Author Topic: Help! I think I made the wrong Trad/Roth IRA choice  (Read 2895 times)

Dusty Dog Ranch

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Help! I think I made the wrong Trad/Roth IRA choice
« on: May 29, 2016, 09:00:50 PM »
I really need to read the Bogleheads wiki more...

I am putting after tax dollars into a traditional IRA (just set it up this past January). Maxed the 2015 and am making regular direct deposits from my paycheck to max out 2016. There are no pre-tax dollars in this IRA.

According to BHW, this is a "non-deductible IRA"...which I had never heard of before today. If I'm understanding things correctly, I have set myself up to be taxed twice on these dollars. Ummmmm....

So, is this a big fat mistake, and if so, is there a remedy? Convert to Roth?

Ugh.



palebluedot

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Re: Help! I think I made the wrong Trad/Roth IRA choice
« Reply #1 on: May 29, 2016, 09:19:23 PM »
Just to clarify, you cannot put 'after tax' dollars to a Traditional IRA since it is a tax deductible account. For 2016, are you contributing to a Traditional or Roth?

Traditional IRA = pre-tax (deductible)
Roth IRA = post tax (non-deductible)

http://cashmoneylife.com/traditional-ira-vs-roth-ira/
http://www.madfientist.com/traditional-ira-vs-roth-ira/

Dusty Dog Ranch

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Re: Help! I think I made the wrong Trad/Roth IRA choice
« Reply #2 on: May 29, 2016, 09:32:20 PM »
Well, according to Vanguard, I am contributing to a Traditional IRA brokerage account.

Here's the BHW I read today: https://www.bogleheads.org/wiki/Non-deductible_traditional_IRA

I am confused as heck at this point. I should probably call Vanguard on Tuesday.
« Last Edit: May 29, 2016, 09:34:16 PM by Dusty Dog Ranch »

ShoulderThingThatGoesUp

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Re: Help! I think I made the wrong Trad/Roth IRA choice
« Reply #3 on: May 30, 2016, 03:33:06 AM »
Whether you can deduct it or not depends on your income. Look up tIRA income limits and compare them to your situation.

Dusty Dog Ranch

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Re: Help! I think I made the wrong Trad/Roth IRA choice
« Reply #4 on: May 30, 2016, 10:13:44 AM »
Ok, I am eligible for the full deduction based on modified AGI. Therefore, if I understand correctly, I am reducing taxes now, and will pay taxes when I take this money out in the future. Yes?

Sorry if this is super basic and you are shaking your head at me, but I thought I understood the Trad/Roth thing pretty well and then got myself all confused.

palebluedot

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Re: Help! I think I made the wrong Trad/Roth IRA choice
« Reply #5 on: May 30, 2016, 11:25:34 AM »
Yup, you got it! Thanks to ShouldThingThatGoesUp for pointing out the income limits that determines if it can be deducted or not.

Once you get to a point where you will be pulling the trigger on early retirement, read up on converting the Traditional to a Roth over a long time frame to withdraw the money tax-free :)

http://www.madfientist.com/traditional-ira-vs-roth-ira/

Dusty Dog Ranch

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Re: Help! I think I made the wrong Trad/Roth IRA choice
« Reply #6 on: May 30, 2016, 11:39:46 AM »
Thanks all! I so appreciate having this board when I lose my brain in the financial weeds!

MDM

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Re: Help! I think I made the wrong Trad/Roth IRA choice
« Reply #7 on: May 30, 2016, 01:18:06 PM »
Maxed the 2015 and am making regular direct deposits from my paycheck to max out 2016. There are no pre-tax dollars in this IRA.
Ok, I am eligible for the full deduction based on modified AGI. Therefore, if I understand correctly, I am reducing taxes now, and will pay taxes when I take this money out in the future. Yes?
Note that you are reducing taxes now if and only if you take the tIRA deduction on line 32 of form 1040.  Did you do that for your 2015 return?  It's not clear from the quotes above....

Dusty Dog Ranch

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Re: Help! I think I made the wrong Trad/Roth IRA choice
« Reply #8 on: May 30, 2016, 03:16:41 PM »
 Yes, we did take the deduction on line 32. Thanks for spurring me to double check that.

MDM

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Re: Help! I think I made the wrong Trad/Roth IRA choice
« Reply #9 on: May 30, 2016, 03:24:22 PM »
Yes, we did take the deduction on line 32. Thanks for spurring me to double check that.
In that case there are pre-tax dollars in the IRA for which you took the deduction.

Dusty Dog Ranch

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Re: Help! I think I made the wrong Trad/Roth IRA choice
« Reply #10 on: May 30, 2016, 03:53:35 PM »
 
Yes, we did take the deduction on line 32. Thanks for spurring me to double check that.
In that case there are pre-tax dollars in the IRA for which you took the deduction.

This makes me realize that part of my confusion is that I have always thought of 'pre-tax dollars' as being the ones that come out of one's paycheck before the Fed/SS/Medicare, aka "Deductions from Gross" on my paycheck. The money I put into the Trad IRA is coming from my net pay, which I think of as 'after-tax'. Now it makes sense that they essentially become pre-tax when we take the deduction.

I am relieved that I didn't create a big hairy mess accidentally. Now just have to keep an eye on those income limits.