Author Topic: Which IRA if MAGI is above Traditional IRA Deduction Limit but below Roth Limit?  (Read 2951 times)

Mustache MW

  • 5 O'Clock Shadow
  • *
  • Posts: 6
Hi there!

I'm researching Traditional vs Roth IRAs and I think I have a pretty good understanding of each and their associated pros/cons, but I can't quite find a definitive answer on this topic, so I need some help.
If a person's Modified Adjusted Gross Income is above the Traditional IRA tax deduction limits, yet below the Roth contribution limits, and their employer does provide a 401k plan, which is the best choice?

For argument, let's assume MAGI of $75,000 in 2014, Single filer, 401k plan offered by employer.

I'm thinking Roth for the following reasons:
1) You wouldn't get any initial tax benefit from Traditional contributions (so at time of contribution, they'd be equivalent)
2) You would have to pay taxes on distributions/withdrawals on the Traditional in the future (so this would favor the Roth)

Is this right?

Thanks,
MW

Beric01

  • Handlebar Stache
  • *****
  • Posts: 1156
  • Age: 28
  • Location: SF Bay Area
  • Law-abiding cyclist
Hi there!

I'm researching Traditional vs Roth IRAs and I think I have a pretty good understanding of each and their associated pros/cons, but I can't quite find a definitive answer on this topic, so I need some help.
If a person's Modified Adjusted Gross Income is above the Traditional IRA tax deduction limits, yet below the Roth contribution limits, and their employer does provide a 401k plan, which is the best choice?

For argument, let's assume MAGI of $75,000 in 2014, Single filer, 401k plan offered by employer.

I'm thinking Roth for the following reasons:
1) You wouldn't get any initial tax benefit from Traditional contributions (so at time of contribution, they'd be equivalent)
2) You would have to pay taxes on distributions/withdrawals on the Traditional in the future (so this would favor the Roth)

Is this right?

Thanks,
MW

Correct. If you're above the traditional IRA deduction limits, the Roth IRA is better in every way.

seattlecyclone

  • Magnum Stache
  • ******
  • Posts: 4637
  • Age: 34
  • Location: Seattle, WA
Yes. For early retirement purposes, tax-deferred is usually a winner where it's an option, but a Roth can be great too if tax-deferred is unavailable.

MDM

  • Walrus Stache
  • *******
  • Posts: 9099
If a person's Modified Adjusted Gross Income is above the Traditional IRA tax deduction limits, yet below the Roth contribution limits, and their employer does provide a 401k plan, which is the best choice?
For argument, let's assume MAGI of $75,000 in 2014, Single filer, 401k plan offered by employer.

Mustache MW, welcome to the forums.

It's not clear from the OP - how much is said person contributing to the 401k?  In other words, what is the actual gross income, how much in 401k contributions, and how much in other pre-tax deduction is subtracted to get to that 75K?

Mustache MW

  • 5 O'Clock Shadow
  • *
  • Posts: 6
Thanks for clearing that up for me!

I'm not quite to that income level yet (Traditional is still deductible for me), but I'm trying to understand for the future.  If I were to marry my girlfriend, or of course, get a huge raise, then I'd be right up in that territory.

MDM, thanks for the welcome!  I didn't include those details in this hypothetical because I didn't think it was relevant to getting an answer to my question.  If you know how it's relevant and you have a point you want to illustrate, please make up the numbers and teach away :-)

MDM

  • Walrus Stache
  • *******
  • Posts: 9099
MDM, thanks for the welcome!  I didn't include those details in this hypothetical because I didn't think it was relevant to getting an answer to my question.  If you know how it's relevant and you have a point you want to illustrate, please make up the numbers and teach away :-)
Contributing to a 401k will reduce your income for IRS purposes.  May or not be relevant for various cases, but...if the $75K is gross, then contributing $17.5K to a 401k would get you back into the allowable range for traditional IRA.  Another situation is contributing only up to the employer match amount in a 401k and still above the MAGI tIRA limit.  In that case, can be better to increase 401k instead of contributing to Roth IRA.

gwines

  • 5 O'Clock Shadow
  • *
  • Posts: 13
  • Age: 31
  • Location: Denver, CO
MDM, Thanks for explaining this. I had no idea that T.IRA contributions' tax exemption was phased out after a certain income level or that R.IRA contributions were limited by income level either.

I was about to dump the $5500 limit into a T.IRA thinking I would deduct it from this year's taxes, but now a R.IRA is unarguably better. I would have been very upset come tax season this year. Thanks for bringing this up.


Joel

  • Pencil Stache
  • ****
  • Posts: 766
  • Location: California
MDM, thanks for the welcome!  I didn't include those details in this hypothetical because I didn't think it was relevant to getting an answer to my question.  If you know how it's relevant and you have a point you want to illustrate, please make up the numbers and teach away :-)

Contributing to a 401k will reduce your income for IRS purposes.  May or not be relevant for various cases, but...if the $75K is gross, then contributing $17.5K to a 401k would get you back into the allowable range for traditional IRA.  Another situation is contributing only up to the employer match amount in a 401k and still above the MAGI tIRA limit.  In that case, can be better to increase 401k instead of contributing to Roth IRA.

This. You should max out your traditional 401k contributions before contributing to a Roth IRA if you are above the traditional ira magi limit.