Author Topic: Confused about IRAs  (Read 1232 times)

Cadman

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Confused about IRAs
« on: September 05, 2015, 05:16:46 PM »
I've searched high and low the last few days and have found some good info on the forum, but I'm still confused on what the best thing would be for my situation.

My wife and I will make a combined gross income of ~170k this year. We both have work sponsored 401k's and assuming we max those out, what's the next step for any remaining 'savings'? At this income level, is there any advantage to a T-IRA? I believe any contribution would not be tax deductible in this situation. We do file married-jointly.

I'd like to invest in some Vanguard index funds but would it make more sense to open up a Roth IRA or simply a taxable acct? If a Roth, the limit would be $5500 for each of us, correct?  Thanks!

JustGettingStarted1980

  • Bristles
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Re: Confused about IRAs
« Reply #1 on: September 05, 2015, 05:34:48 PM »
Yup, Roth.

Other options include HSA, or 529 plan (aka Roth for education).  After that, you are stuck w taxable only.

Check out bogleheads wiki, all your answers will be found there.

Best of luck

MDM

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Re: Confused about IRAs
« Reply #2 on: September 05, 2015, 06:47:00 PM »
You could consider the ordering below.  Your income precludes a deductible IRA.  Roth is better than non-deductible IRA, and with the advent of the backdoor Roth there is no reason to do a non-deductible IRA (except as the backdoor pass-through to the Roth).

In the lists below, thinking "first your 457, then your 401k and/or 403b" wherever "401k" appears is likely correct.
Also, differences of a few tenths of a percent are not important when applicable for only a few years (in other words, these are guidelines not rules).
WHAT
0. Establish an emergency fund to your satisfaction
1. Contribute to 401k up to any company match
2. Pay off any debts with interest rates ~5% or more above the 10-year Treasury note yield.
3. Max HSA
4. Max Traditional IRA or Roth (or backdoor Roth) based on income level
5. Max 401k (if 401k fees are lower than available in an IRA, swap #4 and #5)
6. Fund mega backdoor Roth if applicable
7. Pay off any debts with interest rates ~3% or more above the 10-year Treasury note yield.
8. Invest in a taxable account with any extra.
   
WHY   
0. Give yourself at least enough buffer to avoid worries about bouncing checks   
1. Company match rates are likely the highest percent return you can get on your money   
2. When the guaranteed return is this high, take it.   
3. HSA funds are totally tax free when used for medical expenses, making the HSA better than either traditional or Roth IRAs.   
4. Rule of thumb: traditional if current marginal rate is 25% or higher; Roth if 10% or lower; flip a coin in between (or see   
   http://forum.mrmoneymustache.com/investor-alley/deciding-between-roth-and-traditional-ira-based-on-marginal-tax-rate/
   if you want even more details on that topic.)
5. See #4 for choice of traditional or Roth for 401k   
6. Applicability depends on the rules for the specific 401k   
7. Again, take the risk-free return if high enough   
8. Because earnings, even if taxed, are beneficial   

Cadman

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Re: Confused about IRAs
« Reply #3 on: September 05, 2015, 07:01:58 PM »
JGS and MDM, thank you very  much, exactly what I was looking for!  -C