Author Topic: 401k & Traditional IRA Clarifications  (Read 2978 times)

ReadytoLearn

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401k & Traditional IRA Clarifications
« on: December 10, 2015, 09:25:53 PM »
Hello Everyone!

New forum member and first post...Yearly income is north of $150k / yr (for reference purposes below).

I max out my company 401k each year ($18k in 2015), but I'm feeling a little stupid because from I am reading today, I can also contribute $5500 to a traditional IRA, from pre-tax dollars (payroll deduction).  I always thought I could only do a backdoor Roth for $5500 each year, I didn't know I can contribute $5500 to a traditional Roth with pre-tax dollars as well.  Am I understanding this correctly?

And while I have your attention...

- That $5500 traditional IRA contribution comes from pre-tax dollars, but I cannot use those dollars to lower my taxable income due to income restrictions (http://tinyurl.com/hwz6zaw).  Correct?  So basically that $5500 grows tax free, but it won't lower my income for tax purposes further (which is fine).

- While I have to max out my 401k by Dec. 31st, I can contribute to that traditional IRA in calendar year 2016, for calendar year 2015, so long as it is done before 2015 income tax filing deadlines and I specify it is for calendar year 2015 (but where do I specify this if it's coming out of my paycheck and going directly to Vanguard IRA?).  Do you agree?

- I'm confused on 401k penalty-free withdrawals.  One website (http://tinyurl.com/odezrpc) states most 401k allow penalty free withdrawels for early retirees after age 55.  So retire at 40, then wait until 55 and you can withdraw from your 401k, simple.  But this website (http://tinyurl.com/3357bnl) says you need to work until 55, then you can withdraw 401k penalty free at 55.  Which is correct?


I appreciate any and all help.  GL in reaching FI if you aren't already there!


johnny847

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Re: 401k & Traditional IRA Clarifications
« Reply #1 on: December 10, 2015, 09:31:42 PM »
No, you're not understanding this correctly.

While you're perfectly free to make contributions to a tIRA, they will not be tax deductible because you make too much. It's right there in your first link!
https://www.irs.gov/Retirement-Plans/2015-IRA-Deduction-Limits-Effect-of-Modified-AGI-on-Deduction-if-You-Are-Covered-by-a-Retirement-Plan-at-Work

Furthermore, you cannot contribute to an IRA via payroll deduction.

The last link is correct with respect to early 401k withdrawals. YOu can withdraw from your 401k penalty free from 55 if you terminated form your employer at 55 or older.

ReadytoLearn

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Re: 401k & Traditional IRA Clarifications
« Reply #2 on: December 10, 2015, 09:45:48 PM »
Thanks for the quick reply.  I'm still confused (I'm a slow learner, I apologize in advance)...

In this article (http://tinyurl.com/q78syq5) they state:
"Deducting your contributions is always an added bonus, but keep in mind even if you’re above the limit that you’re still reaping the rewards of the IRA’s tax-deferred growth."

I guess I'd most closely follow example #3.  It confuses me... it states he can't deduct the $6500 he's putting into a TIRA... so that $6500 was funded from after-tax dollars at 33% income tax bracket (assuming filing jointly and his wife makes no income), but then how could it grow tax free according to the article?

And my idea of contribution to an IRA directly from payroll (I was hoping for pre-tax) came from here:
https://www.irs.gov/Retirement-Plans/Plan-Sponsor/Payroll-Deduction-IRA
« Last Edit: December 10, 2015, 09:47:21 PM by ReadytoLearn »

tj

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Re: 401k & Traditional IRA Clarifications
« Reply #3 on: December 10, 2015, 10:17:06 PM »
Quote
"Deducting your contributions is always an added bonus, but keep in mind even if you’re above the limit that you’re still reaping the rewards of the IRA’s tax-deferred growth."

It does not make sense to contribute to a non-deductible tradtional IRA with the roth available. The earnings are tax deferred in the non-deductible ira. If you do a ROTH, the earnings are tax free.

ReadytoLearn

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Re: 401k & Traditional IRA Clarifications
« Reply #4 on: December 10, 2015, 10:26:42 PM »
I agree with you on this point.  But the wording is one reason I'm confused on this topic.  Also GoCurrieCracker states in one of their articles (http://tinyurl.com/qxxynt7):

"During my working days, with the exception of the first few years I always contributed the maximum amount to my 401k.  I wasn’t as tax savvy back then, and either wasn’t aware of the option to also contribute to a Traditional IRA or wasn’t eligible."

...makes me wonder more. :(

Quote
"Deducting your contributions is always an added bonus, but keep in mind even if you’re above the limit that you’re still reaping the rewards of the IRA’s tax-deferred growth."

It does not make sense to contribute to a non-deductible tradtional IRA with the roth available. The earnings are tax deferred in the non-deductible ira. If you do a ROTH, the earnings are tax free.

ReadytoLearn

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Re: 401k & Traditional IRA Clarifications
« Reply #5 on: December 10, 2015, 10:33:33 PM »
I guess the more I read up, I'm not missing out on anything at my current income level: http://tinyurl.com/gm2ohf5

Just some of those articles I referenced had/have me wondering due to their wording. :(

tj

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Re: 401k & Traditional IRA Clarifications
« Reply #6 on: December 10, 2015, 10:35:21 PM »
I agree with you on this point.  But the wording is one reason I'm confused on this topic.  Also GoCurrieCracker states in one of their articles (http://tinyurl.com/qxxynt7):

"During my working days, with the exception of the first few years I always contributed the maximum amount to my 401k.  I wasn’t as tax savvy back then, and either wasn’t aware of the option to also contribute to a Traditional IRA or wasn’t eligible."

...makes me wonder more. :(


I'm not sure why this is confusing. The IRS has stated income limit for deductibility of traditional IRA's. if you're over the limit, then the Roth is a no brainer.

MDM

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Re: 401k & Traditional IRA Clarifications
« Reply #7 on: December 11, 2015, 02:07:01 AM »
ReadytoLearn, welcome to the forum.

One suggestion: don't bother taking the time to convert links via tinyurl.  Folks are more likely to click through to something with, e.g., gocurrycracker.com than tinyurl.com.

Back to your main question: are the differences among traditional deductible, traditional non-deductible, and Roth IRAs clear now?  And why you would not want to keep your money in a traditional non-deductible since Congress added the Roth option?