I generally invest in Roth accounts, but should I invest in a Traditional IRA?

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popcathiphat
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I generally invest in Roth accounts, but should I invest in a Traditional IRA?

Post by popcathiphat » Tue Mar 22, 2016 1:37 am

Hi Bogleheads!

I'm 26 and currently employed at my first stable job in a few years. I live frugally to max out my Roth 401k, stock up on savings (5% interest savings accounts), and make >$100k in San Francisco, CA.

I normally invest in Roth accounts for everything (Roth IRA, company Roth 401k, and an Health Savings Account). I have a 4-fund (slice and dice) portfolio and might find it a bit easier to manage my accounts if all my IRAs were Roth. But I've been thinking of investing in a Traditional Roth over the next several years -- including for tax year 2015.

I'm thinking of investing a Traditional IRA to
(a) save on state taxes
(b) leave open the idea for a Roth conversion
(c) fill in the lower tax brackets with the Roth IRA at retirement.
... thanks financebuff! http://thefinancebuff.com/case-against-roth-401k.html

I work in at a growing tech company currently, and don't see a when I might leave -- but it's possible. I might:
#1 - leave to do a start-up (so my salary will be much less than it is now)
#2 - leave the Bay Area (for NYC or the Pacific Northwest, maybe Los Angeles but that's in California)
#3 - leave the tech industry in general (to go back to school or do something else)

But all that's like 10 years down the line. For the next 1-7 years, I do see myself working in the Bay Area for a while.

Given the opportunity cost, I'm inclined to keep my 401k as a Roth account, but choose a Traditional IRA for the next several years.

P.S. I've rolled over a traditional 401k into a Roth IRA in a year where I was unemployed.
P.P.S. I have options from my company that may be worth a lot in a few years. Or it could be worth zilch! (Jk, most likely a modest amount, a year or two of salary)

EDIT:
1) My company 401k match is also Roth, as I have a Roth account. If traditional, it'd be a traditional match.
2) I use Netspend accounts for 5%. But most of my money is in Ally (checking, savings, CDs) and LMCU at 3%.
3) I'm in the 28% tax bracket. Don't expect the 33% tax bracket anytime soon.
Last edited by popcathiphat on Tue Mar 22, 2016 2:41 pm, edited 3 times in total.

DSInvestor
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Re: I generally invest in Roth accounts, but should I invest in a Traditional IRA?

Post by DSInvestor » Tue Mar 22, 2016 1:41 am

If you make >100K, are covered by an employer plan like 401k, you are not eligible to deduct Traditional IRA contributions. I would suggest switching 401k contributions to Traditional 401k to get the tax deduction (fed and state) and then contributing to Roth IRA. If your income is too high to allow Roth IRA contributions, use the backdoor into Roth IRA which combines two steps 1) contribution to Traditional IRA and 2) Roth conversion.

See IRS page on IRA deduction limits:
https://www.irs.gov/Retirement-Plans/20 ... an-at-Work

For 2015 and 2016 tax years, no TIRA deduction is allowed for single filers if MAGI > 71K when you are covered by an employer plan.

If you leave CA and move to Pacific Northwest like WA state where there is no state income tax, you'd be better off with Traditional 401k contributions now which would reduce your Fed and CA State income tax liability. Why pre-pay state income tax to CA if you may retire in a state with no state income tax?

If you leave your job and go back to school, you can convert the Traditional assets in your 401k to Roth IRA for little or no tax.
Last edited by DSInvestor on Tue Mar 22, 2016 3:33 am, edited 1 time in total.
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mcraepat9
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Re: I generally invest in Roth accounts, but should I invest in a Traditional IRA?

Post by mcraepat9 » Tue Mar 22, 2016 2:09 am

DSInvestor wrote:I would suggest switching 401k contributions to Traditional 401k to get the tax deduction and then contributing to Roth IRA.
+1

All the reasons you outline are reasons why your 401k should be traditional rather than Roth. In your situation I think a traditional 401k is a no brainer over Roth 401k by a pretty healthy margin, pretty much for the reasons you note in your initial post.
Amateur investors are not cool-headed logicians.

jimkinny
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Re: I generally invest in Roth accounts, but should I invest in a Traditional IRA?

Post by jimkinny » Tue Mar 22, 2016 7:45 am

Allan Roth has written about this. You can google him. He knows more about investing than me. He suggested in a blog posting having both. pretty simple. We do not know the future: our earnings, tax rates or tax policies re TIRA or Roths. Taxes rates and policies can be changed.

The classic answer if your earnings will be higher in the future, use Roth then switch to TIRA as earnings put you in the higher tax brackets, then at retirement go from TIRA to roth using conversions.

KlangFool
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Re: I generally invest in Roth accounts, but should I invest in a Traditional IRA?

Post by KlangFool » Tue Mar 22, 2016 7:53 am

jimkinny wrote:Allan Roth has written about this. You can google him. He knows more about investing than me. He suggested in a blog posting having both. pretty simple. We do not know the future: our earnings, tax rates or tax policies re TIRA or Roths. Taxes rates and policies can be changed.

The classic answer if your earnings will be higher in the future, use Roth then switch to TIRA as earnings put you in the higher tax brackets, then at retirement go from TIRA to roth using conversions.
jimkinny,

<<He suggested in a blog posting having both.>>

A person could get both by contributing 100% to Trad. 401K and Roth IRA. There is no reason to do Roth 401K.

KlangFool

KlangFool
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Re: I generally invest in Roth accounts, but should I invest in a Traditional IRA?

Post by KlangFool » Tue Mar 22, 2016 7:53 am

mcraepat9 wrote:
DSInvestor wrote:I would suggest switching 401k contributions to Traditional 401k to get the tax deduction and then contributing to Roth IRA.
+1

All the reasons you outline are reasons why your 401k should be traditional rather than Roth. In your situation I think a traditional 401k is a no brainer over Roth 401k by a pretty healthy margin, pretty much for the reasons you note in your initial post.
+1

KlangFool

tampaite
Posts: 464
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Re: I generally invest in Roth accounts, but should I invest in a Traditional IRA?

Post by tampaite » Tue Mar 22, 2016 7:54 am

popcathiphat wrote:
I'm 26 and currently employed at my first stable job in a few years. I live frugally to max out my Roth 401k, stock up on savings (5% interest savings accounts), and make >$100k in San Francisco, CA.

