The Money Mustache Community
Learning, Sharing, and Teaching => Investor Alley => Topic started by: psychomaggle on February 13, 2019, 09:36:44 AM
-
According to my research, I will no longer be able to deduct my Traditional IRA contribution this year as my income has gone above the level allowed for deductions. But then I read something about that only applies to employer sponsored Traditional IRAs? My thought process is even if I can't deduct the contribution, I still won't have to pay taxes on any of the capital gains my investment makes, which is a positive. The best method seems to be pay as little taxes now as I'll probably be in a lower tax bracket, right? Roth IRA would have me paying taxes on any gains now, right?
-
Contributions to a Roth IRA are taxable in the year you contribute, but the capital gains are not taxable even when you withdraw them. In contrast, Traditional IRA contributions are normally not taxable in year you contribute (but as you pointed out they may be taxed in your case due to income level). In Traditional IRA, capital gains are not taxed until you withdraw them.
-
here is a webpage with some more info that might help you
https://www.rothira.com/traditional-ira-vs-roth-ira
-
Got it. That pretty much confirms what I was thinking.
-
But then I read something about that only applies to employer sponsored Traditional IRAs?
Unless you are talking about a SEP or SIMPLE, there is no such thing as an "employer sponsored Traditional IRA."
The deductibility of a traditional IRA contribution, however, does depend on both your income and whether you are covered by an employer's retirement plan.
See IRA Deduction Limits | Internal Revenue Service (https://www.irs.gov/retirement-plans/ira-deduction-limits).
-
I still won't have to pay taxes on any of the capital gains my investment makes, which is a positive. The best method seems to be pay as little taxes now as I'll probably be in a lower tax bracket, right? Roth IRA would have me paying taxes on any gains now, right?
Just to make sure, for the after tax money you contribute to a traditional IRA, you will pay taxes on those dividends and capital gains, but you will pay when you withdraw. And instead of paying at the long term capital gains rate, you will be paying at your normal income tax rate.
There are probably some edge cases where after-tax traditional IRA contributions without a backdoor Roth conversion can make sense, but in the general case a Roth IRA contribution will be better.
Roth IRA would have me paying taxes on any gains now, right?
Gains in a Roth IRA are never taxed.