Is there a benefit of investing in Traditional IRA if company provides 401K

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gmehta
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Is there a benefit of investing in Traditional IRA if company provides 401K

Post by gmehta » Wed Oct 17, 2018 2:04 pm

Hi,

My employer provides a 401K match. I have invested the $18,500 in the 401K for this year. Company doesn't provide any IRA. Also since my salary is around 200K, I don't think I am eligible for Roth IRA anyway.

Given that, does it make sense to invest in Traditional IRA (another 5500). What is the benefit of doing that vs. investing that money in a regular brokerage account? Are there some benefits that I am missing in that case?

Thanks

02nz
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Re: Is there a benefit of investing in Traditional IRA if company provides 401K

Post by 02nz » Wed Oct 17, 2018 2:11 pm

gmehta wrote:
Wed Oct 17, 2018 2:04 pm
Company doesn't provide any IRA.
Companies don't "provide" IRAs. They are Individual Retirement Arrangements.

The answer depends on your tax situation. The main advantage of a traditional IRA contribution would be tax deductibility, but the fact that you're maxing out your 401k contributions suggests you're likely above the income limit for qualifying for that tax deduction. You should look into a Roth IRA. No tax break up front, but you never pay taxes on that money (including earnings) again, subject to some conditions. There are income limits as well on who can contribute to a Roth but 1) they're higher than for deductible contributions to a traditional IRA and 2) it's easy to get around them by doing a "backdoor Roth" - see the wiki.

ahnathan
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Re: Is there a benefit of investing in Traditional IRA if company provides 401K

Post by ahnathan » Wed Oct 17, 2018 2:12 pm

Significant benefit to filling a traditional IRA and then doing a Roth conversion every year. I *think* most people would tell you to do this before going to a taxable brokerage account.

Roth money will grow tax free and all future withdrawals are tax free. You have to pay tax on that 5500 anyway, may as well let it grow and withdraw tax free.

Chuck
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Re: Is there a benefit of investing in Traditional IRA if company provides 401K

Post by Chuck » Wed Oct 17, 2018 2:14 pm

IMO, a non-deductible traditional IRA is worse than nothing. Buy stocks in taxable and pay capital gains, instead of converting all your gains to regular taxable income. You could just buy bonds in it, and defer tax on gains until 59.5, but that's a small benefit for tying up your money. You could just buy I-Bonds instead.

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Earl Lemongrab
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Re: Is there a benefit of investing in Traditional IRA if company provides 401K

Post by Earl Lemongrab » Wed Oct 17, 2018 2:47 pm

You wouldn't be able to deduct a TIRA contribution. However, if you have no other IRAs with pretax amounts, you can use the backdoor Roth method, by making a non-deductible contribution and immediately converting to a Roth IRA.
This week's fortune cookie: "Your financial life will be secure and beneficial." So I got that going for me, which is nice.

gmehta
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Re: Is there a benefit of investing in Traditional IRA if company provides 401K

Post by gmehta » Wed Oct 17, 2018 2:57 pm

@chuck:
As per IRS, if the AGI for married filing jointly is > $199K, then you can contribute nothing to Roth IRA correct.

https://www.irs.gov/retirement-plans/pl ... e-for-2018

In that case, the only option remaining for investment is regular brokerage account

nolesrule
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Re: Is there a benefit of investing in Traditional IRA if company provides 401K

Post by nolesrule » Wed Oct 17, 2018 3:16 pm

Bogleheads info about the Backdoor Roth IRA.

