Author Topic: Explain to me how you get money into the traditional IRA  (Read 5809 times)

MVal

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Explain to me how you get money into the traditional IRA
« on: July 29, 2015, 09:36:29 AM »
Okay, here's a real softball question for you seasoned Mustachians from a rookie... So, I have this Roth IRA and I've been hearing a traditional IRA is better if you're trying to ER since you get more tax advantage now and can just ladder it to the Roth later. But how do you get the money tax free in the tIRA? Do you have your employer involved like with your 401K so they can take the money out "pre-tax"? Or do you pay taxes on it upfront and then at the end of the year when you get your taxes done, the feds "refund" the tax back to you? I don't get it.

I've got my $5500 ready to invest for the year, but I'm just not sure if I should go ahead and dump in the existing Roth or open up a new tIRA with it? Or maybe I just do the tIRA with next year's contributions...ah, choices.

seattlecyclone

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Re: Explain to me how you get money into the traditional IRA
« Reply #1 on: July 29, 2015, 09:47:00 AM »
Your employer will not be involved at all. You just put the money in, and this amount will be subtracted from your income when calculating your taxes. If you want to be really fancy about it, you can even adjust your withholding with your employer so that you don't overpay on taxes through your paychecks, but this part is really up to you.

laughing_paddler

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Re: Explain to me how you get money into the traditional IRA
« Reply #2 on: July 29, 2015, 09:48:45 AM »
I'm not as expert as others on here, but to get you started, first you have to be eligible:
Are you younger than 50?
Filing singly?
Do you have an modified AGI (AGI plus student loan interest and some possible other stuff) less than 61k?

If yes to all three, you can contribute the full 5500 to a tIRA that you set up on Vanguard in just a few minutes. When you file 2015 taxes your taxable income drops by the 5500 and you owe less tax, or get a larger refund of money that was withheld from paychecks.

I'm certain experts can pick this apart for lots of small inaccuracies due to specific examples, but you can get a feel for it until others start chiming in.

laughing_paddler

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forummm

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Re: Explain to me how you get money into the traditional IRA
« Reply #4 on: July 29, 2015, 10:31:58 AM »
I'm not as expert as others on here, but to get you started, first you have to be eligible:
Are you younger than 50?
Filing singly?
Do you have an modified AGI (AGI plus student loan interest and some possible other stuff) less than 61k?

If yes to all three, you can contribute the full 5500 to a tIRA that you set up on Vanguard in just a few minutes. When you file 2015 taxes your taxable income drops by the 5500 and you owe less tax, or get a larger refund of money that was withheld from paychecks.

I'm certain experts can pick this apart for lots of small inaccuracies due to specific examples, but you can get a feel for it until others start chiming in.

You can also get the T.IRA deduction if you are married, over 50, etc. The main variables are income and availability of retirement account at work.
http://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
http://www.irs.gov/Retirement-Plans/Are-You-Covered-by-an-Employer's-Retirement-Plan%3F
http://www.irs.gov/Retirement-Plans/2015-IRA-Deduction-Limits-Effect-of-Modified-AGI-on-Deduction-if-You-Are-NOT-Covered-by-a-Retirement-Plan-at-Work
http://www.irs.gov/Retirement-Plans/IRA-Deduction-Limits

laughing_paddler

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Re: Explain to me how you get money into the traditional IRA
« Reply #5 on: July 29, 2015, 10:37:55 AM »
^ right, yes of course, I saw that that would look like I was saying ONLY under 50 is eligible as soon as I hit 'post' :-)

forummm

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Re: Explain to me how you get money into the traditional IRA
« Reply #6 on: July 29, 2015, 10:46:45 AM »
^ right, yes of course, I saw that that would look like I was saying ONLY under 50 is eligible as soon as I hit 'post' :-)

If you want to change something, you can always edit posts after you post them. There's a "modify" button in the top right of your posts.

CorpRaider

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Re: Explain to me how you get money into the traditional IRA
« Reply #7 on: July 29, 2015, 12:00:21 PM »
You just write it off, Jerry!

Eric

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Re: Explain to me how you get money into the traditional IRA
« Reply #8 on: July 29, 2015, 12:18:05 PM »
Or do you pay taxes on it upfront and then at the end of the year when you get your taxes done, the feds "refund" the tax back to you? I don't get it.

Yes, you just contribute your after tax money and when you file your taxes you get to deduct this amount from your income.

MVal

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Re: Explain to me how you get money into the traditional IRA
« Reply #9 on: July 29, 2015, 01:49:49 PM »
I'm not as expert as others on here, but to get you started, first you have to be eligible:
Are you younger than 50?
Filing singly?
Do you have an modified AGI (AGI plus student loan interest and some possible other stuff) less than 61k?

If yes to all three, you can contribute the full 5500 to a tIRA that you set up on Vanguard in just a few minutes. When you file 2015 taxes your taxable income drops by the 5500 and you owe less tax, or get a larger refund of money that was withheld from paychecks.

