Author Topic: Confused - Roth or traditional IRA  (Read 2384 times)

lulu0915

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Confused - Roth or traditional IRA
« on: January 26, 2018, 12:52:33 PM »
 Hello everyone. I have been following this blog for a few months now. My husband and I have decided to start investing in our retirement.  We are just a little bit confused and was hoping that you guys could help us.

He is a fellow in his last year. He makes currently $60,000 a year. Last year he also made $60,000 a year. Starting July of this year he’ll be making $250,000-300k, and every year after it will be around $300-350k. I have a small business and make roughly $15-$20,000 a year. We file jointly.

 We were going to open up a Roth IRA for last year. Until I read the following linked from jlcollins blog.
https://momanddadmoney.com/documents/Traditional%20vs%20Roth%20IRA.pdf

And then thought maybe we should do a traditional IRA instead. I am thinking upon retirement our tax bracket will be higher than it is right now? Would it make more sense for us to do a Roth Ira Ray this year? And a traditional IRA next year? Or a traditional IRA both years?

Any help would be greatly appreciated!



JLee

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Re: Confused - Roth or traditional IRA
« Reply #1 on: January 26, 2018, 01:11:10 PM »
I would do a traditional IRA as long as you qualify for it.  You probably don't as of 2018:

https://www.fidelity.com/retirement-ira/contribution-limits-deadlines

2017 Traditional IRA deduction limits - Married (filing joint returns)
≤ $99,000    Full deduction up to the amount of your contribution limit
> $99,000 but < $119,000   Partial deduction
≥ $119,000   No deduction

Once your income exceeds that, you can still contribute to a Roth for a bit (the link above has Roth income limits as well), and then your only option would be to do a non-deductible Traditional IRA and do a back-door Roth: https://www.rothira.com/what-is-a-backdoor-roth-ira

MDM

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Re: Confused - Roth or traditional IRA
« Reply #2 on: January 26, 2018, 02:02:19 PM »
We were going to open up a Roth IRA for last year. Until I read the following linked from jlcollins blog.
https://momanddadmoney.com/documents/Traditional%20vs%20Roth%20IRA.pdf
Unfortunately that is a poor guide for this issue.  It is correct that "the most important decision you can make is to get started, not which IRA you choose."

But the advice to compare marginal rate now with effective rate on withdrawal is not correct, and makes traditional accounts seem much better than in fact they are.  Even though traditional will be better for most, it's not that good.  See Traditional versus Roth - Bogleheads for a much better analysis.

With the expected income for 2018 and future years, contributing to a 2017 Roth IRA out of choice, and using backdoor Roth IRAs out of necessity for 2018 and beyond, appears correct.

Using traditional for 401k/403b in this and at least several future years seems advisable.  See Investment Order for more thoughts.

lulu0915

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Re: Confused - Roth or traditional IRA
« Reply #3 on: January 26, 2018, 02:18:47 PM »
Thank you both very much.

So for 2017, I am still confused to do a Roth or traditional? JLee said traditional. But MDM you mentioned contributing to a  Roth out of choice. Do you mean then to contribute to a Roth for 2017?

MDM

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Re: Confused - Roth or traditional IRA
« Reply #4 on: January 26, 2018, 02:55:55 PM »
Thank you both very much.

So for 2017, I am still confused to do a Roth or traditional? JLee said traditional. But MDM you mentioned contributing to a  Roth out of choice. Do you mean then to contribute to a Roth for 2017?
For you, 2017 is somewhat of a coin flip situation.  The reason I suggested Roth is because, given your expected future income, there is a very good chance your withdrawal marginal rate will be as high as your 2017 tax saving marginal rate. 

If you contribute the IRS maximum, the tie (and even a slightly lower marginal withdrawal rate) goes to a Roth. 

But contributing to a tIRA for 2017 is also defensible from the perspective that, until you actually have a large traditional balance, if "something happens" then you could find yourself in a low marginal withdrawal rate situation.

Either way, we're likely only talking +/- 15% at most on $11K contributions and the growth, so it won't make or break things for you.

terran

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Re: Confused - Roth or traditional IRA
« Reply #5 on: January 26, 2018, 03:36:55 PM »
As the others have said, in future years chances are your only option will be a backdoor roth. If you have a balance in a deductible traditional IRA (what you would do for 2017), then you have to convert it along with the after tax traditional IRA balance when you do the backdoor roth, which is a taxable event. Better to pay the tax in your current lower bracket now by contributing directly to roth than to have to pay it in the future when you convert. This way you'll have a clean slate without any traditional balance for future backdoor roth contributions.

Traditional IRA contributions are a good choice for people who don't expect to have such a high income that they have to use a backdoor roth to contribute at all (or at least not people who will have to do that so soon).

Definitely go traditional for whatever 401k/403b/457 your husband has at his new job though.

JustGettingStarted1980

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Re: Confused - Roth or traditional IRA
« Reply #6 on: January 26, 2018, 03:44:25 PM »
For Tax reasons, in 2017 you should fund 2 traditional IRA’s for a total of $11,000. You should then convert it to a Roth IRA.  For 2018, due to increased income, you should fund 2 “backdoor Roth IRA’s”.  Your spouse should also maxed out his 401(k) to $18,500 in the fall of 2018.  If you have a 401(k) or a 403B in your workplace, you should max out that as well to $18,500 .

JGS

MDM

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Re: Confused - Roth or traditional IRA
« Reply #7 on: January 26, 2018, 04:58:06 PM »
For Tax reasons, in 2017 you should fund 2 traditional IRA’s for a total of $11,000. You should then convert it to a Roth IRA.
What tax advantage does this provide, compared with a direct Roth contribution?

Bird In Hand

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Re: Confused - Roth or traditional IRA
« Reply #8 on: January 26, 2018, 05:25:17 PM »
He is a fellow in his last year. He makes currently $60,000 a year. Last year he also made $60,000 a year. Starting July of this year he’ll be making $250,000-300k, and every year after it will be around $300-350k. I have a small business and make roughly $15-$20,000 a year. We file jointly.

I think you already got some good advice about the IRA situation.  This is just an aside: you've been living on $75k-$80k/yr recently, and your income is about to go to $265k-$320k, followed by $315k-$370k.  I know taxes will take a bite out of it, but what else are you going to do with the extra $195k-$290k per year that you will soon be making?  If you don't inflate your $80k lifestyle (guessing $70k after taxes?), you could be FI in 5 years or so.  Amazing!

JustGettingStarted1980

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Re: Confused - Roth or traditional IRA
« Reply #9 on: January 27, 2018, 09:22:24 AM »
For Tax reasons, in 2017 you should fund 2 traditional IRA’s for a total of $11,000. You should then convert it to a Roth IRA.
What tax advantage does this provide, compared with a direct Roth contribution?

You're absolutely right, MDM. But I wanted to simplify things for OP as they will have to learn how to Backdoor Roth from now on anyway. A direct Roth Contribution is federal tax deductible in 2017 since their income is <99K. In 2018, however, they will have to do the Backdoor Roth, might as well learn now.

I'm sure I could of explained myself better above, haha

JGS

MDM

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Re: Confused - Roth or traditional IRA
« Reply #10 on: January 27, 2018, 09:45:54 AM »
A direct Roth Contribution is federal tax deductible in 2017 since their income is <99K.
And by "Roth" you mean "traditional"? ;)