Author Topic: Seeking best Traditional IRA to reduce taxes owed  (Read 2149 times)

lilliannaomi

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Seeking best Traditional IRA to reduce taxes owed
« on: February 22, 2017, 06:52:55 PM »
Due to a few bonuses last year, my Tax Guy says I owe ~$2,500 to the IRS. This is the first time I've ever owed, so this is new territory. He said I can reduce this by ~$1,700 by contributing the max $5,500 to a Traditional IRA for 2016 before the April tax deadline. Can anyone confirm this is correct? I'm on board with opening an IRA, as this seems like as good a time as any to get the ball rolling on retirement accounts. But this is totally new territory for me...

My main question is: what is the best place to open a Traditional IRA? Local bank? Online bank? Are there other good institutions? Do the rates change or are they fixed?

I'm relatively new to MMM, and this is my first post. Thanks in advance for any advice, Mustachians!
« Last Edit: February 22, 2017, 06:54:52 PM by lilliannaomi »

seattlecyclone

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Re: Seeking best Traditional IRA to reduce taxes owed
« Reply #1 on: February 22, 2017, 07:09:32 PM »
The amount you would save on taxes depends on your tax rate. I don't recommend going through a bank; they'll typically offer you an IRA savings account with pitiful interest that will not even keep up with inflation. You should be actually investing this money. Vanguard is a fine place for this.

Blonde Lawyer

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Re: Seeking best Traditional IRA to reduce taxes owed
« Reply #2 on: February 22, 2017, 07:56:23 PM »
I could be wrong but I think it also depends on your income.  If you make too much, you don't qualify for a deduction for investing an IRA.  For those that know more on the subject, let me know if I'm wrong!

MustacheAndaHalf

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Re: Seeking best Traditional IRA to reduce taxes owed
« Reply #3 on: February 22, 2017, 08:27:01 PM »
I'll assume you're paying both Federal and State tax.
(If your state tax rate is 0%, you need to fire your tax guy.  Reduction of $1700 out of $5500 suggests a 31% tax rate, meaning you straddle the 28% and 33% tax brackets, and have too much taxable income to make a tax-deductible contribution to a Traditional IRA)

But yes, you can do a few things for tax year 2016 even though it's 2017, like IRA contributions.  The deadline is April 15, but don't wait.  There's some delay in opening an IRA, and more people like to do things closer to the deadline.  You'll want to pick Vanguard, Fidelity or Schwab... you send them $11,000 and have them setup an IRA for 2016.  You can move $5500 into that account.  And then you also setup an IRA for 2017 so you're already set for this year (another $5500).

MDM

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Re: Seeking best Traditional IRA to reduce taxes owed
« Reply #4 on: February 22, 2017, 08:34:31 PM »
I could be wrong but I think it also depends on your income.  If you make too much, you don't qualify for a deduction for investing an IRA.  For those that know more on the subject, let me know if I'm wrong!
That's generally correct, but the person also has to be "covered by" a retirement plan at work.  That should be indicated by a check (or absence thereof) in the appropriate box on the W-2 received from the employer.  E.g., being at all vested in a defined benefit pension means one is definitely covered.

See IRA Deduction Limits for more details.  Note that merely "having access to" a 401k plan does not mean one is "covered by" that plan - money has to have been contributed to it for the year in question.

Mgmny

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Re: Seeking best Traditional IRA to reduce taxes owed
« Reply #5 on: February 23, 2017, 04:59:14 AM »
I could be wrong but I think it also depends on your income.  If you make too much, you don't qualify for a deduction for investing an IRA.  For those that know more on the subject, let me know if I'm wrong!
That's generally correct, but the person also has to be "covered by" a retirement plan at work.  That should be indicated by a check (or absence thereof) in the appropriate box on the W-2 received from the employer.  E.g., being at all vested in a defined benefit pension means one is definitely covered.

