Author Topic: Two roth IRAs or traditional and roth for married couple  (Read 2530 times)

dsmguy

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Two roth IRAs or traditional and roth for married couple
« on: October 05, 2014, 09:07:30 AM »
Hello-

My wife and I have recently paid off some debt and are starting to focus more on our saving.

Current household income is $135,000. I'm contributing 10% to my employer 401k and my wife is contributing 6% (her options for investments are rather poor, so just doing enough to get the match).

I recently opened a roth ira through Vanguard. We want to fully fund two IRAs each year, but I'm not sure if we should open an additional Roth, or have a Roth in my name and a traditional in her name. I'm working under the assumption that it makes more sense for us to open IRAs and maxing those out before we begin to think about opening a taxable account.

So knowing that I've already opened a Roth IRA in my name would the "best" course of action be:

A) Open additional Roth IRA in wife's name
B) Open traditional IRA in wife's name
C) Fully fund my employer 401k before funding either of the above
D) Something different


wtjbatman

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Re: Two roth IRAs or traditional and roth for married couple
« Reply #1 on: October 05, 2014, 09:27:58 AM »
http://www.irs.gov/Retirement-Plans/IRA-Deduction-Limits

For a married couple filing jointly you can not deduct your Traditional IRA contribution if you have greater than $116,000 modified AGI. The partial reduction begins as "early" as $96,000 in AGI. You could max out both of your 401ks and you still wouldn't get the full deduction. Do you have access to a HSA? Maxing that out as well as the 401ks should lower your adjusted AGI enough to allow you to qualify for the full deduction.

When it comes to contributing to an IRA, unless you have an HSA you can contribute to, a Roth is likely your best answer. I do think you should reconsider your 401k contributions however. At your income level and with the percentage of tax you're paying, maxing out your 401k is going to save you a lot more money than even the average high fee 401k account will cost you. A lot more.

Random guy on the internet recommendation? Max out both 401k's first (and squeeze in a HSA in there if you have one), then use whatever money you have left over to fund Roth IRAs.

aschmidt2930

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Re: Two roth IRAs or traditional and roth for married couple
« Reply #2 on: October 05, 2014, 09:34:36 AM »
I would start by reading this post by the Mad Fientist on Traditional IRAs vs Roth IRAs:

http://www.madfientist.com/traditional-ira-vs-roth-ira/

In my opinion, max out your 401k (Assuming you have low cost options available), max out your traditional IRA, and taxable accounts from there.  With 135k in household income you shouldn't have any trouble maxing out both while still building up a strong taxable account to help you through the Roth Pipeline Conversion time frame. 

Edit: Completely spaced on the deduction income limits pointed out by wtjbatman (Blaming that one on not having my coffee yet this morning :)).  With that in mind, I would contribute anything you can deduct in a traditional IRA, after that go Roth. 
« Last Edit: October 05, 2014, 09:44:45 AM by aschmidt2930 »

dsmguy

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Re: Two roth IRAs or traditional and roth for married couple
« Reply #3 on: October 05, 2014, 01:50:31 PM »
http://www.irs.gov/Retirement-Plans/IRA-Deduction-Limits

For a married couple filing jointly you can not deduct your Traditional IRA contribution if you have greater than $116,000 modified AGI. The partial reduction begins as "early" as $96,000 in AGI. You could max out both of your 401ks and you still wouldn't get the full deduction. Do you have access to a HSA? Maxing that out as well as the 401ks should lower your adjusted AGI enough to allow you to qualify for the full deduction.

When it comes to contributing to an IRA, unless you have an HSA you can contribute to, a Roth is likely your best answer. I do think you should reconsider your 401k contributions however. At your income level and with the percentage of tax you're paying, maxing out your 401k is going to save you a lot more money than even the average high fee 401k account will cost you. A lot more.

Random guy on the internet recommendation? Max out both 401k's first (and squeeze in a HSA in there if you have one), then use whatever money you have left over to fund Roth IRAs.

