Traditional vs Roth IRA

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vajg
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Traditional vs Roth IRA

Post by vajg » Wed Mar 13, 2019 11:01 am

Newbie here, just trying to understand.

I've been contributing to a Roth IRA for that last 7 years; don't recall why I went with a roth, I just did.

So I have been reading so much information on this forum, and am a bit confused about traditional and roth IRA, and which one I should go with, and all the benefits of both.

I have an employer 401k that I also contribute to. So if I decide to go with a traditional IRA, my deduction depends on my AGI right?

So my AGI for 2018 was ~73,000. And 2019 will be right around there or more (most likely more). I am single, and from reading on the IRS website, I can't take a deduction if my AGI is more than 74,000; if i go the traditional IRA route. If I can't take a deduction now, better to go the Roth route, right? Or is the traditional route still better? Or should I contribute to both? Or do I need to provide more info?

Thanks for the feedback.

Silk McCue
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Re: Traditional vs Roth IRA

Post by Silk McCue » Wed Mar 13, 2019 11:26 am

Welcome to Bogleheads!

We have an excellent Wiki on this. Take time to read it get a more complete education on this.

Traditional Versus Roth

Cheers

02nz
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Re: Traditional vs Roth IRA

Post by 02nz » Wed Mar 13, 2019 11:38 am

For a single filer with 73K of income, the right answer is probably to contribute as much as you can (traditional not Roth) to your 401k, and also max the Roth IRA.

Topic Author
vajg
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Re: Traditional vs Roth IRA

Post by vajg » Wed Mar 13, 2019 12:10 pm

02nz wrote:
Wed Mar 13, 2019 11:38 am
For a single filer with 73K of income, the right answer is probably to contribute as much as you can (traditional not Roth) to your 401k, and also max the Roth IRA.
That is what I thought too.

Why contribute to a traditional now, cant deduct but get taxed on it, and also get taxed on it when I take it out, right?

JustinR
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Re: Traditional vs Roth IRA

Post by JustinR » Wed Mar 13, 2019 12:17 pm

Yea, at your income a Roth IRA is the way to go. The limit for tax deductions on a Tira is $74,000 magi.

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Wiggums
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Re: Traditional vs Roth IRA

Post by Wiggums » Wed Mar 13, 2019 12:19 pm

JustinR wrote:
Wed Mar 13, 2019 12:17 pm
Yea, at your income a Roth IRA is the way to go. The limit for tax deductions on a Tira is $74,000 magi.
[/quote

I agree

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atdharris
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Re: Traditional vs Roth IRA

Post by atdharris » Wed Mar 13, 2019 12:26 pm

I make about $85k a year and use a traditional 401k and a Roth IRA. From all my discussions around here, that's the best thing you can do.

typicalmillenial
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Re: Traditional vs Roth IRA

Post by typicalmillenial » Wed Mar 13, 2019 12:51 pm

My question is, say I have a company sponsored 401K (traditional), and I am maxing this out, would Vanguard be able to access pretax dollars as well for the traditional IRA?

lakpr
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Re: Traditional vs Roth IRA

Post by lakpr » Wed Mar 13, 2019 1:10 pm

typicalmillenial wrote:
Wed Mar 13, 2019 12:51 pm
My question is, say I have a company sponsored 401K (traditional), and I am maxing this out, would Vanguard be able to access pretax dollars as well for the traditional IRA?
Don’t really understand your question. Who is your 401k plan administrator? Is it Vanguard also?

If so, yes Vanguard can see both your 401k balances and IRA balances. You can see both of them on a single login to Vanguard web site

typicalmillenial
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Re: Traditional vs Roth IRA

Post by typicalmillenial » Thu Mar 14, 2019 9:32 am

lakpr wrote:
Wed Mar 13, 2019 1:10 pm
typicalmillenial wrote:
Wed Mar 13, 2019 12:51 pm
My question is, say I have a company sponsored 401K (traditional), and I am maxing this out, would Vanguard be able to access pretax dollars as well for the traditional IRA?
Don’t really understand your question. Who is your 401k plan administrator? Is it Vanguard also?

