Traditional or Roth IRA for spouse and I

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justinpmhnp
Posts: 12
Joined: Mon Jun 04, 2018 1:43 pm

Traditional or Roth IRA for spouse and I

Post by justinpmhnp » Fri Nov 09, 2018 12:36 pm

Boglehead youngling here! For 2019 I am trying to decide if I am eligible to deduct traditional IRA contributions for myself and wife.

MFJ
32/28 yo.
No state income tax on wages - TN
Gross income of 118k base with 3-5k once a year bonus.
Wife is a stay at home mom who may bring in roughly 2-5k per year in side jobs.
1 child with one on the way.
Not eligible for HSA.

We are maxing out my 403b and would prefer to go the traditional IRA route for both of us but I am having a hard time understanding if we are eligible to do this. I understand the pros and cons or Traditional/Roth but not understanding the AGI/MAGI limits and eligibility. Any help would be greatly appreciated! Thank you!

PFInterest
Posts: 2554
Joined: Sun Jan 08, 2017 12:25 pm

Re: Traditional or Roth IRA for spouse and I

Post by PFInterest » Fri Nov 09, 2018 1:08 pm

you are likely eligible.
but it doesnt matter, you should do a rIRA.

justinpmhnp
Posts: 12
Joined: Mon Jun 04, 2018 1:43 pm

Re: Traditional or Roth IRA for spouse and I

Post by justinpmhnp » Fri Nov 09, 2018 1:25 pm

How come? In retirement/early retirement I can't see myself pulling out more than 75k/year. Right now I'm paying 22% taxes on Roth contributions.

KlangFool
Posts: 10412
Joined: Sat Oct 11, 2008 12:35 pm

Re: Traditional or Roth IRA for spouse and I

Post by KlangFool » Fri Nov 09, 2018 1:35 pm

justinpmhnp wrote:
Fri Nov 09, 2018 1:25 pm
How come? In retirement/early retirement I can't see myself pulling out more than 75k/year. Right now I'm paying 22% taxes on Roth contributions.
justinpmhnp,

1) What is the size of your emergency fund?

2) How do you plan to pay for your kid's college education?

3) You need to be employed long enough before you can early retire. In the meantime, you may be unemployed and pay for your kid's college education.

Roth IRA's contribution can be withdrawn at any time without paying penalty. You could max up your and your spouse's Roth IRAs. It can serve as second level emergency fund and college education fund.

KlangFool

justinpmhnp
Posts: 12
Joined: Mon Jun 04, 2018 1:43 pm

Re: Traditional or Roth IRA for spouse and I

Post by justinpmhnp » Fri Nov 09, 2018 1:53 pm

KlangFool wrote:
Fri Nov 09, 2018 1:35 pm
justinpmhnp wrote:
Fri Nov 09, 2018 1:25 pm
How come? In retirement/early retirement I can't see myself pulling out more than 75k/year. Right now I'm paying 22% taxes on Roth contributions.
justinpmhnp,

1) What is the size of your emergency fund?

2) How do you plan to pay for your kid's college education?

3) You need to be employed long enough before you can early retire. In the meantime, you may be unemployed and pay for your kid's college education.

Roth IRA's contribution can be withdrawn at any time without paying penalty. You could max up your and your spouse's Roth IRAs. It can serve as second level emergency fund and college education fund.

KlangFool
Good point.
1) Right now our emergency fund is about 20k.
2) Wife will start working for the school system again once the kid(s) are in school. She works for a church school and tuition is 60-70% subsidized by the church. College discount of 70% if she works for the church. Obviously, this benefit could leave but who knows. TN residents do get 2 years of free college after high school.
3) Perhaps we could beef out our Roth contributions to say 50-100K combined and then consider going the traditional route?

KlangFool
Posts: 10412
Joined: Sat Oct 11, 2008 12:35 pm

Re: Traditional or Roth IRA for spouse and I

Post by KlangFool » Fri Nov 09, 2018 1:59 pm

justinpmhnp wrote:
Fri Nov 09, 2018 1:53 pm
KlangFool wrote:
Fri Nov 09, 2018 1:35 pm
justinpmhnp wrote:
Fri Nov 09, 2018 1:25 pm
How come? In retirement/early retirement I can't see myself pulling out more than 75k/year. Right now I'm paying 22% taxes on Roth contributions.
justinpmhnp,

1) What is the size of your emergency fund?

2) How do you plan to pay for your kid's college education?

3) You need to be employed long enough before you can early retire. In the meantime, you may be unemployed and pay for your kid's college education.

Roth IRA's contribution can be withdrawn at any time without paying penalty. You could max up your and your spouse's Roth IRAs. It can serve as second level emergency fund and college education fund.

KlangFool
Good point.
1) Right now our emergency fund is about 20k.
2) Wife will start working for the school system again once the kid(s) are in school. She works for a church school and tuition is 60-70% subsidized by the church. College discount of 70% if she works for the church. Obviously, this benefit could leave but who knows. TN residents do get 2 years of free college after high school.
3) Perhaps we could beef out our Roth contributions to say 50-100K combined and then consider going the traditional route?
justinpmhnp,

I would go with Roth IRA all the time. If the ACA stays and you early retire, you could use Roth IRA contribution to lower your AGI and qualify for the subsidy. Or, you could spend your Roth IRA contribution while doing Roth conversion. Aka, Roth conversion ladder.

