Author Topic: Question on IRA  (Read 1846 times)

Trying2bFrugal

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Question on IRA
« on: March 08, 2018, 12:08:16 PM »
For 2017, I have not done any investment on tax front (401k or IRA)

I was eligible from 2016 on 401K but never did due to ignorance/financial stupidity.
Am I totally out of option for 2017 taxes (I am yet to file it)

Can I open a Traditional IRA and fund $5500 for 2017? Is it possible/allowed?

Lady SA

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Re: Question on IRA
« Reply #1 on: March 08, 2018, 12:16:11 PM »
yes, you can contribute towards a 2017 IRA until April, I forget the exact date. You just essentially mark your contribution as towards 2017, NOT 2018.

I don't really understand this:
Am I totally out of option for 2017 taxes (I am yet to file it)

So I don't know if this is a question. You can file your 2017 taxes until April, so you still have time left

terran

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Re: Question on IRA
« Reply #2 on: March 08, 2018, 12:31:28 PM »
Did your employer contribute to your 401k in 2017? Or did neither you nor your employers contribute to your 401k in 2017?

Did your spouse (if any) or your spouse's employer contribute to his/her 401k in 2017?

If neither you nor your employer contributed to your 401k in 2017 then you are considered not to have been covered by a retirement plan in 2017 (regardless of whether you could have contributed), in which case you should see how your Modified Adjusted Gross income compares to the limits posted here based on your filing status and spousal retirement plan coverage status.

If either you or your employer did contribute to your 401k in 2017 then you are considered to have been covered by a retirement plan in 2017, in which case you you should see how your MAGI compares to the limits posted here.

If your MAGI falls within one of the limits given your filing status, retirement plan coverage status, and spousal retirement plan coverage status then you can contribute to a traditional IRA any time until April 17th (the tax filing deadline) and deduct that contribution from your 2017 income.

If you're MAGI does not meet the above limits, you may still be able to contribute to a Roth IRA, depending on how your MAGI compares to the limits posted here. You cannot deduct this contribution from your income, but you also won't pay tax on what you withdraw in retirement, or on the dividends until then.

If, based on your income, you can contribute to neither a deductible traditional IRA nor a Roth IRA, then you can contribute to a non-deductible traditional IRA and roll that over into a Roth IRA. This doesn't work well if you already have a previously deducted traditional IRA, but if not you'll only pay tax on the gains between when you contribute and convert, so it is effectively the same as contributing directly to a Roth IRA. This is a little more complex and requires some extra tax forms for the tax year in which you convert (2018 in this case), so if you go this route do some research on the "backdoor roth."

Valvore

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Re: Question on IRA
« Reply #3 on: March 08, 2018, 12:55:21 PM »
Definitely sign up! Its as simple as going to fidelity.com (or some other financial site) and clicking open an account. You can link your bank account easily too. When you make a transfer from the bank to the IRA, there will be an option to select "contribution year 2017"

I never contribute the full $5,500 until late March. I save up a big E-Fund, empty the amount needed to max in March and start all over building up my EF.

Trying2bFrugal

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Re: Question on IRA
« Reply #4 on: March 09, 2018, 08:11:51 AM »
Did your employer contribute to your 401k in 2017..


For 2017:
1. Only I am employed and wife not earned/employed in 2017.
2. I was eligible for 401k contribution, my employer would contribute only when I contribute, so there was no 401K in 2017.
3. I am less than 99K AGI.

A. When I file tax, though I am the only earning person, am I considered under [married filing jointly or qualifying widow(er)]?
B. So should I be able to open a traditional IRA account and fund traditional IRA towards 2017 for getting $5500 tax deductions?


General Questions:
1. If a single earning person in a family has employment for 120K/year (I wish, but no I dont have that salary. $ is just for understanding), but when he take 3 months off work, his gross earning for that year is 90K. So at the time of tax filing, will salary get
  • adjusted and will his AGI shows as 90k?
  • If he contributed 18K on 401K, what would be his traditional IRA contribution (before tax)?