If so, yes Vanguard can see both your 401k balances and IRA balances. You can see both of them on a single login to Vanguard web site
Sorry, let me try to clarify. I have an employee sponsored Traditional 401K through Fidelity. Would I be able to have a traditional IRA through Vanguard that would pull pre-tax dollars from my w2 check?

Admiral
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Re: Traditional vs Roth IRA

Post by Admiral » Thu Mar 14, 2019 9:47 am

typicalmillenial wrote:
Thu Mar 14, 2019 9:32 am
lakpr wrote:
Wed Mar 13, 2019 1:10 pm
typicalmillenial wrote:
Wed Mar 13, 2019 12:51 pm
My question is, say I have a company sponsored 401K (traditional), and I am maxing this out, would Vanguard be able to access pretax dollars as well for the traditional IRA?
Don’t really understand your question. Who is your 401k plan administrator? Is it Vanguard also?

If so, yes Vanguard can see both your 401k balances and IRA balances. You can see both of them on a single login to Vanguard web site
Sorry, let me try to clarify. I have an employee sponsored Traditional 401K through Fidelity. Would I be able to have a traditional IRA through Vanguard that would pull pre-tax dollars from my w2 check?
Your T-IRA is independent of your workplace plan, except in the sense of the deductability cap ($19,000 per year, which is the total of YOUR contribution and does not include any employer contribution and/or match.) You put the money in and then take the deduction on your taxes.

OP: You should be saving up to the deductibility limit in a pre-tax account, and then anything leftover should go to Roth.

lakpr
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Re: Traditional vs Roth IRA

Post by lakpr » Thu Mar 14, 2019 10:08 am

typicalmillenial wrote:
Thu Mar 14, 2019 9:32 am
Sorry, let me try to clarify. I have an employee sponsored Traditional 401K through Fidelity. Would I be able to have a traditional IRA through Vanguard that would pull pre-tax dollars from my w2 check?
The answer is, as anything to do with IRS, is "it's complicated".

Firstly: IRAs are outside of employment. The custodian where you save your IRA, will not have access to your pay checks. Even if they are with the same custodian. You should send a separate check (or authorize auto-debit of your bank account) to your IRA custodian to contribute to the traditional IRA. Then when you file the taxes before April 15 of the next year, you deduct the amount you contributed to IRA.

Secondly: IRS rules state that, if you are "covered by an employer retirement plan", then your ability to contribute to a traditional IRA is limited. Based on the guidance given by IRS (I have included a link below), to be classified as "not covered", there should be NOTHING contributed to your workplace plan either by you, or by your employer on your behalf. Throughout the entire year. Not a single penny.

Now there are some "safe harbor" 401k plans out there, not sure if your employer is one of them -- where the employer contributes 3% of the salary to a 401k / 403b irrespective of whether the employee chooses to contribute or not. That act, intended to nudge you towards saving for retirement, could make you "covered" by the employer retirement plan.

What if you ARE covered by a retirement plan? In that case, look up the amount that's reported on your W-2 at the end of the year, check if it is below the income thresholds shown in the link below, based on your IRS filing status. If you are over the threshold, then your IRA contribution cannot be deducted. You should, if this happens, immediately convert the amount in the traditional IRA to Roth IRA. Withdrawing the amount from the traditional IRA after you discover you are not able to deduct, will further complicate the situation. The custodian will have to issue a 1099-R document saying you withdrew $X from the traditional IRA, and then IRS deems it unreported income. Conversion to Roth IRA from a non-deductible traditional IRA is always allowed; no income limits.

If you are NOT covered by an employer retirement plan, then the limits are $5500 for the year 2018 (there's still time to contribute before April 15 to reduce taxes), and $6000 for the year 2019.