I normally invest in Roth accounts for everything (Roth IRA, company Roth 401k, and an Health Savings Account).
My suggestion - stick with Roth accounts as you don't know what your future tax rates would be.

jimkinny
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Re: I generally invest in Roth accounts, but should I invest in a Traditional IRA?

Post by jimkinny » Tue Mar 22, 2016 7:59 am

KlangFool wrote:
jimkinny wrote:Allan Roth has written about this. You can google him. He knows more about investing than me. He suggested in a blog posting having both. pretty simple. We do not know the future: our earnings, tax rates or tax policies re TIRA or Roths. Taxes rates and policies can be changed.

The classic answer if your earnings will be higher in the future, use Roth then switch to TIRA as earnings put you in the higher tax brackets, then at retirement go from TIRA to roth using conversions.
jimkinny,

<<He suggested in a blog posting having both.>>

A person could get both by contributing 100% to Trad. 401K and Roth IRA. There is no reason to do Roth 401K.

KlangFool
Yes, I lazily lumped TIRA and 401k together.

KlangFool
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Re: I generally invest in Roth accounts, but should I invest in a Traditional IRA?

Post by KlangFool » Tue Mar 22, 2016 8:49 am

tampaite wrote:
popcathiphat wrote:
I'm 26 and currently employed at my first stable job in a few years. I live frugally to max out my Roth 401k, stock up on savings (5% interest savings accounts), and make >$100k in San Francisco, CA.

I normally invest in Roth accounts for everything (Roth IRA, company Roth 401k, and an Health Savings Account).
My suggestion - stick with Roth accounts as you don't know what your future tax rates would be.
tampaite,

<<you don't know what your future tax rates would be.>>

1) Please explain why does that matters? This statement does not make any sense to me. OP has the flexibility to do Roth conversion whenever it is advantageous to him. So, how does the future tax rate matter to him?

2) If a person does not know how the future tax rate going to be, it is safer to have all 3: Trad. 401K, Roth IRA, and taxable account. A person could choose where to spend the money from depending on the tax situation.

KlangFool

niceguy7376
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Location: Metro ATL

Re: I generally invest in Roth accounts, but should I invest in a Traditional IRA?

Post by niceguy7376 » Tue Mar 22, 2016 8:58 am

Company MATCH to a 401k is always in trad 401k. Please check on that.
So you already have a small trad 401k component. As for asset allocation, it wouldnt matter much at this age and balance if money is in trad or roth.

At your filing status and salary, my preference would be trad 401k and roth ira and hsa.

if you do trad 401k, will you be in 15 or 25% or still 28%?
Last edited by niceguy7376 on Tue Mar 22, 2016 10:21 am, edited 1 time in total.

uclalien
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Re: I generally invest in Roth accounts, but should I invest in a Traditional IRA?

Post by uclalien » Tue Mar 22, 2016 9:27 am

niceguy7376 wrote:Company 401k is always in trad 401k. Please check on that.
So you already have a small trad 401k component.
Many companies offer a Roth 401k option, which appears to be the case for the OP.

JeffroZ
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Re: I generally invest in Roth accounts, but should I invest in a Traditional IRA?

Post by JeffroZ » Tue Mar 22, 2016 10:10 am

uclalien wrote:
niceguy7376 wrote:Company 401k is always in trad 401k. Please check on that.
So you already have a small trad 401k component.
Many companies offer a Roth 401k option, which appears to be the case for the OP.
Think he is saying company match is always in traditional.

koldude
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Re: I generally invest in Roth accounts, but should I invest in a Traditional IRA?

Post by koldude » Tue Mar 22, 2016 10:33 am

Just curious; (kinda not related the topic of the OP), but you mentioned you're getting 5% interest on a savings account. Can I ask where/how? The best rate I'm able to find for any sort of savings account that's FDIC insured is 1.25% at online banks (I get 1% on my own account from Ally).

Sorry if its not germane to the discussion.

Caduceus
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Re: I generally invest in Roth accounts, but should I invest in a Traditional IRA?

Post by Caduceus » Tue Mar 22, 2016 11:18 am

It is hard to guess your marginal tax rate since you only mention that your income is more than $100,000, but given the facts presented, it is likely you should switch to both a Traditional 401k and a Traditional IRA.

You are in a high marginal tax bracket now (including marginal state tax of 9%, I am guessing) and you have a reasonable chance of being in a low marginal tax bracket in the forseeable future (you mention working for a start-up, returning for further education, and moving away from California). Even if you stay in California, your high marginal bracket now makes the Traditional plans a good bet.

Some forum posters say Traditional 401k + Roth IRA because the Roth will diversify your tax location. But if you've only been contributing to Roth vehicles the entire time, you already have substantial Roth-space assets, so taking the upfront tax savings from a Traditional IRA and Traditional 401k is better.

The most important thing is you should continue saving the same amount - the tax savings from contributing to a Traditional 401k should go into a taxable account. If you were previously saving $23,000 in Roth IRA and Roth 401k accounts, you now need to save $23,000 in a Traditional IRA and 401k account plus the $8,000 or so in tax savings you get in a taxable account, and make sure you don't use it for a vacation or some other purchase.

If you spend the tax savings, or if you are not a disciplined spender in general, it might be better to just continue down the path you were previously in, and put as much money as you can in Roth accounts.

DSInvestor
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Re: I generally invest in Roth accounts, but should I invest in a Traditional IRA?

Post by DSInvestor » Tue Mar 22, 2016 11:28 am

Caduceus wrote:It is hard to guess your marginal tax rate since you only mention that your income is more than $100,000, but given the facts presented, it is likely you should switch to both a Traditional 401k and a Traditional IRA.

You are in a high marginal tax bracket now (including marginal state tax of 9%, I am guessing) and you have a reasonable chance of being in a low marginal tax bracket in the forseeable future (you mention working for a start-up, returning for further education, and moving away from California). Even if you stay in California, your high marginal bracket now makes the Traditional plans a good bet.