Roth IRA is very useful for tax management. Especially if you early retire.

Please check out following URL.

https://www.madfientist.com/how-to-acce ... nds-early/

KlangFool

GlacierRunner
Posts: 12
Joined: Mon Apr 16, 2018 5:29 pm

Re: Traditional or Roth IRA for spouse and I

Post by GlacierRunner » Fri Nov 09, 2018 2:46 pm

Couple thoughts:
Consider diversifying your retirement savings by tax treatment. If you are putting $18,500 into a traditional 401k, then you might want to put $11,000 into Roth IRAs. (increasing next year)

Another thought, with your described income, your AGI is not that far over the 22% tax bracket. You might put as much as you need into a traditional IRA to stay under 22% and then send the rest to a Roth.

You say your wife will return to work when the children are older. Your household income will likely be higher then, so you may want to take advantage of these "low" earning years by using a Roth.

coupleofcents
Posts: 186
Joined: Wed May 24, 2017 7:55 am

Re: Traditional or Roth IRA for spouse and I

Post by coupleofcents » Fri Nov 09, 2018 2:48 pm

Full traditional IRA deduction for 2018 is less than 101,000 income, partial deduction from 101,000-119,000. See

Code: Select all

https://www.fidelity.com/retirement-ira/contribution-limits-deadlines
for a chart and a calculator if your AGI/MAGI (typically this is line 37 on IRS tax form 1040) is between 101,000-119,000.

If you max our your 403b (18,500 for 2018) I think that means you are hovering right around the full or partial deduction income limit at 101,000. If you then contribute to traditional IRA (11,000) total, you should be able to get an AGI below 101,000 to qualify for the entire deduction.

I prefer to pay less taxes now so I would go traditional. Many here will suggest you always to Roth. Essentially if you think you will be in a higher tax bracket in retirement, than Roth is better, if lower, than traditional.

However there are ways to covert traditional IRA to Roth later on to minimize taxes.

I'm not a tax expert here so make sure you do your research in case I got something wrong here.

justinpmhnp
Posts: 12
Joined: Mon Jun 04, 2018 1:43 pm

Re: Traditional or Roth IRA for spouse and I

Post by justinpmhnp » Fri Nov 09, 2018 2:55 pm

coupleofcents wrote:
Fri Nov 09, 2018 2:48 pm
Full traditional IRA deduction for 2018 is less than 101,000 income, partial deduction from 101,000-119,000. See

Code: Select all

https://www.fidelity.com/retirement-ira/contribution-limits-deadlines
for a chart and a calculator if your AGI/MAGI (typically this is line 37 on IRS tax form 1040) is between 101,000-119,000.

If you max our your 403b (18,500 for 2018) I think that means you are hovering right around the full or partial deduction income limit at 101,000. If you then contribute to traditional IRA (11,000) total, you should be able to get an AGI below 101,000 to qualify for the entire deduction.

I prefer to pay less taxes now so I would go traditional. Many here will suggest you always to Roth. Essentially if you think you will be in a higher tax bracket in retirement, than Roth is better, if lower, than traditional.

However there are ways to covert traditional IRA to Roth later on to minimize taxes.

I'm not a tax expert here so make sure you do your research in case I got something wrong here.
This is what I was originally thinking. Just didn't understand how the taxes worked. Say I make in 2019 120k, substract 19K is 101k. Then subtract 12k is 89k. Is this my MAGI which determines if I can deduct the 12k from my taxes? That probably didn't make any sense lol

GlacierRunner
Posts: 12
Joined: Mon Apr 16, 2018 5:29 pm

Re: Traditional or Roth IRA for spouse and I

Post by GlacierRunner » Fri Nov 09, 2018 3:00 pm

coupleofcents wrote:
Fri Nov 09, 2018 2:48 pm

If you max our your 403b (18,500 for 2018) I think that means you are hovering right around the full or partial deduction income limit at 101,000. If you then contribute to traditional IRA (11,000) total, you should be able to get an AGI below 101,000 to qualify for the entire deduction.

I'm not a tax expert here so make sure you do your research in case I got something wrong here.
Because his wife isn't contributing to a workplace plan this year, she can deduct her contributions to a tIRA with a family income of $189k. So he may want to prioritize a tIRA for her over himself.

to the OP - you might want to read page 35 of the instructions for form 1040 on the IRS website.

coupleofcents
Posts: 186
Joined: Wed May 24, 2017 7:55 am

Re: Traditional or Roth IRA for spouse and I

Post by coupleofcents » Fri Nov 09, 2018 3:12 pm

justinpmhnp wrote:
Fri Nov 09, 2018 2:55 pm
coupleofcents wrote:
Fri Nov 09, 2018 2:48 pm
Full traditional IRA deduction for 2018 is less than 101,000 income, partial deduction from 101,000-119,000. See

Code: Select all

https://www.fidelity.com/retirement-ira/contribution-limits-deadlines
for a chart and a calculator if your AGI/MAGI (typically this is line 37 on IRS tax form 1040) is between 101,000-119,000.

