Author Topic: Confused about IRAs  (Read 2167 times)

lisa_mustache

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Confused about IRAs
« on: March 02, 2017, 05:30:48 PM »
I'm pretty new to MMM, and very new to investing.  Since finding this site, I am now maxing out my 401(k) contributions, and my HSA account, and funneling all of our new mustachian savings into a taxable Vanguard index fund.  I have filled out the case study workbook, which I think tells me that I make too much for a Traditional IRA, so I am thinking about maxing out two Roth IRAs for this year (one for me, one for my husband) before putting more money into the taxable account.  But I keep getting confused and turned around reading posts in this forum and linked articles. 

I'm happy to provide more info if this isn't enough:

In 2016, our AGI was $167,000.  Between a recent promotion, my annual raise, and a generous bonus year, I will gross over $200k in 2017.  My spouse is a SAHP, and not currently making any taxable income.  Is Roth our only IRA option?  Should I contribute to a tIRA anyway, even with no immediate tax benefit (or do I have that part wrong?)?  Forgo all IRAs and go straight to more index funds?  I have read the investment order sticky a few times, but I still am not quite sure which IRAs apply to us.

Thanks very much for your time and consideration.  This mustachian thing has been really fun to jump into this year!

MDM

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Re: Confused about IRAs
« Reply #1 on: March 02, 2017, 07:59:38 PM »
Between a recent promotion, my annual raise, and a generous bonus year, I will gross over $200k in 2017.  My spouse is a SAHP, and not currently making any taxable income.  Is Roth our only IRA option?
Depends on your exact MAGI, based on IRA Deduction Limits and IRA Contribution Limits.

See also Backdoor Roth IRA - Bogleheads if your income is/becomes much higher than $200K.

Perhaps the best way for you to learn and get good feedback is to take what you think you understand from your reading and post something like "I plan to _____ because ______."

People will then likely applaud you for your plan, or point out something you might not have considered.

lisa_mustache

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Re: Confused about IRAs
« Reply #2 on: March 02, 2017, 08:48:22 PM »
Thanks, MDM!  My shaky comprehension based on those links is: I can't contribute to a Roth for 2017, and any investment in a traditional IRA would not give me a tax deduction.  If doing our taxes next year paints a different picture, we can re-evaluate.

I plan to invest in our taxable Vanguard account because there would be no tax advantage from a tIRA, and could actually be a double tax whammy (post-tax money now and then taxes on withdrawal, unless we do the Roth conversion).  Does that sound right? 


MDM

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Re: Confused about IRAs
« Reply #3 on: March 02, 2017, 08:59:34 PM »
Thanks, MDM!  My shaky comprehension based on those links is: I can't contribute to a Roth for 2017, and any investment in a traditional IRA would not give me a tax deduction.  If doing our taxes next year paints a different picture, we can re-evaluate.

I plan to invest in our taxable Vanguard account because there would be no tax advantage from a tIRA, and could actually be a double tax whammy (post-tax money now and then taxes on withdrawal, unless we do the Roth conversion).  Does that sound right?
Correct on no advantage to contributing and holding in a tIRA.

A Roth, however, is likely better than taxable, especially at your income, because once invested you never pay taxes on gains from that money (provided you keep them there until age 59.5).  If you make too much to contribute to the Roth "through the front door", then use the backdoor Roth.

lisa_mustache

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Re: Confused about IRAs
« Reply #4 on: March 02, 2017, 09:09:56 PM »
Thanks, MDM!  My shaky comprehension based on those links is: I can't contribute to a Roth for 2017, and any investment in a traditional IRA would not give me a tax deduction.  If doing our taxes next year paints a different picture, we can re-evaluate.

I plan to invest in our taxable Vanguard account because there would be no tax advantage from a tIRA, and could actually be a double tax whammy (post-tax money now and then taxes on withdrawal, unless we do the Roth conversion).  Does that sound right?
Correct on no advantage to contributing and holding in a tIRA.

A Roth, however, is likely better than taxable, especially at your income, because once invested you never pay taxes on gains from that money (provided you keep them there until age 59.5).  If you make too much to contribute to the Roth "through the front door", then use the backdoor Roth.

Excellent, thank you!

PaulMaxime

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Re: Confused about IRAs
« Reply #5 on: March 02, 2017, 10:59:35 PM »
Sounds to me like you are doing everything right.

I'd make sure that your 401K was in good inexpensive investments, and that you max out enough to get the full match, if any. That Vanguard fund will be very tax efficient.

The Roth IRA's are a great thing and make sure you put as much into them as possible.

One thing to look into is the After Tax 401K. You can convert those contributions to Roth at any time and that can really bump up the amount you can put into a Roth.

MustacheAndaHalf

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Re: Confused about IRAs
« Reply #6 on: March 03, 2017, 08:56:43 PM »
You cannot contribute to a Roth IRA at your income level.  And your 401(k) lowers your Traditional IRA contribution limit:
https://www.irs.gov/retirement-plans/2017-ira-deduction-limits-effect-of-modified-agi-on-deduction-if-you-are-covered-by-a-retirement-plan-at-work

Just to correct one point, you do receive a tiny benefit from the Traditional IRA funded by non-deductible contributions.  First, you delay paying of tax on dividends (about 2%/yr x 15%, or $17/yr on a $5,500 contribution).  So you get a slight dividends on dividends compounding effect.  But mostly I mention it because it negates the IRS "step doctrine" for reaching a Roth IRA.

Once you've contributed to the Traditional IRA (after-tax), wait for a statement showing your Traditional IRA, and then convert to a Roth IRA.

MDM

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Re: Confused about IRAs
« Reply #7 on: March 03, 2017, 09:15:36 PM »
But mostly I mention it because it negates the IRS "step doctrine" for reaching a Roth IRA.

Once you've contributed to the Traditional IRA (after-tax), wait for a statement showing your Traditional IRA, and then convert to a Roth IRA.
Most likely there is no need to worry about timing for the backdoor Roth, particularly in light of the recent More support for backdoor Roth? [Roth IRA Decision reversing Tax Court] - Bogleheads.org.  Just depends on how many nines one wants to be 99.99...% sure.

MustacheAndaHalf

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Re: Confused about IRAs
« Reply #8 on: March 04, 2017, 11:06:43 AM »
MDM, thanks for the link.

Looks like that case opens the door to getting the same result with a Roth Conversion challenged by the step doctrine... The IRS commissioner cannot overrule laws created by Congress.  So... I can finally forget about Roth IRAs and the step doctrine!

doneby35

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Re: Confused about IRAs
« Reply #9 on: March 04, 2017, 11:51:23 AM »
I was a little confused about this too. If both my spouse and I participate in an employer's 401k, is the full deductibility limit 98,000 MAGI or 184,000 MAGI?

MDM

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Re: Confused about IRAs
« Reply #10 on: March 04, 2017, 04:26:46 PM »
I was a little confused about this too. If both my spouse and I participate in an employer's 401k, is the full deductibility limit 98,000 MAGI or 184,000 MAGI?
Because each of you is covered by a retirement plan, you are each subject to the same MAGI limit: in 2017, $99K.  That means:

If the MFJ 1040 return you file in 2018 for your 2017 taxes has a $98K MAGI, you may both deduct up to the maximum for your own tIRA.   

If the MFJ 1040 return you file in 2018 for your 2017 taxes has a $120K MAGI, neither of you may deduct any amount of a tIRA contribution. 

If your MAGI is between $99K and $119K, you each may deduct exactly the same fraction of the maximum tIRA contribution.