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FYI I have started updating the FAQ message starter with new or updated links and some refreshed content.

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Hi all,
I'm 42 years old, currently maxing out my Roth 401(k) and one Roth IRA each year. My wife doesn't work, so I was contemplating on maxing out another Roth IRA in her name. Our AGI is around 165K. I'm also maxing out our HSA each year and not spending any of it as another tax advantaged investment account. I'm currently investing any extra $ in a low turnover % index fund, but wondering if there's anything better to invest non-retirement moneys into. Also, living in Texas where we have no state-income tax - is it still typically advantageous to go with the ROTH, assuming i'm going to live on 80% of my retirement salary? Also am planning on retiring at 57 years old and don't know if i'll be in a higher or lower tax bracket. Does going 100% ROTH IRA and 401k still typically make sense in my scenario over pre-tax?

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russrimm said:   Hi all,
I'm 42 years old, currently maxing out my Roth 401(k) and one Roth IRA each year. My wife doesn't work, so I was contemplating on maxing out another Roth IRA in her name. Our AGI is around 165K. I'm also maxing out our HSA each year and not spending any of it as another tax advantaged investment account. I'm currently investing any extra $ in a low turnover % index fund, but wondering if there's anything better to invest non-retirement moneys into. Also, living in Texas where we have no state-income tax - is it still typically advantageous to go with the ROTH, assuming i'm going to live on 80% of my retirement salary? Also am planning on retiring at 57 years old and don't know if i'll be in a higher or lower tax bracket. Does going 100% ROTH IRA and 401k still typically make sense in my scenario over pre-tax?

 I dont see having everything in Roth as being the best option tax-wise.
Do you at all have anything in traditional IRA/401k accounts? What kind of taxable income do you expect to have at age 57 when you retire? You could live on 80% of (pre)retirement salary but if all that is going to come from a Roth account, you will have zero taxable income. That is far from optimal.

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Yes I have 225K in a rollover IRA, 56K in another rollver IRA, 90K in a traditional IRA, 107K in a 401k plan (all roth), 67K in a Roth IRA.  I'm maxing 17500 in roth 401k and 5500 in roth IRA and 6500 in HSA.  I'm investing some of the emergency fund which is a little over 100K into low fee index funds with low turnover %.

What should I be doing differently?

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russrimm said:   Yes I have 225K in a rollover IRA, 56K in another rollver IRA, 90K in a traditional IRA, 107K in a 401k plan (all roth), 67K in a Roth IRA.  I'm maxing 17500 in roth 401k and 5500 in roth IRA and 6500 in HSA.  I'm investing some of the emergency fund which is a little over 100K into low fee index funds with low turnover %.

What should I be doing differently?

  
With that kind of savings I would say you are in the 25%+ tax bracket currently.  With having everything in a Roth you will have zero (or near zero if you have some savings outside of retirement accounts earning interest in retirement) taxable income in retirement.  So right now you are paying 25% + the earning power to invest in a retirement account.  If you were to take some of those funds and put them in a normal 401k or IRA, then you would be able to take out just enough in retirement to stay in the 10-15% tax bracket.  Then take any additional money you need out of your ROTH accounts.  Currently the tax brackets are at 15% up to 36k single, and 72k married.  So on that amount of money you are currently losing between 10-15%+gains by putting it all in a roth. 

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russrimm said:   Yes I have 225K in a rollover IRA, 56K in another rollver IRA, 90K in a traditional IRA, 107K in a 401k plan (all roth), 67K in a Roth IRA.  I'm maxing 17500 in roth 401k and 5500 in roth IRA and 6500 in HSA.  I'm investing some of the emergency fund which is a little over 100K into low fee index funds with low turnover %.

What should I be doing differently?

  Age, gross income, marital status, kids?

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42 years old, agi is 165k, married, no kids but have 2 on the way (due December), wife doesn't work and won't for at least 5-6 years.

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I'm confused (sorry, a bit of a noob on this stuff)- why is having zero taxable income bad? If I (theoretically) had 100% of my money in a Roth at retirement time, wouldn't I pay 0 tax on the money I took out from it since it's already been taxed?

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russrimm said:   I'm confused (sorry, a bit of a noob on this stuff)- why is having zero taxable income bad? If I (theoretically) had 100% of my money in a Roth at retirement time, wouldn't I pay 0 tax on the money I took out from it since it's already been taxed?
There's a certain amount of income you can have and pay no taxes.  So, at a minimum you want to have that much income (there could be good justification for having more).  If that comes from a Trad IRA, you will have never paid tax on that money.  Of course all your Roth distributions were taxed in the year you put the monies into Roth.

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russrimm said:   I'm confused (sorry, a bit of a noob on this stuff)- why is having zero taxable income bad? If I (theoretically) had 100% of my money in a Roth at retirement time, wouldn't I pay 0 tax on the money I took out from it since it's already been taxed?
 

  It is not so much that it is bad to pay zero tax (at retirement); it is more of at what cost now are you getting it. By going with a Roth instead of a trad. 401k, you are foregoing the tax deduction you can get now --- perhaps 25% marginal. If you had at least some invested in trad. 401k and took that out during retirement, you get some deduction now as well as pay a zero or a smaller tax rate at the time of retirement.

