Author Topic: Traditional/Roth IRA?  (Read 4901 times)

emptypockets

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Traditional/Roth IRA?
« on: January 08, 2014, 11:36:06 AM »
I have been lurking for a few months and am starting to gather my information to give a full screenshot of my situation and ask for advice, but I have a few general questions.

1 - My wife is quiting her Job to be a full time mother. She currently has about 4k in a 401k account through her company. My question is should we transfer this to a Roth IRA or traditional IRA. I do not have much experience with these or with investing in general. I understand that each account has its positives and negatives, and by transfering to a roth there would be tax implications. My main concern is that any contributing we will be doing will be with after tax income and I already have a 401k from my employer. From what I've read there's a possibility that any contributions we make might not be tax deductible? This makes me think a roth would be the better option.

2 - Being new to this is all very overwhelming. I see people with many different accounts 401k's, multiple IRA's, college plans, HSA, Index Funds etc. I was just wondering as a general rule, how you decided how much to disperse in each account. I know the goals are maxing the 401k first, but I am also looking to save for college for two kids (one 7 and one 3 months.) via index funds and possibly a 529 account. My thoughts are that if I spread my investments too thin, than it wont be beneficial at all. (i.e putting $100 in 5 different accounts, vs $500 in one account) So almost a poll type question is what accounts do you have and how much do you try to put towards each account. Doesnt have to be exact, just curious. Currently we just have our 401k's, one of which will possibly be an IRA. I would like to open a vanguard account for index funds and 529 but I am trying to asses what I could contribute to all of my accounts and if it would even be worth it. Again, I know the goal it to max 401k first and then IRA before you open accounts, but I would like to contribute some savings into index funds for money available without penalty and a 529 to help my money grow in time for college.

Thanks for any help/advice ahead of time!



Cheddar Stacker

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Re: Traditional/Roth IRA?
« Reply #1 on: January 08, 2014, 01:32:53 PM »
Transfer the old 401K to a traditional IRA. There is no tax affect to the conversion. You already got the tax deduction when the original contribution was made to the 401K so there is no deduction for it upon transfer, but you will pay taxes on it if you transfer it to a roth.

Continue to contribute to your 401K, and max it out if you can ($17,500). Depending on how much money you make, you should fully fund a traditional IRA ($5,500) each year in your wife's name, and yours if possible. Since she's not working, you should be able to do this for her, and you will deduct this on your income tax return each year. It stops becoming an option to deduct an IRA contribution for you once you reach about $100K in wages, so that's your cutoff for you. For your wife, you can make and deduct up to $5,500 as long as you earn less than about $180K in taxable income. If you make more than that a 529 plan, an HSA, or a Roth will likely be your best option.

Eventually you'll want to move all your 401K/IRA money into a Roth IRA, but it's best to do this after you stop working as your income will be much lower and it allows you to do it with a much lower tax burden.

I agree that you could spread yourself too thin with multiple accounts. However, the idea is to save as much tax as possible now in whatever way you can. If you've already maxed out the 401K, move to the next level. If that's a 529 because that's what's most important to you, keep it simple and just do that.

Personally we haven't funded anything other than our 401K's and a taxable investment account at this point since I plan to develop a nice size rental real estate portfolio which is much harder to do in tax deferred accounts.

Good luck!

dragoncar

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Re: Traditional/Roth IRA?
« Reply #2 on: January 08, 2014, 01:41:51 PM »
Transfer the old 401K to a traditional IRA. There is no tax affect to the conversion. You already got the tax deduction when the original contribution was made to the 401K so there is no deduction for it upon transfer, but you will pay taxes on it if you transfer it to a roth.

Continue to contribute to your 401K, and max it out if you can ($17,500). Depending on how much money you make, you should fully fund a traditional IRA ($5,500) each year in your wife's name, and yours if possible. Since she's not working, you should be able to do this for her, and you will deduct this on your income tax return each year. It stops becoming an option to deduct an IRA contribution for you once you reach about $100K in wages, so that's your cutoff for you. For your wife, you can make and deduct up to $5,500 as long as you earn less than about $180K in taxable income. If you make more than that a 529 plan, an HSA, or a Roth will likely be your best option.

Eventually you'll want to move all your 401K/IRA money into a Roth IRA, but it's best to do this after you stop working as your income will be much lower and it allows you to do it with a much lower tax burden.

I agree that you could spread yourself too thin with multiple accounts. However, the idea is to save as much tax as possible now in whatever way you can. If you've already maxed out the 401K, move to the next level. If that's a 529 because that's what's most important to you, keep it simple and just do that.

Personally we haven't funded anything other than our 401K's and a taxable investment account at this point since I plan to develop a nice size rental real estate portfolio which is much harder to do in tax deferred accounts.