2. For 2018, if I am investing as much I can (my employer contributes upto 3% with 100% and next 5% with 50% on pay) and loads the traditional IRA with $5500. Then at later part of the year (lets say July), if my wife gets work with salary of $80K with 401K benefits and we exceed $120K on the gross (now from July to Dec she earned 40K totallying $160K). In this scenario will I be considered as overpaid on IRA/401K and not get tax deduction and at same time will we get into any trouble for over loading IRA? Will IRA contributions (traditional/Roth) be a better idea to be loaded at end of year? (I may not have saving at end of year too)

3. I was initially thinking that I can contribute $18,000 on 401k and $5,500 on traditional IRA which would save me from $23000 on gross during tax on deductions. Seems I am wrong (way too wrong).

I am re-reading 'back roth ira' thing you have told, still a lot to learn.

a big E-Fund, empty the amount needed to max in March and start all over building up my EF.
what is big E-fund?

Thanks! I am looking at the fiedelity.com. There are multiple options, but am i need to signup on Traditional IRA? https://www.fidelity.com/retirement-ira/overview
« Last Edit: March 09, 2018, 08:15:44 AM by Trying2bFrugal »

terran

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Re: Question on IRA
« Reply #5 on: March 09, 2018, 09:09:55 AM »
Yes, you file married filing jointly. You don't really have a choice anyway (except married filing separately, but that's rarely the right choice), but people like you are who that filing status is most advantageous for since you get to "use" the deductions and lower tax bracket space that your wife is not.

What matters in Modified AGI, not AGI, so you may need to add some things back in to line 38 of Form 1040 (see https://www.irs.gov/publications/p590a#en_US_2017_publink1000230489 for what you need to add back in), but yes, as long as your MAGI is below $99k you can make a deductible traditional IRA contribution of $5500 regardless of whether you're covered by a retirement plan at work (it sounds like you weren't since neither you nor your employer contributed -- I know the "covered" term is confusing, I had it wrong for awhile until someone corrected me). In fact, as long as you have at least $11000 of income, your wife can also make her own $5500 deductible traditional IRA contribution as well!

For your general question, what matters is your MAGI which is AGI (line 38, form 1040) with some things like IRA deductions and student loan interest deductions (see the link above) added back in. So it doesn't matter what your "salary" is, just what you're actually paid (according to your W2) over the course of the year. Things like employer paid health insurance, 401k contributions, etc won't be included in your W2 Box 1, so they help reduce your AGI and your MAGI.

So if someone "makes" $120k/year (as in that's the stated salary), but only works 9 months for a total gross salary of $90k, and contributes $18k to his 401k (note that the limit for 2018 is $18.5k), then his AGI would be $90k - $18k = $72K. There would probably be other reductions like health insurance, but for simplicity we can ignore that. So his AGI is 72k, and since there have not yet been any deductions from the link above, his MAGI is also $72k. If he files MFJ and this is all the income in his household then he can make a full $5500 deductible IRA contribution, and his husband/wife can also make a full $5500 deductible IRA contribution. His AGI then becomes $72k - $11k = $61k (note that his MAGI is still $72k).

For 2018, if you and/or your employer is contributing to your 401k and your MAGI goes over $121k (see increased limits at the links here), then you will no longer be eligible for deductible IRA contributions. What you'll want to do at that point is call your IRA custodian and ask them to "recharacterize" your 2018 traditional IRA contribution to a Roth IRA contribution. They will move your contribution and any gains on that contribution to a Roth IRA making it effectively as if you had contributed to a Roth IRA in the first place. You can recharacterize any time up until the tax filing deadline for the year. You'll need to attach a statement to your taxes explaining what you did.

You got the math a little off in that $18k + $5.5k = $23.5k, but otherwise you're right that that would take that amount off your taxable income. Note that the 2018 401k limit is $18,5k, and your wife can also contribute $5.5k to her IRA even if she doesn't have income (as long as you do).

At your income level you don't need to worry about the backdoor Roth for awhile. Just forget about it until your income is too high to make Roth contributions (MAGI of $189k in 2018, higher by the time you're there).