IRS link here: https://www.irs.gov/retirement-plans/20 ... an-at-work

typicalmillenial
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Re: Traditional vs Roth IRA

Post by typicalmillenial » Thu Mar 14, 2019 6:16 pm

lakpr wrote:
Thu Mar 14, 2019 10:08 am
typicalmillenial wrote:
Thu Mar 14, 2019 9:32 am
Sorry, let me try to clarify. I have an employee sponsored Traditional 401K through Fidelity. Would I be able to have a traditional IRA through Vanguard that would pull pre-tax dollars from my w2 check?
The answer is, as anything to do with IRS, is "it's complicated".

Firstly: IRAs are outside of employment. The custodian where you save your IRA, will not have access to your pay checks. Even if they are with the same custodian. You should send a separate check (or authorize auto-debit of your bank account) to your IRA custodian to contribute to the traditional IRA. Then when you file the taxes before April 15 of the next year, you deduct the amount you contributed to IRA.

Secondly: IRS rules state that, if you are "covered by an employer retirement plan", then your ability to contribute to a traditional IRA is limited. Based on the guidance given by IRS (I have included a link below), to be classified as "not covered", there should be NOTHING contributed to your workplace plan either by you, or by your employer on your behalf. Throughout the entire year. Not a single penny.

Now there are some "safe harbor" 401k plans out there, not sure if your employer is one of them -- where the employer contributes 3% of the salary to a 401k / 403b irrespective of whether the employee chooses to contribute or not. That act, intended to nudge you towards saving for retirement, could make you "covered" by the employer retirement plan.

What if you ARE covered by a retirement plan? In that case, look up the amount that's reported on your W-2 at the end of the year, check if it is below the income thresholds shown in the link below, based on your IRS filing status. If you are over the threshold, then your IRA contribution cannot be deducted. You should, if this happens, immediately convert the amount in the traditional IRA to Roth IRA. Withdrawing the amount from the traditional IRA after you discover you are not able to deduct, will further complicate the situation. The custodian will have to issue a 1099-R document saying you withdrew $X from the traditional IRA, and then IRS deems it unreported income. Conversion to Roth IRA from a non-deductible traditional IRA is always allowed; no income limits.

If you are NOT covered by an employer retirement plan, then the limits are $5500 for the year 2018 (there's still time to contribute before April 15 to reduce taxes), and $6000 for the year 2019.

IRS link here: https://www.irs.gov/retirement-plans/20 ... an-at-work
Thank you! For some reason, I could not really find anything like this elsewhere (I suppose I should check the IRS site next time...) Either way, appreciate the response and apologies to OP for any confusion I might have caused :oops:

JustinR
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Re: Traditional vs Roth IRA

Post by JustinR » Thu Mar 14, 2019 9:31 pm

typicalmillenial wrote:
Thu Mar 14, 2019 9:32 am
lakpr wrote:
Wed Mar 13, 2019 1:10 pm
typicalmillenial wrote:
Wed Mar 13, 2019 12:51 pm
My question is, say I have a company sponsored 401K (traditional), and I am maxing this out, would Vanguard be able to access pretax dollars as well for the traditional IRA?
Don’t really understand your question. Who is your 401k plan administrator? Is it Vanguard also?

If so, yes Vanguard can see both your 401k balances and IRA balances. You can see both of them on a single login to Vanguard web site
Sorry, let me try to clarify. I have an employee sponsored Traditional 401K through Fidelity. Would I be able to have a traditional IRA through Vanguard that would pull pre-tax dollars from my w2 check?
I don't get what you're trying to do.

A traditional IRA you fund from your regular bank account. Then you deduct it from your taxable income on your tax return at the end of the year. You don't "fund it with pre-tax dollars from your paycheck."

typicalmillenial
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Re: Traditional vs Roth IRA

Post by typicalmillenial » Fri Mar 15, 2019 8:58 am

JustinR wrote:
Thu Mar 14, 2019 9:31 pm
typicalmillenial wrote:
Thu Mar 14, 2019 9:32 am
lakpr wrote:
Wed Mar 13, 2019 1:10 pm
typicalmillenial wrote:
Wed Mar 13, 2019 12:51 pm
My question is, say I have a company sponsored 401K (traditional), and I am maxing this out, would Vanguard be able to access pretax dollars as well for the traditional IRA?
Don’t really understand your question. Who is your 401k plan administrator? Is it Vanguard also?

