Roth/Trad IRA - Help?

[Anonymous]

Thanks for the input everyone!

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@youdontkillmoney wrote:

In my case the government made the decision for me, if you make a certain income above a limit you cannot go the Roth route, in my case married filing jointly we earn above $193K together, so we both have traditional IRAs:

http://www.rothira.com/roth-ira-limits

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Yeah, the limit's a downer.  I assume you would've gotten a Roth had you qualified for it?  I'm not saying that you should or shouldn't be allowed to contribute to a Roth, but I feel that you have better alternatives at that income level since you have more options available to you - investment-wise.  

[Anonymous]

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@Anonymous wrote:

I see your reasoning. The taxes you pay now with a Roth is so much lower than it would be say 30 years from now are so benificial, that's why they cap it at 5.5k. Personally I have an illness that runs in my family, I have 50 percent chance of having it. I'll be getting tested in the next 5-10 years. If I have it, I'll be retiring early become and traveling for a few good years. If I dont, I don't. But a Roth lets withdraw whenever on the principal. I need a third or fourth tier of emergency accessible cash.

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Sorry to hear.  That's a good point, though.  Tax-free, early withdrawals on the contribution amounts will be helpful in case of an emergency (5 years after start date I think) and $10,000 for a first-time home buyer.  

Wish you the best!

[Anonymous]

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@tacpoly wrote:

You can still backdoor your traditional post-tax IRA contributions into a pre-existing Roth account.  Just make sure you don't have a lot of pre-tax IRA contributions because you'll have to pay income tax on that percentage of your conversion. 

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I don't understand this ^.

"traditional post-tax IRA contributions"? -  did you mean pre-tax?

"Just make sure you don't have a lot of pre-tax IRA contributions" - what?  Converting a traditional to a roth would trigger an ordinary income tax, right?

[tacpoly]

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@nightglider wrote:

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@Anonymous wrote:

I see your reasoning. The taxes you pay now with a Roth is so much lower than it would be say 30 years from now are so benificial, that's why they cap it at 5.5k. Personally I have an illness that runs in my family, I have 50 percent chance of having it. I'll be getting tested in the next 5-10 years. If I have it, I'll be retiring early become and traveling for a few good years. If I dont, I don't. But a Roth lets withdraw whenever on the principal. I need a third or fourth tier of emergency accessible cash.

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Slight correction: The $5.5k limit is not a Roth/Traditional limit, but an IRA limit. Those whose employers offer Roth 401(k)'s can make the same after-tax contributions with the same 401(k) limit.

The reasoning I thnk you're referring to has nothing to do with assuming a raise in income taxes. Traditional contributions are effectively less because assuming everything is equal (amount/rate of contributions, rate of returns, etc), Roth and Traditional accounts (both IRA and 401(k)) will have the same balance when you're ready to retire, but your Traditional will be taxed and your Roth will not.

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I think when people on this thread typed "Roth" they were only talking about the Roth IRA and not the Roth 401K.  Outside the Roth 401K, the Roth IRA contribution limit is the same as the IRA pre-tax contribution limit. 

[tacpoly]

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@Anonymous wrote:

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@tacpoly wrote:

You can still backdoor your traditional post-tax IRA contributions into a pre-existing Roth account.  Just make sure you don't have a lot of pre-tax IRA contributions because you'll have to pay income tax on that percentage of your conversion. 

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I don't understand this ^.

"traditional post-tax IRA contributions"? -  did you mean pre-tax?

"Just make sure you don't have a lot of pre-tax IRA contributions" - what?  Converting a traditional to a roth would trigger an ordinary income tax, right?

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You can make post-tax contributions to an IRA.  For example:  a person making over the IRA maximum income limit can still make IRA contributions but they cannot take them as a tax deduction.  Because you've already paid income tax on this money, it is "post-tax".  These post tax contributions can then be converted to a Roth IRA without having to pay income tax again. 

However, if your IRA contributions are pre-tax, you will have to pay income tax on these when you do the conversion to a Roth.  If you have post-tax and pre-tax IRA contributions and want to convert some to a Roth, you will pay tax on the % of your conversion equal to the proportion of pre-tax contribution that you have.  For example:

You have $5000 in post-tax IRA contributions.  You also have $15000 in pre-tax IRA contribution.  That's 25% post-tax, 75% pre-tax.  If you want to convert $5000 to a Roth, you will have to pay income tax on $3750 ($5000 x 0.75). 

