The Money Mustache Community
Learning, Sharing, and Teaching => Investor Alley => Topic started by: Iron Mike Sharpe on November 11, 2014, 12:52:29 PM
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I'm confused if I should be (or am even allowed to) switching to a traditional IRA instead of a Roth IRA.
Here's my situation:
Salary: almost $60,000 a year
Bonus: up to 10% (normally between 8-9%, lowest ever was 6.5%) -- this can't go to my 401(k)
My company's 401(k) plan only allows employees to contribute up to 25% of their salary to the plan. I don't particularly understand the reasoning:
401(k) plans impose plan limits (ours is 25%) to help pass discrimination testing. Every year, the IRS requires all 401k plans to take a discrimination test to ensure that the plan is equitable to both highly compensated employees and non-highly compensated employees.
So, next year I can send around $15,000 to my 401(k) before the company match. I estimate, that my taxable salary + bonus after 401(k) will be around $50,000.
I'm single with no children. Next year the standard deduction + personal exemption will be $10,300. The 15% bracket ends at $37,450. So, anything above $47,750 will be taxed at 25%.
I'm not really sure about the rules of getting a tax break for a traditional IRA if I am in a 401(k) plan. I can't figure out if I would be able to get a tax break if I used a T-IRA. I have been using a Roth IRA instead. But, looking at my estimates, I have about $2250 in income that will be taxed at 25%.
1) Is it even worth it to waste my time and energy thinking about this?
2) If it is possible for me to get a tax break on a T-ITA, should I put $2250 in one and the rest into a Roth IRA?
I am unfortunately moving out of my HDHP and will be losing my ability to send money to an HSA. There is a prescription I went back on mid-year, and I think a full-year of it will wipe out the tax advantages of the plan. I have switched to a Silver plan because if I need more health care during the year, the HDHP will be a money loser for me.
Now that I actually put my thoughts down, I am thinking that I should just continue going with the Roth. I think having a separate bucket of money that has different tax properties might be better for me down the road.
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I'd go T.IRA if I were you, at least to the extent it gets you down to the 15% bracket.
Single, covered employee (that's you-it means you have a 401k at work) can deduct 100% of a T.IRA if their MAGI is < $60K. Your MAGI would be roughly the $50K you quoted unless you have other income sources. This means you can deduct a full $5,500 T.IRA contribution if you want to.
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I'd go T.IRA if I were you, at least to the extent it gets you down to the 15% bracket.
Single, covered employee (that's you-it means you have a 401k at work) can deduct 100% of a T.IRA if their MAGI is < $60K. Your MAGI would be roughly the $50K you quoted unless you have other income sources. This means you can deduct a full $5,500 T.IRA contribution if you want to.
+1
Then, after maxing out the traditional IRA, you could direct any remaining savings/investing into taxable instruments that will give you easy access to your money in early retirement so that tIRA can keep growing, tax free (not to mention taking advantage of Roth conversions later on).
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Thanks! Will go this route next year. The last three year's I've been doing a Roth IRA but I've been able to also keep my taxable in the 15% bracket until next year.