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    401k vs. iras

    Need some help. I'm confused about 401k contribution vs. traditional ira vs. Roth.

    I make 220k and am single. I know that disqualifies me for Roth contribution or does it if I have a Roth from years before when I made less money?
    I am maxing my 401k at the 17k yearly I have 230k in the 401k. Should I also just put 5k in a ira to max that or should I keep cash and just invest? I have an emergency fund of 50k which would cover expenses for a year in a job loss. I'm 37. I probably should start contribution to that ira right?

    #2
    Originally posted by JWhite View Post
    Need some help. I'm confused about 401k contribution vs. traditional ira vs. Roth.

    I make 220k and am single. I know that disqualifies me for Roth contribution or does it if I have a Roth from years before when I made less money?
    I am maxing my 401k at the 17k yearly I have 230k in the 401k. Should I also just put 5k in a ira to max that or should I keep cash and just invest? I have an emergency fund of 50k which would cover expenses for a year in a job loss. I'm 37. I probably should start contribution to that ira right?
    You make too much to deduct traditional IRA contributions. You make too much to directly contribute to a Roth. What you can do is make an indirect Roth contribution.

    Contribute to a traditional IRA. The limit for 2014 is 5.5k. Then, convert your traditional IRA to a Roth (you can just use your existing Roth IRA). There is no income limit to convert.

    Do you have existing traditional, Sep, or Simple IRAs? If not, there is no tax due on your conversion as you do not qualify to deduct your traditional IRA contribution. (Note: any gains in the meantime will be taxable). If yes, there will most likely be some tax due.

    I would definitely make the 5.5k IRA contribution before investing in a taxable account.

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      #3
      More importantly, have you ever contributed to a traditional IRA in the past and deducted the contribution (like before you made a lot of money)? If you do a backdoor Roth, ALL of the money you have ever contributed to an IRA will be considered for tax purposes. In some cases, it can mean paying a metric boatload of taxes on previous tax deductible IRA contributions.

      I do a backdoor Roth each year but I have no previous IRA contributions (just 401k). So I pay no taxes on the conversion.

      Tom

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        #4
        Originally posted by JWhite View Post
        Need some help. I'm confused about 401k contribution vs. traditional ira vs. Roth.

        I make 220k and am single. I know that disqualifies me for Roth contribution or does it if I have a Roth from years before when I made less money?
        I am maxing my 401k at the 17k yearly I have 230k in the 401k. Should I also just put 5k in a ira to max that or should I keep cash and just invest? I have an emergency fund of 50k which would cover expenses for a year in a job loss. I'm 37. I probably should start contribution to that ira right?
        You asked a good question. Roth is based on MAGI (Modified Adjusted Gross Income). MAGI is related to your gross income, but the 401k contribution reduces that, and many other things do too. In most realistic scenarios the $220k is going to be too high to lower your MAGI to under $183k. You would need to find about $50k in straight line deductions

        Ex
        $18k to 401k (increased for 2015)
        $3350 to HSA

        you would need $29k more of reductions...

        so the end decision of "use a traditional IRA" is good.
        And also remember to add money to a taxable account too. Overall you should be putting 20% minimum of your gross pay into savings. $220k*20%=$44k per yet

        $18k to 401k
        $5500 to traditional

        $21k per yer should be added to taxable accounts too.

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          #5
          nice question but i don't know about this matter ....

          Comment


            #6
            Originally posted by jIM_Ohio View Post
            Roth is based on MAGI (Modified Adjusted Gross Income). MAGI is related to your gross income, but the 401k contribution reduces that, and many other things do too. In most realistic scenarios the $220k is going to be too high to lower your MAGI to under $183k.
            The $183k limit is for married filing jointly. If you file single, then it is phased out by $133k.

            Definitely use a regular taxable brokerage account once you have maxed out the tax advantaged retirement accounts.

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