traditional or roth IRA

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Topic Author
Jimmy21
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traditional or roth IRA

Post by Jimmy21 » Fri Apr 05, 2019 9:40 pm

i worked a ton of overtime last year and i'm using the extra money to get in to investing. I did 5,500 in to a roth IRA for myself, but i hadn't done my wifes, yet. I was planning to do it before i submitted our taxes. Im currently working on my taxes with turbo tax. It says that if i did a traditional ira, we'd get an extra $1,100 back on our taxes. So, would we better off having 5,500 in a roth or 5,500 in a traditional + 1,100 in taxable?

im 35, shes 33. We have 2 kids. We made 162k last year. This isn't normal for us. Normal would be 90k-110k






if our whole financial picture matters,

15k or so ready to invest
180k in annuity through work
25k in emergency fund
8k in my roth
0 in wifes roth
3k in taxable
haven't started hers yet, doing that before the 15th
170k owed on our house, valued at 400k
103k owed on rental, rented for 1400, we see 1260.
mothers inheritance will probably be about 700k (hopefully not for 15+ years)

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RickBoglehead
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Re: traditional or roth IRA

Post by RickBoglehead » Fri Apr 05, 2019 10:10 pm

With MAGI that high, a traditional IRA would not be deductible...
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DonIce
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Re: traditional or roth IRA

Post by DonIce » Fri Apr 05, 2019 10:13 pm

RickBoglehead wrote:
Fri Apr 05, 2019 10:10 pm
With MAGI that high, a traditional IRA would not be deductible...
It would be if they have no retirement plan at work.

DonIce
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Re: traditional or roth IRA

Post by DonIce » Fri Apr 05, 2019 10:14 pm

If this is an abnormally high income year it is probably better to contribute to a traditional IRA and get the deduction.

lakpr
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Re: traditional or roth IRA

Post by lakpr » Fri Apr 05, 2019 10:15 pm

Traditional IRA seems to be the right choice then. If you are getting $1100 in a $5500 traditional IRA contribution you are in the 22% tax bracket. $162k of income is, yes, in the 22% marginal tax bracket, so the math is correct.

If your normal income is around 90k to 110k, you are very likely in the 12% tax bracket. If you don't anticipate getting overtime as much this year and will revert to your regular income, then if makes sense to plan traditional IRA for 2018, get the tax benefit; then after you file the taxes and get the refund, turn around and convert that $5500 and its earnings to Roth IRA. At 12% tax rate you will owe the IRS $660 odd, and payable along with 2019 return next year.

The difference of $550, the 10% difference is yours to keep.

ONE major note: IRS regulations prohibit tapping funds from Roth IRA conversion funds before 5 years have elapsed. If you do, you owe 10% penalty on the amount withdrawn. Congress specifically enacted this rule to prevent people from paying taxes for Roth conversion of their traditional IRA funds, then turning around immediately to withdraw funds; whereas if they tapped funds directly from the traditional IRA, they would have owed taxes AND penalties. This 5 year rule is intended to close the loophole and make either maneuver identical in effect.

So these conversion amounts should not be relied on as second tier emergency funds, a role direct Roth contribution funds fulfill.

Topic Author
Jimmy21
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Re: traditional or roth IRA

Post by Jimmy21 » Fri Apr 05, 2019 11:47 pm

I dont know if it effects the decision, but the next few years could be just as high. I work construction and the area is booming right now. I doubt we'll make 160, but i dont think 130 is out of the question for this year and next. Eventually construction will slow down and ill be lucky to get 1500 hours for the year.


Im assuming that doing the traditional ira would still make sense for this year?

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FiveK
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Re: traditional or roth IRA

Post by FiveK » Sat Apr 06, 2019 12:14 am

Jimmy21 wrote:
Fri Apr 05, 2019 11:47 pm
I dont know if it effects the decision, but the next few years could be just as high. I work construction and the area is booming right now. I doubt we'll make 160, but i dont think 130 is out of the question for this year and next. Eventually construction will slow down and ill be lucky to get 1500 hours for the year.