See IRA Deduction Limits for more details.  Note that merely "having access to" a 401k plan does not mean one is "covered by" that plan - money has to have been contributed to it for the year in question.

I'm trying to work this out the now. We're above the income limits for IRA deduction, but I'm a contractor and I'm not eligible for my company's 401k plan until November. (Really dumb policy, I know)... Will the box be checked in 2017 taxes even though I only have 2 months to contribute in 2017? There's a chance I could potentially max in those two months, but with holidays etc in November and December, it will be close, I think.

Because we're in a higher tax bracket I made the stupid decision to start contributing to both Roth and traditional IRA weekly to hit 5500 total by end of the year ($106 a week). Once I realized that I might not be eligible to deduct IRA contributions, I stopped the auto deposit, so I'm out like 6 weeks of IRA payments. Not a ton of money, but money nonetheless.

lilliannaomi

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Re: Seeking best Traditional IRA to reduce taxes owed
« Reply #6 on: February 23, 2017, 06:03:00 AM »
Thanks, everyone! My new employer does offer a 401k, but I won't be eligible to join until my 1 year anniversary in October. My former employer (where I worked for most of 2016) did not offer one. All of that was factored into my Tax Guy's suggestion.

Let's say I take his advice and open the IRA for 2016. Since I'm totally new to the investing game, and I feel I don't have enough time to adequately research anything before opening this IRA, would it be advisable to open a Traditional IRA at my local bank now? Pros: little to no fees, convenience, familiarity, etc. Then once I've done my research, would I be able to transfer the bank IRA to Vanguard or something comparable? Or would the recommendation be to just go straight with Vanguard and learn as I go?

By the way, I'm only able to contribute the $5,500 for 2016 at this time. I'm not able to plop another $5,500 in for 2017 as one poster suggested. My tax guy says making just the 2016 contribution now is fine, but we were discussing only bank IRAs, not going through a brokerage. I'm not seeing anything about minimums on the Vanguard site, so I think just the 2016 max contribution would be OK for now.

Thanks, again!

NoStacheOhio

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Re: Seeking best Traditional IRA to reduce taxes owed
« Reply #7 on: February 23, 2017, 06:16:57 AM »
Thanks, everyone! My new employer does offer a 401k, but I won't be eligible to join until my 1 year anniversary in October. My former employer (where I worked for most of 2016) did not offer one. All of that was factored into my Tax Guy's suggestion.

Let's say I take his advice and open the IRA for 2016. Since I'm totally new to the investing game, and I feel I don't have enough time to adequately research anything before opening this IRA, would it be advisable to open a Traditional IRA at my local bank now? Pros: little to no fees, convenience, familiarity, etc. Then once I've done my research, would I be able to transfer the bank IRA to Vanguard or something comparable? Or would the recommendation be to just go straight with Vanguard and learn as I go?

By the way, I'm only able to contribute the $5,500 for 2016 at this time. I'm not able to plop another $5,500 in for 2017 as one poster suggested. My tax guy says making just the 2016 contribution now is fine, but we were discussing only bank IRAs, not going through a brokerage. I'm not seeing anything about minimums on the Vanguard site, so I think just the 2016 max contribution would be OK for now.

Thanks, again!

Just open an IRA at Vanguard/Schwab/Fidelity and dump the cash in. You don't have to invest it right away.

lilliannaomi

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Re: Seeking best Traditional IRA to reduce taxes owed
« Reply #8 on: February 23, 2017, 06:35:53 AM »


Just open an IRA at Vanguard/Schwab/Fidelity and dump the cash in. You don't have to invest it right away.
[/quote]
Thanks, everyone! My new employer does offer a 401k, but I won't be eligible to join until my 1 year anniversary in October. My former employer (where I worked for most of 2016) did not offer one. All of that was factored into my Tax Guy's suggestion.