Some forum posters say Traditional 401k + Roth IRA because the Roth will diversify your tax location. But if you've only been contributing to Roth vehicles the entire time, you already have substantial Roth-space assets, so taking the upfront tax savings from a Traditional IRA and Traditional 401k is better.
Keep in mind that when one is covered by an employer plan like 401k, there is an income limit to take the TIRA deduction. For 2015 and 2016, a single filer covered by an employer plan cannot deduct any TIRA contributions if MAGI for Traditional IRA purposes exceeds 71K. Given that OP's salary exceeds 100K, the 18K contribution to Traditional 401k would not be enough bring MAGI down to allow any TIRA deduction. As such, it would be a better plan to contribute to Traditional 401k and Roth IRA (via backdoor if necessary).

For 2015, full Roth IRA contribution is permitted if MAGI for Roth IRA purposes is under 116K. A person with 134K salary who contributes 18K to Traditional 401k would be allowed full contribution to Roth IRA. If direct Roth contribution is not allowed at OP's income, traditional IRA contribution and conversion to Roth IRA (i.e. backdoor into Roth IRA) can be considered. In this case, the Traditional IRA contribution would be non-deductible given OP's income and coverage by employer plan. OP would need to make sure to file form 8606 with tax return to track the IRA basis to allow tax free conversion of that basis to Roth IRA.
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Chadnudj
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Re: I generally invest in Roth accounts, but should I invest in a Traditional IRA?

Post by Chadnudj » Tue Mar 22, 2016 11:43 am

tampaite wrote:
popcathiphat wrote:
I'm 26 and currently employed at my first stable job in a few years. I live frugally to max out my Roth 401k, stock up on savings (5% interest savings accounts), and make >$100k in San Francisco, CA.

I normally invest in Roth accounts for everything (Roth IRA, company Roth 401k, and an Health Savings Account).
My suggestion - stick with Roth accounts as you don't know what your future tax rates would be.
That's EXACTLY why he should be using a Traditional 401k....because he KNOWS he's in a high tax bracket now.

Also, there's the whole issue (beaten to death in other threads), that your traditional 401k contributions avoid taxation at your highest marginal level, and then are withdrawn to fill your lowest brackets first (with the effect being that your traditional dollars, when withdrawn, are taxed at your effective tax rate, which is necessarily lower than your highest marginal rate since it includes all the lower brackets).

I'm fully in support of a Roth IRA....but about 95-99% of people (including the OP) are better off with a Traditional 401k than a Roth 401k.

tampaite
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Re: I generally invest in Roth accounts, but should I invest in a Traditional IRA?

Post by tampaite » Tue Mar 22, 2016 12:43 pm

Chadnudj wrote:
That's EXACTLY why he should be using a Traditional 401k....because he KNOWS he's in a high tax bracket now.
He could be in EVEN a higher bracket when he is getting ready to retire.

It all comes down to taxes - want to pay taxes now(go with Roth) or want to pay taxes later(go with Traditional)

DSInvestor
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Re: I generally invest in Roth accounts, but should I invest in a Traditional IRA?

Post by DSInvestor » Tue Mar 22, 2016 1:16 pm

tampaite wrote:
Chadnudj wrote:
That's EXACTLY why he should be using a Traditional 401k....because he KNOWS he's in a high tax bracket now.
He could be in EVEN a higher bracket when he is getting ready to retire.

It all comes down to taxes - want to pay taxes now(go with Roth) or want to pay taxes later(go with Traditional)
Yes but OP wishes to:
1) save on state and fed taxes now. Traditional 401k does this.

2) Leave open the idea for Roth conversion. Traditional 401k does this. With traditional 401k contributions, OP may be able to convert Traditional 401k assets to Roth using an in-plan conversion (if available) or with a rollover out of the 401k to RolloverIRA/Roth IRA upon separation from service. If in-plan conversion is available, Traditional 401k offers tax savings and the option to convert later if OP changes mind while at this employer. Roth 401k contributions are irrevocable once made. There is no recharacterization of a Roth 401k contribution like there is with Roth IRA contribution.

3) OP may leave current job to do a startup and thus have a lower salary. This leans towards Traditional 401k now and conversion later.

4) OP may leave Bay Area for a lower tax state. This leans towards Traditional 401k. If OP stays in a state with high income tax, at least he benefitted from a large state and fed tax deduction every year while he had high income.

5) OP may leave tech industry and go back to school. If going back to school, tax bracket may be so low that OP may be able to convert Traditional to Roth with little or no tax. This leans towards Traditional 401k.

IMO, it makes most sense to max out Traditional 401k, then max out Roth IRA, then invest in taxable. OP will max out his tax deduction now, get some Roth IRA space and get some assets in taxable. Plenty of tax diversification while getting all available tax deductions while working in a high tax bracket Fed and state.

If OP has other financial objectives like paying off student loans, saving for a car, saving for a house, saving to start a new business, Traditional 401k's tax savings gives OP more take home pay to direct in those other directions. It's not always about retirement savings or whether one will have a higher tax rate in retirement.
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KlangFool
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Re: I generally invest in Roth accounts, but should I invest in a Traditional IRA?

Post by KlangFool » Tue Mar 22, 2016 1:37 pm

tampaite wrote:
Chadnudj wrote:
That's EXACTLY why he should be using a Traditional 401k....because he KNOWS he's in a high tax bracket now.
He could be in EVEN a higher bracket when he is getting ready to retire.

It all comes down to taxes - want to pay taxes now(go with Roth) or want to pay taxes later(go with Traditional)
tampaite,

<<He could be in EVEN a higher bracket when he is getting ready to retire.>>

1) This does not happen to 99+% of people.

2) For less than 1% of people, if this really happen to them, it won't matter. In this case, the person would have retirement income far exceed 100K per year.

3) What is more likely for less than 1% of the people, they retire early to enjoy their lives.

So, tell me why does this matters?

KlangFool

sreynard
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Re: I generally invest in Roth accounts, but should I invest in a Traditional IRA?

Post by sreynard » Tue Mar 22, 2016 1:51 pm

uclalien wrote:
niceguy7376 wrote:Company 401k is always in trad 401k. Please check on that.
So you already have a small trad 401k component.
Many companies offer a Roth 401k option, which appears to be the case for the OP.
He meant a company match, if any, is always in a traditional 401k, hence the "small trad 401k component".

Chadnudj
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Re: I generally invest in Roth accounts, but should I invest in a Traditional IRA?

