Author Topic: Traditional IRA high income  (Read 1641 times)

medinaj2160

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Traditional IRA high income
« on: March 22, 2019, 07:11:30 PM »
Our CPA call us the other day and said that we made too much money to be able to deduct our traditional IRAs contribution.

We max out our 401Ks and our traditional IRAs every year. We still have about $6000 left to contribute to our traditional IRA but I am wondering if we shouldn't since we don't get any deduction.

My question is should I max out our traditional IRAs anyway or should I put the money somewhere else?

Thanks

The_Dude

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Re: Traditional IRA high income
« Reply #1 on: March 22, 2019, 07:34:02 PM »
Do you have any other traditional IRA money invested already?

If not, then the best thing is to do a non deductible traditional IRA contribution and immediately roll it over into a Roth IRA aka backdoor roth contribution.

It doesn't work so well if you already have a large amount of traditional IRA money invested with gains.  if you do a rollover from a traditional IRA to Roth you can't specify an account.  All the IRS cares about is across all traditional IRA accounts if you convert 50% into a roth ira then you pay taxes on 50% of gains. 

ender

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Re: Traditional IRA high income
« Reply #2 on: March 23, 2019, 06:42:33 AM »
Do you have any other traditional IRA money invested already?

If not, then the best thing is to do a non deductible traditional IRA contribution and immediately roll it over into a Roth IRA aka backdoor roth contribution.

It doesn't work so well if you already have a large amount of traditional IRA money invested with gains.  if you do a rollover from a traditional IRA to Roth you can't specify an account.  All the IRS cares about is across all traditional IRA accounts if you convert 50% into a roth ira then you pay taxes on 50% of gains.

The income cap for deducting an IRA is much lower than what it is for a Roth IRA.

OP could potentially do a normal Roth IRA fine, unless their income shot WAY up.

The_Dude

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Re: Traditional IRA high income
« Reply #3 on: March 25, 2019, 10:50:20 AM »
Do you have any other traditional IRA money invested already?

If not, then the best thing is to do a non deductible traditional IRA contribution and immediately roll it over into a Roth IRA aka backdoor roth contribution.

It doesn't work so well if you already have a large amount of traditional IRA money invested with gains.  if you do a rollover from a traditional IRA to Roth you can't specify an account.  All the IRS cares about is across all traditional IRA accounts if you convert 50% into a roth ira then you pay taxes on 50% of gains.

The income cap for deducting an IRA is much lower than what it is for a Roth IRA.

OP could potentially do a normal Roth IRA fine, unless their income shot WAY up.

Hence why I said "non deductible" IRA contribution.  google back door Roth IRA contributions.  Its a way to do Roth IRA contributions even if over the income limit. 

walkwalkwalk

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Re: Traditional IRA high income
« Reply #4 on: March 25, 2019, 11:12:13 AM »
Do you have any other traditional IRA money invested already?

If not, then the best thing is to do a non deductible traditional IRA contribution and immediately roll it over into a Roth IRA aka backdoor roth contribution.

It doesn't work so well if you already have a large amount of traditional IRA money invested with gains.  if you do a rollover from a traditional IRA to Roth you can't specify an account.  All the IRS cares about is across all traditional IRA accounts if you convert 50% into a roth ira then you pay taxes on 50% of gains.

The income cap for deducting an IRA is much lower than what it is for a Roth IRA.

OP could potentially do a normal Roth IRA fine, unless their income shot WAY up.

Hence why I said "non deductible" IRA contribution.  google back door Roth IRA contributions.  Its a way to do Roth IRA contributions even if over the income limit. 
There is still a range that they could be in between deductible traditional and still able to contribute to Roth. that is what ender meant. This would prevent them from having to do backdoor roth. they could just do roth, like regular.

Proud Foot

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Re: Traditional IRA high income
« Reply #5 on: March 25, 2019, 01:12:32 PM »
Do you have any other traditional IRA money invested already?

If not, then the best thing is to do a non deductible traditional IRA contribution and immediately roll it over into a Roth IRA aka backdoor roth contribution.

