Author Topic: Another Roth vs traditional question  (Read 1094 times)

firemane

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Another Roth vs traditional question
« on: May 16, 2019, 02:35:43 PM »
I found some topics on this, but I am still not quite sure I understand.

The irs states that a single person has to have a magi under 64000 to take the full traditional ira tax deduction in 2019.

If someoneís ( Income - hsa and 401k) comes out to 70k and they take the standard deduction with no other major deductions, is it worth it to do traditional over Roth? If so,  At what point does it become not worth it?

This also assumes the person will do a backdoor later on.

EvenSteven

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Re: Another Roth vs traditional question
« Reply #1 on: May 16, 2019, 03:08:04 PM »
If their MAGI is 70K, then they are in the phase out. They can deduct 2,400 in a tIRA.

If they are in a situation where traditional is better than Roth, they should contribute $2,400 to traditional and deduct all of it, and $3,600 to a Roth.

If they are in a situation where Roth is better, then $6,000 to a Roth.

A backdoor Roth wouldn't apply here, so no reason to contribute any non-deductable money to a traditional IRA.

MDM

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Re: Another Roth vs traditional question
« Reply #2 on: May 16, 2019, 04:55:49 PM »
This also assumes the person will do a backdoor later on.
If you are going to use the backdoor process in future years, pre-tax IRA balances at that time will incur tax, presumably at a higher rate than you would pay now.  In that case, doing a direct Roth contribution of $6K now makes sense.

If you know you could roll those pre-tax IRA balances into a 401k/403b when needing the backdoor, then for the deductible amount it's the standard marginal rate now vs. expected marginal rate when withdrawing question.

FIREstache

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Re: Another Roth vs traditional question
« Reply #3 on: May 16, 2019, 06:18:52 PM »
I found some topics on this, but I am still not quite sure I understand.

The irs states that a single person has to have a magi under 64000 to take the full traditional ira tax deduction in 2019.

If someoneís ( Income - hsa and 401k) comes out to 70k and they take the standard deduction with no other major deductions, is it worth it to do traditional over Roth? If so,  At what point does it become not worth it?

This also assumes the person will do a backdoor later on.

The standard deduction is not a factor in calculating MAGI.

ChpBstrd

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Re: Another Roth vs traditional question
« Reply #4 on: May 17, 2019, 08:41:25 PM »
If their MAGI is 70K, then they are in the phase out. They can deduct 2,400 in a tIRA.

Here are instructions on how much you can contribute to the Roth:

https://www.irs.gov/retirement-plans/amount-of-roth-ira-contributions-that-you-can-make-for-2019
https://www.irs.gov/publications/p590a

This is a PITA because you'd like to make contributions into these accounts throughout the year, investing your savings ASAP. However, because you don't necessarily know exactly how much you'll earn, you don't know how much to send to your traditional IRA and how much to send to your Roth IRA. I got in a situation last year where I had to recharacterize contributions. It sucked! Now, my solution is to drop money into my taxable account so that I can stay invested all year, and then I will transfer the optimal amounts to my traditional IRA and Roth IRA when I figure out my taxes early next year.

COEE

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Re: Another Roth vs traditional question
« Reply #5 on: May 19, 2019, 08:51:50 AM »
If you are going to use the backdoor process in future years, pre-tax IRA balances at that time will incur tax, presumably at a higher rate than you would pay now.  In that case, doing a direct Roth contribution of $6K now makes sense.

This.  I was incredibly fortunate to work for a company where I was able to transfer my tIRA to my 401k.  Not all 401k's allow this.  When you start the backdoor you want your tIRA to be as close to $0 balance as possible.

COEE

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Re: Another Roth vs traditional question
« Reply #6 on: May 19, 2019, 08:54:35 AM »
Now, my solution is to drop money into my taxable account so that I can stay invested all year, and then I will transfer the optimal amounts to my traditional IRA and Roth IRA when I figure out my taxes early next year.

How exactly can you do this without paying capital gains or without TLH depending on the performance of the investments?  I didn't think that one could simply do an in-kind transfer, but I may be wrong.

Further - my understanding of doing a recharacterization was as easy as calling your broker and telling them how much to recharacterize.  I'd be interested in knowing some of your difficulties.
« Last Edit: May 19, 2019, 08:56:21 AM by COEE »

firemane

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Re: Another Roth vs traditional question
« Reply #7 on: May 19, 2019, 09:33:41 AM »
Thanks a lot folks. Sounds like Roth is ideal in this case. I am kind of the financial help person to clueless co workers that is what brought up the question lol. In my opinion, if you canít take the full deduction, itís best to stick to Roth to keep things simple. What confused me is that I almost always see recommendations to do traditional without much explanation of why or any inquiry about the persons salary, and at the same time it seems like a lot of people  around here make high salaries

COEE

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Re: Another Roth vs traditional question
« Reply #8 on: May 19, 2019, 10:22:53 AM »
Generally speaking, use roth if you think you will be in a higher tax bracket in retirement... use traditional if you think you will be in a lower tax bracket.  If you expect to be in the same bracket - then it's really a tossup.  If you're a long ways from retirement, then it's really a toss-up since you don't know what the future tax brackets will be like.

What I've found is that this is an excellent strategy - when I was young and in a very low tax bracket, I invested in Roth.  Mid career I invested in traditional to keep myself in a lower tax bracket, and now that I'm struggling to stay in that lower tax bracket, I'm also being phased out of traditional and starting to have to contribute to Roth again.  It's really built-in diversifying if you're doing it right.

MDM

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Re: Another Roth vs traditional question
« Reply #9 on: May 19, 2019, 11:40:07 AM »
What confused me is that I almost always see recommendations to do traditional without much explanation of why or any inquiry about the persons salary, and at the same time it seems like a lot of people  around here make high salaries
A traditional 401k for anyone with a high salary is usually a good idea.  A 401k (or 403b or 457) plan doesn't have the deductible income limit that a tIRA does.

ChpBstrd

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Re: Another Roth vs traditional question
« Reply #10 on: May 20, 2019, 02:55:15 PM »
Now, my solution is to drop money into my taxable account so that I can stay invested all year, and then I will transfer the optimal amounts to my traditional IRA and Roth IRA when I figure out my taxes early next year.

How exactly can you do this without paying capital gains or without TLH depending on the performance of the investments?  I didn't think that one could simply do an in-kind transfer, but I may be wrong.

Further - my understanding of doing a recharacterization was as easy as calling your broker and telling them how much to recharacterize.  I'd be interested in knowing some of your difficulties.

You do end up paying taxes on almost a year of gains or losses. You also might end the year with more or less than the amount planned for deposit.

In my case, I had to send in a form to recharacterize something like $2500 of my $5500 traditional IRA contribution- for both me and my spouse. Both amounts had already been invested so rather than pay another set of commissions to sell and rebuy in each account, I opted to move shares and was left with odd lots. At tax time, the software made me enter every detail of these transactions into an obscure form. Because capital gains had occurred, there was some math involved to track the cost basis (Iím basically audit bait now). All this involved a half dozen calls with my broker. Time invested was probably 5-7 hours.