tag:blogger.com,1999:blog-6587699706949333863.post5177830649706145697..comments2024-03-27T23:39:33.499-05:00Comments on Passive Income Pursuit: Help Me Out: Traditional or Roth IRAPassive Income Pursuithttp://www.blogger.com/profile/13947101854482544346noreply@blogger.comBlogger8125tag:blogger.com,1999:blog-6587699706949333863.post-74427864950120123212017-04-10T14:42:01.368-05:002017-04-10T14:42:01.368-05:00Scott,
No problem. I think if you don't hav...Scott, <br /><br />No problem. I think if you don't have access to a 401k the MAGI phaseout for a Tradtional IRA might be about the same, but I didn't look into it.<br /><br />If anything this all goes to show how we need tax reform because it shouldn't be anywhere near this complicated.<br /><br />All the best.<br /><br />Passive Income Pursuithttps://www.blogger.com/profile/13947101854482544346noreply@blogger.comtag:blogger.com,1999:blog-6587699706949333863.post-6381112701300113272017-04-09T23:12:32.445-05:002017-04-09T23:12:32.445-05:00Yep, that makes sense. Thanks for explaining that....Yep, that makes sense. Thanks for explaining that. I thought the deductions phased out for the tax deductible IRA closer to the income contribution limits for contributing directly into a Roth. As you agree, it doesn't make sense to contribute more into a traditional IRA than you would get for the tax benefit.<br /><br />Sounds like the option you chose is the best, provided that you do want some of it to be tax deductible now.<br /><br />ScottTwo Investinghttps://www.blogger.com/profile/11610162425377829601noreply@blogger.comtag:blogger.com,1999:blog-6587699706949333863.post-53989378568193313692017-04-09T21:26:43.967-05:002017-04-09T21:26:43.967-05:00Scott,
My phone won't let me reply to the com...Scott,<br /><br />My phone won't let me reply to the comment so here's the quick answer.<br /><br />The way I understand it there's a MAGI limit to fully contribute to a Traditional IRA and a separate MAGI threshold to be able to contribute to a Roth IRA.<br /><br />For 2016 we're below the Roth IRA MAGI limit so we could max out 2 Roths. Our MAGI is in the phase out limit to make tax deductible Tradional IRA contributions. So if we max out the Traditional IRAIRAs only $990 would be tax deductible and then there'd be $4510 non-deductible. The way I see it there's no advantage to having the non-deductible so we might as well only put the max tax deductible $990 per Traditional IRA given our situation and the rest would best be served going towards Roth's since we've already paid taxes and can't get the deduction. Essentially I don't see the need to overly complicate the Traditional IRA's by mixing tax deductible and non-deductible contributions. <br /><br />I'll check out the links you provided tomorrow when I'm on the computer. But that's the way I understand it to work and it's what TurboTax is saying we can do. <br /><br />Here's a link to TurboTax that says there's a MAGI limit on tax deductible IRA contributions if you have access to a 401k.<br /><br /><br />https://turbotax.intuit.com/tax-tools/tax-tips/Investments-and-Taxes/Deductions-Allowed-for-Contributions-to-a-Traditional-IRA/INF14777.html<br /><br />Also here's the link to the IRS website that says if you have a 401k there's a phase out range for tax deductible contributions.<br /><br />https://www.irs.gov/retirement-plans/plan-participant-employee/2016-ira-contribution-and-deduction-limits-effect-of-modified-agi-on-deductible-contributions-if-you-are-covered-by-a-retirement-plan-at-work<br /><br />If MFJ and MAGI is <$98k then you CAN max out with full tax deductible contributions. If MAGI is > $118k then you CAN'T make tax deductible contributions. Our MAGI is between those hence the $990 per Traditional IRA that we can do tax deductible. However there's a separate MAGI limit for Roth contributions I think it's around $180k which we're well under.<br /><br />Hope that helps. <br />Passive Income Pursuithttps://www.blogger.com/profile/13947101854482544346noreply@blogger.comtag:blogger.com,1999:blog-6587699706949333863.post-26605410380179013022017-04-09T20:49:31.935-05:002017-04-09T20:49:31.935-05:00Passive IncomePursuit,
I know you've got it f...Passive IncomePursuit,<br /><br />I know you've got it figured out already, but I'm a little confused. I don't think having a 401k has anything to do with being able to contribute the maximum to an IRA. It is only if you have an employer (401k or 403b) plan AND have a MAGI above a certain amount that your ability to contribute to a *tax-deductible* traditional IRA gets phased out. You could still contribute the maximum into a non-deductible traditional IRA. The phase out income range is very similar to the range that limits a direct contribution to a Roth IRA.<br /><br />Is the $990 amount what is left from the phase out that you can still contribute to a tax deductible? Even with a 401k, you'd still have the choice of contributing the maximum to a non-deductible traditional IRA or doing a backdoor Roth (doing a non-deductible traditional IRA followed by a rollover into a Roth).<br /><br />Given that you are likely at or above the MAGI limit for a Roth contribution as well, I don't think that you'd be able to contribute directly to a Roth. You'd have to contribute it first as a non-deductible traditional IRA and then do the rollover.