Roth IRA or no?

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Boglelicious123
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Roth IRA or no?

Post by Boglelicious123 » Wed Jun 12, 2019 6:32 pm

Through some words of wisdom from others on this forum I am going to open up an IRA account (either a roth or traditional). I am currently putting the max towards my 403b and would like to be able to invest some excess somewhere else. I currently have a taxable account, but now realize that's probably not the best way forward (I have only had the taxable account for a few months so selling the investments won't incur many taxable gains).

At this point in time my wife and I are under the max married filed jointly amount to be able to open up a roth by about $50K. However, we do see our salaries potentially going up in the future (we are in our 30's). I see one huge advantage of a roth to be that I can withdraw my contributions at any point with no penalty. This would be great for peace of mind (and other expenses that may pop up). What happens if I open a roth IRA now, contribute for a few years, then we do happen to go over max allowable married filed jointly income mandated by the government? Would I then have to transfer the roth into a traditional IRA? That doesn't seem tax-efficient at all since I've already paid taxes on the funds in the roth, so will I have to pay taxes again when I get that $ out after converting it to a traditional IRA?

It seems like I should set up a roth IRA, but I am concerned about potentially not being able to contribute to a roth sometime down the road due to income increases. Any sage advice out there for me? Thanks in advance!

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David Jay
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Re: Roth IRA or no?

Post by David Jay » Wed Jun 12, 2019 6:45 pm

Boglelicious123 wrote:
Wed Jun 12, 2019 6:32 pm
What happens if I open a roth IRA now, contribute for a few years, then we do happen to go over max allowable married filed jointly income mandated by the government? Would I then have to transfer the roth into a traditional IRA?
No, you can keep the Roth and everything in it. You would simply be unable to contribute additional money to the Roth in any tax year when your income exceeds the limit.

This is one reason why you can contribute to a Roth until April 15 of the following year (i.e. make your “2019” contribution to your Roth until April 15, 2020), you can do your taxes first to see if you qualify to make a contribution.
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius

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Boglelicious123
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Re: Roth IRA or no?

Post by Boglelicious123 » Wed Jun 12, 2019 6:58 pm

David Jay wrote:
Wed Jun 12, 2019 6:45 pm
Boglelicious123 wrote:
Wed Jun 12, 2019 6:32 pm
What happens if I open a roth IRA now, contribute for a few years, then we do happen to go over max allowable married filed jointly income mandated by the government? Would I then have to transfer the roth into a traditional IRA?
No, you can keep the Roth and everything in it. You would simply be unable to contribute additional money to the Roth in any tax year when your income exceeds the limit.

This is one reason why you can contribute to a Roth until April 15 of the following year (i.e. make your “2019” contribution to your Roth until April 15, 2020), you can do your taxes first to see if you qualify to make a contribution.
Ok, thanks for the response and info. With compounding in mind, does it make more sense for me to just open up a traditional IRA then? If I have to leave the Roth on it’s own, doesn’t that hurt my ability to have that account compound with new additional contributions over time? I may be totally wrong on that...

lakpr
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Re: Roth IRA or no?

Post by lakpr » Wed Jun 12, 2019 7:04 pm

Firstlt, you ability to contribute to Roth IRA is income limited only for that particular year when your annual income exceeds the threshold set by IRS. The prior tear’s contributions need not be re-characterized to a traditional IRA at all, not sure where you got that idea from.

If for a particular year you made the full Roth IRA contribution (say full $6k now for 2019), and later you find out that you exceeded income limits to make such contribution after you filled out your tax returns (say in Feb 2020), you gave two choices.

First, you can re-characterize the previously made contribution as “traditional IRA”, wait a business day, then convert that traditional IRA contribution to a Roth IRA. The second alternative is to simply withdraw the excess Roth contribution before April 15, 2020 (tax day).

In the first alternative, you will have to pay taxes in any difference between the amount you have contributed and the amount you converted. That is, say you contributed $6000, and by the time you converted to Roth the balance was $6200, you claim $200 as income and pay taxes on it. You will have to file additional form called Form 8606

Of course, in the second alternative also you pay taxes on the $200, but not going to end up with $6200 in Roth as in the first.

Please go to the Wiki link on this site, search for the term “Backdoor Roth”, and read it thoroughly. If you don’t follow all the steps precisely and in the correct sequence, you could find yourself in a heap of a mess with IRS. Roth conversions, once done, are non-reversible.