If you max our your 403b (18,500 for 2018) I think that means you are hovering right around the full or partial deduction income limit at 101,000. If you then contribute to traditional IRA (11,000) total, you should be able to get an AGI below 101,000 to qualify for the entire deduction.

I prefer to pay less taxes now so I would go traditional. Many here will suggest you always to Roth. Essentially if you think you will be in a higher tax bracket in retirement, than Roth is better, if lower, than traditional.

However there are ways to covert traditional IRA to Roth later on to minimize taxes.

I'm not a tax expert here so make sure you do your research in case I got something wrong here.
This is what I was originally thinking. Just didn't understand how the taxes worked. Say I make in 2019 120k, substract 19K is 101k. Then subtract 12k is 89k. Is this my MAGI which determines if I can deduct the 12k from my taxes? That probably didn't make any sense lol
I understood your question and my understanding is the same as the way you laid it out. Taxes do not factor into AGI/MAGI, they come in later. So contributing to 403b or 401K reduces your AGI (see https://www.investopedia.com/ask/answer ... r-magi.asp), and so does contributing to a traditional IRA (line 32) which gets you to your AGI on line 37 of 1040.

However don't forget that your AGI will include things like: interest on savings account, ordinary dividends, tax refunds (like state tax refunds), unemployment. I really suggest you look at 1040 with everything up to line 37 to understand what AGI is.

KlangFool
Posts: 10412
Joined: Sat Oct 11, 2008 12:35 pm

Re: Traditional or Roth IRA for spouse and I

Post by KlangFool » Fri Nov 09, 2018 3:23 pm

OP,

If you early retired, you need 5 years of expense in your Roth IRAs and emergency fund in order for Roth conversion ladder to work. Then, you need some money in the Roth IRAs for your kid's college education. You have only 11K per year of Roth IRAs to work with. After all said and done, is it worthwhile to contribute some amount to Trad. IRA?

Tax diversification is useful. Keep it simple. Max up your Trad 401K/403B and Roth IRAs.

KlangFool

coupleofcents
Posts: 186
Joined: Wed May 24, 2017 7:55 am

Re: Traditional or Roth IRA for spouse and I

Post by coupleofcents » Fri Nov 09, 2018 3:28 pm

KlangFool wrote:
Fri Nov 09, 2018 3:23 pm
OP,

If you early retired, you need 5 years of expense in your Roth IRAs and emergency fund in order for Roth conversion ladder to work. Then, you need some money in the Roth IRAs for your kid's college education. You have only 11K per year of Roth IRAs to work with. After all said and done, is it worthwhile to contribute some amount to Trad. IRA?

Tax diversification is useful. Keep it simple. Max up your Trad 401K/403B and Roth IRAs.

KlangFool
https://www.madfientist.com/traditional ... -roth-ira/
This guy is one of the main tax gurus around the FIRE community, and he seems to think traditional IRA is the better route. What do you think?

KlangFool
Posts: 10412
Joined: Sat Oct 11, 2008 12:35 pm

Re: Traditional or Roth IRA for spouse and I

Post by KlangFool » Fri Nov 09, 2018 5:20 pm

coupleofcents wrote:
Fri Nov 09, 2018 3:28 pm
KlangFool wrote:
Fri Nov 09, 2018 3:23 pm
OP,

If you early retired, you need 5 years of expense in your Roth IRAs and emergency fund in order for Roth conversion ladder to work. Then, you need some money in the Roth IRAs for your kid's college education. You have only 11K per year of Roth IRAs to work with. After all said and done, is it worthwhile to contribute some amount to Trad. IRA?

Tax diversification is useful. Keep it simple. Max up your Trad 401K/403B and Roth IRAs.

KlangFool
https://www.madfientist.com/traditional ... -roth-ira/
This guy is one of the main tax gurus around the FIRE community, and he seems to think traditional IRA is the better route. What do you think?
coupleofcents,

1) Not necessary at OP's income level and circumstances. OP's annual expense is probably around the 50K to 75K level.

2) A person needs approximately 5 years of expense in the emergency fund plus Roth IRA contribution in order to create a Roth conversion ladder.

KlangFool

fulltilt
Posts: 181
Joined: Thu Dec 01, 2011 2:23 pm

Re: Traditional or Roth IRA for spouse and I

Post by fulltilt » Fri Nov 09, 2018 8:44 pm

coupleofcents wrote:
Fri Nov 09, 2018 3:12 pm
justinpmhnp wrote:
Fri Nov 09, 2018 2:55 pm
coupleofcents wrote:
Fri Nov 09, 2018 2:48 pm
Full traditional IRA deduction for 2018 is less than 101,000 income, partial deduction from 101,000-119,000. See

Code: Select all

https://www.fidelity.com/retirement-ira/contribution-limits-deadlines
for a chart and a calculator if your AGI/MAGI (typically this is line 37 on IRS tax form 1040) is between 101,000-119,000.

