Author Topic: How exactly do I contribute to a Traditional IRA?  (Read 5317 times)

Anti-ComplainyPants

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How exactly do I contribute to a Traditional IRA?
« on: February 25, 2015, 12:30:22 PM »
I'm getting the feeling that there is a blatantly obvious fact that I'm missing, which is the last piece of the puzzle in deciding Traditional vs. Roth for myself.

I have been contributing to a Roth IRA; obviously, with post-tax dollars from my paycheck. I also contribute to a 403(b) - these contributions are made automatically by my employer pre-tax. Unfortunately that means I'm stuck with the crappy fund options that they offer.

So if I decided to contribute to a Traditional IRA instead of my Roth, would the money come from my paycheck (post-tax) or withheld from my check and contributed through my employer (pre-tax)? I'm confused because I know Traditional IRAs are tax-differed, and I meet the criteria for my contributions to be fully deductible, but that does mean I still fund it with my post-tax dollars that are refunded when I do my taxes at the end of the year?

As background, I should remain in the 15% tax bracket regardless. I am considering Traditional in order to have more money building compound interest over time, as opposed to less money available to compound in Roth (because the money has already been taxed). Yes, I'll pay those taxes later when I withdraw them from a Traditional, but only on my contributions; my tax-free interest/dividend income should hypothetically be higher over time since there was more money in the account.

Does this make sense, and can anyone clarify?

skyrefuge

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Re: How exactly do I contribute to a Traditional IRA?
« Reply #1 on: February 25, 2015, 12:35:25 PM »
but that does mean I still fund it with my post-tax dollars that are refunded when I do my taxes at the end of the year?

Yes, you fund all IRAs (whether Roth or Traditional) with a transfer from your bank account. It has nothing to do with your paycheck. Your tax deduction from contributing to a Traditional comes at tax filing time.

NathanP

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Re: How exactly do I contribute to a Traditional IRA?
« Reply #2 on: February 25, 2015, 12:45:11 PM »
As mentioned, the tax benefit comes when filing your taxes. See this page for income limits based on whether you do or do not have a retirement plan at work.

http://www.irs.gov/Retirement-Plans/IRA-Deduction-Limits

Mississippi Mudstache

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Re: How exactly do I contribute to a Traditional IRA?
« Reply #3 on: February 25, 2015, 12:47:12 PM »
Skyrefuge is correct. You can adjust your withholding if you would prefer to get the tax savings back now instead of next year.

FarmerPete

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Re: How exactly do I contribute to a Traditional IRA?
« Reply #4 on: February 25, 2015, 12:54:22 PM »
Where is your Roth IRA held?  If it's a solid company with low fee options, I would open up an IRA with them.  I know that you can open an IRA with Fidelity crazy easy.  You can then link your bank account and direct deposit the money into your account.  You can also do it via check if you don't want to link the accounts.  Your contribution for your IRA and Roth IRA COMBINED is $5500, so if you are already contributing to your Roth, you'll have to subtract that number from $5500 to show how much you can put in an IRA.

Hey It's Me

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Re: How exactly do I contribute to a Traditional IRA?
« Reply #5 on: February 25, 2015, 03:20:14 PM »
Where is your Roth IRA held?  If it's a solid company with low fee options, I would open up an IRA with them.  I know that you can open an IRA with Fidelity crazy easy.  You can then link your bank account and direct deposit the money into your account.  You can also do it via check if you don't want to link the accounts.  Your contribution for your IRA and Roth IRA COMBINED is $5500, so if you are already contributing to your Roth, you'll have to subtract that number from $5500 to show how much you can put in an IRA.

I opened mine with Fidelity with a few hundred dollars, but they're basically just sitting there as it seems Fidelity generally doesn't allow you to invest in funds unless you have $2,500 to invest...

Anti-ComplainyPants

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Re: How exactly do I contribute to a Traditional IRA?
« Reply #6 on: February 25, 2015, 03:37:52 PM »
This is exactly what I needed to know, thank you!

I opened my Roth with Vanguard, so if I continue going through with opening a Traditional, it'll also be through them. I'd need a $3000 deposit to start, but I wonder if they'd waive that considering I already have a Roth account with them that is rapidly approaching Admiral status...

