Author Topic: Some ROTH vs Traditional IRA questions...  (Read 5478 times)

Emergo

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Some ROTH vs Traditional IRA questions...
« on: January 09, 2016, 06:23:59 PM »
So traditional IRA is good if you can use it to deduct from your taxes.

Let's say I'm at $64,000 right now, with a bump up to $69,000 in July. I'm single. I have no house mortgage. I might buy a house in 3-6 years.

Another bump up in salary might occur next year which will put me above $71,000. So this means I won't be able to deduct my taxes if I do traditional IRA anyway.

So rather than doing traditional this year, then just switching to Roth IRA. Should I just go ahead and file Roth for last year 2014, $5,500 (I didn't put any for last year and can still do it now) and then Roth this year 2015, and then so forth.

Many sites seem to suggest doing traditional over Roth but I guess it depends on your situation and what you make and what your AGI is.

It sounds like Roth is more beneficial for me in case I want to use that money to buy a house, or any emergencies.

(Btw, I realize this has probably been answered already by some of you, but I just want to make sure.... again.)

Thoughts?

MDM

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Re: Some ROTH vs Traditional IRA questions...
« Reply #1 on: January 09, 2016, 06:32:10 PM »
Some previous discussion:
http://forum.mrmoneymustache.com/investor-alley/deciding-between-roth-and-traditional-ira-based-on-marginal-tax-rate/
https://www.bogleheads.org/forum/viewtopic.php?f=10&t=140758
https://www.bogleheads.org/wiki/Traditional_versus_Roth

Do you have access to a 401k (or similar)?  If your gross is $75K but you contribute $18K to the 401k, that makes you MAGI $57K and you can also make the full $5.5K deductible contribution to a tIRA.

JLee

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Re: Some ROTH vs Traditional IRA questions...
« Reply #2 on: January 09, 2016, 06:50:35 PM »
I would do traditional as long as you can - if your income continues to scale you will lose the ability to do that.

Emergo

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Re: Some ROTH vs Traditional IRA questions...
« Reply #3 on: January 09, 2016, 08:22:04 PM »
I would do traditional as long as you can - if your income continues to scale you will lose the ability to do that.

Do traditional as long as I can - why? Because it's able to help me deduct my income tax right?

Here's additional info on my status:

I have no debt. I have zero in my portfolio. I don't have any assets. I've only started reading this forum and only recently maxed my 401k. IRA is the next step for me, and deciding between Roth and Traditional has been my conflict for weeks. I also have about $11,000 in my checking account. $5500 of which I want to take out of there and put it into a IRA for 2014, and maybe a couple thousand to this year's IRA.

$64k - gross income
-$18k - 401k (deductible)
-$5.5k - IRA (deductible only if this is Traditional)
-----
$40.5k - Adjusted Gross Income <------
-$4,050 personal exemption (deductible)
-$6,300 standard deduction, if greater than itemized (deductible)
----
$31,200 - Taxable Income
----
So with my taxable income of $31,200,
I am taxed by the first $9,275 * 0.10 = $927.50
Then $31,200 - $9,275 * 0.15 = $3,288.75
Together with $927.50 = $4,216.25
----

Now, since the brackets go like this:

$0-$9,275 earnings you have by 10%
$9,276-$37,650 by $15%
$37,651-$91,150 by 25%

It doesn't really matter if I deduct the tIRA since I will still be within the 15% tax bracket.

This, along with my goal of maybe buying a house within 3-6 years, can you guys help me determine which to choose given the information?

MDM, I'm not sure what you mean by if I have access to a 401k. I am only 27 and recently just started maxing it out.
« Last Edit: January 09, 2016, 08:34:22 PM by Emergo »

Emergo

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Re: Some ROTH vs Traditional IRA questions...
« Reply #4 on: January 09, 2016, 09:38:33 PM »
Some previous discussion:
http://forum.mrmoneymustache.com/investor-alley/deciding-between-roth-and-traditional-ira-based-on-marginal-tax-rate/
https://www.bogleheads.org/forum/viewtopic.php?f=10&t=140758
https://www.bogleheads.org/wiki/Traditional_versus_Roth

Do you have access to a 401k (or similar)?  If your gross is $75K but you contribute $18K to the 401k, that makes you MAGI $57K and you can also make the full $5.5K deductible contribution to a tIRA.