I'm certain experts can pick this apart for lots of small inaccuracies due to specific examples, but you can get a feel for it until others start chiming in.

I see, okay. Yes, I only make 40K/yr currently, and I don't know, but I would hope I would make more in the future, so I'm not sure when I would be able to FIRE and have my income drop back into a lower tax bracket. I mean, right now I'm in the 15% one, so pretty low, but still it would be cool to be able to deduct another $5500 from my taxes this year. I could take that refund and reinvest it somewhere else.

tdogz

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Re: Explain to me how you get money into the traditional IRA
« Reply #10 on: July 29, 2015, 02:11:03 PM »
This may or may not apply to your situation, but...
tIRA contributions can also help knock your income down to a level where you would qualify for the Saver's Credit. At $40k and filing as Single, you would need to get below the $30,500 threshold to get any of the Saver's Credit in 2015.

http://www.irs.gov/Retirement-Plans/Plan-Participant,-Employee/Retirement-Topics-Retirement-Savings-Contributions-Credit-(Saverís-Credit)
« Last Edit: July 29, 2015, 02:14:39 PM by tdogz »

MVal

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Re: Explain to me how you get money into the traditional IRA
« Reply #11 on: July 29, 2015, 03:15:48 PM »
This may or may not apply to your situation, but...
tIRA contributions can also help knock your income down to a level where you would qualify for the Saver's Credit. At $40k and filing as Single, you would need to get below the $30,500 threshold to get any of the Saver's Credit in 2015.

http://www.irs.gov/Retirement-Plans/Plan-Participant,-Employee/Retirement-Topics-Retirement-Savings-Contributions-Credit-(Saverís-Credit)

Are you serious? Why did no one ever tell me about this? That is crazy! So let me get this straight...if you max out your 401K and IRA(s) to the point that you are below $18,250 taxable/AGI for the year, then the government gives you 50% of what you put in as a credit?! Dang!
So in order to do that, I would have to take my $40K and let's say I max out the 401K, HSA and put some money in either a Roth or tIRA, all to the tune of at least $21,750. And so if did that, this Saver's Credit would give me back half, $10,875? Whoa!

Found this chart online just now...

2015 Saver's Credit
Credit Rate   Married Filing Jointly   Head of Household   All Other Filers*
50% of your contribution   AGI not more than $36,500   AGI not more than $27,375   AGI not more than $18,250
20% of your contribution   $36,501 - $39,500   $27,376 - $29,625   $18,251 - $19,750
10% of your contribution   $39,501 - $61,000   $29,626 - $45,750   $19,751 - $30,500
0% of your contribution   more than $61,000   more than $45,750   more than $30,500
Retirement savings eligible for the credit
The Saverís Credit can be taken for your contributions to a traditional or Roth IRA; your 401(k), SIMPLE IRA, SARSEP, 403(b), 501(c)(18) or governmental 457(b) plan; and your voluntary after-tax employee contributions to your qualified retirement and 403(b) plans.
Rollover contributions (money that you moved from another retirement plan or IRA) arenít eligible for the Saverís Credit. Also, your eligible contributions may be reduced by any recent distributions you received from a retirement plan or IRA.

And I'm not too clear on what a tax credit really is, since I'm a single worker and pretty much don't get any. Is it like, whatever the credit is, your taxable income is reduced by that much? Or do you get that amount as a cash refund?

And the other question is...if I fund a tIRA rather than a Roth and I take this Saver's Credit, does that prevent me from taking a deduction on the contribution? Or on the other tax advantaged accounts, for that matter??
« Last Edit: July 29, 2015, 03:20:35 PM by MVal »

seattlecyclone

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Re: Explain to me how you get money into the traditional IRA
« Reply #12 on: July 29, 2015, 03:52:37 PM »
Unfortunately the saver's credit is not that sweet of a deal. You only get a credit on the applicable percentage of the first $2,000 of retirement contributions per person, and the credit is non-refundable (meaning if it's less than your total tax, it just takes your tax down to zero instead of causing the government to pay you). It's still worth being aware of though!

MVal

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Re: Explain to me how you get money into the traditional IRA
« Reply #13 on: July 29, 2015, 03:53:32 PM »
Oh, wait a minute...I just read about what a non-refundable tax credit is...so basically, the best that could happen if I did this is I could potentially reduce my whole tax bill for the year to $0, I wouldn't get a cash refund.

Which would be pretty cool, I think, anyway! I mean, if I had a $0 tax bill, I guess that means any federal tax I paid in 2015 would have to be refunded to me, correct? So far, I've paid about $2,000 in fed income tax this year, so if I started this now, I suppose I would get at least a $2,000 refund.

Am I understanding this right?

MVal

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Re: Explain to me how you get money into the traditional IRA
« Reply #14 on: July 29, 2015, 03:55:38 PM »
Oh nevermind, Seattlecyclone just cleared it up. So I probably shouldn't knock myself out right now and be destitute for the rest of the year to do this, I suppose.