MoneyMarathon
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Re: Is there a benefit of investing in Traditional IRA if company provides 401K

Post by MoneyMarathon » Wed Oct 17, 2018 3:24 pm

gmehta wrote:
Wed Oct 17, 2018 2:57 pm
As per IRS, if the AGI for married filing jointly is > $199K, then you can contribute nothing to Roth IRA correct.
It's really easy to contribute to a traditional IRA (a non-deductible contribution) and roll it over to a Roth IRA. I can do this on Vanguard entirely online in about 10 minutes total time spent. So there isn't really much of an income limitation on using a Roth IRA for tax-free growth, it's not even a hassle to do the "backdoor" conversion to Roth IRA.

ahnathan
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Re: Is there a benefit of investing in Traditional IRA if company provides 401K

Post by ahnathan » Wed Oct 17, 2018 3:48 pm

gmehta wrote:
Wed Oct 17, 2018 2:57 pm
@chuck:
As per IRS, if the AGI for married filing jointly is > $199K, then you can contribute nothing to Roth IRA correct.

https://www.irs.gov/retirement-plans/pl ... e-for-2018

In that case, the only option remaining for investment is regular brokerage account
Read above, but the income limit to contribute to a Roth is procedural only. If you are above the limit just contribute to a tIRA and then convert it to Roth for the exact same benefit as contributing to Roth from the start. In my (albeit limited) experience you should fill this space ($11,000 total if married) before moving to taxable.

$18,500 plus employer match
$5,500 ($11,000 if married) tIRA to Roth converted
Then taxable +\- HSA

This is the route I am taking.

BaylorBears
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Re: Is there a benefit of investing in Traditional IRA if company provides 401K

Post by BaylorBears » Wed Oct 17, 2018 10:08 pm

When younconvert the $5500, is that added to your gross income and you pay 24% (if in that marginal bracket) of the $5500 to the govt the year youbconvert the $5500 to a Roth?

On the bigleheads wiki it says “since it was only in the account a minimal time, the taxes should be negligible” but in my example above, if correct, if would be close to $1400

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Earl Lemongrab
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Re: Is there a benefit of investing in Traditional IRA if company provides 401K

Post by Earl Lemongrab » Wed Oct 17, 2018 11:20 pm

BaylorBears wrote:
Wed Oct 17, 2018 10:08 pm
When younconvert the $5500, is that added to your gross income and you pay 24% (if in that marginal bracket) of the $5500 to the govt the year youbconvert the $5500 to a Roth?

On the bigleheads wiki it says “since it was only in the account a minimal time, the taxes should be negligible” but in my example above, if correct, if would be close to $1400
No, it's not added your taxable income, because you didn't take a deduction on it. Only the growth on it from the time it's contributed until conversion.
This week's fortune cookie: "Your financial life will be secure and beneficial." So I got that going for me, which is nice.

gmehta
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Re: Is there a benefit of investing in Traditional IRA if company provides 401K

Post by gmehta » Thu Oct 18, 2018 1:35 am

ahnathan wrote:
Wed Oct 17, 2018 3:48 pm
gmehta wrote:
Wed Oct 17, 2018 2:57 pm
@chuck:
As per IRS, if the AGI for married filing jointly is > $199K, then you can contribute nothing to Roth IRA correct.

https://www.irs.gov/retirement-plans/pl ... e-for-2018

In that case, the only option remaining for investment is regular brokerage account
Read above, but the income limit to contribute to a Roth is procedural only. If you are above the limit just contribute to a tIRA and then convert it to Roth for the exact same benefit as contributing to Roth from the start. In my (albeit limited) experience you should fill this space ($11,000 total if married) before moving to taxable.

$18,500 plus employer match
$5,500 ($11,000 if married) tIRA to Roth converted
Then taxable +\- HSA

This is the route I am taking.
Once you convert the Traditional IRA to Roth IRA, can you continue contributing to it for the upcoming years or is this just a one time thing?

rkhusky
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Re: Is there a benefit of investing in Traditional IRA if company provides 401K

Post by rkhusky » Thu Oct 18, 2018 7:02 am

gmehta wrote:
Thu Oct 18, 2018 1:35 am
Once you convert the Traditional IRA to Roth IRA, can you continue contributing to it for the upcoming years or is this just a one time thing?
You can contribute to either. Next year you can use the same Traditional and Roth accounts to do a backdoor Roth again. If your income drops sufficiently, you could even contribute directly to the Roth.

danaht
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Re: Is there a benefit of investing in Traditional IRA if company provides 401K

Post by danaht » Thu Oct 18, 2018 7:17 am

If you are over the Roth IRA Income limit, and can't do a back door Roth because of existing IRA balances - then I believe it's still worth contributing the $5500 to a TIRA as a last resort. This should be done after you have already maxed out your 401k, and HSA contributions (if you can make these). The contributions to your TIRA will be after-tax - and will add to your TIRA after tax basis that you will need to keep track of. The benefit of the TIRA - is that at least you can still defer the earnings. Definitely not as good as a Roth however.

