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Understanding traditional IRA deduction limits
Posted on 1/3/24 at 1:25 am
Posted on 1/3/24 at 1:25 am
Someone please help me understand traditional IRAs.
If you’re covered under a workplace retirement plan and make over a certain income, the tax deductibility of IRA contributions is reduced and eventually prohibited. Does this mean that the tax benefit of contributing to an IRA over another investment vehicle is gone? Do tax benefits of the treatment of gains still exist?
If you’re covered under a workplace retirement plan and make over a certain income, the tax deductibility of IRA contributions is reduced and eventually prohibited. Does this mean that the tax benefit of contributing to an IRA over another investment vehicle is gone? Do tax benefits of the treatment of gains still exist?
3
Posted on 1/3/24 at 6:10 am to AllbyMyRelf
Contribute to a Roth.
Posted on 1/3/24 at 7:05 am to AllbyMyRelf
Roth has income phase out limits.
Traditional IRA does not.
You can contribute to business plan and traditional IRA.
I think that's your question at least.
Traditional IRA does not.
You can contribute to business plan and traditional IRA.
I think that's your question at least.
Posted on 1/3/24 at 7:45 am to HailToTheChiz
IRS Website
No, Roth contributions aren’t deductible from taxable income, traditional contributions are. If you are also covered under an employer plan, there are deduction limitations based on income level for traditional IRA. If you’re phased out from taking deductions, what’s the benefit of the traditional IRA?
No, Roth contributions aren’t deductible from taxable income, traditional contributions are. If you are also covered under an employer plan, there are deduction limitations based on income level for traditional IRA. If you’re phased out from taking deductions, what’s the benefit of the traditional IRA?
This post was edited on 1/3/24 at 8:11 am
Posted on 1/3/24 at 7:46 am to LSUtiger89
Wish I could.
Posted on 1/3/24 at 8:12 am to AllbyMyRelf
quote:
No, Roth contributions aren’t deductible from taxable income, traditional contributions are. If you are also covered under an employer plan, there are deduction limitations based on income level for traditional IRA. If you’re phased out from taking deductions, what’s the benefit of the traditional IRA?
Ah I follow you now.
I think it's just another vehicle to use for investment purposes
Posted on 1/3/24 at 8:20 am to AllbyMyRelf
No tax benefit if you make more than the limit. I assume you are asking about funding an IRA in additional to your company 401k. You still get the tax benefit with your 401k. You should go Roth with additional retirement funds after funding your 401k.
In general, you should probably fund both traditional and Roth type accounts even before maxing your 401k. Always contribute to your company match, though.
Roth doesn't give you any immediate tax savings, but if you leave the money there long enough to appreciate significantly, then do not owe tax on the appreciation.
In general, you should probably fund both traditional and Roth type accounts even before maxing your 401k. Always contribute to your company match, though.
Roth doesn't give you any immediate tax savings, but if you leave the money there long enough to appreciate significantly, then do not owe tax on the appreciation.
Posted on 1/3/24 at 8:22 am to AllbyMyRelf
Why can’t you? Even if income is high so as backdoor Roth.
Posted on 1/3/24 at 8:35 am to AllbyMyRelf
First, you can use the traditional IRA contribution to facilitate a backdoor Roth IRA (unless you have existing Trad IRA in which case yo have to pay tax on a portion due to pro rata rule.)
Traditional IRA also gives you advantage of tax differed growth so you pay no tax over the years on dividends, interest or capital gains within the IRA. Problem is you eventually pay tax on withdrawals at your income tax rate which is higher than long term capital gains rates. Non deductible IRA contributions arent taxed again though since you paid tax on the income already. Only earnings are taxed at withdrawal. Another drawback is non deductible IRA is still subject to RMDs.
Traditional IRA also gives you advantage of tax differed growth so you pay no tax over the years on dividends, interest or capital gains within the IRA. Problem is you eventually pay tax on withdrawals at your income tax rate which is higher than long term capital gains rates. Non deductible IRA contributions arent taxed again though since you paid tax on the income already. Only earnings are taxed at withdrawal. Another drawback is non deductible IRA is still subject to RMDs.
Posted on 1/3/24 at 9:23 am to AllbyMyRelf
quote:
If you’re phased out from taking deductions, what’s the benefit of the traditional IRA?