Let's say I take his advice and open the IRA for 2016. Since I'm totally new to the investing game, and I feel I don't have enough time to adequately research anything before opening this IRA, would it be advisable to open a Traditional IRA at my local bank now? Pros: little to no fees, convenience, familiarity, etc. Then once I've done my research, would I be able to transfer the bank IRA to Vanguard or something comparable? Or would the recommendation be to just go straight with Vanguard and learn as I go?

By the way, I'm only able to contribute the $5,500 for 2016 at this time. I'm not able to plop another $5,500 in for 2017 as one poster suggested. My tax guy says making just the 2016 contribution now is fine, but we were discussing only bank IRAs, not going through a brokerage. I'm not seeing anything about minimums on the Vanguard site, so I think just the 2016 max contribution would be OK for now.

Thanks, again!

Just open an IRA at Vanguard/Schwab/Fidelity and dump the cash in. You don't have to invest it right away.


Cool, I'm down with that. Thanks!

If anyone has insight into how to select one of the big three, I'd appreciate it. There's a thread on Reddit about it, but I'm still undecided. Perhaps for someone in my current situation, it doesn't really matter?

NoStacheOhio

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Re: Seeking best Traditional IRA to reduce taxes owed
« Reply #9 on: February 23, 2017, 06:59:16 AM »
Perhaps for someone in my current situation, it doesn't really matter?

Basically.

We're with Fidelity because that's where my employer plan is. But basically, none of them charge fees to have an IRA, and they all have good index fund choices.

rubybeth

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Re: Seeking best Traditional IRA to reduce taxes owed
« Reply #10 on: February 23, 2017, 07:10:51 AM »

Cool, I'm down with that. Thanks!

If anyone has insight into how to select one of the big three, I'd appreciate it. There's a thread on Reddit about it, but I'm still undecided. Perhaps for someone in my current situation, it doesn't really matter?

Well, here's the thing--it's fairly easy to move an IRA later if you want to. So you could open one wherever and then move it later--you can even leave it in cash until you decide how to invest it. My husband moved his from a local credit union to Vanguard with one form--very easy. And I use Fidelity for mine. Both are easy to use websites. The only thing I've heard is that Vanguard is experiencing a boom and may not be as quick to respond to questions as Fidelity. I haven't had any problems with either, though I've contacted Fidelity more since that's who I worked with before I got married, and their customer service is great--I like using their online chat thing. Also, Fidelity is offering some very competitive funds--my funds in FUSVX (FUSEX until you get to the $10k required for FUSVX) has lower fees than my husband's funds in VTSMX (VTSAX until you get to the 10k). They both have very low fees, but for this reason alone, I'd suggest Fidelity.

The other cool thing about Fidelity is their cash brokerage account, which I've been using for years as our main checking account. It makes buying and selling stock so extremely quick/easy, and the checks are free, free bill pay, and they reimburse all ATM fees--literally anywhere. I can use an ATM anywhere and they pay me back whatever fee I was charged. Also, they pay interest on this account, which isn't a ton, but it's better than nothing. This is more info. on this account: https://www.fidelity.com/cash-management/fidelity-cash-management-account/overview I also think this account will make FIRE very simple--I can so easily move funds from the sale of stock into this account and pay a bill with it.

lilliannaomi

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Re: Seeking best Traditional IRA to reduce taxes owed
« Reply #11 on: February 23, 2017, 08:05:32 AM »
Perhaps for someone in my current situation, it doesn't really matter?

Basically.

We're with Fidelity because that's where my employer plan is. But basically, none of them charge fees to have an IRA, and they all have good index fund choices.


Thanks for this! Later this year I'll join my employer's 401K, which is through Schwab. Would that be a good reason to go with Schwab now for this IRA? Or does it not matter since they're totally separate accounts...?

lilliannaomi

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Re: Seeking best Traditional IRA to reduce taxes owed
« Reply #12 on: February 23, 2017, 08:10:54 AM »

Cool, I'm down with that. Thanks!