An E-fund is just shorthand for emergency fund: money you keep around in an easily accessible place (like a bank account) that's invested in a way that's not likely to lose value (so not stocks) in case something unexpected comes up that you need money for.

Fidelity is a good option (we have almost all our money there). You need to be a little more careful with them than Vanguard since they offer lots of not so great investment options along with lots of great ones. Yes, you want to signup for a Traditional IRA. Have your wife signup too if you can afford to lock away an extra $5500 (make sure you have enough of an emergency fund first).

I would suggest you invest in a target date fund as they offer a good mix of investments all in one fund so you don't have to worry about investing in multiple funds. With Fidelity you want one of their Fidelity Freedom Index funds (note that the "Index" part is important as they also have actively managed funds call Fidelity Freedom funds with higher expense ratios for no real benefit).

Trying2bFrugal

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Re: Question on IRA
« Reply #6 on: March 09, 2018, 12:40:15 PM »
Yes, you file married filing jointly. You don't really have a choice anyway (except married filing separately, but that's rarely the right choice), but people like you are who that filing status is most advantageous for since you get to "use" the deductions and lower tax bracket space that your wife is not.

What matters in Modified AGI, not AGI, so you may need to add some things back in to line 38 of Form 1040 (see https://www.irs.gov/publications/p590a#en_US_2017_publink1000230489 for w..
Thanks a lot.

I read your comment atleast 5 times to understand (realized its simplicity when I read for 5th time), read IRS site links (Still not catching their jargon).
I think I can put 11K on IRA for me and wife for 2017. That should give immediate 2.5 back on tax refund when i file taxes?

Somehow I ended up here : http://rootofgood.com/make-six-figure-income-pay-no-tax/ through someone in MMM profile.
I know there is standard deduction, but what is the personal exemption? Will I be able to get on a standard deduction? (I tried efile with dummy info but i didnt get that exemption)

When I think back, I feel ashamed on the level of financial stupidity (I live reasonably frugal, but very stupid on savings, investments). Thanks again for your help in explaining in detail.



terran

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Re: Question on IRA
« Reply #7 on: March 09, 2018, 12:54:58 PM »
Yes, you file married filing jointly. You don't really have a choice anyway (except married filing separately, but that's rarely the right choice), but people like you are who that filing status is most advantageous for since you get to "use" the deductions and lower tax bracket space that your wife is not.

What matters in Modified AGI, not AGI, so you may need to add some things back in to line 38 of Form 1040 (see https://www.irs.gov/publications/p590a#en_US_2017_publink1000230489 for w..
Thanks a lot.

I read your comment atleast 5 times to understand (realized its simplicity when I read for 5th time), read IRS site links (Still not catching their jargon).
I think I can put 11K on IRA for me and wife for 2017. That should give immediate 2.5 back on tax refund when i file taxes?

Somehow I ended up here : http://rootofgood.com/make-six-figure-income-pay-no-tax/ through someone in MMM profile.
I know there is standard deduction, but what is the personal exemption? Will I be able to get on a standard deduction? (I tried efile with dummy info but i didnt get that exemption)

When I think back, I feel ashamed on the level of financial stupidity (I live reasonably frugal, but very stupid on savings, investments). Thanks again for your help in explaining in detail.

The standard deduction is $12700 in 2017 (if memory serves me correctly). You take either this or itemized deductions. Unless you have large state income tax, mortgage interest, property tax, or charitable giving expenses you're probably better off with the standard deduction. It shows up on line 40 of form 1040.

The personal exemption is $4050 per person, so $8100 for you and your wife unless you have kids (in which case you get an exemption for them them too if they're your dependents). This shows up on line 42 of form 1040. This goes away thanks to the new tax bill in 2018. It is replaced with a new higher standard deduction ($24000).

The amount you'll save by contributing to a deductible IRA depends entirely on your state and federal marginal tax brackets and any credits it might make you eligible for. The easiest thing to do is probably to throw all your numbers in some tax software and see what happens when you add/remove an entry for an IRA contribution. I used taxact for the last few years until I went the "by hand" route this year, which I learned a lot from and was kind of "fun" but it's not for the feint of heart. 