If you max our your 403b (18,500 for 2018) I think that means you are hovering right around the full or partial deduction income limit at 101,000. If you then contribute to traditional IRA (11,000) total, you should be able to get an AGI below 101,000 to qualify for the entire deduction.

I prefer to pay less taxes now so I would go traditional. Many here will suggest you always to Roth. Essentially if you think you will be in a higher tax bracket in retirement, than Roth is better, if lower, than traditional.

However there are ways to covert traditional IRA to Roth later on to minimize taxes.

I'm not a tax expert here so make sure you do your research in case I got something wrong here.
This is what I was originally thinking. Just didn't understand how the taxes worked. Say I make in 2019 120k, substract 19K is 101k. Then subtract 12k is 89k. Is this my MAGI which determines if I can deduct the 12k from my taxes? That probably didn't make any sense lol
I understood your question and my understanding is the same as the way you laid it out. Taxes do not factor into AGI/MAGI, they come in later. So contributing to 403b or 401K reduces your AGI (see https://www.investopedia.com/ask/answer ... r-magi.asp), and so does contributing to a traditional IRA (line 32) which gets you to your AGI on line 37 of 1040.

However don't forget that your AGI will include things like: interest on savings account, ordinary dividends, tax refunds (like state tax refunds), unemployment. I really suggest you look at 1040 with everything up to line 37 to understand what AGI is.
IRA contributions reduce your AGI but the phaseout is based on MAGI, right? So I think the 403b helps, but the IRA doesn’t. I think...

From IRS site:
If you file Form 1040, refigure the amount on the page 1 "adjusted gross income" line without taking into account any of the following amounts.

IRA deduction.
Student loan interest deduction.
Domestic production activities deduction.
Foreign earned income exclusion.
Foreign housing exclusion or deduction.
Exclusion of qualified savings bond interest shown on Form 8815.
Exclusion of employer-provided adoption benefits shown on Form 8839.
This is your modified AGI.

justinpmhnp
Posts: 12
Joined: Mon Jun 04, 2018 1:43 pm

Re: Traditional or Roth IRA for spouse and I

Post by justinpmhnp » Fri Nov 09, 2018 9:31 pm

fulltilt wrote:
Fri Nov 09, 2018 8:44 pm
coupleofcents wrote:
Fri Nov 09, 2018 3:12 pm
justinpmhnp wrote:
Fri Nov 09, 2018 2:55 pm
coupleofcents wrote:
Fri Nov 09, 2018 2:48 pm
Full traditional IRA deduction for 2018 is less than 101,000 income, partial deduction from 101,000-119,000. See

Code: Select all

https://www.fidelity.com/retirement-ira/contribution-limits-deadlines
for a chart and a calculator if your AGI/MAGI (typically this is line 37 on IRS tax form 1040) is between 101,000-119,000.

If you max our your 403b (18,500 for 2018) I think that means you are hovering right around the full or partial deduction income limit at 101,000. If you then contribute to traditional IRA (11,000) total, you should be able to get an AGI below 101,000 to qualify for the entire deduction.

I prefer to pay less taxes now so I would go traditional. Many here will suggest you always to Roth. Essentially if you think you will be in a higher tax bracket in retirement, than Roth is better, if lower, than traditional.

However there are ways to covert traditional IRA to Roth later on to minimize taxes.

I'm not a tax expert here so make sure you do your research in case I got something wrong here.
This is what I was originally thinking. Just didn't understand how the taxes worked. Say I make in 2019 120k, substract 19K is 101k. Then subtract 12k is 89k. Is this my MAGI which determines if I can deduct the 12k from my taxes? That probably didn't make any sense lol
I understood your question and my understanding is the same as the way you laid it out. Taxes do not factor into AGI/MAGI, they come in later. So contributing to 403b or 401K reduces your AGI (see https://www.investopedia.com/ask/answer ... r-magi.asp), and so does contributing to a traditional IRA (line 32) which gets you to your AGI on line 37 of 1040.

However don't forget that your AGI will include things like: interest on savings account, ordinary dividends, tax refunds (like state tax refunds), unemployment. I really suggest you look at 1040 with everything up to line 37 to understand what AGI is.
IRA contributions reduce your AGI but the phaseout is based on MAGI, right? So I think the 403b helps, but the IRA doesn’t. I think...

From IRS site:
If you file Form 1040, refigure the amount on the page 1 "adjusted gross income" line without taking into account any of the following amounts.

IRA deduction.
Student loan interest deduction.
Domestic production activities deduction.
Foreign earned income exclusion.
Foreign housing exclusion or deduction.
Exclusion of qualified savings bond interest shown on Form 8815.
Exclusion of employer-provided adoption benefits shown on Form 8839.
This is your modified AGI.
Ahhh I see that now. So do you take into account the standard deduction to find out magi?