By the way, the money contributed to Roth IRA directly (while you are under the limits), can be withdrawn at any time; but the money you got into Roth IRA through backdoor Roth (the first alternative) cannot be accessed until 5 years have passed from Jan1 of the year the Roth conversion is made. In the example I gave above, if you converted in 2019, you can access those funds only after January 1, 2024. Just be aware of this, you need to track direct contributions vs Roth conversions in your Roth IRA, if you ever have an intention of tapping Roth for unforeseen emergencies. (To be precise, you can access those conversion funds, but must pay a 10% penalty).

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willthrill81
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Re: Roth IRA or no?

Post by willthrill81 » Wed Jun 12, 2019 7:10 pm

As lakpr noted, a backdoor Roth is what you'll need to do if your income goes beyond the thresholds for making regular Roth IRA contributions. It's not difficult, but you do need to follow the necessary steps.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

Chrono Triggered
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Re: Roth IRA or no?

Post by Chrono Triggered » Wed Jun 12, 2019 7:11 pm

Boglelicious123 wrote:
Wed Jun 12, 2019 6:58 pm
David Jay wrote:
Wed Jun 12, 2019 6:45 pm
Boglelicious123 wrote:
Wed Jun 12, 2019 6:32 pm
What happens if I open a roth IRA now, contribute for a few years, then we do happen to go over max allowable married filed jointly income mandated by the government? Would I then have to transfer the roth into a traditional IRA?
No, you can keep the Roth and everything in it. You would simply be unable to contribute additional money to the Roth in any tax year when your income exceeds the limit.

This is one reason why you can contribute to a Roth until April 15 of the following year (i.e. make your “2019” contribution to your Roth until April 15, 2020), you can do your taxes first to see if you qualify to make a contribution.
Ok, thanks for the response and info. With compounding in mind, does it make more sense for me to just open up a traditional IRA then? If I have to leave the Roth on it’s own, doesn’t that hurt my ability to have that account compound with new additional contributions over time? I may be totally wrong on that...
Correct, you are incorrect.

Compounding interest doesn't matter what account the money is in. If you exceed the Roth option at some point, then use traditional. That money will compound the same as if you invested it in your Roth account instead.

Depending on how much your incomes will increase ( especially regarding tax brackets) then a case for pounding Roth as hard as you can until that happens is a strong consideration.

fyre4ce
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Re: Roth IRA or no?

Post by fyre4ce » Wed Jun 12, 2019 7:31 pm

In general, you should figure out whether you prefer Traditional or Roth investments. Traditional means you defer taxes until retirement, Roth means you pay taxes now, and never again. Which one is better is almost entirely based on whether you'll pay a higher tax rate now or in retirement. We have a Wiki page on this topic; I'd suggest checking it out. Most people, most of the time, should prefer Traditional investments although there are enough exceptions for it to be worth checking your particular case.

Either a Traditional or Roth IRA is better than saving money in a taxable account, because the end-to-end taxes are almost always much lower. The Traditional IRA locks up the money until age 59.5, although there are exceptions that allow you to withdraw penalty-free prior to this age. As you indicated, the Roth IRA is even better, in that contributions can be withdrawn tax and penalty free any time. The only problem is that you lose all the tax-free growth you would have gotten on the contributions, so save this for emergencies. It's better to trim your budget a bit than to withdraw from a Roth IRA for non-emergencies.

As has been pointed out, the income limits on the Roth IRA are only for contributions, not for owning the account; no forced conversion to Traditional or double-taxation if you go over the limit in future years. If you contribute to a Roth IRA, and when you file your taxes for that tax year you realize you've exceeded the limit, you will need to re-characterize some or all of those to Traditional.

The income (MAGI) limit for Roth IRA contributions is $193k for a MFJ couple. By your numbers you're around $143k MAGI, so you and your spouse are both eligible to contribute to Roth IRAs. You can contribute to a Traditional IRA at any income, but the income to deduct those contributions (this is what you want) is pretty low: $103k-$123k. So, looks like you're out of luck here. If your wife does NOT have a retirement plan at her work (you said "salaries" so I assume she works too), then she could make deductible contributions to a Traditional IRA; that limit is $193k-203k. If she does have a retirement plan, then Roth is her only good IRA option. Does she have a retirement plan, and is she maxing it out?

