Author Topic: Put raise into tIRA or Roth?  (Read 1344 times)

Dusty Dog Ranch

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Put raise into tIRA or Roth?
« on: December 11, 2015, 02:47:12 PM »
My pay is going up by $4100 in 2016. My tax-deferred payroll deductions currently go into a PERS (pension), and I plan to max my 457 in 2016. I am married, filing jointly, and our combined gross incomes are at $93,500, so if I understand the IRS info, I am still eligible for full deductions from my gross. I should be able to max a tIRA given our current income/expenses. My questions:

Am i understanding the IRS piece correctly? I.e., can fully deduct from my pre-tax earnings as long as we don't make more than $ 98,000 in 2016?

It's possible that my husband will get a raise sometime in 2016, but probably not enough to push past the $98k limit...however,

Assuming we both get raises over the next couple of years, enough to go past the $98 k limit, then the tIRA isn't so great. Should i just skip a tIRA and go straight to Roth?

I get befuddled pretty quickly when it comes to numbers and taxes, so your help in understanding my options is much appreciated.

JLee

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Re: Put raise into tIRA or Roth?
« Reply #1 on: December 11, 2015, 03:03:27 PM »
I would do a tIRA as long as possible. I am fairly confident that your 457 contributions will also reduce your MAGI, so you have a ways to go before you're out of tIRA range.

celticmyst08

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Re: Put raise into tIRA or Roth?
« Reply #2 on: December 11, 2015, 03:08:47 PM »
Also, the tIRA deductibility is phased out after $98k. I believe the range is up to $118k now. So you could continue to contribute some to your tIRAs, up to the amount that you could deduct (based on wherever you fell in the phaseout range), then put the rest in a Roth ($5500 max total between the two).

dandarc

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Re: Put raise into tIRA or Roth?
« Reply #3 on: December 11, 2015, 03:09:39 PM »
Whether or not you can fully deduct your traditional IRA contribution has to do with Modified Adjusted Gross Income - MAGI.  A very rough formula for MAGI is:

Salary less

Health insurance premiums & similar
FSAs
Workplace Retirement deferralls (PERS / traditional 457)

So you're not that close to the start of the phase-out range:
98K salary -
18K (457)

that's 80K in MAGI - well under the limit to deduct, without considering any of the other above-the-line deductions.

So can you deduct the tIRA? probably, if I'm understanding what you are proposing correctly.  Should you do that is another question that has a lot of facets.  What is your marginal tax rate?  Do you think you'll pay a rate higher or lower on withdrawal on this money?  Is your AGI close to any of the cliffs to get or increase your Saver's tax credit?  Kids and the credits that go along with them?

Basically, I'd run scenarios in TaxCaster (or even full-on TurboTax - you don't pay till you file) or in MDM's spreadsheet in the sticky post in Ask a Mustachian, and look at a bunch of different scenarios to help you decide.

Finally, keep in mind that if you make tIRA contributions, and later find you cannot deduct them so you'd be better off with Roth contributions, the IRS lets you recharacterize all or part of your IRA contributions between traditional and Roth up to your tax filing deadline - April 15th (October 15th with extension) of the following year.  So if you decide later that you'd have rather done the other, you're not stuck.  No reason to hem and haw over it - get the money to work as soon as you're able, and if you need to, you can switch from Roth to Traditional or vice-versa later.