You are not allowed to separate post-tax from pre-tax during a conversion.  

[Anonymous]

Thanks for all the good information on Traditional vs Roth IRAs. Unfortunately, I'm one of the ones that will have to play catch up but its okay. This forum is an excellent source of information!

[youdontkillmoney]

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@Anonymous wrote:

Thanks for the input everyone!

---

@youdontkillmoney wrote:

In my case the government made the decision for me, if you make a certain income above a limit you cannot go the Roth route, in my case married filing jointly we earn above $193K together, so we both have traditional IRAs:

http://www.rothira.com/roth-ira-limits

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Yeah, the limit's a downer.  I assume you would've gotten a Roth had you qualified for it?  I'm not saying that you should or shouldn't be allowed to contribute to a Roth, but I feel that you have better alternatives at that income level since you have more options available to you - investment-wise.  

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^^^

Yes, I prefer a Roth if I qualified so when I withdrawal I do not get taxed.

[tacpoly]

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@youdontkillmoney wrote:

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@Anonymous wrote:

Thanks for the input everyone!

---

@youdontkillmoney wrote:

In my case the government made the decision for me, if you make a certain income above a limit you cannot go the Roth route, in my case married filing jointly we earn above $193K together, so we both have traditional IRAs:

http://www.rothira.com/roth-ira-limits

---

Yeah, the limit's a downer.  I assume you would've gotten a Roth had you qualified for it?  I'm not saying that you should or shouldn't be allowed to contribute to a Roth, but I feel that you have better alternatives at that income level since you have more options available to you - investment-wise.  

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^^^

Yes, I prefer a Roth if I qualified so when I withdrawal I do not get taxed.

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So why not do a backdoor conversion to a Roth IRA?  If all your IRA contributions are after tax, there is no additional liability. 

[Anonymous]

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@tacpoly wrote:

You can make post-tax contributions to an IRA.  For example:  a person making over the IRA maximum income limit can still make IRA contributions but they cannot take them as a tax deduction.  Because you've already paid income tax on this money, it is "post-tax".  These post tax contributions can then be converted to a Roth IRA without having to pay income tax again. 

However, if your IRA contributions are pre-tax, you will have to pay income tax on these when you do the conversion to a Roth.  If you have post-tax and pre-tax IRA contributions and want to convert some to a Roth, you will pay tax on the % of your conversion equal to the proportion of pre-tax contribution that you have.  For example:

You have $5000 in post-tax IRA contributions.  You also have $15000 in pre-tax IRA contribution.  That's 25% post-tax, 75% pre-tax.  If you want to convert $5000 to a Roth, you will have to pay income tax on $3750 ($5000 x 0.75). 

You are not allowed to separate post-tax from pre-tax during a conversion.  

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Oh, okay.  So the Traditional Roth would be designated as pre-tax only if it was taken as a deduction on your annual filing;  post-tax if it wasn't.  That's interesting.  Thanks for the clarification.  

[tacpoly]

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@Anonymous wrote:

Oh, okay.  So the Traditional Roth would be designated as pre-tax only if it was taken as a deduction on your annual filing;  post-tax if it wasn't.  That's interesting.  Thanks for the clarification.  

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There is a line for the IRA deduction on the 1040 and you need to file a 1086 (or some number) for post tax IRA contributions.

There is a traditional IRA where contributions can be pre-tax (as long as you are under the maximum income limit) or post-tax (with no income limit).  For both contributions, distributions of all gains are subject to income tax.  If you withdraw any part of your IRA, even your principal contributions, there will be penalties if you are less than 59.5 years of age. 

Then there is the Roth IRA where contributions are only post-tax.  Any person may contribute as long as he/she is under the maximum income limit.  The main advantage of the Roth IRA is that distributions are all tax-free (with no penalties if you meet certain criteria).  Another great advantage of a Roth IRA is that your contributions (not gains) can be withdrawn without penalties (as long as you meet the 2 year holding period). 

I suggest you do research on your own regarding various retirement contribution options and not solely rely on the information random people give out.