Flyer24
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Re: Is there a benefit of investing in Traditional IRA if company provides 401K

Post by Flyer24 » Thu Oct 18, 2018 7:31 am

BaylorBears wrote:
Wed Oct 17, 2018 10:08 pm
When younconvert the $5500, is that added to your gross income and you pay 24% (if in that marginal bracket) of the $5500 to the govt the year youbconvert the $5500 to a Roth?

On the bigleheads wiki it says “since it was only in the account a minimal time, the taxes should be negligible” but in my example above, if correct, if would be close to $1400
You don’t pay taxes on the $5500 contribution. You pay taxes on the growth. If it is only in the account for a day, then the taxes would be almost nothing.

suemarkp
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Re: Is there a benefit of investing in Traditional IRA if company provides 401K

Post by suemarkp » Fri Oct 19, 2018 12:03 am

Here's another reason I can think of to have a traditional IRA if you have a 401K. Contribute pre-tax to the 401K and get the company match. If your investment choices suck, transfer the pretax and company match money to an IRA where you have more control of the investments and fees. I'm not sure if there are any minimum time requirements of it sitting in the 401K before you can do this transfer. This is like a mega back door roth where you can transfer your after tax money (but not the gains) tax free from a 401K to a Roth at any time.

I'm thinking of slicing and dicing my 401K into traditional IRAs and Roths because I don't have control of where the different buckets of 401K go -- its all mixed together. I also must withdraw from all the different piles of money in the sequence the plan defines (after tax comes out first, roth goes last). I think I want to reduce it so all I have is pre-tax in my 401K and move out the after tax and the Roth money to non-employer accounts. I may move some pre-tax to an IRA, but not sure I want to do that yet.
Mark | Kent, WA

nolesrule
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Re: Is there a benefit of investing in Traditional IRA if company provides 401K

Post by nolesrule » Fri Oct 19, 2018 7:24 am

suemarkp wrote:
Fri Oct 19, 2018 12:03 am
Here's another reason I can think of to have a traditional IRA if you have a 401K. Contribute pre-tax to the 401K and get the company match. If your investment choices suck, transfer the pretax and company match money to an IRA where you have more control of the investments and fees. I'm not sure if there are any minimum time requirements of it sitting in the 401K before you can do this transfer. This is like a mega back door roth where you can transfer your after tax money (but not the gains) tax free from a 401K to a Roth at any time.

I'm thinking of slicing and dicing my 401K into traditional IRAs and Roths because I don't have control of where the different buckets of 401K go -- its all mixed together. I also must withdraw from all the different piles of money in the sequence the plan defines (after tax comes out first, roth goes last). I think I want to reduce it so all I have is pre-tax in my 401K and move out the after tax and the Roth money to non-employer accounts. I may move some pre-tax to an IRA, but not sure I want to do that yet.
You cannot rollover your pre-tax 401k contributions and their earnings to an IRA while you are still employed with the company.

Some companies will allow you to rollover your company match if it is vested.

terran
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Re: Is there a benefit of investing in Traditional IRA if company provides 401K

Post by terran » Fri Oct 19, 2018 8:05 am

Unless I've missed it, amongst on this talk of backdoor Roth contributions no one has point out one "obvious" thing: if your salary is $200k and you've contributed $18.5k to a traditional 401(k) then you're MAGI is low enough to contribute directly to a Roth IRA. Don't forget to also subtract employee paid health insurance and other pretax deductions from your pay.

