Author Topic: What would you do: A Trad or Roth IRA?  (Read 3168 times)

cbgg

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What would you do: A Trad or Roth IRA?
« on: March 02, 2015, 08:26:05 PM »
I am puzzling through a tax planning question and am interested in the opinions of all you smart tax planning and investing mustachians.

My situation:
 - I anticipate that my family income in 2015 will be just below the max threshold for a deductible Trad IRA (as in, we could take a valuable deduction in 2015).
 - In 2016 and for a few years, I anticipate that my family income may be a little too high to qualify for a deductible Trad IRA or a Roth IRA.  Of course, there is no way to know this for sure, it's just an educated guess! 
 - My family doesn't have plans to FIRE completely, but will probably ramp down total family earnings substantially in 2020 or so (reducing work to have kids)
 - I am about to change jobs and need to either roll my 401k into an IRA (would be lower fee via Vanguard) or into my new co's 401K plan (I don't know too much about the details yet, but I assume not as competitive as a normal Vanguard account).
 - I currently hold only a Roth IRA, meaning that the "backdoor" IRA conversion is still open for me.

My question:
 - For 2015, do you think I should put my $5500 in a Trad IRA or a Roth IRA?
 - For rolling over my 401k, do you think I should put it into a Trad IRA or an employer 401K?

And if you think I'm fundamentally misunderstanding something please let me know!  I'm trying to wrap my mind around all this.

aschmidt2930

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Re: What would you do: A Trad or Roth IRA?
« Reply #1 on: March 02, 2015, 08:46:39 PM »
I would do a traditional IRA for the tax deduction.  With the low income cut offs for it, I think it's crazy to pass it up while it's available. 

Bruinguy

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Re: What would you do: A Trad or Roth IRA?
« Reply #2 on: March 02, 2015, 08:53:57 PM »
I'd take advantage of the tax deduction of the traditional IRA. 

And, I'd roll my 401(k) into my traditional IRA.  In your traditional IRA, you will have complete control on your investment options, etc.  That might not be the case in your new 401(k).  My understanding is that there is no tax difference between the two.

cbgg

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Re: What would you do: A Trad or Roth IRA?
« Reply #3 on: March 02, 2015, 09:01:16 PM »
I'd take advantage of the tax deduction of the traditional IRA. 

And, I'd roll my 401(k) into my traditional IRA.  In your traditional IRA, you will have complete control on your investment options, etc.  That might not be the case in your new 401(k).  My understanding is that there is no tax difference between the two.
I would do a traditional IRA for the tax deduction.  With the low income cut offs for it, I think it's crazy to pass it up while it's available.

Do you guys think that I'll regret "closing the door" on a backdoor IRA that I would have otherwise done for the next few years?  Or am I worrying too much about what might happen in the future, when none of that is guaranteed? 

MDM

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Re: What would you do: A Trad or Roth IRA?
« Reply #4 on: March 02, 2015, 09:11:10 PM »
- In 2016 and for a few years, I anticipate that my family income may be a little too high to qualify for a deductible Trad IRA or a Roth IRA.  Of course, there is no way to know this for sure, it's just an educated guess!
There is a big difference between the tIRA and Roth limits - are you expecting an $85K/yr income increase?

Quote
My question:
 - For 2015, do you think I should put my $5500 in a Trad IRA or a Roth IRA?
Normally I'd say Trad, but if you are expecting a large income increase that might lead to a high post retirement income...?

Quote
- For rolling over my 401k, do you think I should put it into a Trad IRA or an employer 401K?
Depends on the investment options.  If the 401k is good enough, keep funds there so you can do backdoor Roth later.

cbgg

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Re: What would you do: A Trad or Roth IRA?
« Reply #5 on: March 02, 2015, 09:46:39 PM »


- In 2016 and for a few years, I anticipate that my family income may be a little too high to qualify for a deductible Trad IRA or a Roth IRA.  Of course, there is no way to know this for sure, it's just an educated guess!
There is a big difference between the tIRA and Roth limits - are you expecting an $85K/yr income increase?


Maybe I'm even more confused than I thought….