Good luck!

Yup

emptypockets

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Re: Traditional/Roth IRA?
« Reply #3 on: January 08, 2014, 02:52:17 PM »
Thanks for the help!

wtjbatman

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Re: Traditional/Roth IRA?
« Reply #4 on: January 08, 2014, 10:46:31 PM »
1) 401k up to match
2) Roth/T IRA up to max ($5500 per person per year)
3) 401k/529/Taxable after that. 401k for best income reduction benefits and tax free growth, taxable for flexibility.

hoppy08520

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Re: Traditional/Roth IRA?
« Reply #5 on: January 09, 2014, 07:44:55 AM »
1) 401k up to match
2) Roth/T IRA up to max ($5500 per person per year)
3) 401k/529/Taxable after that. 401k for best income reduction benefits and tax free growth, taxable for flexibility.
I think there can be some exceptions to this. If you are in a higher tax bracket (say the 25% bracket or above) and your income makes you ineligible to make deductible IRA contributions, then you might be better off maximizing your 401(k) before contributing to a Roth IRA (assuming you are below the Roth IRA contribution limits and are therefore eligible), in order to pay less taxes today. If you are in the 15% tax bracket, then there's a better case for the investing priority order that wtjbatman wrote. The only time I wouldn't do that is if your 401(k) options are abysmal.

If you're above the Roth IRA contribution limit, and you can make backdoor Roth IRA contributions, then the point is moot because you should have enough income to maximize your contributions to both accounts (401(k) and backdoor Roth IRA) so there's no need to debate priorities.

The point is also moot if you have enough to maximize both your 401(k) and IRA (of either flavor, Roth or Traditional). Strive to max them both so you don' t have to fret over these decisions :-)


wtjbatman

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Re: Traditional/Roth IRA?
« Reply #6 on: January 09, 2014, 08:29:35 AM »
Good advice above. Honestly depends on your income. And better to have these problems (Where oh where should I put all this retirement money?) than not saving anything.

teen persuasion

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Re: Traditional/Roth IRA?
« Reply #7 on: January 09, 2014, 09:20:51 PM »
We aren't high income; I'm only working part time, after being a SAHM for years.  I have DH max his 401k (I don't have access to one) to bring our AGI down low enough to qualify for more EIC, and our state matches EIC at 30%.  I then turn around and use our tax refunds to fund our Roth IRAs.  If we needed the tax deduction, I would do the traditional IRA, but we can't use the deduction, and it wouldn't increase our EIC the way the 401k contribution does, so it is Roth all the way for us.  I'm beginning to increase the contribution to our HSA, but nowhere near maxing that, yet.

Lowering our AGI is also good for the financial aid our college kids receive.  We haven't used 529s at all; the kids have lots of scholarships, grants, and some loans and work study.  Keeping our AGI below $50k (plus other qualifiers) means that the asset test is waived on the FAFSA.

The financial aid situation for DS5 will be entirely different; the other kids will most likely be out of the house, so as far as the FAFSA is concerned, he'll be an only child.  I'm working hard to get us to the position of FIRE before his FAFSA needs to be filed, and I'm constantly on the watch as to how the FA rules evolve each year.  The amount of assets "protected" goes down every year, and the AGI level for automatic EFC=0 was rolled back from $32k to $23k a few years ago.  It has been increased once, to $24k.  We can't quite make that level anymore.

Cheddar Stacker

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Re: Traditional/Roth IRA?
« Reply #8 on: January 10, 2014, 08:45:00 AM »
We aren't high income; I'm only working part time, after being a SAHM for years.  I have DH max his 401k (I don't have access to one) to bring our AGI down low enough to qualify for more EIC, and our state matches EIC at 30%.  I then turn around and use our tax refunds to fund our Roth IRAs.  If we needed the tax deduction, I would do the traditional IRA, but we can't use the deduction, and it wouldn't increase our EIC the way the 401k contribution does, so it is Roth all the way for us.  I'm beginning to increase the contribution to our HSA, but nowhere near maxing that, yet.

Lowering our AGI is also good for the financial aid our college kids receive.  We haven't used 529s at all; the kids have lots of scholarships, grants, and some loans and work study.  Keeping our AGI below $50k (plus other qualifiers) means that the asset test is waived on the FAFSA.

The financial aid situation for DS5 will be entirely different; the other kids will most likely be out of the house, so as far as the FAFSA is concerned, he'll be an only child.  I'm working hard to get us to the position of FIRE before his FAFSA needs to be filed, and I'm constantly on the watch as to how the FA rules evolve each year.  The amount of assets "protected" goes down every year, and the AGI level for automatic EFC=0 was rolled back from $32k to $23k a few years ago.  It has been increased once, to $24k.  We can't quite make that level anymore.

