Author Topic: Traditional IRA or backdoor Roth for us? Anything else I should consider?  (Read 2274 times)

Onomatopoeia

  • 5 O'Clock Shadow
  • *
  • Posts: 15
  • Location: Boston, MA
We're a couple in our late 20s getting married this year. I went to go fund our Roth IRAs for 2015 and realized that we will make above the income l limit for contributing to a Roth IRA this year. I already have a Roth in my name, my fiancee doesn't yet have an IRA at all. 

A couple of years ago I decided that a Roth IRA would be best for me but I don't know whether I should change that assumption. Do you think it's worth going the backdoor IRA route or get two traditional IRAs?

My strategy this year is to fully fund our employer 401ks, fully fund two IRAs of some sort, pay all 46k to a parent who loaned it to us, and then contribute all additional funds to our brokerage account. Let me know if there is something else we should consider! 

Also, right now at my employer I'm registered as Single 0, should I change this to Married since we're getting married mid year?

Facts:
Checking account:
Regular expenses / emergency fund: ~20k

Investments:
Only one of has an IRA so far: 11k in Roth IRA funded for 2013 and 2014
100k in one 401k
75k in other 401k
Both of us are contributing the max to our 401ks this year
Currently empty brokerage account where we kept the money for our down payment

Debt
46k at 0% to a parent, paying back in full this year (down payment)
288k 30 year fixed mortgage at 3.875%

Salaries:
Me:
Gross salary: 106,600
Bonus pay in paychecks: ~8k
Bonus: ~17k in shares vesting mid year

Him:
Gross salary:140,000 (but he begins this job in June so he will only realize ~1/2 of this amount for 2015)
Bonus: ~20% of salary

Aphalite

  • Bristles
  • ***
  • Posts: 425
You guys should be fine to fully fund roth for 2015 (income is too high for traditional) - husband is making 70k, you're making 107k, together is 177k, 401k brings that down to 141k, if you add in bonuses of 8k and 14k (20% of 70k), you're still below the phase out limit

Going forward, in 2016, you have a decision to make:
1) take the 28% tax hit and fund Roth using backdoor method - never get taxed again
2) contribute to brokerage account if you believe that you will be able to get into the 15% tax bracket in the future to take advantage of 0% capital gains, otherwise, you're better off with a Roth since capital gains and interest is not taxed

I find 2 to be riskier than 1, as trying to change grandfathered Roth IRA tax free status is a lot more politically unpopular than raising capital gains tax, YMMV

Your question on taxes - normally, since you're contributing the max to your 401k, your paycheck is being over deducted for taxes, I would have your W4 be married, with one extra allowance, and your husband's to be married, with zero allowances, you may still get a refund at the end of the year this way, but it's preferable to being penalized for underpaying taxes throughout the year
« Last Edit: April 14, 2015, 01:29:49 PM by aphalite »

GoldenStache

  • Stubble
  • **
  • Posts: 239
  • Location: Washington, DC
I agree with Aphalite on Roth this year

Do you plan on FIRE or working longer than you need to (with an even higher salary)?


MDM

  • Senior Mustachian
  • ********
  • Posts: 10092
A couple of years ago I decided that a Roth IRA would be best for me but I don't know whether I should change that assumption. Do you think it's worth going the backdoor IRA route or get two traditional IRAs?
You won't be able to deduct contributions to the tIRAs so the Roth (direct if your situation matches aphalite's assumptions, or backdoor if needed) is much better - because you will pay tax on tIRA withdrawals but not on Roth withdrawals.

Quote
My strategy this year is to fully fund our employer 401ks, fully fund two IRAs of some sort, pay all 46k to a parent who loaned it to us, and then contribute all additional funds to our brokerage account. Let me know if there is something else we should consider!
Great plan.  HSA available?

Quote
Also, right now at my employer I'm registered as Single 0, should I change this to Married since we're getting married mid year?
Probably, but see http://forum.mrmoneymustache.com/ask-a-mustachian/how-can-we-optimize-our-withholdings/ for more details.

MDM

  • Senior Mustachian
  • ********
  • Posts: 10092
normally, since you're contributing the max to your 401k, your paycheck is being over deducted for taxes
This is possible if the company's payroll program is poor but usually (at least the ones of which I'm aware) the withholding calculations are done based on taxable income, so the presence/absence of a 401k won't affect the accuracy of the withholding.