So I think I'm going to pull the trigger on my strategy: contribute to Traditional instead of Roth. Using the logic that even though I'm in a 15% tax bracket now, I'm betting that my tax bracket in retirement will be no higher; plus I'll have more money to gain compound interest because it's pre-tax. And I can always put that Traditional money into a my Roth through the "back door" in the future.

Anyone have any major concerns about that strategy on my behalf?

jmusic

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Re: How exactly do I contribute to a Traditional IRA?
« Reply #7 on: February 25, 2015, 04:10:52 PM »
Note that if you already put your money in a Roth, it's possible to recharacterize the contribution as a Traditional.  I did this in 2014.  I'm not sure if it's possible to still do this for 2014 though. 

celticmyst08

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Re: How exactly do I contribute to a Traditional IRA?
« Reply #8 on: February 25, 2015, 04:34:55 PM »
I think I'll be doing this too... My husband and I both have Vanguard Roth IRAs (he opened his in 2013 and I opened mine last year). We are in the 25% tax bracket after getting married so I think it makes more sense to do tIRAs now. Our MAGI is still low enough to deduct all our contributions.

How would we go about recharacterizing our Roth IRA contributions to tIRA? It would be for 2015. I should probably just call Vanguard...

MrMoogle

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Re: How exactly do I contribute to a Traditional IRA?
« Reply #9 on: February 25, 2015, 04:58:08 PM »
I opened my Roth with Vanguard, so if I continue going through with opening a Traditional, it'll also be through them. I'd need a $3000 deposit to start, but I wonder if they'd waive that considering I already have a Roth account with them that is rapidly approaching Admiral status...

So I think I'm going to pull the trigger on my strategy: contribute to Traditional instead of Roth. Using the logic that even though I'm in a 15% tax bracket now, I'm betting that my tax bracket in retirement will be no higher; plus I'll have more money to gain compound interest because it's pre-tax. And I can always put that Traditional money into a my Roth through the "back door" in the future.

Anyone have any major concerns about that strategy on my behalf?

Look at Vanguard Target Retirement Funds, they only have $1k requirements, and if you pick the 2060, it's mostly stocks. 

Yes, it's usually better to do Traditional while you work: http://www.madfientist.com/retire-even-earlier/

You'll do a Roth Conversion in retirement, a backdoor is something slightly different for high earners.  But that sounds good :)

You can adjust your withholding to take advantage of your tax deduction now, there are posts in the forum that talk about how to do this.

Anti-ComplainyPants

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Re: How exactly do I contribute to a Traditional IRA?
« Reply #10 on: February 26, 2015, 07:12:03 AM »
Note that if you already put your money in a Roth, it's possible to recharacterize the contribution as a Traditional.  I did this in 2014.  I'm not sure if it's possible to still do this for 2014 though.

That probably would have been a good idea, but I already filed my 2014 taxes. No biggie, now I have some money in a Roth, which can serve to provide some emergency cash in an absolutely-positively-worst-case scenario. Yes, I know, I will avoid this at all costs, and have already established an emergency cash fund (I could feel the corrections coming).

johnny847

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Re: How exactly do I contribute to a Traditional IRA?
« Reply #11 on: February 26, 2015, 07:20:08 AM »
Note that if you already put your money in a Roth, it's possible to recharacterize the contribution as a Traditional.  I did this in 2014.  I'm not sure if it's possible to still do this for 2014 though.

That probably would have been a good idea, but I already filed my 2014 taxes. No biggie, now I have some money in a Roth, which can serve to provide some emergency cash in an absolutely-positively-worst-case scenario. Yes, I know, I will avoid this at all costs, and have already established an emergency cash fund (I could feel the corrections coming).
You can still do this if you file an amended return. http://www.bogleheads.org/wiki/IRA_recharacterization
Quote
If you filed your tax return by April 15 of the year following the contribution (or applied for an extension at the time), you may recharacterize until October 15 of that year. If you recharacterize after April 15, write "Filed pursuant to section 301.9100-2" on your amended return.

Mississippi Mudstache

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Re: How exactly do I contribute to a Traditional IRA?
« Reply #12 on: February 26, 2015, 07:23:52 AM »
I opened mine with Fidelity with a few hundred dollars, but they're basically just sitting there as it seems Fidelity generally doesn't allow you to invest in funds unless you have $2,500 to invest...

