Author Topic: Roth vs Traditional IRA Contributions for Income "Tweener"  (Read 2102 times)

Spivey

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Roth vs Traditional IRA Contributions for Income "Tweener"
« on: July 01, 2015, 09:48:33 AM »
I believe my gross income and 401(k) contributions put me in a situation where I can contribute a small amount (~$1,000) to a Traditional IRA and the difference (~$4,500) to a Roth IRA. Does it make more sense to max out my Roth IRA or invest a small amount into a Traditional IRA? Here are my incomes details:

Gross Income = $91,140 (salary & bonuses) + $3645 (4% match)
401(k) Contribution = $18,000 + $3645

MDM

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Re: Roth vs Traditional IRA Contributions for Income "Tweener"
« Reply #1 on: July 01, 2015, 10:00:22 AM »
Assuming you file single, you will be in the 25% marginal bracket.  Rule of thumb says "use traditional" in that case, so I'd put the $1K into the traditional.  If your salary goes up much, you won't be able to contribute to a tIRA much longer.

But can you still do any deductible tIRA, even this year?  $91,140 - $18,000 = $73,140 and that is above the $71K cutoff, so...?

Spivey

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Re: Roth vs Traditional IRA Contributions for Income "Tweener"
« Reply #2 on: July 01, 2015, 10:47:56 AM »
Do you need to subtract the standard deduction ($6,300) and personal exemption ($4,000) when calculating income?

Cheddar Stacker

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Re: Roth vs Traditional IRA Contributions for Income "Tweener"
« Reply #3 on: July 01, 2015, 10:54:51 AM »
Do you need to subtract the standard deduction ($6,300) and personal exemption ($4,000) when calculating income?

Taxable income, yes. AGI which the T.IRA cutoff is based on, no.

It's possible there are some pre-tax deductions though like health insurance that could make you eligible for a deductible T.IRA contribution.

MDM

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Re: Roth vs Traditional IRA Contributions for Income "Tweener"
« Reply #4 on: July 01, 2015, 10:56:55 AM »
Do you need to subtract the standard deduction ($6,300) and personal exemption ($4,000) when calculating income?
For your IRA deduction limit the answer, unfortunately, is "no."

E.g., see http://apps.irs.gov/app/vita/content/globalmedia/ira_deduction_worksheet_1040i.pdf.  In short, you take your total income (Line 22 on Form 1040) and subtract anything from "Form 1040, lines 23 through 31a, plus any write-in adjustments you entered on the dotted line next to line 36" to get your Modified Adjusted Gross Income, and that determines IRA deductibility.

An almost equivalent way to calculate MAGI is to start with AGI and add back any amounts on lines 32-35 of Form 1040.

TheAccountant

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Re: Roth vs Traditional IRA Contributions for Income "Tweener"
« Reply #5 on: July 29, 2015, 09:03:48 AM »
It depends on your contribution goals, retirement horizon, and estimates of your retirement tax rate.  The simplest aspect to consider it that while the Traditional IRA may or may not be more tax advantaged depending on your situation, the Roth is still tax advantaged compared to normal investments, and you can contribute more to the Roth IRA than the Traditional IRA.

"Back of the envelope" example:

Pre-tax income limit of a Traditional IRA = $5,500
Pre-tax income limit of a Roth IRA in your situation = ($5,500/(1 - .25)) = $7333.33

Both will result in $5,500 in your IRA account, but the Roth contribution will never be taxed again as it was contributed post-tax, which is analogous to being allowed a larger contribution.

However, other factors may outweigh this consideration.

To fully evaluate the situation, you should estimate your retirement income/tax rate/date and prepare a scenario analysis of Roth vs. Traditional (you could reuse this spreadsheet each year). 

bittheory

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Re: Roth vs Traditional IRA Contributions for Income "Tweener"
« Reply #6 on: July 29, 2015, 12:26:41 PM »
Following as my situation is very similar in terms of income and I carry both a traditional and Roth IRA, but contribute much more to my Roth.