Rough Example:
120k salary
-SD 24k
-403b 19k
-tIRA 12k
AGI = 65k
Magi=65k + 12k = 77k

Or do you not count SD towards agi/magi?

fulltilt
Posts: 181
Joined: Thu Dec 01, 2011 2:23 pm

Re: Traditional or Roth IRA for spouse and I

Post by fulltilt » Fri Nov 09, 2018 9:54 pm

justinpmhnp wrote:
Fri Nov 09, 2018 9:31 pm
fulltilt wrote:
Fri Nov 09, 2018 8:44 pm
coupleofcents wrote:
Fri Nov 09, 2018 3:12 pm
justinpmhnp wrote:
Fri Nov 09, 2018 2:55 pm
coupleofcents wrote:
Fri Nov 09, 2018 2:48 pm
Full traditional IRA deduction for 2018 is less than 101,000 income, partial deduction from 101,000-119,000. See

Code: Select all

https://www.fidelity.com/retirement-ira/contribution-limits-deadlines
for a chart and a calculator if your AGI/MAGI (typically this is line 37 on IRS tax form 1040) is between 101,000-119,000.

If you max our your 403b (18,500 for 2018) I think that means you are hovering right around the full or partial deduction income limit at 101,000. If you then contribute to traditional IRA (11,000) total, you should be able to get an AGI below 101,000 to qualify for the entire deduction.

I prefer to pay less taxes now so I would go traditional. Many here will suggest you always to Roth. Essentially if you think you will be in a higher tax bracket in retirement, than Roth is better, if lower, than traditional.

However there are ways to covert traditional IRA to Roth later on to minimize taxes.

I'm not a tax expert here so make sure you do your research in case I got something wrong here.
This is what I was originally thinking. Just didn't understand how the taxes worked. Say I make in 2019 120k, substract 19K is 101k. Then subtract 12k is 89k. Is this my MAGI which determines if I can deduct the 12k from my taxes? That probably didn't make any sense lol
I understood your question and my understanding is the same as the way you laid it out. Taxes do not factor into AGI/MAGI, they come in later. So contributing to 403b or 401K reduces your AGI (see https://www.investopedia.com/ask/answer ... r-magi.asp), and so does contributing to a traditional IRA (line 32) which gets you to your AGI on line 37 of 1040.

However don't forget that your AGI will include things like: interest on savings account, ordinary dividends, tax refunds (like state tax refunds), unemployment. I really suggest you look at 1040 with everything up to line 37 to understand what AGI is.
IRA contributions reduce your AGI but the phaseout is based on MAGI, right? So I think the 403b helps, but the IRA doesn’t. I think...

From IRS site:
If you file Form 1040, refigure the amount on the page 1 "adjusted gross income" line without taking into account any of the following amounts.

IRA deduction.
Student loan interest deduction.
Domestic production activities deduction.
Foreign earned income exclusion.
Foreign housing exclusion or deduction.
Exclusion of qualified savings bond interest shown on Form 8815.
Exclusion of employer-provided adoption benefits shown on Form 8839.
This is your modified AGI.
Ahhh I see that now. So do you take into account the standard deduction to find out magi?

Rough Example:
120k salary
-SD 24k
-403b 19k
-tIRA 12k
AGI = 65k
Magi=65k + 12k = 77k

Or do you not count SD towards agi/magi?
I think it seems like it is salary minus 403b only. You don’t subtract tIRA or SD. Standard deduction doesn’t matter in this case. So MAGI would be 101k so I think you would be in the phaseout for your IRA. GlacierRunner’s idea is excellent. Either have your wife do an tIRA and a Roth for you or just do two Roths. Two Roths seem like a good choice....

justinpmhnp
Posts: 12
Joined: Mon Jun 04, 2018 1:43 pm

Re: Traditional or Roth IRA for spouse and I

Post by justinpmhnp » Fri Nov 09, 2018 10:16 pm

Thank you everyone for the great info! I think for now we will will continue to max the 403b and 2 Roth’s with any extras going to taxable. :sharebeer

coupleofcents
Posts: 186
Joined: Wed May 24, 2017 7:55 am

Re: Traditional or Roth IRA for spouse and I

Post by coupleofcents » Sat Nov 10, 2018 10:28 am

IRA contributions reduce your AGI but the phaseout is based on MAGI, right? So I think the 403b helps, but the IRA doesn’t. I think...

From IRS site:
If you file Form 1040, refigure the amount on the page 1 "adjusted gross income" line without taking into account any of the following amounts.

IRA deduction.
Student loan interest deduction.
Domestic production activities deduction.
Foreign earned income exclusion.
Foreign housing exclusion or deduction.
Exclusion of qualified savings bond interest shown on Form 8815.
Exclusion of employer-provided adoption benefits shown on Form 8839.
This is your modified AGI.
You're right! Sorry OP for steering you wrong. The phaseout for IRA deduction is based on MAGI which includes IRA contributions.

However, as I read your response about standard deduction I realize you actually may be asking about how to to find what tax bracket you will fall in. That's where standard deduction comes into play.

So for example:
120k salary
-403b 19k
MAGI 101,000
-tIRA 12k
AGI is 89,000
-SD 24k
taxable income, 65K

This means you fall in the 12% tax bracket. And if you do Roth IRA you don't subtract 12K which means your taxable income is 77K so you're still in 12% bracket.

