Pls help Roth vs Traditional IRA for a personal IRA

[Peej17]

Hello,

I'm new to the Mustachian community. Been pretty frugal my whole life and didn't realize it before but I've always wanted to retire early. Didn't know how to get the ball started in that regard until recently. Now I'm getting all the information I can and making all the necessary changes I can.

With regards to changes, I had opened an IRA account with Chase and was under the assumption that it would be distributed into mutual funds but that wasn't the case. I have a traditional 401k at my job and so the money I deposited into the personal IRA account is technically "tax-free" however the account type is a traditional IRA :( 

In effort to make my money start working for me I'm planning to move the funds to Vanguard. However, I'm unsure of how to proceed. Do I choose a personal Roth IRA and pay taxes on the money at chase while I transfer it over or keep it as a traditional IRA when I move it over to vanguard?

I'd hate to pay taxes twice.

[nawhite]

Short answer is "for most people planning on early retirement, a traditional is almost always better than a Roth"

The Medium answer is "If you have access to an HSA, it is better than either, fund that first. After that, it depends on your income now, your expected expenses and income in retirement, how far you are from retirement, and how you expect tax rates to change between now and your retirement, but in most cases for an early retirement person with relatively stable tax rates, a traditional is a better bet"

Long answer: Just read the MadFIentist's post on it: http://www.madfientist.com/traditional-ira-vs-roth-ira/

The one exception to all of these is, if you expect to need to withdraw your contributions within 5 years, you can only do that tax and penalty free from a Roth. So if you are less than 5 years from FIRE and will need your contributions to fund things in the short term while you set up a ladder or something, the Roth may be a better bet.

[NorCalistache]

I agree with nawhite.

Here's one scenario: Some 'stachers have relatively high working incomes, save a bunch of it so they can be FI and RE, after which they will practice simple living with relatively low post-retirement income. If this scenario is what you anticipate, then a traditional IRA has the advantage that you can do tax-deferred savings while your income is high, and then pay taxes in retirement when you withdraw at a lower tax rate. In contrast, under the same scenario with a Roth IRA you front-load paying taxes at a higher tax rate, and avoid lower post-retirement taxes.

As nawhite points out, there are other factors, such as different treatment of early withdrawals and uncertainty regarding future tax rates.

[MDM]

I have a traditional 401k at my job and so the money I deposited into the personal IRA account is technically "tax-free" however the account type is a traditional IRA :( 

Peej17, welcome to the forum.

Based on the sentence above, you need to learn a little more about how the various account types work.  E.g., see IRA Deduction Limits: using a 401k doesn't cause an IRA to be tax-free, but it may cause a traditional IRA to be non-deductible.

See also Traditional versus Roth - Bogleheads for some discussion on the relative merits of each.

[Peej17]

Thanks MDM,
I'm learning a lot already. What I meant was I already have a 401k with pre-tax contributions and so the contributions made to the IRA were made with post tax dollars. I opened the IRA with very little information. Now i'm just trying to figure out the best way to fix it and get back on the right track if you will.

[Peej17]

Thank you NorCalistache and Nawhite,
You've both given me something to think about. Since I have the traditional 401k with my employer and I plan on contributing to an IRA account any contribution to the IRA will be post-tax. Is a way to make contributions to a personal IRA account with pre-tax dollars?

My company uses fidelity for our 401k plan but my IRA will be with vanguard.

[MDM]

Thanks MDM,
I'm learning a lot already. What I meant was I already have a 401k with pre-tax contributions and so the contributions made to the IRA were made with post tax dollars. I opened the IRA with very little information. Now i'm just trying to figure out the best way to fix it and get back on the right track if you will.

In addition to the link in my previous post, see line 32 and the instructions for it in 2016 Form 1040 - f1040.pdf and 2016 Instruction 1040 - i1040gi.pdf respectively.

Based on all that, will your IRA contributions be pre-tax or post-tax by the time you file your 2017 taxes in 2018?

[nawhite]

Thank you NorCalistache and Nawhite,
You've both given me something to think about. Since I have the traditional 401k with my employer and I plan on contributing to an IRA account any contribution to the IRA will be post-tax. Is a way to make contributions to a personal IRA account with pre-tax dollars?

My company uses fidelity for our 401k plan but my IRA will be with vanguard.

You just need to tell your IRA provider "this will be a traditional (pre-tax) account" and then deduct the contribution from your taxes when you file on line 32 of your 1040. That's how you turn your "post-tax" dollars back into "pre-tax" dollars.