Commission-free ETFs are your friend.

KCM5

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Re: How exactly do I contribute to a Traditional IRA?
« Reply #13 on: February 27, 2015, 10:37:27 AM »
I think I'll be doing this too... My husband and I both have Vanguard Roth IRAs (he opened his in 2013 and I opened mine last year). We are in the 25% tax bracket after getting married so I think it makes more sense to do tIRAs now. Our MAGI is still low enough to deduct all our contributions.

How would we go about recharacterizing our Roth IRA contributions to tIRA? It would be for 2015. I should probably just call Vanguard...

We just did this. Called Vanguard, the customer service representative had us open a tIRA while on the phone with her (could have been done ahead of time) and then she transferred the money from the Roth to the tIRA.

Does anyone know, when I file my taxes do I claim the contributions to the Roth as a traditional IRA contribution (in our case it was $3900) or the contributions plus the earnings (another $400 or so)? Or is that $400 income and then also claimed as a contribution?

Mississippi Mudstache

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Re: How exactly do I contribute to a Traditional IRA?
« Reply #14 on: February 27, 2015, 10:53:11 AM »
Customer service moved the entire balance back (contribution + earnings) into a t.IRA, right? If so, claim just the original $3900 contribution. The $400 in earnings will be taxed when you pull it out of the t.IRA.

KCM5

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Re: How exactly do I contribute to a Traditional IRA?
« Reply #15 on: February 27, 2015, 10:56:18 AM »
Customer service moved the entire balance back (contribution + earnings) into a t.IRA, right? If so, claim just the original $3900 contribution. The $400 in earnings will be taxed when you pull it out of the t.IRA.

Excellent. That's what happened (contributions + earnings to tIRA) and that's what I've claimed on my taxes (contribution only). Thanks.

FLBiker

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Re: How exactly do I contribute to a Traditional IRA?
« Reply #16 on: February 27, 2015, 12:23:31 PM »
Note that if you already put your money in a Roth, it's possible to recharacterize the contribution as a Traditional.  I did this in 2014.  I'm not sure if it's possible to still do this for 2014 though.

I did this for me and my wife in 2014, and it saved us over $2.5k in taxes.  I'd done Roth for years before that, but Traditional is the way to go (for us).

celticmyst08

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Re: How exactly do I contribute to a Traditional IRA?
« Reply #17 on: February 27, 2015, 12:34:54 PM »
I think I'll be doing this too... My husband and I both have Vanguard Roth IRAs (he opened his in 2013 and I opened mine last year). We are in the 25% tax bracket after getting married so I think it makes more sense to do tIRAs now. Our MAGI is still low enough to deduct all our contributions.

How would we go about recharacterizing our Roth IRA contributions to tIRA? It would be for 2015. I should probably just call Vanguard...

We just did this. Called Vanguard, the customer service representative had us open a tIRA while on the phone with her (could have been done ahead of time) and then she transferred the money from the Roth to the tIRA.
Awesome. That's exactly what I want to do. Thanks!

zurich78

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Re: How exactly do I contribute to a Traditional IRA?
« Reply #18 on: March 01, 2015, 06:59:23 PM »
I'd think a Roth is more favorable than a tira.  All earnings can be withdrawn tax-free.  So not sure why anyone would specifically choose not to invest in one if given the choice to have one.

celticmyst08

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Re: How exactly do I contribute to a Traditional IRA?
« Reply #19 on: March 02, 2015, 10:13:13 AM »
I'd think a Roth is more favorable than a tira.  All earnings can be withdrawn tax-free.  So not sure why anyone would specifically choose not to invest in one if given the choice to have one.

Roths are indeed awesome. However, the idea is that most early retirees will have a lower income in retirement than during their working years. Hence, it can often be better to get the sweet tax deductions now (and therefore have extra money to invest every year) and then start converting the tIRA to a Roth later on. Here's a post explaining the concept: http://www.madfientist.com/traditional-ira-vs-roth-ira/

Obviously this won't be true in all scenarios, but I think it tends to be a better option for the early retirement crowd. It all depends on your income now vs your expected retirement income.