If so, yes Vanguard can see both your 401k balances and IRA balances. You can see both of them on a single login to Vanguard web site
Sorry, let me try to clarify. I have an employee sponsored Traditional 401K through Fidelity. Would I be able to have a traditional IRA through Vanguard that would pull pre-tax dollars from my w2 check?
I don't get what you're trying to do.

A traditional IRA you fund from your regular bank account. Then you deduct it from your taxable income on your tax return at the end of the year. You don't "fund it with pre-tax dollars from your paycheck."
It was a misunderstanding of the tax advantages regarding traditional Roth IRA. I am was under the impression that Traditional IRA could be contributed to in the same way as a Traditional 401K, with pretax dollars. I am beyond the income level to deduct, so it seems to make more sense for me to contribute Roth in addition to maxing my employer sponsored program.

Admiral
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Re: Traditional vs Roth IRA

Post by Admiral » Fri Mar 15, 2019 9:43 am

typicalmillenial wrote:
Fri Mar 15, 2019 8:58 am
JustinR wrote:
Thu Mar 14, 2019 9:31 pm
typicalmillenial wrote:
Thu Mar 14, 2019 9:32 am
lakpr wrote:
Wed Mar 13, 2019 1:10 pm
typicalmillenial wrote:
Wed Mar 13, 2019 12:51 pm
My question is, say I have a company sponsored 401K (traditional), and I am maxing this out, would Vanguard be able to access pretax dollars as well for the traditional IRA?
Don’t really understand your question. Who is your 401k plan administrator? Is it Vanguard also?

If so, yes Vanguard can see both your 401k balances and IRA balances. You can see both of them on a single login to Vanguard web site
Sorry, let me try to clarify. I have an employee sponsored Traditional 401K through Fidelity. Would I be able to have a traditional IRA through Vanguard that would pull pre-tax dollars from my w2 check?
I don't get what you're trying to do.

A traditional IRA you fund from your regular bank account. Then you deduct it from your taxable income on your tax return at the end of the year. You don't "fund it with pre-tax dollars from your paycheck."
It was a misunderstanding of the tax advantages regarding traditional Roth IRA. I am was under the impression that Traditional IRA could be contributed to in the same way as a Traditional 401K, with pretax dollars. I am beyond the income level to deduct, so it seems to make more sense for me to contribute Roth in addition to maxing my employer sponsored program.
You still seem confused. Both a T-IRA and a T-401k (or T-403b, or T-457) plan use pre-tax dollars (that's the "tradition" in "traditional.") Any type of Roth uses after-tax dollars. The mechanism for getting the money into these accounts may differ (direct payroll deduction in a workplace plan, manual contribution for a non-workplace plan) but they are all funded with pre-tax dollars.

Yes, if you are above the phaseout then a Roth IRA is appropriate.

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ruralavalon
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Re: Traditional vs Roth IRA

Post by ruralavalon » Fri Mar 15, 2019 9:46 am

atdharris wrote:
Wed Mar 13, 2019 12:26 pm
I make about $85k a year and use a traditional 401k and a Roth IRA. From all my discussions around here, that's the best thing you can do.
Yes, that is the best set of contribution choices for you.

Make maximum annual employee contribution ($19k) to your 401k, and the maximum annual contribution ($6k) to a Roth IRA, if a total of $25k annually is practical for you.

typicalmillenial wrote:
Fri Mar 15, 2019 8:58 am
It was a misunderstanding of the tax advantages regarding traditional Roth IRA. I am was under the impression that Traditional IRA could be contributed to in the same way as a Traditional 401K, with pretax dollars. I am beyond the income level to deduct, so it seems to make more sense for me to contribute Roth in addition to maxing my employer sponsored program.
Correct. if you cannot deduct contributions to a traditional IRA then contribute to a Roth IRA. This is in addition to making maximum annual contributions to the 401k.