Trying2bFrugal

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Re: Question on IRA
« Reply #8 on: March 09, 2018, 01:24:10 PM »
The standard deduction is $12700 in 2017 (if memory serves me correctly). You take either this or itemized deductions. Unless you have large state income tax, mortgage interest, property tax, or charitable giving expenses you're probably better off with the standard deduction. It shows up on line 40 of form 1040.

The personal exemption is $4050 per person, so $8100 for you and your wife unless you have kids (in which case you get an exemption for them them too if they're your dependents). This shows up on line 42 of form 1040. This goes away thanks to the new tax bill in 2018. It is replaced with a new higher standard deduction ($24000).

The amount you'll save by contributing to a deductible IRA depends entirely on your state and federal marginal tax brackets and any credits it might make you eligible for. The easiest thing to do is probably to throw all your numbers in some tax software and see what happens when you add/remove an entry for an IRA contribution. I used taxact for the last few years until I went the "by hand" route this year, which I learned a lot from and was kind of "fun" but it's not for the feint of heart.

Okay, so when I file tax for 2017, I pay tax for
= Gross - $31800 (Personal Exemption : 4050*2: $8100 + Standard deductions: $12700 + IRA: $11000 ($5500 mine + $5500 for wife)) - 401K (which is $0 this year)

Did I get this right?


Edit:
I ran a dry run on Tax act and it looks like I got the math right finally (yes, still the high mark calc arent accounted).
Thanks a lot. Finally I got a break from Financial stupidity.
Let me make that damn IRA account started and funded this weekend.
« Last Edit: March 09, 2018, 02:27:52 PM by Trying2bFrugal »

terran

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Re: Question on IRA
« Reply #9 on: March 09, 2018, 09:03:43 PM »
The standard deduction is $12700 in 2017 (if memory serves me correctly). You take either this or itemized deductions. Unless you have large state income tax, mortgage interest, property tax, or charitable giving expenses you're probably better off with the standard deduction. It shows up on line 40 of form 1040.

The personal exemption is $4050 per person, so $8100 for you and your wife unless you have kids (in which case you get an exemption for them them too if they're your dependents). This shows up on line 42 of form 1040. This goes away thanks to the new tax bill in 2018. It is replaced with a new higher standard deduction ($24000).

The amount you'll save by contributing to a deductible IRA depends entirely on your state and federal marginal tax brackets and any credits it might make you eligible for. The easiest thing to do is probably to throw all your numbers in some tax software and see what happens when you add/remove an entry for an IRA contribution. I used taxact for the last few years until I went the "by hand" route this year, which I learned a lot from and was kind of "fun" but it's not for the feint of heart.

Okay, so when I file tax for 2017, I pay tax for
= Gross - $31800 (Personal Exemption : 4050*2: $8100 + Standard deductions: $12700 + IRA: $11000 ($5500 mine + $5500 for wife)) - 401K (which is $0 this year)

Did I get this right?

Looks right to me. Always best to rely on the finalized filing, but I think at the high level you've got it.

Trying2bFrugal

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Re: Question on IRA
« Reply #10 on: March 14, 2018, 12:54:15 PM »
Looks right to me. Always best to rely on the finalized filing, but I think at the high level you've got it.

I created Fidelity traditional IRA account today and it says it may take 1 or 2 days to open for funding it.

Now, I have a question.

On my 2017 tax, net gross would be lessthan 75K (makes this income under 15% of $18,651 – $75,900 tax rate).
For 2017,
1. I didnt have any 401K
2. I can invest $11,000 (5500 on my name and 5500 on wife in traditional IRA), which will save around $2000 on taxes (so I would get back from Fed+State?)

We are planning to start looking for house starting April and if right house is found (within our budget), then we would want down 20%. (planning to buy a house around $200,000).
I saved some money for down payment.

