IRA vs 401(k), other options?

[michael]

Still grappling with the best option for me...

a) My employer has a 401(k) available but does not match any contributions.
b) My income is too high for a Roth (boo-hoo)

I currently have $20k in a taxable VTSAX account and another $6k in (as far as I know) non-taxable bonds through VBMFX. My expenses are such that I could meet any IRA contribution limit should I choose one, then continue to invest in these other accounts.

So what are my real options here, as I see it?

• Contribute to the 401(k) for tax savings
• Don't contribute to the 401(k) but do contribute to a traditional IRA. From what I can tell, if I dont contribute to the 401(k) then traditional IRA contributions are tax deductible.
• Contribute to both the 401(k) and a traditional IRA. In this case, none of my deductions to the IRA are tax deductible, but interim growth is tax-free. That's better than nothing at least, but could get complicated on April 15...

Now another option is the Roth backdoor, i.e. rolling over a traditional IRA into a Roth to bypass the income limit. Is this still viable for 2013? If I do it for tax year 2012, then will I be able to contribute freely to the Roth in 2013, or do I have to keep rolling over traditional IRAs into Roths?

What do you guys think about my options? What did I miss?

I am, by the way, in the 28% bracket and am of the opinion that taxes will probably be higher when I retire, so I would like to get them out of the way now, if possible.

[sherr]

I am, by the way, in the 28% bracket and am of the opinion that taxes will probably be higher when I retire, so I would like to get them out of the way now, if possible.

Only if your *average* tax rate in retirement is higher than your *marginal* tax rate now. If you plan on spending *a lot* of money in retirement then that may be true, but if like most people on this forum you're talking about withdrawing only ~$30k / year in retirement then it is almost certainly not true. I also believe tax rates will be higher in the future, but I don't believe that the taxes on the low-income earners will triple to over 28%.

First of all I suggest that you max out your 401k. You can put a lot more in a 401k than you can a either type of IRA, so get the tax advantage off of the most money you can by maxing that out.

Once you've done that you won't be eligible to make deductible contributions to a Traditional IRA, your next-best option would be to make backdoor contributions to a Roth. To do so you'd make regular contributions to a Traditional IRA, and then convert (reconstitute) the money to a Roth IRA. You'd have to do this every year you wish to contribute to the Roth.

[chucklesmcgee]

To do so you'd make regular contributions to a Traditional IRA, and then convert (reconstitute) the money to a Roth IRA. You'd have to do this every year you wish to contribute to the Roth.

It takes about 3 clicks in Vanguard if you have no other traditional IRA assets.

Also look at HSAs.

[michael]

I am, by the way, in the 28% bracket and am of the opinion that taxes will probably be higher when I retire, so I would like to get them out of the way now, if possible.

Only if your *average* tax rate in retirement is higher than your *marginal* tax rate now. If you plan on spending *a lot* of money in retirement then that may be true, but if like most people on this forum you're talking about withdrawing only ~$30k / year in retirement then it is almost certainly not true. I also believe tax rates will be higher in the future, but I don't believe that the taxes on the low-income earners will triple to over 28%.

Ok, that's a good point. I appreciate you making it, because I haven't seen it made that succinctly elsewhere. Like others here, my FI plans include spending less than $30k/year, which would certainly put me in a much lower bracket as the rest would be reinvested.

First of all I suggest that you max out your 401k. You can put a lot more in a 401k than you can a either type of IRA, so get the tax advantage off of the most money you can by maxing that out.

This makes sense. I got the 401(k) holdings info from the accounting office today, and there's one Vanguard large cap blend fund amidst a number of other growth and value funds. Some of those other funds offer fairly low expense ratios, so there are some good options I will explore to diversify my portfolio.

Once you've done that you won't be eligible to make deductible contributions to a Traditional IRA, your next-best option would be to make backdoor contributions to a Roth. To do so you'd make regular contributions to a Traditional IRA, and then convert (reconstitute) the money to a Roth IRA. You'd have to do this every year you wish to contribute to the Roth.

Does it matter at what point in the fiscal year I convert to the Roth? For example, I am thinking I'd contribute to the traditional throughout the fiscal year, then convert before filing taxes. Cutting it too close/losing compounding opportunity?

[sherr]

Once you've done that you won't be eligible to make deductible contributions to a Traditional IRA, your next-best option would be to make backdoor contributions to a Roth. To do so you'd make regular contributions to a Traditional IRA, and then convert (reconstitute) the money to a Roth IRA. You'd have to do this every year you wish to contribute to the Roth.

Does it matter at what point in the fiscal year I convert to the Roth? For example, I am thinking I'd contribute to the traditional throughout the fiscal year, then convert before filing taxes. Cutting it too close/losing compounding opportunity?

No not really, converting before you file taxes should be fine. After all your interest will also be compounding in the Traditional IRA throughout the year so you're not really loosing anything by waiting.

I'll also +1 Chuckles' suggestion to look into Health Savings Accounts. They're primarily an additional way to save and spend tax-free money for medical expenses, but once you reach retirement age you can withdraw the money for non-medical reasons and not pay a penalty (but still pay taxes). So if you keep your money there long term they're essentially an additional way to invest in a Traditional IRA / 401k. You have to be on a High Deductible Health Plan though, so if you have large regular medical expenses it may not be for you. I like mine a lot though.

[gmaxwell]

• Don't contribute to the 401(k) but do contribute to a traditional IRA. From what I can tell, if I dont contribute to the 401(k) then traditional IRA contributions are tax deductible.

The advice I got was that that I was covered by the plan no matter if I contributed to it or not, and so didn't qualify for the no-employer-sponsored plan rules.  Regardless: doing the taxable IRA and periodic conversions (plus a maxed out 401k) is the optimal thing to do in any case.

[markstache]

You might also consider holding some I-Bonds or EE-Bonds. They behave like a traditional IRA with respect to earnings if used for income, but if you use them to pay for education, they behave more like a Roth. Might be worth looking into.