Post by Chadnudj » Tue Mar 22, 2016 2:23 pm

tampaite wrote:
Chadnudj wrote:
That's EXACTLY why he should be using a Traditional 401k....because he KNOWS he's in a high tax bracket now.
He could be in EVEN a higher bracket when he is getting ready to retire.

It all comes down to taxes - want to pay taxes now(go with Roth) or want to pay taxes later(go with Traditional)
1. OP doesn't say whether he/she is single or married. If he/she is single now, and eventually gets married, that might affect their tax bracket in retirment.

2. Even if OP was in the same or a higher bracket at retirement, that DOES NOT mean that a Roth is necessarily better -- remember, as you take a dollar out of your traditional 401k, it first fills your 0%, then 10%, then 15% bracket, etc. So in retirement (and ignoring SS, which I understand may affect this somewhat), your 401k dollars get taxed at your EFFECTIVE tax rate (i.e. the average of all your brackets combined), while your traditional 401k contribution is taxed at your HIGHEST bracket only.

3. You're forgetting, too, state taxes. OP is in California, where he pays pretty high state taxes on his income right now. OP may move to a state that doesn't tax his 401k withdrawals, or has lower/no state income tax. By contributing to a traditional 401k, he's avoiding those taxes now as well.

popcathiphat
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Re: I generally invest in Roth accounts, but should I invest in a Traditional IRA?

Post by popcathiphat » Tue Mar 22, 2016 2:26 pm

Updated original post.

DSInvestor, great point on saving for a house or saving to start a business. I'm considering moving out of my cheap apartment for a nicer situation if and when the market downturns in the area. (It's kind of happening already). Moreover, bunching my IRAs as Roth would be useful in managing....since our 401k provider is not Vanguard and because I have a limited fund selection -- I might as well have the Roth/Traditional complexity in the 401k for now.

KlangFool, yeah I hear you too. Part of the reason I kind of just want to go with the Roth is that I've done a rollover before -- and never did a Roth recharacterization (might have if there was a big market drop, but it was only modest and not worth the time).

That said, it's not that I'm necessarily trying to save more money RIGHT NOW. Just want to know what is the best long-term decision given what I think might happen in the future.

DSInvestor
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Re: I generally invest in Roth accounts, but should I invest in a Traditional IRA?

Post by DSInvestor » Tue Mar 22, 2016 2:31 pm

popcathiphat wrote: 1) I'm pretty sure company 401k match is also Roth, as I have a Roth account. If traditional, I think it'd be a traditional match.
Employer match always goes into Traditional 401k even if your employee salary deferrals go into Roth 401k.
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popcathiphat
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Re: I generally invest in Roth accounts, but should I invest in a Traditional IRA?

Post by popcathiphat » Tue Mar 22, 2016 2:36 pm

DSInvestor wrote:
popcathiphat wrote: 1) I'm pretty sure company 401k match is also Roth, as I have a Roth account. If traditional, I think it'd be a traditional match.
Employer match always goes into Traditional 401k even if your employee salary deferrals go into Roth 401k.
Just asked. They match whatever I pick. So Roth 401k gets Roth match.

JeffroZ
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Re: I generally invest in Roth accounts, but should I invest in a Traditional IRA?

Post by JeffroZ » Tue Mar 22, 2016 2:51 pm

popcathiphat wrote:
DSInvestor wrote:
popcathiphat wrote: 1) I'm pretty sure company 401k match is also Roth, as I have a Roth account. If traditional, I think it'd be a traditional match.
Employer match always goes into Traditional 401k even if your employee salary deferrals go into Roth 401k.
Just asked. They match whatever I pick. So Roth 401k gets Roth match.
Your HR person or whomever you asked is wrong

Can my employer match my designated Roth contributions? Must my employer allocate the matching contributions to a designated Roth account?

Yes, your employer can make matching contributions on your designated Roth contributions. However, your employer can only allocate your designated Roth contributions to your designated Roth account. Your employer must allocate any contributions to match designated Roth contributions into a pre-tax account, just like matching contributions on traditional, pre-tax elective contributions.
https://www.irs.gov/Retirement-Plans/Re ... ccounts#10

retiredjg
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Re: I generally invest in Roth accounts, but should I invest in a Traditional IRA?

Post by retiredjg » Tue Mar 22, 2016 2:52 pm

In your tax bracket, I'd suggest traditional 401k and Roth IRA. Most people are in a lower tax bracket in retirement or in the same tax bracket in retirement. There is no sense in paying 28% now when you could pay less than 28% later. If you end up in the same bracket as now, it's a wash (no benefit either way).

I do not believe it is possible for the match to go into Roth 401k. I think someone is mistaken or a miscommunication has occurred. "They match whatever I pick" probably means you get a match not matter which you pick. But the match is not going into Roth 401k, it's going into tax-deferred 401k.

KlangFool
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Re: I generally invest in Roth accounts, but should I invest in a Traditional IRA?

Post by KlangFool » Tue Mar 22, 2016 3:14 pm

popcathiphat wrote:Updated original post.

DSInvestor, great point on saving for a house or saving to start a business. I'm considering moving out of my cheap apartment for a nicer situation if and when the market downturns in the area. (It's kind of happening already). Moreover, bunching my IRAs as Roth would be useful in managing....since our 401k provider is not Vanguard and because I have a limited fund selection -- I might as well have the Roth/Traditional complexity in the 401k for now.

KlangFool, yeah I hear you too. Part of the reason I kind of just want to go with the Roth is that I've done a rollover before -- and never did a Roth recharacterization (might have if there was a big market drop, but it was only modest and not worth the time).

That said, it's not that I'm necessarily trying to save more money RIGHT NOW. Just want to know what is the best long-term decision given what I think might happen in the future.
popcathiphat,

<<That said, it's not that I'm necessarily trying to save more money RIGHT NOW.>>

1) I do not know about you. I would like to keep as much of my money to myself as opposed to paying tax. I want to spend what I earn. Why would you want to pay more tax than necessary?

2) I disagree with your statement that it is not necessary to save more money now. Too many of my peers are either unemployed or under-employed after 40 years old. So, you should save and invest as much as possible when you can. Make hay while the sun shine!

KlangFool

popcathiphat
Posts: 46
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Re: I generally invest in Roth accounts, but should I invest in a Traditional IRA?

Post by popcathiphat » Tue Mar 22, 2016 4:16 pm

KlangFool wrote:
popcathiphat wrote:Updated original post.