If anyone has insight into how to select one of the big three, I'd appreciate it. There's a thread on Reddit about it, but I'm still undecided. Perhaps for someone in my current situation, it doesn't really matter?

Well, here's the thing--it's fairly easy to move an IRA later if you want to. So you could open one wherever and then move it later--you can even leave it in cash until you decide how to invest it. My husband moved his from a local credit union to Vanguard with one form--very easy. And I use Fidelity for mine. Both are easy to use websites. The only thing I've heard is that Vanguard is experiencing a boom and may not be as quick to respond to questions as Fidelity. I haven't had any problems with either, though I've contacted Fidelity more since that's who I worked with before I got married, and their customer service is great--I like using their online chat thing. Also, Fidelity is offering some very competitive funds--my funds in FUSVX (FUSEX until you get to the $10k required for FUSVX) has lower fees than my husband's funds in VTSMX (VTSAX until you get to the 10k). They both have very low fees, but for this reason alone, I'd suggest Fidelity.

The other cool thing about Fidelity is their cash brokerage account, which I've been using for years as our main checking account. It makes buying and selling stock so extremely quick/easy, and the checks are free, free bill pay, and they reimburse all ATM fees--literally anywhere. I can use an ATM anywhere and they pay me back whatever fee I was charged. Also, they pay interest on this account, which isn't a ton, but it's better than nothing. This is more info. on this account: https://www.fidelity.com/cash-management/fidelity-cash-management-account/overview I also think this account will make FIRE very simple--I can so easily move funds from the sale of stock into this account and pay a bill with it.

Amazing! Thank you so much for all the info. Really appreciate it.

NoStacheOhio

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Re: Seeking best Traditional IRA to reduce taxes owed
« Reply #13 on: February 23, 2017, 08:19:09 AM »
Perhaps for someone in my current situation, it doesn't really matter?

Basically.

We're with Fidelity because that's where my employer plan is. But basically, none of them charge fees to have an IRA, and they all have good index fund choices.


Thanks for this! Later this year I'll join my employer's 401K, which is through Schwab. Would that be a good reason to go with Schwab now for this IRA? Or does it not matter since they're totally separate accounts...?

That's a perfectly reasonable choice. I can't say with 100% certainty, but you should be able to access both accounts using one login.

My wife had an employer account thru Schwab a while back, and it was perfectly fine. I prefer the Fidelity interface, but they both do everything you need.

I think Schwab leans more toward ETFs for their cheap index options, but I could be wrong. SCHB is their low fee, free-to-trade broad US equity ETF, which yields very similar results to VTSAX.

Blonde Lawyer

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Re: Seeking best Traditional IRA to reduce taxes owed
« Reply #14 on: February 24, 2017, 10:25:17 AM »
Piggy backing off this question - if you are above the income limits to get a tax deduction for investing in an IRA (and have a hypothetical maxed 401k) is there any advantage to using one over just Vanguard index funds or the like?

seattlecyclone

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Re: Seeking best Traditional IRA to reduce taxes owed
« Reply #15 on: February 24, 2017, 10:28:18 AM »
Yes. Look up backdoor Roth for more details. The benefit is that you'll likely never owe taxes on dividends and gains if you do this, while you will if you invest in a taxable account.

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Re: Seeking best Traditional IRA to reduce taxes owed
« Reply #16 on: February 24, 2017, 02:20:48 PM »
Perhaps for someone in my current situation, it doesn't really matter?

Basically.

We're with Fidelity because that's where my employer plan is. But basically, none of them charge fees to have an IRA, and they all have good index fund choices.


Thanks for this! Later this year I'll join my employer's 401K, which is through Schwab. Would that be a good reason to go with Schwab now for this IRA? Or does it not matter since they're totally separate accounts...?
It seems like a good reason to me, and is why my IRA is at Schwab. If nothing else you can see the holdings of both accounts on the screen at the same time, with the total $ summed up at the bottom.