Author Topic: Newlywed, wife lost IRA deductions!  (Read 1714 times)

FenderStrat

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Newlywed, wife lost IRA deductions!
« on: February 15, 2018, 11:23:10 AM »
I'm hoping to get a critique of our investment tax planning from those of you who are smarter about taxes than I am. I got married in October 2017. My wife and I are now filing taxes married filing jointly. She started a new job last year and was only eligible to contribute to her 403b around the time of our wedding, and made no contributions in 2017. We both maxed out our Traditional IRAs. Because she was eligible at some point for her employer's 403b, and our combined incomes exceed IRA deduction limitations, her IRA contributions are now non-deductible! If she can't get the deductions from her IRA contributions she'd rather contribute to a Roth IRA.

So here's how we are planning things going forward. We will recharacterize her IRA contributions last year to a Roth. She will max out her 403b and deduct that. Any of her additional savings will go into her Roth. Not much changes for me. I will continue to max out my Traditional IRA and get the deduction, all my additional savings go to my taxable account. I have RMDs from an Inherited IRA which I'll have taxes withheld. If our income ever changes to allow more IRA deductions, or can't contribute to a Roth, we could just recharacterize our contributions accordingly.

My only concern with my wife contributing to her 403b is that 1) There is no employer match. 2) The funds available are expensive and crappy. They only have International (TRIEX) and Bond (TBIRX) index funds. Why no US stock index fund?? The closest I could find is CREF Equity Index Account (QCEQPX), but this sounds more like an annuity than an index fund. All of these "index funds" expenses are .31-.37%. Otherwise, we are looking at a target date fund (PARLX). Expenses are .99%, yikes! I'm wondering if it would be better for her to forget the 403b deductions and invest in Vanguard index funds in her IRA instead?

I hope this all makes sense. Any comments?

dandarc

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Re: Newlywed, wife lost IRA deductions!
« Reply #1 on: February 15, 2018, 11:27:54 AM »
"covered by an employer retirement plan"

Am I correct that $0 went into wife's 403B for 2017?  And there was no workplace retirement plan at another job for the year?  If so, seems she was not covered by an employer's plan for 2017, at least according to this article at irs.gov:

https://www.irs.gov/retirement-plans/are-you-covered-by-an-employers-retirement-plan

dandarc

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Re: Newlywed, wife lost IRA deductions!
« Reply #2 on: February 15, 2018, 11:31:18 AM »
Should add - and also there is no other retirement plan at new job.  Not uncommon at a public school, for example, to have a 401(a) defined benefit or contribution plan and a 403(b) and a 457(b) - that 401(a) could be easy to forget about WRT "is my IRA contribution deductible".

ReadySetMillionaire

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Re: Newlywed, wife lost IRA deductions!
« Reply #3 on: February 15, 2018, 11:39:39 AM »
"covered by an employer retirement plan"

Am I correct that $0 went into wife's 403B for 2017?  And there was no workplace retirement plan at another job for the year?  If so, seems she was not covered by an employer's plan for 2017, at least according to this article at irs.gov:

https://www.irs.gov/retirement-plans/are-you-covered-by-an-employers-retirement-plan

Having just gotten married last year, and having looked into this issue pretty thoroughly, I am pretty certain that whether you contribute or not is irrelevant.  The question is whether you were eligible to contribute to a qualified retirement plan, and if you were, then you begin to get phased out of traditional IRA deductions.


OP, seems like you have a good grip on things for the 2017 tax year, but 2018 is far more tricky.  You are effectively posing the classic post-tax versus pre-tax investment conundrum, and my vote is always to minimize taxes as much as possible.  I would need to know more about your income, but if you are phased out of IRA deductions, then I'm sure you are jointly making $110k plus.  I would then assume this income is higher than your retirement income, which means your tax rate is higher now, which means you're better off contributing to pre-tax accounts for the time being.

Again, though, I think you need to post more about income, expected retirement income, etc. to fully go through that analysis.

terran

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Re: Newlywed, wife lost IRA deductions!
« Reply #4 on: February 15, 2018, 11:46:50 AM »
Having just gotten married last year, and having looked into this issue pretty thoroughly, I am pretty certain that whether you contribute or not is irrelevant.  The question is whether you were eligible to contribute to a qualified retirement plan, and if you were, then you begin to get phased out of traditional IRA deductions.