It doesn't work so well if you already have a large amount of traditional IRA money invested with gains.  if you do a rollover from a traditional IRA to Roth you can't specify an account.  All the IRS cares about is across all traditional IRA accounts if you convert 50% into a roth ira then you pay taxes on 50% of gains.

The income cap for deducting an IRA is much lower than what it is for a Roth IRA.

OP could potentially do a normal Roth IRA fine, unless their income shot WAY up.

Hence why I said "non deductible" IRA contribution.  google back door Roth IRA contributions.  Its a way to do Roth IRA contributions even if over the income limit.

The_Dude, according to the IRS the IRA deduction phaseout starts at $101k (AGI) and the Roth IRA income cap for contributions is $199k (MAGI)

OP, if I were in your situation I would contribute the unused space to a Roth IRA and find out how much of your current Traditional IRA contributions are considered non-deductible. You could then either leave it in the IRA as a non-deductible contribution or you could re-characterize it to a Roth IRA contribution. Ask your CPA about this and they should be able to give you more detail. Then you will need to contact your brokerage to have them do the actual re-characterization.

ender

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Re: Traditional IRA high income
« Reply #6 on: March 25, 2019, 06:39:54 PM »
There is still a range that they could be in between deductible traditional and still able to contribute to Roth. that is what ender meant. This would prevent them from having to do backdoor roth. they could just do roth, like regular.

Yep.

The income for phasing out IRA deductions is much lower than Roth IRA phase out. Only after that are nondeductible IRA contributions a good idea.

The_Dude

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Re: Traditional IRA high income
« Reply #7 on: March 25, 2019, 07:03:41 PM »
Fair enough that people should use a regular Roth IRA contribution if available before doing a backdoor contribution.

medinaj2160

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Re: Traditional IRA high income
« Reply #8 on: March 29, 2019, 10:08:13 AM »
Do you have any other traditional IRA money invested already?

If not, then the best thing is to do a non deductible traditional IRA contribution and immediately roll it over into a Roth IRA aka backdoor roth contribution.

It doesn't work so well if you already have a large amount of traditional IRA money invested with gains.  if you do a rollover from a traditional IRA to Roth you can't specify an account.  All the IRS cares about is across all traditional IRA accounts if you convert 50% into a roth ira then you pay taxes on 50% of gains.

The income cap for deducting an IRA is much lower than what it is for a Roth IRA.

OP could potentially do a normal Roth IRA fine, unless their income shot WAY up.

Hence why I said "non deductible" IRA contribution.  google back door Roth IRA contributions.  Its a way to do Roth IRA contributions even if over the income limit.

The_Dude, according to the IRS the IRA deduction phaseout starts at $101k (AGI) and the Roth IRA income cap for contributions is $199k (MAGI)

OP, if I were in your situation I would contribute the unused space to a Roth IRA and find out how much of your current Traditional IRA contributions are considered non-deductible. You could then either leave it in the IRA as a non-deductible contribution or you could re-characterize it to a Roth IRA contribution. Ask your CPA about this and they should be able to give you more detail. Then you will need to contact your brokerage to have them do the actual re-characterization.

my AGI is $124,000 so I believe the entire traditional IRA contribution is non deductible. Any downside to just contribute to the traditional IRA without being able to take deduction?

We have $3950 left to maxout the tradition IRA for 2018.
« Last Edit: March 29, 2019, 10:13:29 AM by medinaj2160 »

Cromacster

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Re: Traditional IRA high income
« Reply #9 on: March 29, 2019, 10:39:07 AM »
Do you have any other traditional IRA money invested already?

If not, then the best thing is to do a non deductible traditional IRA contribution and immediately roll it over into a Roth IRA aka backdoor roth contribution.

It doesn't work so well if you already have a large amount of traditional IRA money invested with gains.  if you do a rollover from a traditional IRA to Roth you can't specify an account.  All the IRS cares about is across all traditional IRA accounts if you convert 50% into a roth ira then you pay taxes on 50% of gains.