Im assuming that doing the traditional ira would still make sense for this year?
See Traditional versus Roth - Bogleheads for more, but in short a reasonable guess would be to use traditional until your taxable income drops to the 12% bracket, then use Roth.

Topic Author
Jimmy21
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Re: traditional or roth IRA

Post by Jimmy21 » Sat Apr 06, 2019 1:29 am

So, i think ill stick it in a traditional. Any recommendations on what i should buy? My two thoughts are VLXVX - Vanguard Target Retirement target 2065 and VTSAX total stock market

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camillus
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Re: traditional or roth IRA

Post by camillus » Sat Apr 06, 2019 1:39 am

Jimmy21 wrote:
Sat Apr 06, 2019 1:29 am
So, i think ill stick it in a traditional. Any recommendations on what i should buy? My two thoughts are VLXVX - Vanguard Target Retirement target 2065 and VTSAX total stock market
In my opinion, either would be fine. I would put it in the target retirement fund until you get around to learning a bit more about portfolio design.

VTASX would have you in 100% US stock

The Target Retirement fund would have you in something like
10% US and International Bonds
50% US stock
40% International Stock

The Target Date Fund is more diversified, and if you happen to forget about it for 20-30 years, would do just fine rebalancing and "gliding" as needed.

billfromct
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Re: traditional or roth IRA

Post by billfromct » Sat Apr 06, 2019 7:10 am

The ability to contribute to a tax deductible IRA starts to phase out when your modified adjusted gross income (MAGI) hits $101k if married filing jointly & "you are covered by a retirement plan at work".

You say you or your spouse has "180k in annuity at work". A 403b, 401k, pension, etc would be a retirement plan at work.

Google "income limits to contribute to a tax deductible IRA" & go to the IRS site.

bill

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Wiggums
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Re: traditional or roth IRA

Post by Wiggums » Sat Apr 06, 2019 7:16 am

Another vote for tIRA

Triple digit golfer
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Re: traditional or roth IRA

Post by Triple digit golfer » Sat Apr 06, 2019 7:19 am

I vote for Traditional as long as the contribution is deductible.

Topic Author
Jimmy21
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Re: traditional or roth IRA

Post by Jimmy21 » Sat Apr 06, 2019 9:15 am

billfromct wrote:
Sat Apr 06, 2019 7:10 am
The ability to contribute to a tax deductible IRA starts to phase out when your modified adjusted gross income (MAGI) hits $101k if married filing jointly & "you are covered by a retirement plan at work".

You say you or your spouse has "180k in annuity at work". A 403b, 401k, pension, etc would be a retirement plan at work.

Google "income limits to contribute to a tax deductible IRA" & go to the IRS site.

bill
It took a little searching around the irs website, but i found the answer here
https://www.irs.gov/retirement-plans/pl ... an-at-work

What you quoted, 101k-120k for partial deduction, is if SHE had a retirement at work. That jumps up to 189k because SHE is not covered but i am. We are able to deduct the full amount of a traditional ira contribution for her.

Topic Author
Jimmy21
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Re: traditional or roth IRA

Post by Jimmy21 » Sat Apr 06, 2019 9:33 am

RickBoglehead wrote:
Fri Apr 05, 2019 10:10 pm
With MAGI that high, a traditional IRA would not be deductible...
Also, i just noticed this. I dont think it matteres, but the 162k number was gross, magi was like 130k. I probably should have quoted that originally, but as i said, im kinda new to this

Topic Author
Jimmy21
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Re: traditional or roth IRA

Post by Jimmy21 » Mon Apr 15, 2019 12:53 pm

I want to contribute to my wifes account, but now I'm confused. Should i contribute to roth or traditional this year?


Traditional would still be tax deductible. This year will probably be also really good for us, but not as good. Im going to guess our AGI ends up being like 120k

lakpr
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Re: traditional or roth IRA

Post by lakpr » Mon Apr 15, 2019 1:04 pm

If you mean for tax year 2018, today is the deadline to contribute. Do Traditional.