Now,
1) I learnt that, there is an option in IRA to withdraw upto $10,000 for first home buyers. But what I am not sure is
         a) Do I pay any penalty or does the money in IRA should stay for 'x' number of days?
         b) If I invest in IRA, it would save me $2000 in tax. But if I withdraw and if thats going to be added to my gross, i may pay it back in taxes?
         c) is there a option to get it as a loan?
2) I am trying to decide between fund the traditional IRA or not as we arent sure if there would be any loss if not advantage of funding it.
3) If I can invest in IRA and withdraw in May, will I be considered as playing system? Last thing I want is to file everything legal and getting calls from IRS and waste my time.
4) There is a possibility of my wife getting into a job which may increase our gross family income but at the same time, we would max out 401k and IRA, so I guess we would be lessthan 75K (15% rate) ultimately.
5) More the delay in finding right house, more chances i dont need to pull money out of IRA.

Whats the right way of doing it? Just keep the money in bank account and not fund IRA or invest in IRA and take the money when needed?
How fast is it to take money out of IRA?

Valvore

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Re: Question on IRA
« Reply #11 on: March 14, 2018, 01:57:35 PM »
a big E-Fund, empty the amount needed to max in March and start all over building up my EF.
what is big E-fund?

Thanks! I am looking at the fiedelity.com. There are multiple options, but am i need to signup on Traditional IRA? https://www.fidelity.com/retirement-ira/overview

A big emergency fund. Here is an example of what I was talking about.

Jan 1 2017 - Emergency fund $6,000 & IRA $0
February 1 2017 - - Emergency fund $7,000 & IRA $0
March 1 2017 - Emergency fund $8,000 & IRA $0
April 1 2017 - Emergency fund $3500 & IRA 5500

So I fully funded my IRA and lessened my emergency fund to my lowest acceptable amount. Now I can work on rebuilding my emergency fund and contribute nothing to my IRA until I make another big contributions before tax day next year.

Trying2bFrugal

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Re: Question on IRA
« Reply #12 on: March 15, 2018, 07:56:25 AM »
a big E-Fund, empty the amount needed to max in March and start all over building up my EF.
what is big E-fund?

Thanks! I am looking at the fiedelity.com. There are multiple options, but am i need to signup on Traditional IRA? https://www.fidelity.com/retirement-ira/overview

A big emergency fund. Here is an example of what I was talking about.

Jan 1 2017 - Emergency fund $6,000 & IRA $0
February 1 2017 - - Emergency fund $7,000 & IRA $0
March 1 2017 - Emergency fund $8,000 & IRA $0
April 1 2017 - Emergency fund $3500 & IRA 5500

So I fully funded my IRA and lessened my emergency fund to my lowest acceptable amount. Now I can work on rebuilding my emergency fund and contribute nothing to my IRA until I make another big contributions before tax day next year.

Thanks!

If you can help with my other question on IRA (my previous post). Basically I am not sure if it is a good idea to invest in IRA with my current situation (for 2017), as thats the money help for down payment and investing and taking it back - will it do any good (the tax bracket is going to be same 15% so there isnt much saving I am doing here).

terran

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Re: Question on IRA
« Reply #13 on: March 15, 2018, 09:33:09 AM »
If you need to take it back out that quickly I probably wouldn't bother, but given the recent tax law change (15% bracket is now 12% bracket) I suppose you would save a few percent, so I guess the question is whether saving $10000 x 3% = $300 is worth the added complexity to you.

If you need that money for a downpayment, definitely don't invest it even if you put it in an IRA. Just leave it in cash in the IRA.

If there's a chance you can contribute to the IRA and scrape together enough for the downpayment then it might make sense to contribute to the IRA since you'll no longer be able to after April 17th, and then the worst that happens is you take it back out, and the best case is you leave it in and end up with a higher balance in your IRA.

Having bought a house, do realize that you won't know the exact amount you need to bring to closing until the day before, so you need to have enough to cover any possible downpayment and closing costs in a local bank that you can go to and get a bank check from. They won't take a personal check and they won't wait for you to transfer money from your IRA or online bank account.