That what I thought too, but I was recently set straight by one of the Bogleheads resident retirement plan experts.

NoStacheOhio

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Re: Newlywed, wife lost IRA deductions!
« Reply #5 on: February 15, 2018, 11:50:42 AM »
I'm hoping to get a critique of our investment tax planning from those of you who are smarter about taxes than I am. I got married in October 2017. My wife and I are now filing taxes married filing jointly. She started a new job last year and was only eligible to contribute to her 403b around the time of our wedding, and made no contributions in 2017. We both maxed out our Traditional IRAs. Because she was eligible at some point for her employer's 403b, and our combined incomes exceed IRA deduction limitations, her IRA contributions are now non-deductible! If she can't get the deductions from her IRA contributions she'd rather contribute to a Roth IRA.

So here's how we are planning things going forward. We will recharacterize her IRA contributions last year to a Roth. She will max out her 403b and deduct that. Any of her additional savings will go into her Roth. Not much changes for me. I will continue to max out my Traditional IRA and get the deduction, all my additional savings go to my taxable account. I have RMDs from an Inherited IRA which I'll have taxes withheld. If our income ever changes to allow more IRA deductions, or can't contribute to a Roth, we could just recharacterize our contributions accordingly.

My only concern with my wife contributing to her 403b is that 1) There is no employer match. 2) The funds available are expensive and crappy. They only have International (TRIEX) and Bond (TBIRX) index funds. Why no US stock index fund?? The closest I could find is CREF Equity Index Account (QCEQPX), but this sounds more like an annuity than an index fund. All of these "index funds" expenses are .31-.37%. Otherwise, we are looking at a target date fund (PARLX). Expenses are .99%, yikes! I'm wondering if it would be better for her to forget the 403b deductions and invest in Vanguard index funds in her IRA instead?

I hope this all makes sense. Any comments?

Anything under 1% in an employer plan is good-ish. Obviously, you'd love funds below 0.1%, but 0.3% isn't outrageous. Assuming there aren't additional account fees, you're still probably better off maximizing your deductible contributions there before moving on to anything else.

FenderStrat

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Re: Newlywed, wife lost IRA deductions!
« Reply #6 on: February 15, 2018, 11:57:22 AM »
Should add - and also there is no other retirement plan at new job.  Not uncommon at a public school, for example, to have a 401(a) defined benefit or contribution plan and a 403(b) and a 457(b) - that 401(a) could be easy to forget about WRT "is my IRA contribution deductible".

Oops. I left out that she has an additional 401K which has been sort of "contributed" to. It isn't vested for something like 2 years if I remember right. Since it isn't vested and she doesn't know if her program will even be around 2 years from now, we aren't considering it in our planning.

FenderStrat

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Re: Newlywed, wife lost IRA deductions!
« Reply #7 on: February 15, 2018, 11:59:11 AM »
I'm hoping to get a critique of our investment tax planning from those of you who are smarter about taxes than I am. I got married in October 2017. My wife and I are now filing taxes married filing jointly. She started a new job last year and was only eligible to contribute to her 403b around the time of our wedding, and made no contributions in 2017. We both maxed out our Traditional IRAs. Because she was eligible at some point for her employer's 403b, and our combined incomes exceed IRA deduction limitations, her IRA contributions are now non-deductible! If she can't get the deductions from her IRA contributions she'd rather contribute to a Roth IRA.

So here's how we are planning things going forward. We will recharacterize her IRA contributions last year to a Roth. She will max out her 403b and deduct that. Any of her additional savings will go into her Roth. Not much changes for me. I will continue to max out my Traditional IRA and get the deduction, all my additional savings go to my taxable account. I have RMDs from an Inherited IRA which I'll have taxes withheld. If our income ever changes to allow more IRA deductions, or can't contribute to a Roth, we could just recharacterize our contributions accordingly.

My only concern with my wife contributing to her 403b is that 1) There is no employer match. 2) The funds available are expensive and crappy. They only have International (TRIEX) and Bond (TBIRX) index funds. Why no US stock index fund?? The closest I could find is CREF Equity Index Account (QCEQPX), but this sounds more like an annuity than an index fund. All of these "index funds" expenses are .31-.37%. Otherwise, we are looking at a target date fund (PARLX). Expenses are .99%, yikes! I'm wondering if it would be better for her to forget the 403b deductions and invest in Vanguard index funds in her IRA instead?

