The Money Mustache Community
Learning, Sharing, and Teaching => Taxes => Topic started by: prax on January 25, 2016, 11:49:03 PM
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Hey folks! It looks like I made a mistake this year by contributing to my traditional IRA with post-tax dollars. I was under the impression that I'd get back the taxes I paid on that money come tax time, but now that I'm filing I see that because of my high income + employer 401k, this is not the case. I thought I had done my homework when I chose a tIRA (because I expect my income to be much lower in retirement) but I guess I missed the fine print.
I've done some searching around, but it's still unclear to me what I should do in this situation. Is that money going to be taxed again when I withdraw it? Should I try to convert it to a Roth?
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Yes, converting to a Roth is the thing to do. In fact I have been doing this for years, making non-deductible IRA contributions and converting into a Roth IRA.
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Is that money going to be taxed again when I withdraw it? Should I try to convert it to a Roth?
Best, if you are within the Roth income limit, to recharacterize your contribution as a Roth. See https://www.bogleheads.org/wiki/IRA_recharacterization.
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If you do not have any other traditional IRA in your name, and you exceed Roth income limits, you can do the backdoor Roth.https://www.bogleheads.org/wiki/Backdoor_Roth_IRA (https://www.bogleheads.org/wiki/Backdoor_Roth_IRA)
If you do have an IRA in your name, you can transfer than money into your employer's 401(k). Then you will be eligible for the backdoor Roth without owing tax on the conversion.
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I don't have anything to add, but am posting to see what you find out. I also went with a tIRA this year in combination with a 401K and 457 for the "tax benefit".
I haven't done my taxes yet, but hopefully I don't run into the same issue.
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Best, if you are within the Roth income limit, to recharacterize your contribution as a Roth. See https://www.bogleheads.org/wiki/IRA_recharacterization.
Thanks for this MDM! This is what I'll be doing.
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Not sure if it was stated clearly enough, but there's two kinds of Traditional IRA contribtions: deductible, and non-deductible. You stumbled into the correct contribution: at high income, you can only use after-tax dollars. Most people call this a "non-deductible IRA", and it means the money you put it is not taxed later (it becomes your cost basis, and you subtract the cost basis when figuring taxes on gains).
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Not sure if it was stated clearly enough, but there's two kinds of Traditional IRA contribtions: deductible, and non-deductible. You stumbled into the correct contribution: at high income, you can only use after-tax dollars. Most people call this a "non-deductible IRA", and it means the money you put it is not taxed later (it becomes your cost basis, and you subtract the cost basis when figuring taxes on gains).
Got it. But won't I be taxed on the gains then, unlike a Roth?
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Got it. But won't I be taxed on the gains then, unlike a Roth?
Yes, unless you do a "backdoor Roth conversion." See https://www.bogleheads.org/wiki/Backdoor_Roth_IRA.