Scenario 2

125k salary
-403b 19k
MAGI 106,000
- tIRA you cannot deduct the full 12,000 because your MAGI is above 101,000. Using calculator, you can deduct 3500 out of 5500 and spouse can deduct all 5500 so
- 9000
AGI 97,000
-SD 24K
taxable income 73K

This means you still fall in the 12% tax bracket. But if you do Roth instead you add back 12K and have 85K taxable income. You so are paying 22% rate on income above 77K or 22% of 8K. Does that make sense?

KlangFool
Posts: 10412
Joined: Sat Oct 11, 2008 12:35 pm

Re: Traditional or Roth IRA for spouse and I

Post by KlangFool » Sat Nov 10, 2018 10:45 am

coupleofcents wrote:
Sat Nov 10, 2018 10:28 am
IRA contributions reduce your AGI but the phaseout is based on MAGI, right? So I think the 403b helps, but the IRA doesn’t. I think...

From IRS site:
If you file Form 1040, refigure the amount on the page 1 "adjusted gross income" line without taking into account any of the following amounts.

IRA deduction.
Student loan interest deduction.
Domestic production activities deduction.
Foreign earned income exclusion.
Foreign housing exclusion or deduction.
Exclusion of qualified savings bond interest shown on Form 8815.
Exclusion of employer-provided adoption benefits shown on Form 8839.
This is your modified AGI.
You're right! Sorry OP for steering you wrong. The phaseout for IRA deduction is based on MAGI which includes IRA contributions.

However, as I read your response about standard deduction I realize you actually may be asking about how to to find what tax bracket you will fall in. That's where standard deduction comes into play.

So for example:
125k salary
-403b 19k
MAGI 101,000
-tIRA 12k
AGI is 89,000
-SD 24k
taxable income, 65K

This means you fall in the 12% tax bracket. And if you do Roth IRA you don't subtract 12K which means your taxable income is 77K so you're still in 12% bracket.

Scenario 2

125k salary
-403b 19k
MAGI 106,000
- tIRA you cannot deduct the full 12,000 because your MAGI is above 101,000. Using calculator, you can deduct 3500 out of 5500 and spouse can deduct all 5500 so
- 9000

AGI 97,000
-SD 24K
taxable income 73K

This means you still fall in the 12% tax bracket. But if you do Roth instead you add back 12K and have 85K taxable income. You so are paying 22% rate on income above 77K or 22% of 8K. Does that make sense?
coupleofcents,

<<Using calculator, you can deduct 3500 out of 5500 and spouse can deduct all 5500 so
- 9000
>>

In that case, out of the $5,500 of OP's contribution, $3,500 is deductible Trad. IRA. , $2,000 is Roth IRA. OP's spouse contribution is $5,500 deductible Trad. IRA.

<<You so are paying 22% rate on income above 77K or 22% of 8K.>>

Yes, OP saves some taxes on that 8K/9K. But, OP has only $2,000 in Roth IRA. That is the tradeoff.

If the OP's goal is early retirement and pays the kid's college education, there may not be enough Roth IRA's space to reach the goal. It is only 11K per year. There are only 10 to 20 years to go.

My personal strategy is not to over-optimize. Spread the money across Trad. 401K, Roth IRAs, and the taxable account.

I maxed up Trad. 401K/403B/457 and 2 x Roth IRAs. The rest into the taxable account. My kids are in college now. So, I am paying 50K to 60K per year. I still max up Trad. 401K/403B/457 and 2 x Roth IRAs. Essentially, I am moving my money from my taxable account to the Trad. 401K/403B/457 and 2 x Roth IRAs.

KlangFool

coupleofcents
Posts: 186
Joined: Wed May 24, 2017 7:55 am

Re: Traditional or Roth IRA for spouse and I

Post by coupleofcents » Sat Nov 10, 2018 11:36 am

KlangFool wrote:
Sat Nov 10, 2018 10:45 am
coupleofcents wrote:
Sat Nov 10, 2018 10:28 am
IRA contributions reduce your AGI but the phaseout is based on MAGI, right? So I think the 403b helps, but the IRA doesn’t. I think...

From IRS site:
If you file Form 1040, refigure the amount on the page 1 "adjusted gross income" line without taking into account any of the following amounts.

IRA deduction.
Student loan interest deduction.
Domestic production activities deduction.
Foreign earned income exclusion.
Foreign housing exclusion or deduction.
Exclusion of qualified savings bond interest shown on Form 8815.
Exclusion of employer-provided adoption benefits shown on Form 8839.
This is your modified AGI.
You're right! Sorry OP for steering you wrong. The phaseout for IRA deduction is based on MAGI which includes IRA contributions.

However, as I read your response about standard deduction I realize you actually may be asking about how to to find what tax bracket you will fall in. That's where standard deduction comes into play.

So for example:
120k salary
-403b 19k
MAGI 101,000
-tIRA 12k
AGI is 89,000
-SD 24k
taxable income, 65K

This means you fall in the 12% tax bracket. And if you do Roth IRA you don't subtract 12K which means your taxable income is 77K so you're still in 12% bracket.