You can set up automatic contributions to the Roth IRA from your checking account, for convenience.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

1CEBITN
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Re: Traditional vs Roth IRA

Post by 1CEBITN » Fri Mar 15, 2019 12:48 pm

OP, at your income level I would think hard about maxing out your 401k using 100% Roth 401k (if available from your employer) and also max out the Roth IRA if you can afford it. If not, make sure you get the employer match in your 401k for sure before you put anything into the Roth IRA. Your tax bill based on your income bracket now will likely be lower than any other time over the rest of your career. You will likely need to live off of at least $75k/year in retirement and who knows what the tax rate will be then so I'd pay the taxes now at your income level when they are low (historically). Doing traditional 401k and Roth IRA is not a bad way to go either, you get tax savings now and you can always convert in retirement to avoid the traditional 401k and IRA issues after age 70 (required minimum distributions). That's a pretty common recommendation around here.

When you get into the 30+% tax brackets I would for sure (and did personally) switch to the traditional 401k to reap the tax savings from pre-tax contributions. I would still contribute to the Roth IRA at that point until your income phases you out of those. Whatever you do, though, don't ever open an IRA with 401k rollover money so you can do back-door Roth IRA contributions when you go over the income allowed to contribute to a Roth IRA. Then you can continue to do Roth IRA contributions forever essentially. That's a little off topic but I wish someone would have given me that advice when I was younger.

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ruralavalon
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Re: Traditional vs Roth IRA

Post by ruralavalon » Fri Mar 15, 2019 1:13 pm

For most people traditional 401k contributions are likely better than Roth contributions to a 401k. TFB blog post "The Case Against Roth 401k". "I think for most people the majority, if not 100%, of the contribution should go to a Traditional 401(k)."
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

1CEBITN
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Re: Traditional vs Roth IRA

Post by 1CEBITN » Fri Mar 15, 2019 1:37 pm

ruralavalon wrote:
Fri Mar 15, 2019 1:13 pm
For most people traditional 401k contributions are likely better than Roth contributions to a 401k. TFB blog post "The Case Against Roth 401k". "I think for most people the majority, if not 100%, of the contribution should go to a Traditional 401(k)."
I agree with that to a point. He also says: "A Roth 401(k) is good for people in low paying jobs now but expect to have high paying jobs later." Which was precisely the point I was making. I'm assuming the OP's income will increase significantly over time if he is only 7 years into his career. If OP's income level is likely stagnant for the next 10 years then I would agree with you that traditional 401k is better.

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ruralavalon
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Re: Traditional vs Roth IRA

Post by ruralavalon » Fri Mar 15, 2019 4:46 pm

1CEBITN wrote:
Fri Mar 15, 2019 1:37 pm
ruralavalon wrote:
Fri Mar 15, 2019 1:13 pm
For most people traditional 401k contributions are likely better than Roth contributions to a 401k. TFB blog post "The Case Against Roth 401k". "I think for most people the majority, if not 100%, of the contribution should go to a Traditional 401(k)."
I agree with that to a point. He also says: "A Roth 401(k) is good for people in low paying jobs now but expect to have high paying jobs later." Which was precisely the point I was making. I'm assuming the OP's income will increase significantly over time if he is only 7 years into his career. If OP's income level is likely stagnant for the next 10 years then I would agree with you that traditional 401k is better.
OP did not say that "he is only 7 years into his career". OP said "I've been contributing to a Roth IRA for that last 7 years . . . "

The OP is not in a low paying job now; OP has above average earnings. The OP has indicated nothing about potential earning capacity in future years.

The OP has mentioned nothing about size of traditional accounts. "Until you know you can generate from your Traditional 401(k) enough income to fill the lower brackets, it doesn’t make sense to contribute to a Roth 401(k). "
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

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Re: Traditional vs Roth IRA

Post by LadyGeek » Sat Mar 16, 2019 7:31 am

New member Blandrew has a question which I've moved into a new thread. See: [How do I know if I am eligible for an IRA deduction?]
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