The Money Mustache Community
Learning, Sharing, and Teaching => Investor Alley => Topic started by: montanamiser on September 10, 2014, 09:48:14 AM
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Hello MMM Community,
This year I decided to leave a fun, but no money, barely surviving woodworking business to go into the tech sector. With my new found job, I have the possibility to invest in a 401K, HSA, FSA.
I am on target to max out my 401K this year and my HSA ( with company match), I even set aside $350 for new glasses/contacts in my FSA.
But I am trying to lower my taxable income with an IRA account (probably will devote money towards this January - April 15th).
Is it possible to have both a company-sponsored 401K and a ROTH IRA? Or since I am electing to do a 401K does that mean I only have the option to start a Traditional IRA?
I read an article over at the Mad Fientist that proposed that a ROTH is preferable over a Traditional IRA, since you have more money to start with ( so more money to compound, since no taxes are taken out). http://www.madfientist.com/traditional-ira-vs-roth-ira/
(http://www.madfientist.com/traditional-ira-vs-roth-ira/)
Love to hear your thoughts !
Thank you,
Kristian
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You can have both a 401k and an IRA, type eligibility is based on MAGI.
See IRS link: http://www.irs.gov/Retirement-Plans/Plan-Participant,-Employee/Retirement-Topics-IRA-Contribution-Limits
If tax rate now > tax rate in retirement, favor traditional.
If tax rate now < tax rate in retirement, favor Roth.
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You have it backwards - the Traditional saves taxes now, Roth saves taxes later at the expense of paying more now, and having a 401K only impacts your IRAs in that you have a lower limit to make deductible traditional contributions.
The Roth vs Traditional (assuming you are actually eligible for both - in tech you might be making enough money it really isn't much of a choice) has to do with what your marginal tax rate is today vs. what you think your effective tax rate will be in the future. So if you've already managed your AGI down to the 0% tax bracket, before making the IRA decision, then for sure go Roth. Above that, you've gotta decide. A lot of people draw the line between the 15% and 25% brackets - if I'm in the 15% I go Roth, in 25% Traditional (to the extent I can).
Personally I've come to the realization that we can likely pay 0 to very little income taxes in retirement, assuming the basic tax structure remains the same, so I put as much into traditional retirement accounts as I can. So happens we now make so much money that on the IRA side, the Roth is where we have to go - believe me, if there was a way to do it, I'd be putting IRA contributions into traditional. Falls in the good problems to have category.
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Hi Serpentstooth,
Yes, I have an FSA - I set aside $250 to cover new glasses or contacts. My work plan covers vision ( which includes $100 towards glasses or contacts). This way I can have my company pay for one and I'll purchase the other with my FSA.
Great points. Thanks for the links!
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You can have both a 401k and an IRA, type eligibility is based on MAGI.
See IRS link: http://www.irs.gov/Retirement-Plans/Plan-Participant,-Employee/Retirement-Topics-IRA-Contribution-Limits
If tax rate now > tax rate in retirement, favor traditional.
If tax rate now < tax rate in retirement, favor Roth.
I like the simplicity of how you framed that statement. I have a feeling I will be making less money in retirement. Six-figure high tech job now vs living off investments in the future, makes me lean towards the Traditional IRA plan.
Thanks for the clarity.
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Six-figure high tech job now vs living off investments in the future, makes me lean towards the Traditional IRA plan.
Hold up. It sounds like you have a pretty high income. You'll want to make sure your contributions are deductible. If your MAGI is above a certain threshold (I think it's currently ~59.5k/yr) your contributions to a traditional IRA may not give you the tax benefits you were expecting. Make sure you can make deductible contributions to a Roth IRA as well.
If your contributions are not deductible for either, the next best thing for you may be contributing to an IRA via a back door Roth.
http://www.bogleheads.org/wiki/Backdoor_Roth_IRA (http://www.bogleheads.org/wiki/Backdoor_Roth_IRA)
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Six-figure high tech job now vs living off investments in the future, makes me lean towards the Traditional IRA plan.
Hold up. It sounds like you have a pretty high income. You'll want to make sure your contributions are deductible. If your MAGI is above a certain threshold (I think it's currently ~59.5k/yr) your contributions to a traditional IRA may not give you the tax benefits you were expecting. Make sure you can make deductible contributions to a Roth IRA as well.
If your contributions are not deductible for either, the next best thing for you may be contributing to an IRA via a back door Roth.
http://www.bogleheads.org/wiki/Backdoor_Roth_IRA (http://www.bogleheads.org/wiki/Backdoor_Roth_IRA)
I struck through what I don't agree with above. Good call though to check income for deductible traditional IRA. If you're above the threshold to deduct for traditional then definitely go Roth. There is no "deduction" for ROTH IRA contributions, so don't worry about that, but do worry if you make more than $115k ish as a single. Then you have to do backdoor roth IRA.
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Yes, you're right. For the Roth it affects your eligibility of making contributions.
Good catch, bearkat.