Scenario 2

125k salary
-403b 19k
MAGI 106,000
- tIRA you cannot deduct the full 12,000 because your MAGI is above 101,000. Using calculator, you can deduct 3500 out of 5500 and spouse can deduct all 5500 so
- 9000

AGI 97,000
-SD 24K
taxable income 73K

This means you still fall in the 12% tax bracket. But if you do Roth instead you add back 12K and have 85K taxable income. You so are paying 22% rate on income above 77K or 22% of 8K. Does that make sense?
coupleofcents,

<<Using calculator, you can deduct 3500 out of 5500 and spouse can deduct all 5500 so
- 9000
>>

In that case, out of the $5,500 of OP's contribution, $3,500 is deductible Trad. IRA. , $2,000 is Roth IRA. OP's spouse contribution is $5,500 deductible Trad. IRA.

<<You so are paying 22% rate on income above 77K or 22% of 8K.>>

Yes, OP saves some taxes on that 8K/9K. But, OP has only $2,000 in Roth IRA. That is the tradeoff.

If the OP's goal is early retirement and pays the kid's college education, there may not be enough Roth IRA's space to reach the goal. It is only 11K per year. There are only 10 to 20 years to go.

My personal strategy is not to over-optimize. Spread the money across Trad. 401K, Roth IRAs, and the taxable account.

I maxed up Trad. 401K/403B/457 and 2 x Roth IRAs. The rest into the taxable account. My kids are in college now. So, I am paying 50K to 60K per year. I still max up Trad. 401K/403B/457 and 2 x Roth IRAs. Essentially, I am moving my money from my taxable account to the Trad. 401K/403B/457 and 2 x Roth IRAs.

KlangFool
First, scenario 1 above should have a starting gross income of 120K. I've edited my original post and the quote above so my numbers make sense for scenario one.

KlangFool makes a good point about Roth in that it gives you flexibility in using Roth contributions in the future if he retires early for income, or for college expenses, etc.

However, OP never says he wants to retire early or use Roth for college expenses. OP could save up separately for college expenses in a 529 or even taxable account or even pay from his salary when kids go to college.

OP does say earlier that he can't imagine need more than 75K (in todays dollars) in retirement, meaning he expects to withdraw income in retirement in the 12% bracket. So theoretically he would pay more taxes by contributing to Roth instead of traditional if his MAGI is above 101,000 as described above.

Yes, it is a tradeoff and OP has to decide what he wants. I only wanted to spell out the differences.

Oh, and OP, are you eligible for FSA? If you have a baby on the way due to be born in 2019, if your workplace offers an FSA account you can contribute up to $2600 pre-tax for expected hospital charges etc. I have virtually identical numbers to you with MAGI somewhere between 100K-105K, 33 years old, 1 child and one on the way. Wife stays at home.

Good luck.

KlangFool
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Re: Traditional or Roth IRA for spouse and I

Post by KlangFool » Sat Nov 10, 2018 11:55 am

coupleofcents wrote:
Sat Nov 10, 2018 11:36 am

However, OP never says he wants to retire early or use Roth for college expenses. OP could save up separately for college expenses in a 529 or even taxable account or even pay from his salary when kids go to college.
coupleofcents,

<<OP could save up separately for college expenses in a 529>>

At OP's income level, 529 is not a good deal. Roth IRA is a better choice.

<<OP never says he wants to retire early >>

1) Yes, but at OP's expense and saving level, Financially Independent (FI) in 20+ years is entirely possible. Aka, before 62 years old. Then, he could choose to retire or not. His portfolio should be strategically placed to allow for that possibility.

2) The system is designed for the possibility of using the Roth IRAs as the second level emergency fund. So, if OP experienced short-term unemployment during a recession, he would have an extra buffer for him to survive that.

It is designed for both the best case (1) and worst case (2).

KlangFool

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FiveK
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Re: Traditional or Roth IRA for spouse and I

Post by FiveK » Sat Nov 10, 2018 8:15 pm

justinpmhnp wrote:
Fri Nov 09, 2018 12:36 pm
I understand the pros and cons or Traditional/Roth but not understanding the AGI/MAGI limits and eligibility. Any help would be greatly appreciated!
You can throw your numbers into the personal finance toolbox spreadsheet to see things in chart form. It might look something like
Image
in which "401k" really means "401k + tIRA".

Doing 100% t401k, with $5500 Roth IRA for you and $5500 tIRA for you wife, seems a good combination of tax efficiency and simplicity.

You need ~$2.5 million in traditional accounts before a 4% withdrawal rate from those alone will get you out of the 12% bracket.

JustinR
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Re: Traditional or Roth IRA for spouse and I

Post by JustinR » Sat Nov 10, 2018 9:50 pm

justinpmhnp wrote:
Fri Nov 09, 2018 12:36 pm
Boglehead youngling here! For 2019 I am trying to decide if I am eligible to deduct traditional IRA contributions for myself and wife.

MFJ
32/28 yo.
No state income tax on wages - TN
Gross income of 118k base with 3-5k once a year bonus.
Wife is a stay at home mom who may bring in roughly 2-5k per year in side jobs.
1 child with one on the way.
Not eligible for HSA.

