What route to go? IRA-Roth IRA-etc

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cam240
Posts: 16
Joined: Tue Jun 27, 2017 1:16 pm

What route to go? IRA-Roth IRA-etc

Post by cam240 » Tue Nov 14, 2017 3:26 pm

Fellow Bogleheads,

Me and my wife are young college grads (21-22). We both just became eligible for contributions to our 401K. Save on average 2K every month. We have a savings account with 25K+ and only debt is a recent car loan for 10K (we are planning on only having the loan for 1 year and then pay it all off. And if you are wondering why we did not pay all cash we wanted to "diversified" our credit showing an installment loan, probably foolish but oh well). We also have a brokerage account with ETrade (not a significant amount less than 5K) . My question is should we open an IRA account? If so, IRA or Roth IRA? who do you recommend? Is it ever to early to open an IRA type of account? If we do open the account should we just closed the savings account? Need some hand-holding.

Thanks

KlangFool
Posts: 6970
Joined: Sat Oct 11, 2008 12:35 pm

Re: What route to go? IRA-Roth IRA-etc

Post by KlangFool » Tue Nov 14, 2017 3:32 pm

OP-,

Start with the basic information needed in order to advice you.

A) What is your marginal tax rate?

B) Do you pay state income tax?

C) Are you or your spouse a full-time student this year?

KlangFool

cam240
Posts: 16
Joined: Tue Jun 27, 2017 1:16 pm

Re: What route to go? IRA-Roth IRA-etc

Post by cam240 » Tue Nov 14, 2017 3:39 pm

We are in TX so no state income tax (we will have to pay state taxes for MO but should be nothing) We were full time students up until May of this year. Filling Jointly we are on the 25% bracket.

Caduceus
Posts: 1458
Joined: Mon Sep 17, 2012 1:47 am

Re: What route to go? IRA-Roth IRA-etc

Post by Caduceus » Tue Nov 14, 2017 5:07 pm

Is further education on the horizon? Like a masters or Ed.D or something like that? If so, definitely the traditional IRA, because you can convert the money in a low-income year to a Roth IRA when your tax bracket is even lower.

Olemiss540
Posts: 187
Joined: Fri Aug 18, 2017 8:46 pm

Re: What route to go? IRA-Roth IRA-etc

Post by Olemiss540 » Tue Nov 14, 2017 6:30 pm

Being eligible for a 401k and in the 25% bracket, are you sure you are eligible for a tax deductible IRA? Would seem you would only have a Roth as an option. I am also assuming you are doing this IN ADDITION to maxing out your 401k correct?

I would advise maxing 401k contributions and HSA contributions (if eligible) and then open a Roth IRA for you and the spouse. Roth IRAs have multiple advantages including being available as a second tier of emergency funds (contributions only) and will not impact your ability to make backdoor Roth contributions once your joint income is too high.

cam240
Posts: 16
Joined: Tue Jun 27, 2017 1:16 pm

Re: What route to go? IRA-Roth IRA-etc

Post by cam240 » Tue Nov 14, 2017 10:12 pm

Olemiss540 wrote:
Tue Nov 14, 2017 6:30 pm
Being eligible for a 401k and in the 25% bracket, are you sure you are eligible for a tax deductible IRA? Would seem you would only have a Roth as an option. I am also assuming you are doing this IN ADDITION to maxing out your 401k correct?

I would advise maxing 401k contributions and HSA contributions (if eligible) and then open a Roth IRA for you and the spouse. Roth IRAs have multiple advantages including being available as a second tier of emergency funds (contributions only) and will not impact your ability to make backdoor Roth contributions once your joint income is too high.
I just became eligible so I have not/will not maxed out my 401K for this year. I was considering increasing my contribution to 100% at least for the last two/three payroll cycles of the year (is it worth it)? Next year I will for sure work diligently to max out my 401K (wife will strive for the same). Another question is should I try to max out my 401K on the first half of the year? I read I could be missing on employer contribution for the other half of the year depending on how the matching contributions are calculated (lump sum vs every payroll contribution)

overthought
Posts: 105
Joined: Tue Oct 17, 2017 3:44 am

Re: What route to go? IRA-Roth IRA-etc

Post by overthought » Tue Nov 14, 2017 10:25 pm

Regardless of where you decide to send your retirement money for the immediate future, I would open a Roth and make some token contribution now if you plan to use it for storing emergency funds at some point in the future. You can't withdraw contributions penalty-free until 4-5 years after your lifetime first contribution. That way, you reduce the number of years where you risk penalties for withdrawing emergency funds you stored there, should you ever need them.