DSInvestor, great point on saving for a house or saving to start a business. I'm considering moving out of my cheap apartment for a nicer situation if and when the market downturns in the area. (It's kind of happening already). Moreover, bunching my IRAs as Roth would be useful in managing....since our 401k provider is not Vanguard and because I have a limited fund selection -- I might as well have the Roth/Traditional complexity in the 401k for now.

KlangFool, yeah I hear you too. Part of the reason I kind of just want to go with the Roth is that I've done a rollover before -- and never did a Roth recharacterization (might have if there was a big market drop, but it was only modest and not worth the time).

That said, it's not that I'm necessarily trying to save more money RIGHT NOW. Just want to know what is the best long-term decision given what I think might happen in the future.
popcathiphat,

<<That said, it's not that I'm necessarily trying to save more money RIGHT NOW.>>

1) I do not know about you. I would like to keep as much of my money to myself as opposed to paying tax. I want to spend what I earn. Why would you want to pay more tax than necessary?

2) I disagree with your statement that it is not necessary to save more money now. Too many of my peers are either unemployed or under-employed after 40 years old. So, you should save and invest as much as possible when you can. Make hay while the sun shine!

KlangFool
Are you then saying it's best to do a Traditional 401k as it saves me tax money -- extra money I can put into savings or a taxable brokerage account?

Chadnudj
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Re: I generally invest in Roth accounts, but should I invest in a Traditional IRA?

Post by Chadnudj » Tue Mar 22, 2016 4:34 pm

popcathiphat wrote: Are you then saying it's best to do a Traditional 401k as it saves me tax money -- extra money I can put into savings or a taxable brokerage account?
Yes.

Not only that, but at your high income rate/tax bracket (particularly if you're single), traditional 401k is a MUCH, MUCH, MUCH better idea.

Maxing out a traditional 401k will give you around $4k or so more a year in your take home pay (take $18k times your marginal tax bracket for the exact amount). You can use that to fund a taxable account, or just to have some fun/save for other priorities.

KlangFool
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Re: I generally invest in Roth accounts, but should I invest in a Traditional IRA?

Post by KlangFool » Tue Mar 22, 2016 4:55 pm

popcathiphat wrote:
KlangFool wrote:
popcathiphat wrote:Updated original post.

DSInvestor, great point on saving for a house or saving to start a business. I'm considering moving out of my cheap apartment for a nicer situation if and when the market downturns in the area. (It's kind of happening already). Moreover, bunching my IRAs as Roth would be useful in managing....since our 401k provider is not Vanguard and because I have a limited fund selection -- I might as well have the Roth/Traditional complexity in the 401k for now.

KlangFool, yeah I hear you too. Part of the reason I kind of just want to go with the Roth is that I've done a rollover before -- and never did a Roth recharacterization (might have if there was a big market drop, but it was only modest and not worth the time).

That said, it's not that I'm necessarily trying to save more money RIGHT NOW. Just want to know what is the best long-term decision given what I think might happen in the future.
popcathiphat,

<<That said, it's not that I'm necessarily trying to save more money RIGHT NOW.>>

1) I do not know about you. I would like to keep as much of my money to myself as opposed to paying tax. I want to spend what I earn. Why would you want to pay more tax than necessary?

2) I disagree with your statement that it is not necessary to save more money now. Too many of my peers are either unemployed or under-employed after 40 years old. So, you should save and invest as much as possible when you can. Make hay while the sun shine!

KlangFool
Are you then saying it's best to do a Traditional 401k as it saves me tax money -- extra money I can put into savings or a taxable brokerage account?
popcathiphat,

1) Yes. Why would you want to pay more tax than necessary? If you do not want to save and invest, you could spend the money. This is around 5K extra take home pay.

2) Put the tax savings into Roth IRA A/C. You can put up to 5.5K per year. After that, the rest into taxable account.

KlangFool
Last edited by KlangFool on Tue Mar 22, 2016 4:58 pm, edited 1 time in total.

KlangFool
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Re: I generally invest in Roth accounts, but should I invest in a Traditional IRA?

Post by KlangFool » Tue Mar 22, 2016 4:56 pm

Chadnudj wrote:
popcathiphat wrote: Are you then saying it's best to do a Traditional 401k as it saves me tax money -- extra money I can put into savings or a taxable brokerage account?
Yes.

Not only that, but at your high income rate/tax bracket (particularly if you're single), traditional 401k is a MUCH, MUCH, MUCH better idea.

Maxing out a traditional 401k will give you around $4k or so more a year in your take home pay (take $18k times your marginal tax bracket for the exact amount). You can use that to fund a taxable account, or just to have some fun/save for other priorities.
Chadnudj,

It is probably around 5K if you take CA state income tax into consideration.

KlangFool

SouthernCPA
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Re: I generally invest in Roth accounts, but should I invest in a Traditional IRA?

Post by SouthernCPA » Tue Mar 22, 2016 5:06 pm

I used to preach the Roth, but some of my old timer colleagues have started persuading me to take the guaranteed tax savings today because you don't know what your rate will be in the future. It's hard to believe I'll be in a higher tax bracket in retirement when some of my income will be social security and I'm plugging the (lower) difference with draws from retirement accounts. I won't even need to draw as much as I'm making today because my mortgage will be paid off, etc.

If we all had a crystal ball we could make the perfect decision, but I believe the bigger part of the equation is develop discipline in your investing. The roth vs traditional is important, but not as important as whether you're investing for the future.

The more I analyze my strategy, I almost think I need to max out traditional accounts and then put the tax savings into taxable accounts.

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Re: I generally invest in Roth accounts, but should I invest in a Traditional IRA?

Post by Chadnudj » Tue Mar 22, 2016 5:07 pm

KlangFool wrote:
Chadnudj wrote:
popcathiphat wrote: Are you then saying it's best to do a Traditional 401k as it saves me tax money -- extra money I can put into savings or a taxable brokerage account?
Yes.

Not only that, but at your high income rate/tax bracket (particularly if you're single), traditional 401k is a MUCH, MUCH, MUCH better idea.

Maxing out a traditional 401k will give you around $4k or so more a year in your take home pay (take $18k times your marginal tax bracket for the exact amount). You can use that to fund a taxable account, or just to have some fun/save for other priorities.
Chadnudj,

It is probably around 5K if you take CA state income tax into consideration.