If your income grows to over $203k, then you can still contribute to the Roth IRA through the "backdoor". Look at the wiki page on Backdoor Roth IRA. The only snag is if one of you has a Traditional IRA with a pre-tax balance. The wiki page discusses what to do if you have one. Otherwise, until congress changes the laws to forbid it, you can continue to contribute to your Roth IRAs at any income level.

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Socrates
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Re: Roth IRA or no?

Post by Socrates » Wed Jun 12, 2019 7:46 pm

Go Roth. You can have both and income limit is based on MAGI which can be lower than you think.
“Don't waste your time looking back. You're not going that way.” ― Ragnar Lothbrok.

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David Jay
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Re: Roth IRA or no?

Post by David Jay » Wed Jun 12, 2019 9:46 pm

Chrono Triggered wrote:
Wed Jun 12, 2019 7:11 pm
Depending on how much your incomes will increase ( especially regarding tax brackets) then a case for pounding Roth as hard as you can until that happens is a strong consideration.
You can open (2) Roth accounts, one for each of you and put 12,000 (6000 each) every year until you exceed the limit.
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius

Topic Author
Boglelicious123
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Re: Roth IRA or no?

Post by Boglelicious123 » Wed Jun 12, 2019 9:49 pm

Thanks to everyone who has posted...I’ll definitely take a look at the wiki over the next couple days to get comfortable with the best way to proceed. With back-door Roth contributions as a back-up option, looks like a Roth is probably the way to go for me at this point.
fyre4ce wrote:
Wed Jun 12, 2019 7:31 pm
In general, you should figure out whether you prefer Traditional or Roth investments. Traditional means you defer taxes until retirement, Roth means you pay taxes now, and never again. Which one is better is almost entirely based on whether you'll pay a higher tax rate now or in retirement. We have a Wiki page on this topic; I'd suggest checking it out. Most people, most of the time, should prefer Traditional investments although there are enough exceptions for it to be worth checking your particular case.

Either a Traditional or Roth IRA is better than saving money in a taxable account, because the end-to-end taxes are almost always much lower. The Traditional IRA locks up the money until age 59.5, although there are exceptions that allow you to withdraw penalty-free prior to this age. As you indicated, the Roth IRA is even better, in that contributions can be withdrawn tax and penalty free any time. The only problem is that you lose all the tax-free growth you would have gotten on the contributions, so save this for emergencies. It's better to trim your budget a bit than to withdraw from a Roth IRA for non-emergencies.

As has been pointed out, the income limits on the Roth IRA are only for contributions, not for owning the account; no forced conversion to Traditional or double-taxation if you go over the limit in future years. If you contribute to a Roth IRA, and when you file your taxes for that tax year you realize you've exceeded the limit, you will need to re-characterize some or all of those to Traditional.

The income (MAGI) limit for Roth IRA contributions is $193k for a MFJ couple. By your numbers you're around $143k MAGI, so you and your spouse are both eligible to contribute to Roth IRAs. You can contribute to a Traditional IRA at any income, but the income to deduct those contributions (this is what you want) is pretty low: $103k-$123k. So, looks like you're out of luck here. If your wife does NOT have a retirement plan at her work (you said "salaries" so I assume she works too), then she could make deductible contributions to a Traditional IRA; that limit is $193k-203k. If she does have a retirement plan, then Roth is her only good IRA option. Does she have a retirement plan, and is she maxing it out?

If your income grows to over $203k, then you can still contribute to the Roth IRA through the "backdoor". Look at the wiki page on Backdoor Roth IRA. The only snag is if one of you has a Traditional IRA with a pre-tax balance. The wiki page discusses what to do if you have one. Otherwise, until congress changes the laws to forbid it, you can continue to contribute to your Roth IRAs at any income level.
Thanks for all the info here. Yes, my wife does fully contribute to her 403K. Most likely we will be “pooling” our excess funds to fund either the Roth or traditional IRA (depending on which one is better for us)

fyre4ce
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Re: Roth IRA or no?

Post by fyre4ce » Wed Jun 12, 2019 10:54 pm

Boglelicious123 wrote:
Wed Jun 12, 2019 9:49 pm
Thanks for all the info here. Yes, my wife does fully contribute to her 403K. Most likely we will be “pooling” our excess funds to fund either the Roth or traditional IRA (depending on which one is better for us)
You're welcome; glad you found it helpful.