Olemiss540
Posts: 187
Joined: Fri Aug 18, 2017 8:46 pm

Re: What route to go? IRA-Roth IRA-etc

Post by Olemiss540 » Wed Nov 15, 2017 7:58 am

overthought wrote:
Tue Nov 14, 2017 10:25 pm
Regardless of where you decide to send your retirement money for the immediate future, I would open a Roth and make some token contribution now if you plan to use it for storing emergency funds at some point in the future. You can't withdraw contributions penalty-free until 4-5 years after your lifetime first contribution. That way, you reduce the number of years where you risk penalties for withdrawing emergency funds you stored there, should you ever need them.
You are thinking of withdrawing COVERSIONS, the 5 year rule does not apply to withdrawing contributions. You can open a Roth IRA today and withdraw your contributions tomorrow tax and penalty free.....

Olemiss540
Posts: 187
Joined: Fri Aug 18, 2017 8:46 pm

Re: What route to go? IRA-Roth IRA-etc

Post by Olemiss540 » Wed Nov 15, 2017 8:01 am

cam240 wrote:
Tue Nov 14, 2017 10:12 pm
Olemiss540 wrote:
Tue Nov 14, 2017 6:30 pm
Being eligible for a 401k and in the 25% bracket, are you sure you are eligible for a tax deductible IRA? Would seem you would only have a Roth as an option. I am also assuming you are doing this IN ADDITION to maxing out your 401k correct?

I would advise maxing 401k contributions and HSA contributions (if eligible) and then open a Roth IRA for you and the spouse. Roth IRAs have multiple advantages including being available as a second tier of emergency funds (contributions only) and will not impact your ability to make backdoor Roth contributions once your joint income is too high.
I just became eligible so I have not/will not maxed out my 401K for this year. I was considering increasing my contribution to 100% at least for the last two/three payroll cycles of the year (is it worth it)? Next year I will for sure work diligently to max out my 401K (wife will strive for the same). Another question is should I try to max out my 401K on the first half of the year? I read I could be missing on employer contribution for the other half of the year depending on how the matching contributions are calculated (lump sum vs every payroll contribution)
I would not worry about lump sum 401k contributions next year, just set it on autopilot and forget about it. Great idea to try and get as much in by the end of the year as possible! Also remember that you can fund your Roth IRA for 2017 up to the tax filing deadline (April 2018) if you need to.

retiredjg
Posts: 30602
Joined: Thu Jan 10, 2008 12:56 pm

Re: What route to go? IRA-Roth IRA-etc

Post by retiredjg » Wed Nov 15, 2017 8:34 am

I suggest a combination of traditional 401k and Roth IRA. You may not be able to fill all of that space right now, but it is a good goal. If you have one available, an HSA is a good idea as well.

Here is a good place to start your education. Be sure to watch the videos.

https://www.bogleheads.org/wiki/Getting_started

overthought
Posts: 105
Joined: Tue Oct 17, 2017 3:44 am

Re: What route to go? IRA-Roth IRA-etc

Post by overthought » Wed Nov 15, 2017 8:49 am

Olemiss540 wrote:
Wed Nov 15, 2017 7:58 am
overthought wrote:
Tue Nov 14, 2017 10:25 pm
Regardless of where you decide to send your retirement money for the immediate future, I would open a Roth and make some token contribution now if you plan to use it for storing emergency funds at some point in the future. You can't withdraw contributions penalty-free until 4-5 years after your lifetime first contribution. That way, you reduce the number of years where you risk penalties for withdrawing emergency funds you stored there, should you ever need them.
You are thinking of withdrawing CONVERSIONS, the 5 year rule does not apply to withdrawing contributions. You can open a Roth IRA today and withdraw your contributions tomorrow tax and penalty free.....
Oops, you're right. I misread the other 5-year rule: Qualified distributions of *earnings* are only penalty-free if the beneficiary's first-ever Roth contribution was at least 5 tax year previous... which would only matter to somebody who got a really late start on their Roth IRA, I guess.

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