KlangFool
Yep. I wasn't trying to get the math right, just trying to note at more than $100k in income a year, you're talking a pretty big tax savings going traditional 401k vs. Roth 401k.

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Re: I generally invest in Roth accounts, but should I invest in a Traditional IRA?

Post by KlangFool » Tue Mar 22, 2016 5:18 pm

SouthernCPA wrote:I used to preach the Roth, but some of my old timer colleagues have started persuading me to take the guaranteed tax savings today because you don't know what your rate will be in the future. It's hard to believe I'll be in a higher tax bracket in retirement when some of my income will be social security and I'm plugging the (lower) difference with draws from retirement accounts. I won't even need to draw as much as I'm making today because my mortgage will be paid off, etc.

If we all had a crystal ball we could make the perfect decision, but I believe the bigger part of the equation is develop discipline in your investing. The roth vs traditional is important, but not as important as whether you're investing for the future.

The more I analyze my strategy, I almost think I need to max out traditional accounts and then put the tax savings into taxable accounts.
SouthernCPA,

1) With Trad. 401K, if you are wrong and you ended up in higher tax bracket when you retire, it is NOT TOO BAD. It simply mean that you have too much money.

2) With Roth 401K, Iif you pay too much tax NOW and you do not have enough money at retirement, it is FATAL. You cannot get the money back from IRS.

So, for 99+% of people, Trad. 401K is the right choice for them.

KlangFool

hive1432
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Re: I generally invest in Roth accounts, but should I invest in a Traditional IRA?

Post by hive1432 » Tue Mar 22, 2016 6:48 pm

Chadnudj wrote: Maxing out a traditional 401k will give you around $4k or so more a year in your take home pay (take $18k times your marginal tax bracket for the exact amount). You can use that to fund a taxable account, or just to have some fun/save for other priorities.
Could someone please explain to me how contributing to a traditional 401k can increase your take home pay?

If my gross salary is 100k without contributing to my 401k: My federal taxes would be $21,071, leaving me with $78,929 in take home pay.

If I contribute 9k to my 401k, my taxable income would be 91k. My federal taxes would be $18,551, leaving me with $72,449 in take home pay.

This is a very simplified case; no deductions of any kind, only federal taxes etc. But is there something about the simplification that obscures how my take home pay could ever be increased by 401k contributions?

I always thought the benefit of the T401k was to avoid the higher bracket (in my case that 9k I would have taken home would have almost all been subject to the 28% bracket). Is there another benefit I do not understand?

I have the notion I am about to feel very dumb...

DSInvestor
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Re: I generally invest in Roth accounts, but should I invest in a Traditional IRA?

Post by DSInvestor » Tue Mar 22, 2016 7:03 pm

hive1432 wrote:
Chadnudj wrote: Maxing out a traditional 401k will give you around $4k or so more a year in your take home pay (take $18k times your marginal tax bracket for the exact amount). You can use that to fund a taxable account, or just to have some fun/save for other priorities.
Could someone please explain to me how contributing to a traditional 401k can increase your take home pay?

If my gross salary is 100k without contributing to my 401k: My federal taxes would be $21,071, leaving me with $78,929 in take home pay.

If I contribute 9k to my 401k, my taxable income would be 91k. My federal taxes would be $18,551, leaving me with $72,449 in take home pay.

This is a very simplified case; no deductions of any kind, only federal taxes etc. But is there something about the simplification that obscures how my take home pay could ever be increased by 401k contributions?

I always thought the benefit of the T401k was to avoid the higher bracket (in my case that 9k I would have taken home would have almost all been subject to the 28% bracket). Is there another benefit I do not understand?

I have the notion I am about to feel very dumb...
We are comparing Roth 401k contributions vs Traditional 401k contributions. If you have 100K gross salary and contribute 18K to Roth 401k, your AGI is 100K. If you contribute 18K to Traditional 401k, your AGI is 82K.
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hive1432
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Re: I generally invest in Roth accounts, but should I invest in a Traditional IRA?

Post by hive1432 » Tue Mar 22, 2016 7:07 pm

DSInvestor wrote: We are comparing Roth 401k contributions vs Traditional 401k contributions. If you have 100K gross salary and contribute 18K to Roth 401k, your AGI is 100K. If you contribute 18K to Traditional 401k, your AGI is 82K.
And there's that dumb feeling!

Thanks for the quick reply, I got so fixated on my confusion I forgot the whole point of this thread is Roth 401k vs. T401k. Not T401k vs no 401k. :oops:

popcathiphat
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Re: I generally invest in Roth accounts, but should I invest in a Traditional IRA?

Post by popcathiphat » Wed Mar 23, 2016 11:57 am

Going forward, definitely going to do a Traditional 401k...but I'm curious, why the Roth IRA as well? Simply for tax diversification?

Moreover, this year I'm in the 25% tax bracket. I contributed the full amount to a Roth 401k. Should I go ahead and contribute to a Traditional IRA then to save on taxes?

retiredjg
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Re: I generally invest in Roth accounts, but should I invest in a Traditional IRA?

Post by retiredjg » Wed Mar 23, 2016 12:09 pm

There are a few reasons to use Roth IRA instead of traditional IRA. In no particular order….

1) For many people, contributions to tIRA are not deductible. This money should be put into Roth IRA instead.

2) For some, direct contributions to Roth IRA are not allowed because they make too much money. These people can use a back door method to get money into Roth IRA, but the presence of a tIRA will interfere.

3) Tax-diversification.

In the current environment, the combination of t401k and Roth IRA is very useful for a large number of people. It's a good way to go unless you have a specific reason to do something else.

DSInvestor
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Re: I generally invest in Roth accounts, but should I invest in a Traditional IRA?

Post by DSInvestor » Wed Mar 23, 2016 12:11 pm

popcathiphat wrote:Going forward, definitely going to do a Traditional 401k...but I'm curious, why the Roth IRA as well? Simply for tax diversification?