Be advised, though, that neither of you are eligible to deduct contributions to a Traditional IRA, which makes it a much less valuable "non-deductible Traditional IRA." A Roth IRA is strictly better than a non-deductible Traditional IRA, because they both have the same tax treatment on contributions (fully taxed), but withdrawals from a non-deducible Traditional IRA are partly taxed whereas Roth IRA withdrawals are completely tax-free. If your MAGI ever drops below $123k then deducting contributions to a Traditional IRA becomes an option.

Lee_WSP
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Re: Roth IRA or no?

Post by Lee_WSP » Wed Jun 12, 2019 11:22 pm

Boglelicious123 wrote:
Wed Jun 12, 2019 6:58 pm
David Jay wrote:
Wed Jun 12, 2019 6:45 pm
Boglelicious123 wrote:
Wed Jun 12, 2019 6:32 pm
What happens if I open a roth IRA now, contribute for a few years, then we do happen to go over max allowable married filed jointly income mandated by the government? Would I then have to transfer the roth into a traditional IRA?
No, you can keep the Roth and everything in it. You would simply be unable to contribute additional money to the Roth in any tax year when your income exceeds the limit.

This is one reason why you can contribute to a Roth until April 15 of the following year (i.e. make your “2019” contribution to your Roth until April 15, 2020), you can do your taxes first to see if you qualify to make a contribution.
Ok, thanks for the response and info. With compounding in mind, does it make more sense for me to just open up a traditional IRA then? If I have to leave the Roth on it’s own, doesn’t that hurt my ability to have that account compound with new additional contributions over time? I may be totally wrong on that...
By the sound of things your actual options at this point are: do nothing and give up the tax preferential accounts for the year; contribute to a traditional IRA, but you don't get to take a deduction, or contribute to a Roth.

Given those three options, Roth is a no brainer.

In the future, the Roth option becomes a backdoor Roth if your income goes above the threshold.

smectym
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Re: Roth IRA or no?

Post by smectym » Thu Jun 13, 2019 2:42 am

No, in a high state income tax state it just doesn’t pencil out

retiredjg
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Re: Roth IRA or no?

Post by retiredjg » Thu Jun 13, 2019 7:50 am

Boglelicious123 wrote:
Wed Jun 12, 2019 9:49 pm
Most likely we will be “pooling” our excess funds to fund either the Roth or traditional IRA (depending on which one is better for us)
While you are able, you should only use Roth IRA (no-brainer). A traditional IRA makes no sense at all in your current situation because you cannot deduct the contribution from your taxable income.

Even if you are unable to contribute to your Roth IRAs more than a few years, start one now to get the IRAs' 5 tax year clocks started. You want to do that now, not when you are in your late 50's or 60's. Also do not be concerned that "compounding" does not occur if you are not adding money. That is a misunderstanding.

The income limit for contributing to Roth IRA goes up each year. Unless you get some significant salary bumps, you may get to contribute to Roth IRA longer than you think.

When/if you find your can no longer contribute to Roth IRA directly, you can consider using the back door contribution method if there are no other traditional IRAs (rollover, SIMPLE, SEP) in the way. Do not consider the back door without a thorough understanding of how it is documented on your taxes. The back door process is very simple but many people (and their tax preparers) mess up the paperwork. It can be stressful to fix.

If you are not interested in the back door, just put that extra money into a taxable account.

Topic Author
Boglelicious123
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Contribute to Roth or 403B?

Post by Boglelicious123 » Fri Jun 14, 2019 8:44 am

I’m in my early 30’s and am currently contributing enough in my 403b to get the company match. I currently have around 90K in my 403b account. The options are decent (around .15% expense ratio, but no emerging market options).

If I only have the option to choose to start a Roth IRA or max out my already started 403b, which one should I choose with long-term compounding interest in mind? It would be nice to be able to choose my investments with a Roth but I feel like since I have 90K in my 403b already, maybe I should just max that one out. Input is appreciated!

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Misenplace
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Re: Roth IRA or no?

Post by Misenplace » Fri Jun 14, 2019 9:27 am

OP, your new topic has been merged into the previous topic you posted on the same subject. For consistency and housekeeping reasons, it is better to keep your posts on the same issue together.