We are maxing out my 403b and would prefer to go the traditional IRA route for both of us but I am having a hard time understanding if we are eligible to do this. I understand the pros and cons or Traditional/Roth but not understanding the AGI/MAGI limits and eligibility. Any help would be greatly appreciated! Thank you!
I don't know why some people are telling you to do a Roth IRA.

You should do Traditional as much as you can. You defer taxes now and later pay no taxes with a Roth Conversion Ladder. If you do a Roth IRA then you are guaranteed to pay taxes.

TLDR: You should defer taxes as much as humanly possible. That means a traditional IRA.

02nz
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Re: Traditional or Roth IRA for spouse and I

Post by 02nz » Sat Nov 10, 2018 10:04 pm

JustinR wrote:
Sat Nov 10, 2018 9:50 pm
I don't know why some people are telling you to do a Roth IRA.

You should do Traditional as much as you can. You defer taxes now and later pay no taxes with a Roth Conversion Ladder. If you do a Roth IRA then you are guaranteed to pay taxes.

TLDR: You should defer taxes as much as humanly possible. That means a traditional IRA.
I also think in general deferring taxes makes sense, but OP is in the 12% federal tax bracket after the standard deduction, and 0% state. At those rates I'd do some if not all Roth to lock my rates in. The Roth IRA makes a lot of sense, not least as it's simpler from a paperwork point of view.

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FiveK
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Re: Traditional or Roth IRA for spouse and I

Post by FiveK » Sat Nov 10, 2018 10:31 pm

02nz wrote:
Sat Nov 10, 2018 10:04 pm
...OP is in the 12% federal tax bracket after the standard deduction....
Are they?

Taking the midpoints of the bonus and self-employed amounts, with no retirement contributions one gets
AGI = $125,253
Std. ded. = $24,000
QBI ded. = $700
Taxable income = $100,553

This puts them in the 22% bracket until having made $23,153 in traditional contributions.

At least, that's what I got when using the spreadsheet that generated the chart in viewtopic.php?p=4207544#p4207544. Was there an error in there?

02nz
Posts: 528
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Re: Traditional or Roth IRA for spouse and I

Post by 02nz » Sat Nov 10, 2018 10:55 pm

FiveK wrote:
Sat Nov 10, 2018 10:31 pm
02nz wrote:
Sat Nov 10, 2018 10:04 pm
...OP is in the 12% federal tax bracket after the standard deduction....
Are they?

Taking the midpoints of the bonus and self-employed amounts, with no retirement contributions one gets
AGI = $125,253
Std. ded. = $24,000
QBI ded. = $700
Taxable income = $100,553

This puts them in the 22% bracket until having made $23,153 in traditional contributions.

At least, that's what I got when using the spreadsheet that generated the chart in viewtopic.php?p=4207544#p4207544. Was there an error in there?
You may well be right; my ballpark calculations didn't count the self-employment income and assumed that OP's maxed-out 403b contributions are traditional not Roth. OP may be right around the threshold between the 12 and 22% brackets.

vwgrrc
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Re: Traditional or Roth IRA for spouse and I

Post by vwgrrc » Sat Nov 10, 2018 11:44 pm

JustinR wrote:
Sat Nov 10, 2018 9:50 pm
justinpmhnp wrote:
Fri Nov 09, 2018 12:36 pm
Boglehead youngling here! For 2019 I am trying to decide if I am eligible to deduct traditional IRA contributions for myself and wife.

MFJ
32/28 yo.
No state income tax on wages - TN
Gross income of 118k base with 3-5k once a year bonus.
Wife is a stay at home mom who may bring in roughly 2-5k per year in side jobs.
1 child with one on the way.
Not eligible for HSA.

We are maxing out my 403b and would prefer to go the traditional IRA route for both of us but I am having a hard time understanding if we are eligible to do this. I understand the pros and cons or Traditional/Roth but not understanding the AGI/MAGI limits and eligibility. Any help would be greatly appreciated! Thank you!
I don't know why some people are telling you to do a Roth IRA.

You should do Traditional as much as you can. You defer taxes now and later pay no taxes with a Roth Conversion Ladder. If you do a Roth IRA then you are guaranteed to pay taxes.

TLDR: You should defer taxes as much as humanly possible. That means a traditional IRA.
+1. Most people here say always Roth. This is one thing probably the only thing I disagree with bogleheads here. For people who can't take deductions due to income limit, I got that. But for those who can, traditional is most likely a better route. Plus, most of us won't be able to take tIRA deductions for long before we have to switch to Roth due to rising income level.

In my case, we had contributed to tIRA for 2 years and this year might be the last year we can take deductions since our income is getting very close to the limit. I think one should do traditional until the can't.

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Re: Traditional or Roth IRA for spouse and I

Post by LadyGeek » Sun Nov 11, 2018 8:14 pm

vwgrrc - It looks like you had a few problems quoting posts. I removed several extra posts which duplicated what you had the first time.

If you want to practice, post here: Please Try Out Test Posts Here. Otherwise, please let me know if you need further assistance.
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