IRA's

[RussianJoo]

Hi,

I was just wondering how people are putting money into IRA accounts when the cut off salaries to get tax deductions are so low compared to what average physician salaries? My accountant said that because of my income I don't qualify for an IRA account, yet I hear of people on these forums talking about contributing to IRA accounts. What am I missing?

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[Stroganoff]

Hi,

I was just wondering how people are putting money into IRA accounts when the cut off salaries to get tax deductions are so low compared to what average physician salaries? My accountant said that because of my income I don't qualify for an IRA account, yet I hear of people on these forums talking about contributing to IRA accounts. What am I missing?

Most here are probably talking about contributing to a Roth IRA (as opposed to Traditional IRA). The ability to contribute to a Roth IRA starts phasing out when Modified AGI hits $118,000 (if filing Single in 2017) and $186,000 (if Married filing jointly in 2017), so most people above those incomes use the Backdoor method to contribute to a Roth IRA.

The White Coat Investor: Backdoor Roth IRA Tutorial

 

[Smart Money MD]

Hi,

I was just wondering how people are putting money into IRA accounts when the cut off salaries to get tax deductions are so low compared to what average physician salaries? My accountant said that because of my income I don't qualify for an IRA account, yet I hear of people on these forums talking about contributing to IRA accounts. What am I missing?

You can still contribute to a non-deductible IRA (not get any tax benefits) when your salary exceeds the limits. Many people then make a conversion of that IRA to a Roth IRA so that they can get long-term tax-free growth, since you've already paid taxes on your contribution.

 

[sazerac]

Hi,

I was just wondering how people are putting money into IRA accounts when the cut off salaries to get tax deductions are so low compared to what average physician salaries? My accountant said that because of my income I don't qualify for an IRA account, yet I hear of people on these forums talking about contributing to IRA accounts. What am I missing?

There are two separate issues going on here.

There is an income limit, above which you are prohibited from contributing directly to a Roth IRA.

There is a second income limit, above which you cannot deduct contributions to a traditional IRA. You can still contribute, it just won't be deductible.

Some people think if your income is so high that you can't deduct a traditional IRA contribution, you shouldn't bother with the traditional IRA contribution. That is foolish for two reasons. First, an IRA (Roth or Traditional) offers tax free growth meaning you won't pay taxes every year as it increases in value. Second, it is always possible to convert a traditional IRA to a Roth IRA no matter what your income level is.

 

[G-Man82]

This is what I do:

1. Workplace plan (403b) for me.
2. HSA for the triple-tax benefits. Actually I let this one be an extension of my retirement savings accounts.
3. Start of the year, backdoor contributions to Roth IRA via non-deductible contribution to Traditional IRA.
4. Taxable Brokerage Account.

Since I'm employed and have access to a workplace plan, I think that makes my traditional IRA non-deductible. However keeping money in a traditional IRA to me seems like not a good idea (since for me it's all after-tax money anyway) because when I pull money out at age 59.5, it will be taxed at income tax rates. Or at least the gains will be. So why bother with that? Contribute to the traditional and then click on the "convert to Roth" option a day later. That money now gets placed in your Roth IRA and is no longer taxable ever again. Fill out form 8606 when doing taxes and you're golden.

Why? Well, I do this because no more pre-tax space is available to me. Without the Backdoor Roth option, all that would be in taxable account anyway, with gains taxed. So I see it as a way to get a small amount of cash into a tax-advantaged account.

It's well worth your time.


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[RussianJoo]

Thanks everyone. I'll have to talk to my accountant about this in some more detail.

 

[keifernny2]

Thanks everyone. I'll have to talk to my accountant about this in some more detail.

The other thing is, no matter what your income, you can still rollover a 401k or 403b into an IRA if you change employers. That's not considered a contribution. Some people change employers frequently due to short-term contracts. Just be careful doing this if you want to do a backdoor Roth.


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[RussianJoo]

The other thing is, no matter what your income, you can still rollover a 401k or 403b into an IRA if you change employers. That's not considered a contribution. Some people change employers frequently due to short-term contracts. Just be careful doing this if you want to do a backdoor Roth.


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Thank you, Why do I need to be careful if I want to do the backdoor Roth? Is there a limit how much you can convert to the backdoor Roth?

 

[mvenus929]

Thank you, Why do I need to be careful if I want to do the backdoor Roth? Is there a limit how much you can convert to the backdoor Roth?

I think you can only do 1 IRA rollover per year, so if you roll a 401k over, you can't do a Roth rollover.

 

[jacksparrow82]

Thank you, Why do I need to be careful if I want to do the backdoor Roth? Is there a limit how much you can convert to the backdoor Roth?

First, yes, you can only contribute 5500k/yr into a backdoor roth. But, I believe he's referring to the pro-rata rule. If you already have money earning interest in a traditional, SEP, or Simple IRA you can't do a roth conversion without first paying taxes on all of the funds in that IRA (which you don't want to do because that defeats the purpose of your tax-deferred IRAs). So, you would want those accounts empty before trying to do a backdoor roth. If none of that makes any sense, spend some time reading over at whitecoatinvestor.com

 

[G-Man82]

I suggest buying his book as a starting point. Another good one for a basic understanding of personal finance is "The Boglehead's Guide to Investing."


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[ThoracicGuy]

I think you can only do 1 IRA rollover per year, so if you roll a 401k over, you can't do a Roth rollover.

The backdoor Roth is not a rollover but a conversion. You just don't want to have any traditional IRA monies out there when you do it.

 

[RussianJoo]

Thank you guys for all your help.

 

[Yellow mellow]

What would be the best traditional IRA accounts out there ? I was looking at Charles schwab, Fidelity, Betterment and Vanguards. I'm new to IRAs and getting ready to do tax and realized that with my income, I won't qualify for tax deductions. But I would like to contribute to a traditional IRA and then convert to Roth IRA.

 

[sazerac]

What would be the best traditional IRA accounts out there ? I was looking at Charles schwab, Fidelity, Betterment and Vanguards. I'm new to IRAs and getting ready to do tax and realized that with my income, I won't qualify for tax deductions. But I would like to contribute to a traditional IRA and then convert to Roth IRA.

Probably the same institution where you keep your taxable investments. Schwab, Fidelity, Vanguard, I'm sure they are all about the same.

I used to keep mine at Schwab when I was first starting out. When I had substantial assets at Vanguard I moved my IRAs to Vanguard. Never really noticed any changes. The money itself was always in a Vanguard fund no matter which institution sent me monthly statements.