403b, 457, etc)  you cant go back (ignoring higher limits for over 50 crowd for now which congress labelled as 'catch up').
 

MDM

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Re: Yet another tIRA versus Roth question
« Reply #10 on: December 12, 2016, 10:05:01 AM »
.... I don't disagree with edits jut I don't think it matters much - I consider helping people take action much more important than sending them many many disclaimers (your situation may wary, contact your licensed professional, etc.) because that is exactly  how people believe they get overwhelmed.  Who knows their tax rate decades down the road? who knows what laws may or may not pass before then? who knows what other systems would run in parallel and how they would treat specific income streams (see ACA for example of how income is treated or see special rules for child credit or for earned income ,etc.)? point is that certainty does not exist, be directionally correct, have an idea of where you are going, adjust, but above all MOVE. without movement and forward steps you take, spending time on the above is waste of it.
We probably agree more than disagree.  I don't think advising most people to make one guess (yes, certainty does not exist so a guess is needed) about tax rates will overwhelm them, but yes for some it will.

Quote
Whether you convert your tIRA to Roth right away or a little later or years later - matters less (same paperwork, may or may have small tax item) than having tax year contribution to begin with (without funding something the question is academic as there is nothing to convert). However, if you miss specific tax year for your whatever contribution (401k, 403b, 457, etc)  you cant go back (ignoring higher limits for over 50 crowd for now which congress labelled as 'catch up').
Agree with the "right away or a little later" but perhaps not "years later."  Money left in a non-deductible tIRA does have tax-free growth while it remains there, but that growth is taxed at ordinary income rates when withdrawn.  Better to move it to a Roth "right away (or a little later)" for completely tax-free treatment thereafter.  Investing in a taxable account and paying qualified dividend and long term capital gains taxes can be better than a long non-deductible tIRA investment - but not as good as the Roth.