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Home > Seeking Advice: IRA Strategy?

Seeking Advice: IRA Strategy?

October 14th, 2021 at 04:25 pm

At this point, I do not have any IRAs.  Whenever I have left jobs in the past, I took the distribution from my 401k (unfortunate but needed).  Now that I am in a much better position, I am able to start contributing to an IRA in 2022.  My income is above the level for tax deductability for traditional, and within a few years, above the level to be eligible to contribute directly to Roth.  My salary is $115k, and my next promotion (expected sometime next year hopefully), should put me around $140k.  My MAGI will still be under at that level, but don't think it'll be for more than a few years.

What I was planning to do:  starting in 2022, contribute directly to a Roth.  I believe I will be able to max it out or close.  Once my income went over the limit, contribute to a traditional and convert via backdoor to Roth.  Since all of my current projected retirement income is taxable, I liked the idea of diversifying a little bit.  At current, I am projecting to have 401k, Social Security, and eventually taxable investments.  Adding the Roth at this age won't make a huge difference, and I have zero idea what my tax bracket will be in retirement.

Now that there's a proposal to eliminate the ability to back door Roth, I'm wondering if there's even a point to opening one if I can only contribute for a few years.  I could instead increase my 401k contribution to max (currently at 10%, maxing at my current salary would be 17%, which I can probably get close to).  Once that is maxed, I could/would direct any additional retirement savings to a traditional.  Once I receive my next promotion, I should be able to max both 401k and an IRA.  Not sure if since I am over the income limit to deduct my IRA contributions, they are therefore not taxable in retirement, but I need to do more reading on that.

So, that's where I am confused - what say ye, good friends of Saving Advice?  Should I just skip the Roth and focus on maxing 401k then spill excess into Traditional?

7 Responses to “Seeking Advice: IRA Strategy?”

  1. Lots of Ideas Says:
    1634227691

    You have a 401k that you can contribute to?
    Are you contributing the maximum to it?
    Does it have a Roth option?
    Is there something you don’t like about it - limited investment choices?

    I don’t see an advantage to opening an IRA if you have investment space within your 401k.
    Whether you split between Roth and traditional is based on predicting the future. If you put money in a traditional IRA now, you get an immediate ‘bump’ because of the money you don’t pay in taxes. So, if you are in the 22%bracket, $10,000 in an IRA saves you $2200 in taxes. You can use that to pay high interest debt, or you can invest it (or spend) When you retire, you’ll pay taxes on the $10,000 plus any gains. But you might be in a lower tax bracket than now, plus you will have either the interest you saved on debt or the additional money you invested plus it’s earnings. The interest would be taxable, but the principal would be tax free.

    If you put the same $10,000 in a Roth, then you pay the $2200 in taxes now. But when you retire, the money plus its earnings comes to you tax free. If you think your tax bracket will be higher in retirement than now, this strategy makes sense.

    My personal opinion is that if you have any debt other than mortgage, you should use traditional 401k accounts and plow the tax savings into getting debt free. After that, I would do a 50/50 split.

    I haven’t looked at the limit rules for IRAs for along time. If you have to go outside your 401k to access a Roth account, I wouldn’t defer doing that even if I only had access for a few years - limits rise and situations change.

    You can build a spreadsheet to compare these options, trying out the impact of different rates of return.

    Good luck!

  2. LivingAlmostLarge Says:
    1634230206

    I would definitely max out the roth IRA because there is no RMD attached to Roth. I would also max out the 401k because that will be $25k and keep you eligible for Roth. I am very unsure how old you are and how much longer you have to work.

    If you have a 401k you cannot do a traditional IRA deduction and especially with your income. If your income was lower you could but it if were lower it wouldn't make sense anyway.

  3. Lots of Ideas Says:
    1634235800

    RMD (mandatory distributions after you turn 72) is only an issue if you have so much retirement income that you end up being forced to take money you don’t need that adds to your taxable income. Someone with no retirement savings in their forties, unless where they work has a generous pension plan, s unlikely to be in that scenario.

    Every situation is different, and it is worth spending the time to walk through scenarios using a spreadsheet to see the actual result of a strategy over time.

  4. Lots of Ideas Says:
    1634251991

    People who advise using an IRA instead of a 401k generally believe that they can achieve higher yields when they can invest in whatever funds/stocks they want to instead of being limited to the offerings in the 401k.

    For some, this might be true. If you enjoy researching stocks/funds and making your own decisions, then you can potentially outperform the professionals who craft funds based on proposed retirement date. Or if your 401k is limited to company stock and a few low performing g funds, it might be worth it.

    I didn’t enjoy that kind of research, and so I reviewed the options in my plan and picked a mix of funds based on suggestions for my age and risk tolerance. I focused my time on my job, my health and things I enjoyed doing. Once a year I reviewed my strategy with a friend who did enjoy the research, but I made my own decisions.

    That strategy worked for me - I retired at 58 - but I started saving in my 20s so that’s not apples to apples with your situation,

    My best advice is to ask ‘why’ when people give you advice, and if they can’t explain it so you understand them, they don’t understand it either.

    Ask if your company’s provider offers consultation - you don’t have to take advice, but they should be able to explain a lot.

    And I would run the numbers on an HSA - there is significant cost savings at the premium level plus tax savings. Worth the hour or two of math!

  5. MonkeyMama Says:
    1634261474

    You are in a very high tax situation (single + six figure income). I'd just focus on the 401K and taking the tax breaks that you can get now. Tax laws constantly change, so I generally go for a "one bird in the hand is better than two in the bush" strategy. On the flip side of that, I wouldn't make any decisions based on what "taxes might do" soon. I agree with LOI, doesn't matter if you can only get a benefit for a few years. Take it while you can.

    It likely makes more sense to pay off debt than to contribute more to (non-deductible) retirement accounts.

  6. Lots of Ideas Says:
    1634327621

    I’m sorry you don’t want to explore the HSA option - I say that only because when it was introduced where I was working so many people were afraid that they would need expensive medical care early in the year so even though their actual total costs, even if they paid the full deductible, would be less, they rejected it. If you have done the math, then of course you know your situation best. For me, I had the same access to doctors/facilities and the combination of lower premium, company contribution to HSA, and tax benefits more than offset the deductible. But of course that varies a lot.

    Do you have access to a healthcare FSA? They are a little trickier because you have to ‘use it or lose it’ but if you have a lot of regular medical expenses, it’s pretty easy to get to a base number. And near end, you can schedule dentists, eye appointments, to ‘use up’ money if you pay attention.

    If your company doesn’t have an FSA, maybe ask your HR benefits person why, and suggest that others ask too. I believe there are corporate tax incentives to providing this benefit.

  7. Lots of ideas Says:
    1634438158

    The FSA is so worth it.
    It’s like having a 22% off coupon on health care for someone in your tax bracket.
    The only downside is the ‘louse it or lose it’ feature, but if you can pretty accurately estimate expenses, you can pretty much eliminate that risk.

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