Opening an IRA Considering Roth because...

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Timber82
Posts: 166
Joined: Mon Feb 27, 2017 2:39 pm

Opening an IRA Considering Roth because...

Post by Timber82 »

So I know there are numerous threads however a quick search didn't turn up my question and to be honest the word roth is so general it was hard to wade through it all.

So I understand the reasons someone might choose a roth over a traditional, Being taxed now vs taxed later. I was originally intending to go traditional because I don't see myself making more money in retirement than I do now, and if I do, I will gladly pay the tax man.

So I was going along getting ready to create the account when I came across the Traditional IRA income maximum rules. Please help me to determine if I am understanding this.

My wife and I both work at a company that offers a 401K
Our salary's combined is over $119,000, which there may be some wiggle in there if I figure out how to determine my MAGI (since 18K is pre-tax) and all the other pre-tax deductions that might drop us below the $119,000

But I am seeing that if combined we make over $119 then we get no tax benefit or a lowered tax benefit for a traditional IRA making a Roth IRA more beneficial in my eyes.

Can someone correct me if my line of thinking is off?

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cswift01
Posts: 819
Joined: Thu Dec 08, 2016 10:46 am

Re: Opening an IRA Considering Roth because...

Post by cswift01 »

Timber82 wrote:So I know there are numerous threads however a quick search didn't turn up my question and to be honest the word roth is so general it was hard to wade through it all.

So I understand the reasons someone might choose a roth over a traditional, Being taxed now vs taxed later. I was originally intending to go traditional because I don't see myself making more money in retirement than I do now, and if I do, I will gladly pay the tax man.

So I was going along getting ready to create the account when I came across the Traditional IRA income maximum rules. Please help me to determine if I am understanding this.

My wife and I both work at a company that offers a 401K
Our salary's combined is over $119,000, which there may be some wiggle in there if I figure out how to determine my MAGI (since 18K is pre-tax) and all the other pre-tax deductions that might drop us below the $119,000

But I am seeing that if combined we make over $119 then we get no tax benefit or a lowered tax benefit for a traditional IRA making a Roth IRA more beneficial in my eyes.

Can someone correct me if my line of thinking is off?


I don't know about anyone else, but I'm thinking more future income vs. present income. I'm contributing to a Roth under similar circumstances as yours. I think that's the best way forward, also because the Roth is more flexible in terms of usage (e.g. use it as a down payment for a house).

Best,

Me

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evilanne
Posts: 1886
Joined: Thu May 14, 2015 6:52 pm

Re: Opening an IRA Considering Roth because...

Post by evilanne »

Timber,

You are correct. Since you are both covered by retirement accounts at work, the traditional IRA doesn't provide you with much of a tax advantage, if any, as it starts phasing out at MAGI of $99K for MFJ, see https://www.irs.gov/retirement-plans/20 ... n-at-work; overview: https://www.irs.gov/retirement-plans/ir ... ion-limits If you do your own taxes any tax program should guide you through everything and calculate it for you. You also have until 15 April 2018 to fund your IRA(s) for 2017

Timber82
Posts: 166
Joined: Mon Feb 27, 2017 2:39 pm

Re: Opening an IRA Considering Roth because...

Post by Timber82 »

Knowing I have until April 15th is great, is that the same for a traditional? If that is the case I will wait until after I do my taxes to see what our AGI is.

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evilanne
Posts: 1886
Joined: Thu May 14, 2015 6:52 pm

Re: Opening an IRA Considering Roth because...

Post by evilanne »

Deadline is same for all IRAs. It is actually the tax filing deadline, which can vary slightly year to year depending on what day April 15th falls on, occasionally it is delayed a few days.

Postal5MGE
Posts: 13
Joined: Tue Jan 29, 2013 3:09 pm

Re: Opening an IRA Considering Roth because...

Post by Postal5MGE »

One other thing to keep in mind is the tax rate itself. Do you think the tax rate will be the same as it is today when you retire? That part of the equation is a guessing game...it could be higher or it could be lower. My bet is it being higher, which is why I go with the roth in my TSP and IRA.

Timber82
Posts: 166
Joined: Mon Feb 27, 2017 2:39 pm

Re: Opening an IRA Considering Roth because...

Post by Timber82 »

Postal5MGE wrote:One other thing to keep in mind is the tax rate itself. Do you think the tax rate will be the same as it is today when you retire? That part of the equation is a guessing game...it could be higher or it could be lower. My bet is it being higher, which is why I go with the roth in my TSP and IRA.


Good assertion that oddly enough was actually brought up on a podcast I listen to last night (Morningstar Radio). I guess the one thing you can always count on in life is more taxes lol.

PoorFed
Posts: 43
Joined: Sat Oct 08, 2016 8:27 pm

Re: Opening an IRA Considering Roth because...

Post by PoorFed »

Postal5MGE wrote:One other thing to keep in mind is the tax rate itself. Do you think the tax rate will be the same as it is today when you retire? That part of the equation is a guessing game...it could be higher or it could be lower. My bet is it being higher, which is why I go with the roth in my TSP and IRA.


Although I agree with you that taxes will likely be higher in the future, you also need to take into consideration the "progressive" tax structure. When you put money away into a traditional IRA now, your tax "savings" is based on the highest rate you are paying now. When you pull money out later, your taxes start at the lowest rate. For example, suppose I put $5k away now and "save" $1,250 in taxes (assuming I'm in the 25% tax bracket). Later when I retire, assume all I pull out is $5k for the year. With the standard deduction, in essence I pay no taxes so my traditional IRA is actually like a Roth but I didn't pay taxes when I put money in. Best of both worlds. Of course this is an over simplification and I will probably need more than $5k a year but you get the idea. As they say, nothing in life is guarantee except death and taxes...which is why I rather take the "guarantee" deduction now and roll the dice on the future.

Master
Posts: 10
Joined: Wed Jun 14, 2017 3:01 pm

Re: Opening an IRA Considering Roth because...

Post by Master »

Timber82 wrote:
Postal5MGE wrote:One other thing to keep in mind is the tax rate itself. Do you think the tax rate will be the same as it is today when you retire? That part of the equation is a guessing game...it could be higher or it could be lower. My bet is it being higher, which is why I go with the roth in my TSP and IRA.


Good assertion that oddly enough was actually brought up on a podcast I listen to last night (Morningstar Radio). I guess the one thing you can always count on in life is more taxes lol.


Also consider state taxes. I've heard arguments from some people who contribute to a traditional because they live in a state that has a state tax but they plan to retire in a state that does not have a state income tax. My 2 cents.

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