The Money Mustache Community
Learning, Sharing, and Teaching => Ask a Mustachian => Topic started by: 48Nebraska on January 30, 2015, 02:12:00 PM
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Hello fellow Mustachians,
Originally I was 100% into maxing out my Roth IRA, but after learning about the Roth IRA conversion ladder and understanding the growth charts better, I'm stopping contributions to my Roth IRA, and going with the Traditional IRA. However, I have a 401k plan with my company at the moment and they don't allow pre-tax dollars to go to other funds that are not our 401k program. Therefore, the only way I can contribute to my traditional IRA is to put post-tax dollars into it, and the traditional IRA fund said I could write those dollars off at the end of the year with my taxes. However, I also saw that depending on your MAGI, you might not be able to write all or any of those dollars off. So in addition to not being able to contribute pre-tax dollars to the tIRA, you also might not be able to write-off that contribution at the end of the year (depending on your MAGI). Considering all this is there any advantage to contributing to the tIRA rather than the Roth IRA? Any thoughts or suggestions would be greatly appreciated. Thank you.
George
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Just depends what your MAGI is: http://www.irs.gov/Retirement-Plans/Plan-Participant,-Employee/2014-IRA-Contribution-and-Deduction-Limits-Effect-of-Modified-AGI-on-Deductible-Contributions-If-You-ARE-Covered-by-a-Retirement-Plan-at-Work
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Your IRA is separate from your 401k. You contribute cash you have, and then deduct it from your income when you file taxes so long as you qualify using the table ruby posted.
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Thank you guys for the response. So if I don't quality for any deductions based on my MAGI, then isn't putting the money into a Roth IRA more advantageous?
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Thank you guys for the response. So if I don't quality for any deductions based on my MAGI, then isn't putting the money into a Roth IRA more advantageous?
Definitely more advantageous vs. non-deductible contributions to a traditional IRA. Debatable when compared with putting the full $18K into your 401k.
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... So if I don't qualify for any deductions based on my MAGI, then isn't putting the money into a Roth IRA more advantageous?
Both the tIRA and the Roth IRA let your investments compound and grow on a tax-deferred basis. No difference there. The issue between the two IRA types is whether you -- in your specific situation -- would be better off paying income taxes NOW at your present income tax marginal rate and then not having to pay any taxes on your compounded investments later on (Roth IRA) or NOT paying taxes now but then paying taxes on ALL your distributions at what you project your income tax marginal rate will be when you do withdraw (tIRA).
Seems to me, this all becomes moot if you are talking about making POST-tax contributions into a tIRA. Your income gets taxed now. And your distributions still get taxed later?! What is the point?
If you cannot make tax-deferred contributions into a tIRA, then go with the Roth IRA.
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Thank you MDM and Retire to Win for confirming that. Just wanted to make sure I wasn't missing anything. I just started to max out my 401k with the 18k, and will be putting anything else I have, post-tax, into my Roth IRA. Much appreciated!