The income cap for deducting an IRA is much lower than what it is for a Roth IRA.

OP could potentially do a normal Roth IRA fine, unless their income shot WAY up.

Hence why I said "non deductible" IRA contribution.  google back door Roth IRA contributions.  Its a way to do Roth IRA contributions even if over the income limit.

The_Dude, according to the IRS the IRA deduction phaseout starts at $101k (AGI) and the Roth IRA income cap for contributions is $199k (MAGI)

OP, if I were in your situation I would contribute the unused space to a Roth IRA and find out how much of your current Traditional IRA contributions are considered non-deductible. You could then either leave it in the IRA as a non-deductible contribution or you could re-characterize it to a Roth IRA contribution. Ask your CPA about this and they should be able to give you more detail. Then you will need to contact your brokerage to have them do the actual re-characterization.

my AGI is $124,000 so I believe the entire traditional IRA contribution is non deductible. Any downside to just contribute to the traditional IRA without being able to take deduction?

We have $3950 left to maxout the tradition IRA for 2018.

The downside is you still have the Roth option.  Contribute to a Roth IRA.

JLee

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Re: Traditional IRA high income
« Reply #10 on: March 29, 2019, 10:39:42 AM »
Do you have any other traditional IRA money invested already?

If not, then the best thing is to do a non deductible traditional IRA contribution and immediately roll it over into a Roth IRA aka backdoor roth contribution.

It doesn't work so well if you already have a large amount of traditional IRA money invested with gains.  if you do a rollover from a traditional IRA to Roth you can't specify an account.  All the IRS cares about is across all traditional IRA accounts if you convert 50% into a roth ira then you pay taxes on 50% of gains.

The income cap for deducting an IRA is much lower than what it is for a Roth IRA.

OP could potentially do a normal Roth IRA fine, unless their income shot WAY up.

Hence why I said "non deductible" IRA contribution.  google back door Roth IRA contributions.  Its a way to do Roth IRA contributions even if over the income limit.

The_Dude, according to the IRS the IRA deduction phaseout starts at $101k (AGI) and the Roth IRA income cap for contributions is $199k (MAGI)

OP, if I were in your situation I would contribute the unused space to a Roth IRA and find out how much of your current Traditional IRA contributions are considered non-deductible. You could then either leave it in the IRA as a non-deductible contribution or you could re-characterize it to a Roth IRA contribution. Ask your CPA about this and they should be able to give you more detail. Then you will need to contact your brokerage to have them do the actual re-characterization.

my AGI is $124,000 so I believe the entire traditional IRA contribution is non deductible. Any downside to just contribute to the traditional IRA without being able to take deduction?

We have $3950 left to maxout the tradition IRA for 2018.

You'll pay taxes on gains when you withdraw it. If you contribute to a Roth IRA, you won't have to pay taxes on gains on withdrawal.

https://www.rothira.com/roth-ira-limits

At $124k single, you're entering the phase-out area for Roth. At $124k married filing jointly, you're well within limits.

Proud Foot

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Re: Traditional IRA high income
« Reply #11 on: March 29, 2019, 11:25:36 AM »

my AGI is $124,000 so I believe the entire traditional IRA contribution is non deductible. Any downside to just contribute to the traditional IRA without being able to take deduction?

We have $3950 left to maxout the tradition IRA for 2018.

The downside to using non-deductible contributions is you have the Roth available and any growth within it is tax free. You still will pay taxes on the growth of those contributions when you make withdrawals. It will also make things more complicated once you retire and begin converting for a Roth ladder or your income grows to where you are doing backdoor Roth contributions due to your AGI being to high for regular Roth contributions.

So put the $3,950 into a Roth and re-characterize your previous contributions to Roth contributions. I would do the re-characterizing first if your 2018 contributions are the only money in the account. I think this should be able to save you a few steps if your brokerage is able to just reclassify the account on their side rather than having to open up a new account. (The brokerage may not be able to do this though)
« Last Edit: March 29, 2019, 11:27:16 AM by Proud Foot »