Author Topic: roth vs traditional IRA if over the MAGI limit for traditional  (Read 757 times)

me1

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I am brand new here, but been reading for a few weeks and am hooked.

I've read the sticky on order of investments.
I take advantage of my company's 401K and have most of that money in the only Vanguard index fund they offer in there (VFINX) and it's been doing good. The matching at the company is very minimal, so I take advantage of that plus some (but not to the full max of the possible 401K contribution).

I still have money left over, and I've read the sticky on order of investments and I see the next advice it to put that into a traditional IRA.

But... our MAGI is over the limit of being able to do a traditional pretax (145K).  but still under the limit to be able to contribute to a roth.

At this point does it make more sense to do a roth IRA or a regular IRA? Is there any advantage to doing a traditional? At least the roth will be tax free when I take it out? And as I understand it, at this point and until I take it out they will be the same, right?

I could be completely misunderstanding the rules, so I am looking for some advice.

Or should I just max out the 401K first?
And if I still have money over, should it go into roth or traditional IRA, and why?
Thanks!

GizmoTX

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Re: roth vs traditional IRA if over the MAGI limit for traditional
« Reply #1 on: March 10, 2017, 02:01:27 PM »
When you no longer can do a pre-tax tIRA because of your 401K but are still under the limit for a Roth, I would definitely put whatever I could into the Roth precisely because it accumulates tax-free forever. Anything in a traditional IRA or 401K is eventually going to be taxed. However, if you still can get a bigger deduction from additional investing in the 401K, then I might do that even if it's not being matched. After all, you're not getting a match in any of your other choices.

Generally speaking, the Roth makes the most sense for someone in a very minimal income tax situation. Once income materially increases, being able to reduce income tax via 401k or tIRA makes more sense than the Roth. When that is maxed, then put any additional into the Roth until you max it, then a non-deductible tIRA, and finally in a tax friendly taxable account.

MDM

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Re: roth vs traditional IRA if over the MAGI limit for traditional
« Reply #2 on: March 10, 2017, 02:02:27 PM »
me1, welcome to the forum.

Implicit in the order of investments is "...as far as IRS rules will allow."

In other words, the higher one's income now the more likely a traditional IRA will be better - but only if one gets to deduct that initial investment.  Thus if you aren't eligible to deduct a traditional contribution, don't make one.

In your case, whether you should first maximize the traditional 401k or the Roth IRA depends on a few things, including
- the investments and their fees offered in the 401k, and
- your current and likely withdrawal marginal rates.

See the '401k vs Taxable' tab in the case study spreadsheet - but the 401k fees would have to be terrible indeed to overcome the likely lower marginal withdrawal rate.  In other words, from what is in your OP, "max the 401k first" is probably better for you.