Author Topic: Trying to understand contributing to trad IRA without deduction  (Read 911 times)

anonmustach3

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I'm not eligible to deduct contributions to a traditional IRA because I have a 401k through work and make more than the limit for AGI. I'm having trouble understanding the point of making non-tax deductible to a traditional IRA after maxing out 401k, roth IRA, and HSA. Why would I want to contribute to a traditional IRA (and not take a deduction) vs just putting money in taxable accounts? Also, if I decide to go that route, are there any limits to how much you could put in a traditional IRA since I wouldn't be claiming a deduction?

Somewhat related to my question about contributing to a traditional IRA but not getting the deduction. My wife will be earning a small amount of w2 income this year and I'm wondering if that gives us any additional options for tax savings? As I understand it she can't take a trad IRA deduction either because we file jointly and I have a 401k. Is that true? Do we have any other options for her and a retirement account? She doesn't get one through this job and we already max a roth for her.

Telecaster

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Re: Trying to understand contributing to trad IRA without deduction
« Reply #1 on: March 23, 2019, 02:07:10 PM »
I'm not eligible to deduct contributions to a traditional IRA because I have a 401k through work and make more than the limit for AGI. I'm having trouble understanding the point of making non-tax deductible to a traditional IRA after maxing out 401k, roth IRA, and HSA. Why would I want to contribute to a traditional IRA (and not take a deduction) vs just putting money in taxable accounts? Also, if I decide to go that route, are there any limits to how much you could put in a traditional IRA since I wouldn't be claiming a deduction?


You would make tIRA contribution and then convert it to a Roth.   The are specific rules that need to be followed so Google "backdoor Roth" and read very carefully.

Otherwise no, it is not normally desirable to make non-deductible IRA contributions.   

secondcor521

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Re: Trying to understand contributing to trad IRA without deduction
« Reply #2 on: March 23, 2019, 02:18:05 PM »
I personally prioritize putting money in taxable before I would do a non-deductible traditional IRA, so I agree with you there.

You are limited to contributing up to $6K per year total between your Roth IRA and traditional IRA.  So you could contribute $5K to a Roth and $1K to a traditional, or $3K to each, or whatever.  So if you already maxed out your Roth IRA you can contribute $0 to your traditional because of this combined limit.

That combined limit applies regardless of whether the traditional IRA contribution would be deductible.

Your wife is probably eligible to make a full $6K contribution to either her Roth or her traditional IRA via what's called a spousal IRA contribution.  In essence if the two of you make more than $12K and you're married, she can use your earned income to contribute to her IRA.

Whether her traditional IRA is deductible, I'm not sure on that - check the rules at irs.gov.  ETA:  A quick Googling suggests that if you have a workplace plan but she does not, then as long as you are MFJ and your AGI is under $193K then her contribution to a traditional IRA would be fully deductible (cite:  https://www.investopedia.com/ask/answers/081414/can-i-deduct-my-individual-retirement-account-ira-contribution-my-tax-return.asp).

But again, if your wife maxes out her Roth IRA, she would be ineligible to contribute to her traditional IRA.  But that is because of the combined limit noted above and not (necessarily) any other reason.

As @Telecaster notes, you could possibly do a backdoor Roth as well, but that's a more advanced topic so I'd recommend you solidly understand the basics before trying that.
« Last Edit: March 23, 2019, 02:20:38 PM by secondcor521 »

MustacheAndaHalf

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Re: Trying to understand contributing to trad IRA without deduction
« Reply #3 on: March 24, 2019, 03:57:31 AM »
I think putting bonds in a non-deductible IRA makes sense: the bond income gets taxed the same way, so it's better to defer taxes.  The bond income stays untaxed in the IRA, and can grow.

But with equities, growth in taxable costs 15% in tax (median taxpayer) versus paying 22% on the growth in the non-deductible IRA.  That's a difficult hurdle to overcome - especially since you can control when you pay that tax (when you sell in taxable, or when you withdraw from the IRA).

anonmustach3

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Re: Trying to understand contributing to trad IRA without deduction
« Reply #4 on: March 24, 2019, 05:15:40 AM »
Whether her traditional IRA is deductible, I'm not sure on that - check the rules at irs.gov.  ETA:  A quick Googling suggests that if you have a workplace plan but she does not, then as long as you are MFJ and your AGI is under $193K then her contribution to a traditional IRA would be fully deductible (cite:  https://www.investopedia.com/ask/answers/081414/can-i-deduct-my-individual-retirement-account-ira-contribution-my-tax-return.asp).

But again, if your wife maxes out her Roth IRA, she would be ineligible to contribute to her traditional IRA.  But that is because of the combined limit noted above and not (necessarily) any other reason.

As @Telecaster notes, you could possibly do a backdoor Roth as well, but that's a more advanced topic so I'd recommend you solidly understand the basics before trying that.

Thanks for pointing that out. I misread the IRS rules before, but now reading them again, it appears that article is correct and we would be able to deduct a tIRA for her (damnit!), I guess there's always next year.

For a backdoor Roth, is there any point when you are still eligible for a Roth? It seems like a backdoor Roth lets you get around the income limits, not the contribution limits if I understand correctly. So it wouldn't apply for me as far as I can tell.

secondcor521

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Re: Trying to understand contributing to trad IRA without deduction
« Reply #5 on: March 24, 2019, 11:38:44 AM »
Whether her traditional IRA is deductible, I'm not sure on that - check the rules at irs.gov.  ETA:  A quick Googling suggests that if you have a workplace plan but she does not, then as long as you are MFJ and your AGI is under $193K then her contribution to a traditional IRA would be fully deductible (cite:  https://www.investopedia.com/ask/answers/081414/can-i-deduct-my-individual-retirement-account-ira-contribution-my-tax-return.asp).

But again, if your wife maxes out her Roth IRA, she would be ineligible to contribute to her traditional IRA.  But that is because of the combined limit noted above and not (necessarily) any other reason.

As @Telecaster notes, you could possibly do a backdoor Roth as well, but that's a more advanced topic so I'd recommend you solidly understand the basics before trying that.

Thanks for pointing that out. I misread the IRS rules before, but now reading them again, it appears that article is correct and we would be able to deduct a tIRA for her (damnit!), I guess there's always next year.

For a backdoor Roth, is there any point when you are still eligible for a Roth? It seems like a backdoor Roth lets you get around the income limits, not the contribution limits if I understand correctly. So it wouldn't apply for me as far as I can tell.

You can change or make a tIRA contribution for your wife for 2018 up until 4/15/19, so you have a few weeks left to do that if you want to.

As far as your second question, no there's no point.  If you're eligible to contribute to the Roth, it's cleaner and easier to just make the contribution directly rather than do the backdoor.  The backdoor is only to get around the income limits on making the contribution.