Moderator Misenplace

cherijoh
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Re: Roth IRA or no?

Post by cherijoh » Fri Jun 14, 2019 9:36 am

Boglelicious123 wrote:
Wed Jun 12, 2019 6:58 pm
David Jay wrote:
Wed Jun 12, 2019 6:45 pm
Boglelicious123 wrote:
Wed Jun 12, 2019 6:32 pm
What happens if I open a roth IRA now, contribute for a few years, then we do happen to go over max allowable married filed jointly income mandated by the government? Would I then have to transfer the roth into a traditional IRA?
No, you can keep the Roth and everything in it. You would simply be unable to contribute additional money to the Roth in any tax year when your income exceeds the limit.

This is one reason why you can contribute to a Roth until April 15 of the following year (i.e. make your “2019” contribution to your Roth until April 15, 2020), you can do your taxes first to see if you qualify to make a contribution.
Ok, thanks for the response and info. With compounding in mind, does it make more sense for me to just open up a traditional IRA then? If I have to leave the Roth on it’s own, doesn’t that hurt my ability to have that account compound with new additional contributions over time? I may be totally wrong on that...
No, do not open a traditional IRA. Since you have a 403b you are limited in your ability to make a deductible contribution to a traditional IRA based on your AGI.

In the future, when you hit the income limit for making a direct Roth Contribution, you can do a Backdoor Roth.

retiredjg
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Re: Contribute to Roth or 403B?

Post by retiredjg » Fri Jun 14, 2019 2:44 pm

Boglelicious123 wrote:
Fri Jun 14, 2019 8:44 am
If I only have the option to choose to start a Roth IRA or max out my already started 403b, which one should I choose with long-term compounding interest in mind?
Every investor can benefit from having pre-tax and after-tax (such as Roth) investments. After meeting the match in your 403b, it is perfectly fine to invest some in Roth IRA. This gives you tax diversification and also access to funds that are not available in your work plan.

It would be nice to be able to choose my investments with a Roth but I feel like since I have 90K in my 403b already, maybe I should just max that one out. Input is appreciated!
Some people do prefer and recommend filling the tax-deferred space first. Some people prefer and recommend having both tax-deferral and Roth. The decision is yours. If you do not have a Roth IRA at this point, you definitely want to get one started before you are a lot older.


Compounding interest has nothing to do with this. I'm not sure what you think compounding interest is, but it is not something you need to be concerned about. The concept of "compounding interest" simply means that your interest (or other type of earnings) will start making it's own interest (or other type of earnings). This is a good thing and makes your money grow faster.

It will happen in any type of account as long as you don't take the earnings/interest out and spend it. It does not matter if you have a lot in an account or just a little bit. It works the same either way (unless there is some kind of bonus given for having more in there).

Topic Author
Boglelicious123
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Re: Contribute to Roth or 403B?

Post by Boglelicious123 » Fri Jun 14, 2019 3:32 pm

retiredjg wrote:
Fri Jun 14, 2019 2:44 pm
Boglelicious123 wrote:
Fri Jun 14, 2019 8:44 am
If I only have the option to choose to start a Roth IRA or max out my already started 403b, which one should I choose with long-term compounding interest in mind?
Every investor can benefit from having pre-tax and after-tax (such as Roth) investments. After meeting the match in your 403b, it is perfectly fine to invest some in Roth IRA. This gives you tax diversification and also access to funds that are not available in your work plan.

It would be nice to be able to choose my investments with a Roth but I feel like since I have 90K in my 403b already, maybe I should just max that one out. Input is appreciated!
Some people do prefer and recommend filling the tax-deferred space first. Some people prefer and recommend having both tax-deferral and Roth. The decision is yours. If you do not have a Roth IRA at this point, you definitely want to get one started before you are a lot older.


Compounding interest has nothing to do with this. I'm not sure what you think compounding interest is, but it is not something you need to be concerned about. The concept of "compounding interest" simply means that your interest (or other type of earnings) will start making it's own interest (or other type of earnings). This is a good thing and makes your money grow faster.

It will happen in any type of account as long as you don't take the earnings/interest out and spend it. It does not matter if you have a lot in an account or just a little bit. It works the same either way (unless there is some kind of bonus given for having more in there).
Thank you for your advice here. This actually makes a lot of sense to me the way you have explained it!

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