Author Topic: Traditional IRA Question  (Read 5258 times)

FastStache

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Traditional IRA Question
« on: December 13, 2014, 02:38:19 PM »
I want to know if I can change my contributions from a Roth IRA to a traditional IRA for 2014. My issue is I make way more than the irs allows since my MAGI is above the 70K. But I read if we are a single income home, it may not apply for my wife since she does not have a 401K available to her.

https://www.ameriprise.com/investment/iras-retirement-plans/roth-ira-contribution-limits.asp

Can I put my wife's IRA as traditional for 2014 then? I'm assuming I would be stuck with putting my contributions in as a Roth IRA.


shuffler

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Re: Traditional IRA Question
« Reply #1 on: December 13, 2014, 04:08:01 PM »
The "Tax deductibility of Traditional IRA contributions" table at your link is what you're referring to?

At the top of the column it says "IRA Owner Does Not Participate In A Retirement Plan At Work", so that would be true for your wife, as the IRA owner.

Then, assuming that you guys are Married Filing Jointly, the cell you're interested in says:
Quote
Spouse does not participate in a retirement plan at work:
No income limit for full deduction

Spouse participates in a retirement plan at work:
Full deduction:
MAGI less than $181,000

Partial deduction:
MAGI of $181,000 - 191,000

As it is written, your wife is the "IRA Owner" so that means that 'spouse' is referring to you.  Since 'spouse does not participate in a retirement plan at work' isn't true for you (because you do participate in your 401k), then you have to keep reading further down to find the phase-out.  If you're making less than $181k, then yes, she can contribute to a traditional IRA and you guys can fully deduct that contribution off your taxes.  Phase-out sets in after that.

For a bit of pedantry ...
I want to know if I can change my contributions from a Roth IRA to a traditional IRA for 2014.
You can always contribute to a traditional IRA.  You just may not be able to deduct your contributions when doing your taxes.

But I read if we are a single income home ...
It doesn't have anything to do with being single-income.  It only has to do with (non-)participation in work-sponsored retirement plans.

FastStache

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Re: Traditional IRA Question
« Reply #2 on: December 13, 2014, 06:56:02 PM »
Thank you for the response, and paying attention to all the details. Yes we are filing jointly

Magi will be about 110 this year.

Me: since spouse does not have a 401k, I can get the full tax deduction.

Spouse: since I have a 401k, but our magi is below 181k, she can get the full deduction.

We should be well into the 25% bracket, it would be worthwhile. But, I need to double check since we are maxing my 401k, itemizing past the standard deduction,  have a child, some solar improvements, and donations. I should still be past the 70 something k mark. Thank for the replies.

shuffler

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Re: Traditional IRA Question
« Reply #3 on: December 13, 2014, 10:59:27 PM »
Spouse: since I have a 401k, but our magi is below 181k, she can get the full deduction.
Looks right to me.

Magi will be about 110 this year.
Me: since spouse does not have a 401k, I can get the full tax deduction.
No.  You *DO* participate in your work-sponsored 401k, so you need to look at the middle-column for your ability to deduct your contributions.

Here's the cell for you:
Quote
Full deduction:
MAGI less than $96,000

Partial deduction:
MAGI of $96,000 - 116,000
Since your MAGI will be ~$110k, you will be able to deduct a phased-out portion of your contribution.
Looking at the 2013 publication (as an approximation of 2014), it looks like the first 27.5% of your contribution will be deductible.
        http://www.irs.gov/pub/irs-pdf/p590.pdf

FastStache

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Re: Traditional IRA Question
« Reply #4 on: December 23, 2014, 09:56:51 AM »
If I'm understanding this correctly, my gross income will be about 115k, and my 401K contributions will be about 17K, making my AGI about 98K.

After my deductions, exemptions, solar updates, etc my taxable income will likely be close to 73.8K, putting me in the 15% marginal tax bracket.

Does it still make it worthwhile to change my contributions from a Roth to an Traditional IRA? Does my math check out?
« Last Edit: December 23, 2014, 09:58:34 AM by FastStache »

DrF

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Re: Traditional IRA Question
« Reply #5 on: December 23, 2014, 11:15:31 AM »
The "Tax deductibility of Traditional IRA contributions" table at your link is what you're referring to?

