The Money Mustache Community
Learning, Sharing, and Teaching => Investor Alley => Topic started by: alm0stk00l on April 25, 2014, 11:17:12 AM
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Last year, I was working with a company that did not offer a 401k so I maxed a traditional IRA for my wife and another for myself. My wife does not work. This year, I do have access to a 401k which I will max out. I am trying to determine if I can still max a traditional IRA, and deduct the contributions, for my wife. If the contributions are not tax deductible, I will do a roth instead. I read through the IRS documentation and it seems like any contributions to my wife's traditional IRA would not be deductible because I have a 401k through my employer. I could very well have not understood the documentation though, and I am hoping that someone on here could clear the picture up for me. Thanks for the advice.
Which plan is better?
Income: ~$110k
401k contributions: $17.5k
Traditional IRA(wife): $5.5k
Roth IRA(me): $5.5k
or
Income: ~$110k
401k contributions: $17.5k
Roth IRA(wife): $5.5k
Roth IRA(me): $5.5k
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You'll need to make some assumptions about what you think future tax rates will be and do the math to figure out the optimal answer. I, for one, prefer to diversify the tax treatment of my retirement accounts so I'd go with the Roth for both IRAs since you're already contributing $17.5k to a 401k.
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I'd definitely go Roth/Roth instead of Roth/Traditional.
While I understand the benefits of taking the deduction (if allowable) now, you're going to pay taxes on those contributions later when you withdraw and then you'll also pay taxes on the interest earned over that time as well.
If you go Roth, you give up the deduction now, but the money gets to grow tax free. So I can either pay taxes on my $5K contribution today (Roth), or I can pay taxes on the $30K (or whatever) it becomes later (Traditional).
Plus, here's the other thing to consider... you're making $110K and your wife doesn't work. If she does go to work, and/or, you guys make more than the maximum income limit for Roth IRA contribution at some point, you'll need a vacant traditional IRA account to do a backdoor Roth contribution (assuming IRS still allows that at that time of course) to avoid being subject to pro rata.