I was looking at this spreadsheet found in one of the links you provided:

https://docs.zoho.com/sheet/published.do?rid=fs79pc4c77e74e9d94302b74fb7f76f7aabfd

And it just doesn't make sense to me... How is the "Dollars to Contribute to Roth vs. Traditional" $18,000?

Is the assumption just this: If you're going to be rich and still making lots of money when you retire, you should just pick Roth IRA now. Otherwise, just do traditional for as long as you can (if you're eligible based off salary) so that your income tax will be lower + you can use that extra money saved from income tax to go into a brokerage account and then switch to Roth.

Am I right?

JLee

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Re: Some ROTH vs Traditional IRA questions...
« Reply #5 on: January 09, 2016, 09:39:01 PM »
http://www.rothira.com/taking-early-withdrawals-your-roth-ira

Unless I'm mistaken, you need to have 5 years after the account has been opened in order to withdraw penalty-free, and the withdrawal limit is $10k.

I have no experience with withdrawing from retirement accounts for house purposes, but perhaps someone else will chime in soon.

MDM

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Re: Some ROTH vs Traditional IRA questions...
« Reply #6 on: January 10, 2016, 01:49:47 AM »
I was looking at this spreadsheet found in one of the links you provided:

https://docs.zoho.com/sheet/published.do?rid=fs79pc4c77e74e9d94302b74fb7f76f7aabfd

And it just doesn't make sense to me... How is the "Dollars to Contribute to Roth vs. Traditional" $18,000?

See row 39 in that spreadsheet:
"*The value in L2 actually doesn't change any of the percentages in Column I. The benefit of a Roth can be calculated without dollar amounts and simply the data from L3-L7 and assuming that extra money from chosing a traditional account and paying less taxes now will be invested in a taxable brokerage account. I include this dollar amount so people can see the future values of the Roth or Traditional and the taxable account. I'm hoping this helps people better understand the methodology."

Apparently the author's hope was unfulfilled in this case.  Would have been more helpful if the derivation of the equation in column I was provided.

tarheeldan

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Re: Some ROTH vs Traditional IRA questions...
« Reply #7 on: January 10, 2016, 06:20:12 AM »
http://www.rothira.com/taking-early-withdrawals-your-roth-ira

Unless I'm mistaken, you need to have 5 years after the account has been opened in order to withdraw penalty-free, and the withdrawal limit is $10k.

I have no experience with withdrawing from retirement accounts for house purposes, but perhaps someone else will chime in soon.
I believe there is no withdrawal limit on contributions or 5 year rule on contributions. Earnings are different.

terran

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Re: Some ROTH vs Traditional IRA questions...
« Reply #8 on: January 10, 2016, 06:45:09 AM »
So rather than doing traditional this year, then just switching to Roth IRA. Should I just go ahead and file Roth for last year 2014, $5,500 (I didn't put any for last year and can still do it now) and then Roth this year 2015, and then so forth.

I think you're getting confused by people saying you can contribute for the previous year. It means the previous calendar year, but current tax year, not the previous tax year. Between January 1, 2016 and April 18, 2016 (the tax filing deadline) you can contribute to an IRA for both 2015 and 2016. I think you can stretch the 2015 contribution to October if you file for an extension, but I'm not sure, so you should confirm before relying on that.

Emergo

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Re: Some ROTH vs Traditional IRA questions...
« Reply #9 on: January 10, 2016, 06:58:52 AM »
So rather than doing traditional this year, then just switching to Roth IRA. Should I just go ahead and file Roth for last year 2014, $5,500 (I didn't put any for last year and can still do it now) and then Roth this year 2015, and then so forth.

I think you're getting confused by people saying you can contribute for the previous year. It means the previous calendar year, but current tax year, not the previous tax year. Between January 1, 2016 and April 18, 2016 (the tax filing deadline) you can contribute to an IRA for both 2015 and 2016. I think you can stretch the 2015 contribution to October if you file for an extension, but I'm not sure, so you should confirm before relying on that.

You just blew my mind there. I thought that was exactly what I said.

JLee

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Re: Some ROTH vs Traditional IRA questions...
« Reply #10 on: January 10, 2016, 09:11:01 AM »
So rather than doing traditional this year, then just switching to Roth IRA. Should I just go ahead and file Roth for last year 2014, $5,500 (I didn't put any for last year and can still do it now) and then Roth this year 2015, and then so forth.