At the top of the column it says "IRA Owner Does Not Participate In A Retirement Plan At Work", so that would be true for your wife, as the IRA owner.

Then, assuming that you guys are Married Filing Jointly, the cell you're interested in says:
Quote
Spouse does not participate in a retirement plan at work:
No income limit for full deduction

Spouse participates in a retirement plan at work:
Full deduction:
MAGI less than $181,000

Partial deduction:
MAGI of $181,000 - 191,000

As it is written, your wife is the "IRA Owner" so that means that 'spouse' is referring to you.  Since 'spouse does not participate in a retirement plan at work' isn't true for you (because you do participate in your 401k), then you have to keep reading further down to find the phase-out.  If you're making less than $181k, then yes, she can contribute to a traditional IRA and you guys can fully deduct that contribution off your taxes.  Phase-out sets in after that.

For a bit of pedantry ...
I want to know if I can change my contributions from a Roth IRA to a traditional IRA for 2014.
You can always contribute to a traditional IRA.  You just may not be able to deduct your contributions when doing your taxes.

But I read if we are a single income home ...
It doesn't have anything to do with being single-income.  It only has to do with (non-)participation in work-sponsored retirement plans.

Ehhh, I think you are reading it incorrectly.

I read it in the first person. "Does my spouse have a 401k at her employer, or is my spouse employed? No, then my spouse can take the full deduction with an income of ~$180,000."

If you are able to get your MAGI down enough, you could contribute to your own traditional IRA and take the full deduction.

DrF

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Re: Traditional IRA Question
« Reply #6 on: December 23, 2014, 11:28:07 AM »
If I'm understanding this correctly, my gross income will be about 115k, and my 401K contributions will be about 17K, making my AGI about 98K.

After my deductions, exemptions, solar updates, etc my taxable income will likely be close to 73.8K, putting me in the 15% marginal tax bracket.

Does it still make it worthwhile to change my contributions from a Roth to an Traditional IRA? Does my math check out?

Seems sound.

The choice is yours on Roth vs Trad. Pay now, or pay later. What will your tax bracket be when you retire? Who really knows, but there will probably always be ways to pay near zero under a specific income in the future. The question is, will you be below that income?

FastStache

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Re: Traditional IRA Question
« Reply #7 on: December 23, 2014, 01:31:16 PM »
If I'm understanding this correctly, my gross income will be about 115k, and my 401K contributions will be about 17K, making my AGI about 98K.

After my deductions, exemptions, solar updates, etc my taxable income will likely be close to 73.8K, putting me in the 15% marginal tax bracket.

Does it still make it worthwhile to change my contributions from a Roth to an Traditional IRA? Does my math check out?

Seems sound.

The choice is yours on Roth vs Trad. Pay now, or pay later. What will your tax bracket be when you retire? Who really knows, but there will probably always be ways to pay near zero under a specific income in the future. The question is, will you be below that income?

Well, my plan is definitely live at about 40-50 K annually in today's money when retirement comes around. This would mean I'd be in the 15% marginal tax bracket, and probably paying under 10% after deductions etc.

I may still do my wife's IRA as a traditional IRA and probably get about 16-17% tax break on it, and this would still leave us with 15K plus in a Roth and next year's contribution will have me putting mine in a roth and hers is up in the air again, depending on my how big of a raise I get.

DrF

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FastStache

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Re: Traditional IRA Question
« Reply #9 on: December 24, 2014, 08:51:02 AM »
http://www.gocurrycracker.com/never-pay-taxes-again/

That's a great read, and it makes me want to start getting some rentals under my belt.

Philociraptor

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Re: Traditional IRA Question
« Reply #10 on: December 24, 2014, 10:40:55 AM »
Me: since spouse does not have a 401k, I can get the full tax deduction.

This is correct only if BOTH of you do not have 401k's. See here, copied below:

2014 IRA Contribution and Deduction Limits - Effect of Modified AGI on Deductible Contributions If You ARE Covered by a Retirement Plan at Work

married filing jointly or qualifying widow(er)
$96,000 or less - a full deduction up to the amount of your contribution limit.
more than $96,000 but less than $116,000 - a partial deduction.
$116,000 or more - no deduction.
 