<br /><br />Am I reading your post wrong?<br /><br />I am becoming eligible for my employer's 401k this July and will begin contributing the maximum into that. I will continue to fund my Roth through contributions of post-tax money into a non-deductible traditional IRA followed by a rollover into a Roth. This way that money will be only taxed once. If I had just left it in a traditional IRA I would not have gotten the up-front tax benefit AND would have had to pay taxes when it is withdrawn in retirement. Plus, a Roth does not have a required minimum distribution.<br /><br />Thanks for posting an interesting topic!<br /><br />Scott<br /><br />Sources: <br />http://www.savingtoinvest.com/401k-ira-and-roth-ira-contribution-and-income-limits/<br />https://www.kitces.com/blog/how-to-do-a-backdoor-roth-ira-contribution-while-avoiding-the-ira-aggregation-rule-and-the-step-transaction-doctrine/#disqus_thread<br />https://thefinancebuff.com/the-backdoor-roth-ira-a-complete-how-to.htmlTwo Investinghttps://www.blogger.com/profile/11610162425377829601noreply@blogger.comtag:blogger.com,1999:blog-6587699706949333863.post-65696463019767538512017-04-09T13:59:40.528-05:002017-04-09T13:59:40.528-05:00Lanny,
Typically simplicity wins out in my book....Lanny, <br /><br />Typically simplicity wins out in my book. If I go back to being an employee it'll be pre-tax 401k contributions which would reduce our MAGI. We likely wouldn't be able to get deductible contributions to a Traditional IRA, but I would guess we'd be under the MAGI threshold to make Roth IRA contributions. That would be a waiting game to see how things shake out come tax time next year.<br /><br />I've been finishing up some things, namely entering all of the information regarding my ESPP share sales as well as another credit that I forgot we could get. Our max traditional IRA contribution is $830 per account. So the most up to date information is that if we make no IRA contributions of any kind we owe $2. If we make the max allowable Traditional IRA contribution of $830 per account it swings us to a ~$400ish refund. Then we could put the rest into a Roth IRA and have it be tax free forever. Now that the swing is a big bigger I think the Traditional IRA contribution is worth it and I'll see if we have enough free cash to max out the Roth IRA parts.<br /><br />I wish that we could just do $830 x 2 into 1 account as opposed to $830 each in 2 accounts. That makes no sense to me at all because it's the same thing but makes everything so much easier. If we could do that it would have been a no brainer decision. Passive Income Pursuithttps://www.blogger.com/profile/13947101854482544346noreply@blogger.comtag:blogger.com,1999:blog-6587699706949333863.post-86288892791379424922017-04-09T13:24:56.580-05:002017-04-09T13:24:56.580-05:00PiP -
I can see the simplicity standpoint. Wish...PiP - <br /><br />I can see the simplicity standpoint. Wish we all knew what the forward looking tax situation looked like : ) I know mine was a whirl-fricking-wind in 2016, more specifically in the fall - where I maxed every tax advantaged account as much as I could. One thought - would you do pre-tax 401k with your potential of going back to being an employee and maxing that out to reduce your MAGI? In the end - have to do what makes you happy and helps you sleep, right? Do that!!<br /><br />-LannyDividend Diplomatshttp://www.dividenddiplomats.com/noreply@blogger.comtag:blogger.com,1999:blog-6587699706949333863.post-5839468916472904442017-04-09T10:38:13.047-05:002017-04-09T10:38:13.047-05:00Lanny,
That's what I would do if I knew for ...Lanny, <br /><br />That's what I would do if I knew for sure I could then contribute to a Traditional IRA again for the 2017 tax year. However, there's a greater than 50% chance I could go back to being an employee with a 401k and likely be over the income limit to contribute to a Traditional IRA, although I'd still be able to contribute to a Roth most likely. From a purely tax perspective I would do the Traditional in a heartbeat, but I'm also trying to look ahead and for simplicity sake is it worth it to have 2 additional accounts with only ~$800 each in them. To me the answer is no despite it being the better move tax wise. I still have a bit of time decide, but man do I wish we had some more clarity with our taxes. There's been a pretty big change each year for the last 5 or 6 years now which always throws things off a bit.<br /><br />All the best.Passive Income Pursuithttps://www.blogger.com/profile/13947101854482544346noreply@blogger.comtag:blogger.com,1999:blog-6587699706949333863.post-80814173717142781432017-04-09T09:44:38.132-05:002017-04-09T09:44:38.132-05:00PIP -
You're going to hate me for saying it ...PIP - <br /><br />You're going to hate me for saying it - BUT - if you plan on doing Traditional this year - then why not get a kick start and fund the $800 per account for 2016? Saving $180 is huge!! (40 negative swing to 140 positive). Further - you can use that refund money to pay down debt OR throw that right back into the traditional IRA for 2017. I go for scenario 1, especially if you plan on doing those accounts anyways!<br /><br />-LannyDividend Diplomatshttp://www.dividenddiplomats.com/noreply@blogger.com