Thanks for the advice. This is good timing re: the 401k advice as my wife's was just switched over to Fidelity and we've been looking at changing her elections. We are going to max hers out. They currently have everything is a high expense ratio (.78) managed fund. Looking at the account, we have access to the following Spartan Index Funds:

1) FUSVX- Spartan500 Index Fund with .07 expense ratio (Large cap)
2) FSEVX- Spartan extended market index with .08 expense ratio (Mid cap)
3) FSSVX- Spartan small cap index with .34 expense ratio (small cap)
4) FSGDX- Spartan Global excluding US Index fund with .17 expense ratio (international)
5) FSITV- Spartan Bond Index with .17 expense ratio

What do you think a good blend of the above, percentage-wise, would be? We are in our lower 30's and both planning to now max out our 401k's per the good advice taken here. I know there is also a spartan total market fund, instead of the spartan500, but that isn't an option in the choices.
« Last Edit: October 05, 2014, 02:03:58 PM by dsmguy »

wtjbatman

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Re: Two roth IRAs or traditional and roth for married couple
« Reply #4 on: October 05, 2014, 02:38:10 PM »
1) FUSVX- Spartan500 Index Fund with .07 expense ratio (Large cap)
2) FSEVX- Spartan extended market index with .08 expense ratio (Mid cap)
3) FSSVX- Spartan small cap index with .34 expense ratio (small cap)
4) FSGDX- Spartan Global excluding US Index fund with .17 expense ratio (international)
5) FSITV- Spartan Bond Index with .17 expense ratio

What do you think a good blend of the above, percentage-wise, would be? We are in our lower 30's and both planning to now max out our 401k's per the good advice taken here. I know there is also a spartan total market fund, instead of the spartan500, but that isn't an option in the choices.

That really depends on when you plan to retire, and what sort of asset allocation (AA) you are comfortable with. You're lower 30's, but do you plan on retiring in 15 years (say 45yo)? 20+ years when you're 50 and older? Or a more traditional retirement age of 60's? That can help you decide on how aggressive you should be. I can give general advice though. Often people will do something along the lines of half your age in bonds, rest in equities. So you could easily do an 85/15 or 80/20 AA. If you're looking at a market weight AA, it could look like this:

FUSVX (S&P 500) - 45%
FSEVX (Extended Market/Mid and Small Cap according to Yahoo Finance) - 15%
FSGDX (International) - 20%
FSITV (Bonds) - 20%

You can always tinker with it, add more bonds to be more conservative (in which case I'd cut international first), or go less bonds (then I'd add more extended market or even tilt small cap and add in that small-cap only index).

dsmguy

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Re: Two roth IRAs or traditional and roth for married couple
« Reply #5 on: October 05, 2014, 02:44:51 PM »

That really depends on when you plan to retire, and what sort of asset allocation (AA) you are comfortable with. You're lower 30's, but do you plan on retiring in 15 years (say 45yo)? 20+ years when you're 50 and older? Or a more traditional retirement age of 60's? That can help you decide on how aggressive you should be. I can give general advice though. Often people will do something along the lines of half your age in bonds, rest in equities. So you could easily do an 85/15 or 80/20 AA. If you're looking at a market weight AA, it could look like this:

FUSVX (S&P 500) - 45%
FSEVX (Extended Market/Mid and Small Cap according to Yahoo Finance) - 15%
FSGDX (International) - 20%
FSITV (Bonds) - 20%

You can always tinker with it, add more bonds to be more conservative (in which case I'd cut international first), or go less bonds (then I'd add more extended market or even tilt small cap and add in that small-cap only index).

Sorry, I should have provided more details about our situation. We would ideally like to retire around the age of 50-52. I think a 85/15 split wouldn't be bad, so maybe it would make sense to take that 5% from bonds in favor of the FSEVX, extended market.

wtjbatman

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Re: Two roth IRAs or traditional and roth for married couple
« Reply #6 on: October 05, 2014, 03:06:05 PM »

That really depends on when you plan to retire, and what sort of asset allocation (AA) you are comfortable with. You're lower 30's, but do you plan on retiring in 15 years (say 45yo)? 20+ years when you're 50 and older? Or a more traditional retirement age of 60's? That can help you decide on how aggressive you should be. I can give general advice though. Often people will do something along the lines of half your age in bonds, rest in equities. So you could easily do an 85/15 or 80/20 AA. If you're looking at a market weight AA, it could look like this:

FUSVX (S&P 500) - 45%
FSEVX (Extended Market/Mid and Small Cap according to Yahoo Finance) - 15%
FSGDX (International) - 20%
FSITV (Bonds) - 20%

You can always tinker with it, add more bonds to be more conservative (in which case I'd cut international first), or go less bonds (then I'd add more extended market or even tilt small cap and add in that small-cap only index).

Sorry, I should have provided more details about our situation. We would ideally like to retire around the age of 50-52. I think a 85/15 split wouldn't be bad, so maybe it would make sense to take that 5% from bonds in favor of the FSEVX, extended market.

Sounds like an aggressive and diversified AA that fits your long term plans. If you're comfortable with your stash facing high volatility from being 85% equities (think 50% drop like in 2008) and stay the course even during market downturns, I imagine you will have very nice long term returns.