DrF

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Re: Traditional IRA Question
« Reply #11 on: December 24, 2014, 10:48:24 AM »
Me: since spouse does not have a 401k, I can get the full tax deduction.

This is correct only if BOTH of you do not have 401k's. See here, copied below:

2014 IRA Contribution and Deduction Limits - Effect of Modified AGI on Deductible Contributions If You ARE Covered by a Retirement Plan at Work

married filing jointly or qualifying widow(er)
$96,000 or less - a full deduction up to the amount of your contribution limit.
more than $96,000 but less than $116,000 - a partial deduction.
$116,000 or more - no deduction.

http://www.irs.gov/Retirement-Plans/Plan-Participant,-Employee/Retirement-Topics-IRA-Contribution-Limits

Incorrect.

If I have a 401k, but my wife does not, then my wife can take the full deduction as long as our income is < ~$180,000.

Since I have a 401k, I can only take the full deduction if income is < $96,000

Philociraptor

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Re: Traditional IRA Question
« Reply #12 on: December 24, 2014, 10:50:19 AM »
Me: since spouse does not have a 401k, I can get the full tax deduction.

This is correct only if BOTH of you do not have 401k's. See here, copied below:

2014 IRA Contribution and Deduction Limits - Effect of Modified AGI on Deductible Contributions If You ARE Covered by a Retirement Plan at Work

married filing jointly or qualifying widow(er)
$96,000 or less - a full deduction up to the amount of your contribution limit.
more than $96,000 but less than $116,000 - a partial deduction.
$116,000 or more - no deduction.

http://www.irs.gov/Retirement-Plans/Plan-Participant,-Employee/Retirement-Topics-IRA-Contribution-Limits

Incorrect.

If I have a 401k, but my wife does not, then my wife can take the full deduction as long as our income is < ~$180,000.

Since I have a 401k, I can only take the full deduction if income is < $96,000

No. See his quote. "since spouse does not have a 401k, I can get the full tax deduction."

OP appears to be assuming that since wife doesn't have 401k that he is unlimited. That is not true. He has a 401k, so his limits are the lower ones.

edit: What you said is correct. What I said is correct as well. I didn't mention his wife's IRA, I was only referencing his, as shown by the quote.

DrF

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Re: Traditional IRA Question
« Reply #13 on: December 24, 2014, 11:02:37 AM »
OK, OP only said that because of someone else's post. I corrected it before, so the OP would not be confused I did so again. Now we're on the same page!

shuffler

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Re: Traditional IRA Question
« Reply #14 on: December 24, 2014, 12:59:26 PM »
Ehhh, I think you are reading it incorrectly.
No.

What I said for the wife was:  If you're making less than $181k, then yes, she can contribute to a traditional IRA and you guys can fully deduct that contribution off your taxes.  Phase-out sets in after that.

And for the husband I said:  You *DO* participate in your work-sponsored 401k, so you need to look at the middle-column for your ability to deduct your contributions.  Since your MAGI will be ~$110k, you will be able to deduct a phased-out portion of your contribution.

... which is exactly the same as what you (DrFunk) and Philociraptor ended up concluding later.

The whole thing is a little bit clearer if you look at the IRS's own tables, rather than from some 3rd party site.
The IRS has two separate tables:
  IRA Owner is Covered by a Retirement Plan at Work
  IRA Owner is NOT Covered by a Retirement Plan at Work

OK, OP only said that because of someone else's post. I corrected it before, so the OP would not be confused I did so again.
That was OP's own mistake.
« Last Edit: December 24, 2014, 01:12:23 PM by shuffler »

NinetyFour

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Re: Traditional IRA Question
« Reply #15 on: December 24, 2014, 01:01:28 PM »
Links do not work.  :(

shuffler

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Re: Traditional IRA Question
« Reply #16 on: December 24, 2014, 01:12:52 PM »
Links do not work.  :(
Sorry.  Edited/fixed above.

NinetyFour

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Re: Traditional IRA Question
« Reply #17 on: December 24, 2014, 01:36:08 PM »
Great.  Thanks!