Very, very nice job at optimizing the current tax laws to fit your situation. As this post points out, not all situations are created equal. I, and apparently most others, assumed the OP was high income based on our replies. This is a good reminder that we don't all fit into one category.

Teen persuasion, congrats on figuring out what works best for you, and thanks for sharing a different approach to this.

wtjbatman

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Re: Traditional/Roth IRA?
« Reply #9 on: January 10, 2014, 10:29:12 AM »
We aren't high income; I'm only working part time, after being a SAHM for years.  I have DH max his 401k (I don't have access to one) to bring our AGI down low enough to qualify for more EIC, and our state matches EIC at 30%.  I then turn around and use our tax refunds to fund our Roth IRAs.  If we needed the tax deduction, I would do the traditional IRA, but we can't use the deduction, and it wouldn't increase our EIC the way the 401k contribution does, so it is Roth all the way for us.  I'm beginning to increase the contribution to our HSA, but nowhere near maxing that, yet.

Lowering our AGI is also good for the financial aid our college kids receive.  We haven't used 529s at all; the kids have lots of scholarships, grants, and some loans and work study.  Keeping our AGI below $50k (plus other qualifiers) means that the asset test is waived on the FAFSA.

The financial aid situation for DS5 will be entirely different; the other kids will most likely be out of the house, so as far as the FAFSA is concerned, he'll be an only child.  I'm working hard to get us to the position of FIRE before his FAFSA needs to be filed, and I'm constantly on the watch as to how the FA rules evolve each year.  The amount of assets "protected" goes down every year, and the AGI level for automatic EFC=0 was rolled back from $32k to $23k a few years ago.  It has been increased once, to $24k.  We can't quite make that level anymore.

Very, very nice job at optimizing the current tax laws to fit your situation. As this post points out, not all situations are created equal. I, and apparently most others, assumed the OP was high income based on our replies. This is a good reminder that we don't all fit into one category.

Teen persuasion, congrats on figuring out what works best for you, and thanks for sharing a different approach to this.

That's not the OP (unless TP and the OP are the same family unit... ok I'm confused)

Cheddar Stacker

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Re: Traditional/Roth IRA?
« Reply #10 on: January 10, 2014, 11:02:47 AM »
We aren't high income; I'm only working part time, after being a SAHM for years.  I have DH max his 401k (I don't have access to one) to bring our AGI down low enough to qualify for more EIC, and our state matches EIC at 30%.  I then turn around and use our tax refunds to fund our Roth IRAs.  If we needed the tax deduction, I would do the traditional IRA, but we can't use the deduction, and it wouldn't increase our EIC the way the 401k contribution does, so it is Roth all the way for us.  I'm beginning to increase the contribution to our HSA, but nowhere near maxing that, yet.

Lowering our AGI is also good for the financial aid our college kids receive.  We haven't used 529s at all; the kids have lots of scholarships, grants, and some loans and work study.  Keeping our AGI below $50k (plus other qualifiers) means that the asset test is waived on the FAFSA.

The financial aid situation for DS5 will be entirely different; the other kids will most likely be out of the house, so as far as the FAFSA is concerned, he'll be an only child.  I'm working hard to get us to the position of FIRE before his FAFSA needs to be filed, and I'm constantly on the watch as to how the FA rules evolve each year.  The amount of assets "protected" goes down every year, and the AGI level for automatic EFC=0 was rolled back from $32k to $23k a few years ago.  It has been increased once, to $24k.  We can't quite make that level anymore.

Very, very nice job at optimizing the current tax laws to fit your situation. As this post points out, not all situations are created equal. I, and apparently most others, assumed the OP was high income based on our replies. This is a good reminder that we don't all fit into one category.

Teen persuasion, congrats on figuring out what works best for you, and thanks for sharing a different approach to this.

That's not the OP (unless TP and the OP are the same family unit... ok I'm confused)

Sorry, didn't mean to confuse the issue. You are correct batman, TP is not the OP unless they changed their username overnight. My point was most of the advice, including mine, given to OP was under the assumption they have a high enough income to utilize the strategies suggested. TP, being a non high-income family, provided a whole new angle at how to approach things to maximize tax savings.

TP's post could help OP more than all the other ones if OP is not high income. With OP's wife becoming a stay at home mom, it's possible they might benefit more from TP's suggestion/strategy.

teen persuasion

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Re: Traditional/Roth IRA?
« Reply #11 on: January 10, 2014, 06:50:04 PM »
Nope, I'm not the OP.  He asked how everyone prioritizes where they put their retirement and other savings, and mentioned wife becoming a SAHM, so I threw in my 2 cents.  I wasn't entirely sure of the OP's income level, so I clarified about ours.