If you mean for tax year 2019, contribute to Roth for now. Because you are saying this year you expect to have lower income, and at lower incomes Roth is better option. You can always “recharacterize” to Traditional IRA before April 15 next year, if you find that is a more desirable option after computing your taxes.

Topic Author
Jimmy21
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Joined: Sun Jan 28, 2018 3:36 pm

Re: traditional or roth IRA

Post by Jimmy21 » Mon Apr 15, 2019 1:35 pm

lakpr wrote:
Mon Apr 15, 2019 1:04 pm
If you mean for tax year 2018, today is the deadline to contribute. Do Traditional.

If you mean for tax year 2019, contribute to Roth for now. Because you are saying this year you expect to have lower income, and at lower incomes Roth is better option. You can always “recharacterize” to Traditional IRA before April 15 next year, if you find that is a more desirable option after computing your taxes.
I did my 2018 taxes already and at the advice of this thread, i did traditional. 2019 will probably also be a higher earning year for me, but not like last year. I worked something like 2800 hours in 2018. Ive been working just as much overtime, so far in 2019, but im pretty burned out and ready to take some time off.

How do you recharacterize? Im assuming there is some option somewhere on vanguard? Are there any fees or tax penalties for doing so?

lakpr
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Re: traditional or roth IRA

Post by lakpr » Mon Apr 15, 2019 1:45 pm

You have to call Vanguard (or wherever you have the IRA) to do this. It is not something you can do it yourself, there is some backend reporting to IRS that needs to be triggered, only financial institutions can do that. No fees or penalties to do the recharacterization.

If the recharacterization is from Traditional to Roth, there will be additional taxes due, of course.
Jimmy21 wrote: I did my 2018 taxes already and at the advice of this thread, i did traditional. 2019 will probably also be a higher earning year for me, but not like last year. I worked something like 2800 hours in 2018. Ive been working just as much overtime, so far in 2019, but im pretty burned out and ready to take some time off.

How do you recharacterize? Im assuming there is some option somewhere on vanguard? Are there any fees or tax penalties for doing so?

Topic Author
Jimmy21
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Joined: Sun Jan 28, 2018 3:36 pm

Re: traditional or roth IRA

Post by Jimmy21 » Mon Apr 15, 2019 1:56 pm

lakpr wrote:
Mon Apr 15, 2019 1:45 pm
You have to call Vanguard (or wherever you have the IRA) to do this. It is not something you can do it yourself, there is some backend reporting to IRS that needs to be triggered, only financial institutions can do that. No fees or penalties to do the recharacterization.

If the recharacterization is from Traditional to Roth, there will be additional taxes due, of course.
Jimmy21 wrote: I did my 2018 taxes already and at the advice of this thread, i did traditional. 2019 will probably also be a higher earning year for me, but not like last year. I worked something like 2800 hours in 2018. Ive been working just as much overtime, so far in 2019, but im pretty burned out and ready to take some time off.

How do you recharacterize? Im assuming there is some option somewhere on vanguard? Are there any fees or tax penalties for doing so?

How long does it take. Im assuming its not something id want to call vanguard on 4/14 and expect have done before i file on 4/15?

lakpr
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Re: traditional or roth IRA

Post by lakpr » Mon Apr 15, 2019 2:15 pm

Sorry I am not really sure. I would guess at least a couple of days though. And yes, you cannot call on April 14th and have it done by 15th.

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FiveK
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Re: traditional or roth IRA

Post by FiveK » Mon Apr 15, 2019 2:35 pm

Jimmy21 wrote:
Mon Apr 15, 2019 1:35 pm
I did my 2018 taxes already and at the advice of this thread, i did traditional. 2019 will probably also be a higher earning year for me, but not like last year.
If your 2019 marginal tax saving rate for a traditional contribution will be the same as it was for 2018, the advice would probably also be the same.

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