Moreover, this year I'm in the 25% tax bracket. I contributed the full amount to a Roth 401k. Should I go ahead and contribute to a Traditional IRA then to save on taxes?
If you can afford to max out Roth 401k at your level of income, you can afford to max out Traditional 401k + Roth IRA. When making Roth 401k contributions, you get no tax deduction so your fed and state tax liability is higher than if you had contributed to Traditional 401k instead. The tax savings for making Traditional 401k contributions may be close to the $5500 that you'd contribute to Roth IRA. Here at bogleheads, we like to max out tax advantaged contribution space so we suggest maxing out all available tax advantaged space before investing in taxable accounts.

For your situation, Traditional IRA will not save on taxes like Traditional 401 will. Traditional IRA rules impose an income limit to take the deduction when one is covered by an employer plan like 401k. See IRS page in IRA deduction limits and follow links for IRA deduction if you ARE covered by employer plan. You will notice that no deduction is allowed for a single filer covered by employer plan if MAGI for Traditional IRA purposes exceeds 71K for 2015 and 2016 tax years.
https://www.irs.gov/Retirement-Plans/IR ... ion-Limits

Check to see if your income allows Roth IRA contributions. See IRS page on Roth IRA income limits. https://www.irs.gov/Retirement-Plans/Roth-IRAs
If direct Roth IRA contribution is not allowed, contribute to Traditional IRA and then convert to Roth IRA.

In the Traditional 401k vs Roth 401k decision, you always give up a tax deduction to contribute to Roth 401k. With Traditional IRA vs Roth IRA, the rules are different and in your situation, you're not giving up a tax deduction to contribute to Roth IRA because your TIRA deduction is not allowed given your high income and overage by employer plan.
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popcathiphat
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Re: I generally invest in Roth accounts, but should I invest in a Traditional IRA?

Post by popcathiphat » Wed Mar 23, 2016 12:25 pm

I need to double-check when I get home, but I'm 100% sure I can take a partial deduction for the Traditional IRA (AGI is within $61-71k). I'm 50% sure I can take a full deduction (AGI may be under $61k).

Similar question: Given that I may get a partial or full deduction, any reason NOT to do a tIRA?

https://www.irs.gov/Retirement-Plans/Pl ... an-at-Work

DSInvestor
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Re: I generally invest in Roth accounts, but should I invest in a Traditional IRA?

Post by DSInvestor » Wed Mar 23, 2016 1:44 pm

popcathiphat wrote:I need to double-check when I get home, but I'm 100% sure I can take a partial deduction for the Traditional IRA (AGI is within $61-71k). I'm 50% sure I can take a full deduction (AGI may be under $61k).

Similar question: Given that I may get a partial or full deduction, any reason NOT to do a tIRA?

https://www.irs.gov/Retirement-Plans/Pl ... an-at-Work
Could be possible if you have only had this job for part of the year. If you've been at this job all year with salary over 100K (we don't know how much over 100K), it is unlikely that you will get your AGI or MAGI for Traditional IRA purposes under 71K especially if you've contributed to Roth 401k for 2015. If your salary is 100K and you max out Roth 401k for 18K, your AGI is 100K assuming no other income and no above the line deductions like HSA. If your salary is 100K and you max out Traditional 401k for 18K, your AGI would be 82K. Unless you have substantial amounts of other deductions that reduce your AGI on front page of your 1040 form like HSA, net capital loss, large business losses, it is unlikely that you will qualify for any TIRA deduction having worked at full year with salary > 100K.

Note that MAGI for Traditional IRA purposes starts with AGI. With high income in California, you are likely to itemize deductions (schedule A) due to high state income tax but that has no impact on your AGI and MAGI for Traditional IRA purposes. Itemized deductions and exemptions help reduce your taxable income which is line 43 on your 1040 tax return.

IRA contributions for 2015 can be made until April 18, 2016 (tax filing deadline). When preparing your 2015 tax return, try to enter a Traditional IRA contribution. The tax software will examine your tax situation and determine how much of that contribution can be deducted. If you find that you can deduct something on your 2015 return, it may make sense to contribute exactly that much to TIRA to get the deduction, then contribute the remainder to Roth IRA if eligible. Again, your tax software should be able to tell you if you're eligible for Roth IRA contributions. When making you IRA contributions between JAN 01 and APRIL 15, make sure to code the tax year of contribution correctly. You can designate them for current year 2016 or prior year 2015 until APRIL 15, 2016.

If you're interested in tax deductions going forward, definitely switch 401k contributions to Traditional 401k which reduces your AGI and helps you stay under the income limits for both Traditional IRA deduction and Roth IRA contribution.
Wiki

ND Fan 1
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Re: I generally invest in Roth accounts, but should I invest in a Traditional IRA?

Post by ND Fan 1 » Wed Mar 23, 2016 5:44 pm

koldude wrote:Just curious; (kinda not related the topic of the OP), but you mentioned you're getting 5% interest on a savings account. Can I ask where/how? The best rate I'm able to find for any sort of savings account that's FDIC insured is 1.25% at online banks (I get 1% on my own account from Ally).

Sorry if its not germane to the discussion.
There are savings accounts linked to prepaid Debit Cards, by companies such as Brinks, Mango and Netspend. I discovered them through this forum. the accounts have a limit of $5K so you have to open a few to make it worthwhile. I just opened 2 with Netspend, and it wasn't too bad. Some require an initial direct deposit to be eligible for the 5% interest savings account, others you simply have to ACH $500 to begin.

Here is a good link that explains the process. I followed it and everything works so far
https://www.fatwallet.com/forums/finance/1432026/

http://www.doctorofcredit.com/netspend- ... p-to-5000/

I never use the cards, just place my emergency fund there. I link the accounts to my main checking account with USAA. To withdraw money, I simply initiate an ACH pull from my USAA account. There are some inactivity fees, so people buy a $.50 amazon gift card every other month, others simply push $5 there, then pull it back a week later. I do the latter and have it set up automatically at my USAA account. I plan to ACH pull the interest earned every quarter it posts. From my readings, you can have 3 accounts, and your wife can also have 3. These are FDIC insured. The fear is that so many have discovered these that don't use the actual debit cards, that the interest won't last, and there will be a mad dash to get your funds out and it may take a while.

popcathiphat
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Re: I generally invest in Roth accounts, but should I invest in a Traditional IRA?

Post by popcathiphat » Thu Mar 24, 2016 12:09 am

Yup, my AGI is less than $61,000. tIRA all the way!

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Artsdoctor
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Re: I generally invest in Roth accounts, but should I invest in a Traditional IRA?