Only benefit would be tax deferral year over year. But it sounds like you’re describing a scenario that’s perfect for back door Roth. I assume you’ve looked into this already?
Posted on 1/3/24 at 9:52 am to AllbyMyRelf
quote:
If you’re phased out from taking deductions, what’s the benefit of the traditional IRA?
I wondered this too. Maybe you can just buy/sell without worrying about having to pay taxes on any gains until you do retirement withdrawals?
This post was edited on 1/3/24 at 9:54 am
Posted on 1/3/24 at 9:55 am to notsince98
quote:
wondered this too. Maybe you can just buy/sell without worrying about having to pay taxes on any gains until you do retirement withdrawals?
Would it not be another vehicle to contribute to if you maxed your 401k?
Posted on 1/3/24 at 10:04 am to UpstairsComputer
quote:Yes, looks like the only reason to have the IRA.
I assume you’ve looked into this already?
Posted on 1/3/24 at 10:05 am to HailToTheChiz
quote:I guess, but you pay ordinary income tax on the contributions going in and then ordinary income tax on the gains coming out? Seems like a tax disadvantage account in that scenario
Would it not be another vehicle to contribute to if you maxed your 401k?
Posted on 1/3/24 at 10:20 am to AllbyMyRelf
quote:
I guess, but you pay ordinary income tax on the contributions going in and then ordinary income tax on the gains coming out? Seems like a tax disadvantage account in that scenario
Tax deferred going out and your tax would be your tax rates during retirement. that could be much less than a marginal tax rate now on gains in something like a brokerage account if I understand things correctly.
Posted on 1/3/24 at 10:40 am to notsince98
Like torch said above, you do get deferred growth, but then taxed at ordinary income levels. Hard to quantify whether the deferred growth and ordinary tax treatment is better or worse than long term cap gains treatment
Posted on 1/3/24 at 11:39 am to AllbyMyRelf
Backdoor Roth is really the only reason to consider contributing to a trad ira after income limits.
Yeah you could theoretically benefit from tax deferral on capital gains if you continued to contribute to a trad IRA. You'd have to do the math on your tax rate now vs then. But I don't know why you'd even bother if the backdoor Roth is an option, because you get to let your contributions grow tax free.
Plus, if you couldn't do a backdoor, I don't think I would choose to continue to contribute to a trad ira. I'd rather just do a regular brokerage account so you can access those funds sooner without a penalty if needed, and don't have to worry about RMDs.
Yeah you could theoretically benefit from tax deferral on capital gains if you continued to contribute to a trad IRA. You'd have to do the math on your tax rate now vs then. But I don't know why you'd even bother if the backdoor Roth is an option, because you get to let your contributions grow tax free.
Plus, if you couldn't do a backdoor, I don't think I would choose to continue to contribute to a trad ira. I'd rather just do a regular brokerage account so you can access those funds sooner without a penalty if needed, and don't have to worry about RMDs.
Posted on 1/3/24 at 11:43 am to notsince98
quote:
that could be much less than a marginal tax rate now on gains
But you dont pay marginal rate on Long Term Capital Gains. Most will pay 15% LTCG or if in a marginal bracket below That (10 or 12% marginal) you pay 0% LTCG rate. Of course tax policy could change but even if so I'd guess most would be better off in a taxable brokerage where they can extract some of that LTCG before new rates kicked in versus being stuck in a non deductible IRA especially as marginal rates also likely go up in that hypothetical.
Maybe there is a case for using it to hold interest bearing assets such as bonds that are taxed as income in for tax differal. I can see where it might work out for a high income earner especially in a high income tax state anticipating a move to low or no tax state.
Posted on 1/3/24 at 12:37 pm to Puffoluffagus
I have all the above. I get the match in 403b then have Roth and reg brokerage. I can control my investments better in the Roth (more ETF options) and if I need it bf retire, I can get to it easier.
Posted on 1/3/24 at 12:42 pm to TorchtheFlyingTiger
So let me ask this...on the backdoor Roth... hypothetical
If I already have a traditional IRA, I contribute max lump to traditional. Once that goes through, then I immediately convert that to a contribution to my Roth account?
I need to read up on that
If I already have a traditional IRA, I contribute max lump to traditional. Once that goes through, then I immediately convert that to a contribution to my Roth account?
I need to read up on that
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