Trad IRAs: I thought that you could take a full deduction if your family income is less than $183,000
(Refrence on IRA site: http://www.irs.gov/Retirement-Plans/2015-IRA-Deduction-Limits-Effect-of-Modified-AGI-on-Deduction-if-You-Are-NOT-Covered-by-a-Retirement-Plan-at-Work)

Roth IRA: I think that you are eligible for a Roth if your family income is less than $183,000
(reference on IRA site: http://www.irs.gov/Retirement-Plans/Amount-of-Roth-IRA-Contributions-That-You-Can-Make-For-2015)

Have I got it all wrong?  I'll admit I'm a little confused…
« Last Edit: March 02, 2015, 09:54:29 PM by cbgg »

MDM

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Re: What would you do: A Trad or Roth IRA?
« Reply #6 on: March 02, 2015, 10:04:17 PM »
Maybe I'm even more confused than I thought….

Trad IRAs: I thought that you could take a full deduction if your family income is less than $183,000
(Refrence on IRA site: http://www.irs.gov/Retirement-Plans/2015-IRA-Deduction-Limits-Effect-of-Modified-AGI-on-Deduction-if-You-Are-NOT-Covered-by-a-Retirement-Plan-at-Work)

Roth IRA: I think that you are eligible for a Roth if your family income is less than $183,000
(reference on IRA site: http://www.irs.gov/Retirement-Plans/Amount-of-Roth-IRA-Contributions-That-You-Can-Make-For-2015)

Have I got it all wrong?  I'll admit I'm a little confused…

If neither you nor your spouse is covered by a retirement plan (401k, 403b, pension, etc.) at work, then there is no income limit for deducting your tIRA contribution.  From http://www.irs.gov/Retirement-Plans/IRA-Deduction-Limits:
Quote
Your deduction is allowed in full if you (and your spouse, if you are married) aren’t covered by a retirement plan at work.
Before we get into all the possible permutations...what is your and your spouse's situation regarding "covered by retirement plan at work"?

cbgg

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Re: What would you do: A Trad or Roth IRA?
« Reply #7 on: March 02, 2015, 10:27:02 PM »
Maybe I'm even more confused than I thought….

Trad IRAs: I thought that you could take a full deduction if your family income is less than $183,000
(Refrence on IRA site: http://www.irs.gov/Retirement-Plans/2015-IRA-Deduction-Limits-Effect-of-Modified-AGI-on-Deduction-if-You-Are-NOT-Covered-by-a-Retirement-Plan-at-Work)

Roth IRA: I think that you are eligible for a Roth if your family income is less than $183,000
(reference on IRA site: http://www.irs.gov/Retirement-Plans/Amount-of-Roth-IRA-Contributions-That-You-Can-Make-For-2015)

Have I got it all wrong?  I'll admit I'm a little confused…

If neither you nor your spouse is covered by a retirement plan (401k, 403b, pension, etc.) at work, then there is no income limit for deducting your tIRA contribution.  From http://www.irs.gov/Retirement-Plans/IRA-Deduction-Limits:
Quote
Your deduction is allowed in full if you (and your spouse, if you are married) aren’t covered by a retirement plan at work.
Before we get into all the possible permutations...what is your and your spouse's situation regarding "covered by retirement plan at work"?

Ah, I think I see where I have gone wrong! 

I thought a retirement plan just meant a pension, but even a 401k counts.  We will both have 401ks.  So that means our family income has to be less than $98,000 to take a deduction!  So in that case, there is no way we can take a Trad IRA deduction, so it'll be a Roth for us this year.  (Have I got it?)

I guess the question that still stands is whether we should roll that 401K into an IRA (thus material closing off future option of backdoor roth conversion…I think?) or put it into the new co's 401k plan.  Probably need more info from new Co to make a decent decision there, but I still welcome ideas! 

MDM

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Re: What would you do: A Trad or Roth IRA?
« Reply #8 on: March 02, 2015, 11:03:24 PM »
We will both have 401ks.  So that means our family income has to be less than $98,000 to take a deduction!  So in that case, there is no way we can take a Trad IRA deduction, so it'll be a Roth for us this year.  (Have I got it?)
Yes.

Quote
I guess the question that still stands is whether we should roll that 401K into an IRA (thus material closing off future option of backdoor roth conversion…I think?) or put it into the new co's 401k plan.  Probably need more info from new Co to make a decent decision there, but I still welcome ideas!
Yes, see highlighted phrase.