But next year I have plans to make a much bigger contribution to the 401K, so this might be handy for 2016. A $2000 tax credit is nothing to sneeze at, certainly.
« Last Edit: July 29, 2015, 04:01:19 PM by MVal »

seattlecyclone

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Re: Explain to me how you get money into the traditional IRA
« Reply #15 on: July 29, 2015, 05:45:59 PM »
The maximum saver's credit for a single person is $1,000: for someone in the 50% credit range (under $18,250 AGI) who contributes at least $2,000 to a retirement account. The maximum for a married couple is $2,000: below $36,500 AGI and at least $2,000 contributed to each spouse's retirement account.

It's pretty hard to get this whole amount. A single person with $18,250 AGI is going to have a $6,300 standard deduction and $4,000 personal exemption, bringing their taxable income down to $7,950. This person would owe $795 before credits, meaning the saver's credit would be only $795 instead of the full $1,000.

The only way I can think of to get the whole amount is if you're in a situation where you owe some alternative minimum tax, which would require a lot of incentive stock option income or something else that is counted differently between the AMT and the regular tax. My guess is that the number of people who fit this description is extremely small.

Blal

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Re: Explain to me how you get money into the traditional IRA
« Reply #16 on: July 31, 2015, 12:41:32 PM »
The maximum saver's credit for a single person is $1,000: for someone in the 50% credit range (under $18,250 AGI) who contributes at least $2,000 to a retirement account. The maximum for a married couple is $2,000: below $36,500 AGI and at least $2,000 contributed to each spouse's retirement account.

From the link: "Amount of the credit
The amount of the credit is 50%, 20% or 10% of your retirement plan or IRA contributions up to $2,000 ($4,000 if married filing jointly), depending on your adjusted gross income (reported on your Form 1040 or 1040A). Use the chart below to calculate your credit."

*snip - misread*Were you looking at an older version of the credit maybe?

I don't think it effectively makes much of a difference between $1000 and $2000 at that income though, since as you said, it's not going to matter past $800. Maybe someone has an example of where this would matter.

This is among the best reasons I can see for putting money into a Roth IRA over traditional if you can reach the 19500 threshold. For example if your AGI is 21000 and you put 1500 into a tIRA and 4000 into a Roth, you lower your AGI to 19500 for a tax rate of 935 after deductions, then credit 5500 * 0.2 = $1100. Now you have your tax free Roth IRA and at the same tax rate you would've had with the tIRA

Also worth noting is you can go to college half-time and still get this, so you can deduct your tuition, use this to potentially bring your tax to 0 to ensure you get the full $1000 from the AOT credit, since that is refundable at 40%
« Last Edit: July 31, 2015, 12:51:22 PM by Blal »

seattlecyclone

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Re: Explain to me how you get money into the traditional IRA
« Reply #17 on: August 01, 2015, 12:31:29 AM »
No, you're reading the language about the maximum incorrectly. It's not that the maximum credit is $2,000 per person, it's that the maximum contributions that count for the credit is capped at $2,000. Your AGI determines whether the credit is 10%, 20%, or 50% of that amount.

Look at the form. On Line 6 you enter your retirement contributions or $2,000 (whichever is smaller), and then you multiply that by the percentage based on your AGI. There's just no way to put in numbers that result in an $1,100 credit for a single person.

MDM

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Re: Explain to me how you get money into the traditional IRA
« Reply #18 on: August 01, 2015, 12:50:55 AM »
No, you're reading the language about the maximum incorrectly. It's not that the maximum credit is $2,000 per person, it's that the maximum contributions that count for the credit is capped at $2,000. Your AGI determines whether the credit is 10%, 20%, or 50% of that amount.

Look at the form. On Line 6 you enter your retirement contributions or $2,000 (whichever is smaller), and then you multiply that by the percentage based on your AGI. There's just no way to put in numbers that result in an $1,100 credit for a single person.
+1

AFAIK (and it would be good to discover others) the only thing short of a full commercial tax software package that will calculate the saver's credit is the MMM case study spreadsheet.  E.g., see http://forum.mrmoneymustache.com/taxes/best-paycheckwithholding-calculator(s)/.

Blal

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Re: Explain to me how you get money into the traditional IRA
« Reply #19 on: August 05, 2015, 11:50:56 AM »
No, you're reading the language about the maximum incorrectly. It's not that the maximum credit is $2,000 per person, it's that the maximum contributions that count for the credit is capped at $2,000. Your AGI determines whether the credit is 10%, 20%, or 50% of that amount.

Look at the form. On Line 6 you enter your retirement contributions or $2,000 (whichever is smaller), and then you multiply that by the percentage based on your AGI. There's just no way to put in numbers that result in an $1,100 credit for a single person.

Oh, you're right, I misinterpreted that. I did assume the $2000 was the max credit. The IRS pub makes it much more clear.

That's unfortunate, but I should've realized. If it seems too good to be true, it probably is