Post by Artsdoctor » Thu Mar 24, 2016 1:32 am

DSInvestor wrote: For 2015, full Roth IRA contribution is permitted if MAGI for Roth IRA purposes is under 116K. A person with 134K salary who contributes 18K to Traditional 401k would be allowed full contribution to Roth IRA. If direct Roth contribution is not allowed at OP's income, traditional IRA contribution and conversion to Roth IRA (i.e. backdoor into Roth IRA) can be considered. In this case, the Traditional IRA contribution would be non-deductible given OP's income and coverage by employer plan. OP would need to make sure to file form 8606 with tax return to track the IRA basis to allow tax free conversion of that basis to Roth IRA.
Very nice, clear example on how to maximize your 401k contribution in order to qualify for a Roth. Always a good reminder that a 401k and a tIRA are not synonymous.

popcathiphat
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Re: I generally invest in Roth accounts, but should I invest in a Traditional IRA?

Post by popcathiphat » Thu Mar 24, 2016 4:22 am

Artsdoctor wrote:
DSInvestor wrote: For 2015, full Roth IRA contribution is permitted if MAGI for Roth IRA purposes is under 116K. A person with 134K salary who contributes 18K to Traditional 401k would be allowed full contribution to Roth IRA. If direct Roth contribution is not allowed at OP's income, traditional IRA contribution and conversion to Roth IRA (i.e. backdoor into Roth IRA) can be considered. In this case, the Traditional IRA contribution would be non-deductible given OP's income and coverage by employer plan. OP would need to make sure to file form 8606 with tax return to track the IRA basis to allow tax free conversion of that basis to Roth IRA.
Very nice, clear example on how to maximize your 401k contribution in order to qualify for a Roth. Always a good reminder that a 401k and a tIRA are not synonymous.
Wait, I was reading this a bit closer...Given that I'm under $61k this year, contributed to a Roth 401k, and I can get a tax deduction for contribution to a tIRA, I should (1) do so now to get the tax deduction and (2) convert the tIRA to a Roth IRA before April 15, 2016..correct?

EDIT:

Nevermind, I followed the steps to create a backdoor Roth IRA, but my tax payment increased -- by exactly the amount if I had chosen a Roth IRA to start with. I deleted everything including Form 8606...I'm guessing that a backdoor Roth matters only for individuals who have high incomes -- which prevents them from contribution to Roth IRA in the first place.

cmublitz
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Re: I generally invest in Roth accounts, but should I invest in a Traditional IRA?

Post by cmublitz » Thu Mar 24, 2016 6:25 am

Right, you wouldn't deduct your Traditional IRA contribution and then immediately convert it to Roth IRA, since you could have just contributed to the Roth IRA directly anyway. The options that make sense are:
  1. Traditional IRA for the deduction
  2. Contribute directly to the Roth IRA
  3. Perform the "backdoor" Roth IRA if your income exceeds the Roth IRA income limit

DSInvestor
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Re: I generally invest in Roth accounts, but should I invest in a Traditional IRA?

Post by DSInvestor » Thu Mar 24, 2016 10:47 am

popcathiphat wrote:
Wait, I was reading this a bit closer...Given that I'm under $61k this year, contributed to a Roth 401k, and I can get a tax deduction for contribution to a tIRA, I should (1) do so now to get the tax deduction and (2) convert the tIRA to a Roth IRA before April 15, 2016..correct?

EDIT:

Nevermind, I followed the steps to create a backdoor Roth IRA, but my tax payment increased -- by exactly the amount if I had chosen a Roth IRA to start with. I deleted everything including Form 8606...I'm guessing that a backdoor Roth matters only for individuals who have high incomes -- which prevents them from contribution to Roth IRA in the first place.
Your handling of this conversion would be correct if you had done the TIRA contribution and Roth conversion in calendar 2016. The TIRA contribution gives you $5500 deduction and the $5500 conversion (taxable) offsets the deduction. You are considering TIRA contribution for tax year 2015 in calendar 2016 and conversion in calendar 2016. The Traditional IRA contribution for 2015 tax year made any time up to tax filing deadline will be handled by your 2015 tax return and will be deductible if your 2015 AGI was under 61K. The roth conversion done in calendar 2016 must be handled by your 2016 tax return. Your 2015 return will get the full TIRA deduction. Your 2016 tax return will have the conversion income so it adds to your 2016 income. In this case, the roth conversion done in 2016 has no impact on your 2015 tax liability.

If you want the deduction for 2015 tax year, contribute to Traditional IRA for 2015. If you do not want the tax deduction for 2015, contribute to Roth IRA for 2015 which offers the advantage of being a Roth IRA contribution. Roth IRA contribution basis can be withdrawn from Roth IRA at any time without tax or penalty. Roth IRA conversion basis is subject to a 5 year clock for each conversion. Keep it simple.
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popcathiphat
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Re: I generally invest in Roth accounts, but should I invest in a Traditional IRA?

Post by popcathiphat » Thu Mar 24, 2016 2:54 pm

Roth IRA conversion basis is subject to a 5 year clock for each conversion.
Tried searching...are you saying that, once I convert a tIRA to a Roth IRA, then -- if I want to withdraw the funds without any tax or penalty -- I'll have to wait 5 years until after the conversion?

Gufomel
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Re: I generally invest in Roth accounts, but should I invest in a Traditional IRA?

Post by Gufomel » Thu Mar 24, 2016 3:59 pm

KlangFool wrote:
jimkinny wrote:Allan Roth has written about this. You can google him. He knows more about investing than me. He suggested in a blog posting having both. pretty simple. We do not know the future: our earnings, tax rates or tax policies re TIRA or Roths. Taxes rates and policies can be changed.

The classic answer if your earnings will be higher in the future, use Roth then switch to TIRA as earnings put you in the higher tax brackets, then at retirement go from TIRA to roth using conversions.
jimkinny,

<<He suggested in a blog posting having both.>>

A person could get both by contributing 100% to Trad. 401K and Roth IRA. There is no reason to do Roth 401K.

KlangFool
Are you saying there's no reason to do Roth 401k in his situation, or there's never a reason for anyone to do a Roth 401k?

I'm in the 15% tax bracket and have no state income tax. I don't see a Traditional 401k being very beneficial for me. Can you explain?

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