I think you're getting confused by people saying you can contribute for the previous year. It means the previous calendar year, but current tax year, not the previous tax year. Between January 1, 2016 and April 18, 2016 (the tax filing deadline) you can contribute to an IRA for both 2015 and 2016. I think you can stretch the 2015 contribution to October if you file for an extension, but I'm not sure, so you should confirm before relying on that.

You just blew my mind there. I thought that was exactly what I said.
Your post says 2014/2015.

Emergo

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Re: Some ROTH vs Traditional IRA questions...
« Reply #11 on: January 10, 2016, 10:03:36 AM »
Ah I see. My bad. I meant 2015 and 2016. Hahaha

Emergo

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Re: Some ROTH vs Traditional IRA questions...
« Reply #12 on: January 11, 2016, 11:42:49 AM »
Any more thoughts on this topic? Roth vs traditional

Will

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Murse

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Re: Some ROTH vs Traditional IRA questions...
« Reply #14 on: January 11, 2016, 12:35:28 PM »
My salary is set to 75k per year, with holiday pay about 78k and with OT likely somewhere between 80-100k depending on how much I do. I hold a different opinion then most here, most here believe tax rates will stay the same, and I believe this is likely but I also think it's possible for them to go up, because of this (and for simplicities sake) I max out my T 457, and then I do a Roth for my IRA. I like to think of it as diversification.

Edit:holy run-on sentence batman!

jda1984

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Re: Some ROTH vs Traditional IRA questions...
« Reply #15 on: January 12, 2016, 07:46:12 AM »
My salary is set to 75k per year, with holiday pay about 78k and with OT likely somewhere between 80-100k depending on how much I do. I hold a different opinion then most here, most here believe tax rates will stay the same, and I believe this is likely but I also think it's possible for them to go up, because of this (and for simplicities sake) I max out my T 457, and then I do a Roth for my IRA. I like to think of it as diversification.

Edit:holy run-on sentence batman!

I do basically the same thing for the same reason (tax diversification).  Plus then you don't have to prime the Roth conversion ladder later.

Schaefer Light

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Re: Some ROTH vs Traditional IRA questions...
« Reply #16 on: January 12, 2016, 08:18:39 AM »
My salary is set to 75k per year, with holiday pay about 78k and with OT likely somewhere between 80-100k depending on how much I do. I hold a different opinion then most here, most here believe tax rates will stay the same, and I believe this is likely but I also think it's possible for them to go up, because of this (and for simplicities sake) I max out my T 457, and then I do a Roth for my IRA. I like to think of it as diversification.

Edit:holy run-on sentence batman!

I do basically the same thing for the same reason (tax diversification).  Plus then you don't have to prime the Roth conversion ladder later.
I'm in the same boat, and that has also been my strategy so far.

frugaliknowit

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Re: Some ROTH vs Traditional IRA questions...
« Reply #17 on: January 12, 2016, 08:52:55 AM »
1.  Where do you get this from:  "...$5500 of which I want to take out of there and put it into a IRA for 2014, and maybe a couple thousand to this year's IRA."?  Not a tax adviser, but to my knowledge, right now, if you haven't contributed to 2015, you may do so up to around April 15, 2016.  You then have until about April 15, 2017 to contribute to a 2016 IRA.  2014?  I don't think so!

2.  What makes you think you will not be able to deduct a traditional IRA when you get a raise?

Koreth

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Re: Some ROTH vs Traditional IRA questions...
« Reply #18 on: January 12, 2016, 11:26:44 AM »
I'm would continue to contribute to the traditional IRA anway, up to the deduction phase out. Only then would I start contributing to a Roth IRA. Why? Well it wouldn't lower me down a tax bracket (darn), but it will still reduce my overall tax iiability. This in turn means a larger tax return the following year, which becomes extra monies to stuff into savings.

Once I hit the deductability max of the traditional IRA, then I start contributing to the Roth, and will continue to do so until my AGI hits the limit for that. At that point, then monies go to the taxable account.

But that's what I personally would do. My opinions may or may not be applicable to your situation.

dandarc

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Re: Some ROTH vs Traditional IRA questions...
« Reply #19 on: January 12, 2016, 11:29:53 AM »
for frugaliknowit:

Ah I see. My bad. I meant 2015 and 2016. Hahaha