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Earl Lemongrab
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Re: Is there a benefit of investing in Traditional IRA if company provides 401K

Post by Earl Lemongrab » Fri Oct 19, 2018 10:28 am

nolesrule wrote:
Fri Oct 19, 2018 7:24 am
You cannot rollover your pre-tax 401k contributions and their earnings to an IRA while you are still employed with the company.
Unless you've reached age 59-1/2 and the plan allows it. Also applies to Roth contributions.
This week's fortune cookie: "Your financial life will be secure and beneficial." So I got that going for me, which is nice.

wordsmith11
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Re: Is there a benefit of investing in Traditional IRA if company provides 401K

Post by wordsmith11 » Fri Oct 19, 2018 11:08 pm

Unfortunately from a tax perspective (though fortunate from a savings perspective) if you have a sizable tIRA balance already, the "backdoor" Roth isn't much of an option. Hasn't been mentioned so OP should be aware just in case...

nyclon
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Re: Is there a benefit of investing in Traditional IRA if company provides 401K

Post by nyclon » Fri Oct 19, 2018 11:11 pm

wordsmith11 wrote:
Fri Oct 19, 2018 11:08 pm
Unfortunately from a tax perspective (though fortunate from a savings perspective) if you have a sizable tIRA balance already, the "backdoor" Roth isn't much of an option. Hasn't been mentioned so OP should be aware just in case...
True. One workaround is to roll tIRAs into a 401k if available. Then you can start fresh with tIRA basis.

wordsmith11
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Re: Is there a benefit of investing in Traditional IRA if company provides 401K

Post by wordsmith11 » Fri Oct 19, 2018 11:24 pm

nyclon wrote:
Fri Oct 19, 2018 11:11 pm
wordsmith11 wrote:
Fri Oct 19, 2018 11:08 pm
Unfortunately from a tax perspective (though fortunate from a savings perspective) if you have a sizable tIRA balance already, the "backdoor" Roth isn't much of an option. Hasn't been mentioned so OP should be aware just in case...
True. One workaround is to roll tIRAs into a 401k if available. Then you can start fresh with tIRA basis.
Also true. Though in that case you must live with whatever choices your employer offers in the 401k and you can't easily get the money back out without leaving that company.

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Earl Lemongrab
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Re: Is there a benefit of investing in Traditional IRA if company provides 401K

Post by Earl Lemongrab » Sat Oct 20, 2018 12:31 am

wordsmith11 wrote:
Fri Oct 19, 2018 11:24 pm
nyclon wrote:
Fri Oct 19, 2018 11:11 pm
wordsmith11 wrote:
Fri Oct 19, 2018 11:08 pm
Unfortunately from a tax perspective (though fortunate from a savings perspective) if you have a sizable tIRA balance already, the "backdoor" Roth isn't much of an option. Hasn't been mentioned so OP should be aware just in case...
True. One workaround is to roll tIRAs into a 401k if available. Then you can start fresh with tIRA basis.
Also true. Though in that case you must live with whatever choices your employer offers in the 401k and you can't easily get the money back out without leaving that company.
Depends on the plan. Megacorp allows distribution of rollover contributions. That actually got me in a spot of trouble the first time I did Mega Backdoor. I hadn't researched it properly and didn't realize the "balance on 12/31" requirement for pro-rata. So I had rolled out the rollover of earnings. As I was converting from TIRA to Roth that caused a problem. Luckily bach then you could recharacterize, I got a do-over the next year.
This week's fortune cookie: "Your financial life will be secure and beneficial." So I got that going for me, which is nice.

LilyFleur
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Re: Is there a benefit of investing in Traditional IRA if company provides 401K

Post by LilyFleur » Sat Oct 20, 2018 2:42 am

Fast forward to that glorious day when you can retire. You are more likely to have adverse health events the older you get. Current laws provide more protection from creditors for a 401k than an IRA in California. Might want to check it out. You could lose a lot of house equity paying off catastrophic medical bills (in California the amount of house equity that is protected in bankruptcy is much lower than the amount of equity many retirees currently have in their houses). If you had a big chunk saved up in a 401k, you could use that to pay rent if you lost your house.

It is rather unfortunate that we need to consider medical bankruptcy as a factor in our financial planning, but I think it makes sense to at least think about it.

Most likely, the institutions offering to rollover your 401k to an IRA will not be mentioning this aspect of retirement financial planning to you.

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