I hope this all makes sense. Any comments?

Anything under 1% in an employer plan is good-ish. Obviously, you'd love funds below 0.1%, but 0.3% isn't outrageous. Assuming there aren't additional account fees, you're still probably better off maximizing your deductible contributions there before moving on to anything else.

Even if the contributions aren't matched?

dandarc

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Re: Newlywed, wife lost IRA deductions!
« Reply #8 on: February 15, 2018, 12:05:01 PM »
Yes, even if the contributions aren't matched.  The tax savings are massive, and the high fees are not forever.  .3-.4% is high for index funds, but nowhere near high enough to make prioritizing taxable accounts ahead of tax-advantaged a smart play.

There are 401K's out there with front loads and 2%+ annual expense ratios.  Those are where you might consider skipping the 401K.

terran

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Re: Newlywed, wife lost IRA deductions!
« Reply #9 on: February 15, 2018, 12:06:45 PM »
With no match and ER's in the 0.3s I would contribute to all other tax advantaged space first, but I'd contribute to that 403b before switching to taxable.

Proud Foot

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Re: Newlywed, wife lost IRA deductions!
« Reply #10 on: February 15, 2018, 01:06:03 PM »
.... Because she was eligible at some point for her employer's 403b, and our combined incomes exceed IRA deduction limitations, her IRA contributions are now non-deductible! ....

..... I will continue to max out my Traditional IRA and get the deduction, all my additional savings go to my taxable account......


I could be missing something here, but how would you be eligible for the Traditional IRA but your spouse not be eligible? Are you not covered by a retirement plan at your work?


....Why no US stock index fund?? The closest I could find is CREF Equity Index Account (QCEQPX), but this sounds more like an annuity than an index fund. .....

Of the options you listed I would go with the CREF Equity Index Account. From their quarterly commentary
Quote
The CREF Equity Index Account seeks to replicate the Russell 3000 Index to create
a portfolio that closely matches the overall investment characteristics of that index.

FenderStrat

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Re: Newlywed, wife lost IRA deductions!
« Reply #11 on: February 15, 2018, 01:21:37 PM »
.... Because she was eligible at some point for her employer's 403b, and our combined incomes exceed IRA deduction limitations, her IRA contributions are now non-deductible! ....

..... I will continue to max out my Traditional IRA and get the deduction, all my additional savings go to my taxable account......


I could be missing something here, but how would you be eligible for the Traditional IRA but your spouse not be eligible? Are you not covered by a retirement plan at your work?


....Why no US stock index fund?? The closest I could find is CREF Equity Index Account (QCEQPX), but this sounds more like an annuity than an index fund. .....

Of the options you listed I would go with the CREF Equity Index Account. From their quarterly commentary
Quote
The CREF Equity Index Account seeks to replicate the Russell 3000 Index to create
a portfolio that closely matches the overall investment characteristics of that index.

I do not have a retirement plan through work. It's a super small company.

As for the CREF Equity Index Account... I'm concerned that although it sounds like it tracks the Russell 3000 index, it is an annuity. I may be wrong but aren't annuities bad?

"This variable annuity account seeks a favorable
long-term rate of return from a diversified
portfolio selected to track the overall market for
common stocks publicly traded in the United
States, as represented by a broad stock market
index."

https://www.tiaa.org/public/pdf/ffs/194408241.pdf

dandarc

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Re: Newlywed, wife lost IRA deductions!
« Reply #12 on: February 15, 2018, 01:28:57 PM »
TIAA-CREF generally isn't in the business of completely ripping off teachers - they are one of the better investment providers out there.

Variable annuities are more like mutual funds than most other types of annuities.  So what you've got here is equivalent to a Russel 3000 index fund, with a higher than you'd like but not terrible expense ratio.

FenderStrat

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Re: Newlywed, wife lost IRA deductions!
« Reply #13 on: February 15, 2018, 01:38:34 PM »
TIAA-CREF generally isn't in the business of completely ripping off teachers - they are one of the better investment providers out there.

Variable annuities are more like mutual funds than most other types of annuities.  So what you've got here is equivalent to a Russel 3000 index fund, with a higher than you'd like but not terrible expense ratio.

Good to know. Thanks! I'll discuss with my wife. If I can set up a 3 fund portfolio with expenses around .3%, that would be as ideal as it's gonna get.