To give you an idea, in 2014, only the taxable income above 73,800 is taxed at a rate of 25% (or higher) --- married filing jointly. Adding personal exemption and standard deduction, you can have an AGI of 94,100 and still pay less than 25% marginal tax.  In short, make traditional 401k contributions at least to the extent of generating about 95k of retirement income before going with Roth. Of course, this assumes the brackets and rates today, which could very well be different during your retirement.

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So is it safe to say it would be more ideal to diversify my 17,500 contributions up into a 60/40, 80/20 (something other than 100/0) post/pre tax, and keep the 5500 going into the Roth IRA?

It's currently broken up as 226k in a pre-tax rollover ira, 91k in a traditional ira, 43k in a pre-tax 401k, 68k in a roth 401k, & 66k in a roth ira.

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russrimm said:   So is it safe to say it would be more ideal to diversify my 17,500 contributions up into a 60/40, 80/20 (something other than 100/0) post/pre tax, and keep the 5500 going into the Roth IRA?

It's currently broken up as 226k in a pre-tax rollover ira, 91k in a traditional ira, 43k in a pre-tax 401k, 68k in a roth 401k, & 66k in a roth ira.

  Yes, and no. You have to factor in yearly income, marginal tax rates, state marginal tax rate (and deductability), and future marginal tax rates.

In lower income years, you'd might be better to do 100% Roth contributions while in higher income years you might be better to do 100% traditional. In years where your income will be right above a marginal tax bracket breakpoint, you might do traditional until you fall back into the lower bracket for your marginal tax rate, and then do the rest Roth.

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Good thread! Bump!

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It's worth noting that employer matches in your 401(k) are pre-tax, even if they are matching Roth 401(k) contributions.

Also, if you plan to make a large lump-sum distribution during retirement (e.g. buying a retirement home in cash), taking that distribution from Roth funds instead of pre-tax would allow you to avoid a large tax bill for one year.

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Hello.  I would love some guidance as I'm pretty clueless when it comes to taxes.

Mid 30's.  $70K.  Currently contributing to 403b and 457, but not anywhere near maxing them out like the people in this thread.  No employer contribution.  I was told I should max out these accounts and/or consider an IRA account.  I would like advice on where to put my money to maximize my tax benefits.  I usually take standard deductions as I don't have much to itemize or don't know much about itemizing.  I have been told I should hire an accountant who charges $400 to file taxes in order to get  more money back. 

I would like to purchase a house in the near future.  I don't know if I should put the money for down payment in a saving account or contribute as much as I can to the retirement funds and take money from one of those funds for the down payment.  Thanks.

1) If I am to max out the accounts, in which order should I max them out?
2) Should I save money for a down payment before I max these accounts?

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Izmeeh said:   Hello.  I would love some guidance as I'm pretty clueless when it comes to taxes.

Mid 30's.  $70K.  Currently contributing to 403b and 457, but not anywhere near maxing them out like the people in this thread.  No employer contribution.  I was told I should max out these accounts and/or consider an IRA account.  I would like advice on where to put my money to maximize my tax benefits.  I usually take standard deductions as I don't have much to itemize or don't know much about itemizing.  I have been told I should hire an accountant who charges $400 to file taxes in order to get  more money back. 

I would like to purchase a house in the near future.  I don't know if I should put the money for down payment in a saving account or contribute as much as I can to the retirement funds and take money from one of those funds for the down payment.  Thanks.

If you contribute money to a deductible retirement account, then you can deduct that amount from your income for tax purposes, regardless of whether or not you itemize your deductions.

What kind of timeline are we talking about for you getting a house? If it's a year or less, your best bet is to just start saving for a down payment in a regular savings account, because you don't want to invest the money for a relatively short time and have it subject to market risk, and the tax benefit for such a small timeline is minimal.
Izmeeh said:   1) If I am to max out the accounts, in which order should I max them out?
If a match is offered in an employer-sponsored plan, then one should always contribute at least the amount that gives the maximum employer match, as it's free money.

Once you have contributed enough to get the match (or, like in your case, you have no match available), you should look into the investment options provided by your employer-sponsored plans. Sometimes the options can be better than what's available to the general public, and sometimes they can be worse. If your plan has great options available, then you should focus on maxing those accounts first; if not, max either a traditional IRA (if you want the deduction now) or a Roth IRA (if you want to pay taxes now instead of later). Since many employer-sponsored plans have few investment options available and the fees are often a bit high, the general advice is to max the IRA first, since you can pick from pretty much any investments available to the general public through a brokerage account.
Izmeeh said:   2) Should I save money for a down payment before I max these accounts?
Aim to have a 20% down payment for the most expensive house you're willing and able to buy. Save just enough to reach that amount by the time you'll apply for a mortgage, and put the rest into your retirement accounts.

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thank you so much.

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I started a new job where I can contribute to a 403(b) AND a 457 plan to the maximum, so $36k total next year.

My partner has no tax advantaged plans available from her job. What we'd like to do is have me contribute 18k to one plan and her 18k the other. Of course, the money will all come out of my salary pre-tax.

How much should she pay me back in cash to compensate for my deferred salary contribution to "her" half? 18K minus 18k times our effective tax rate? (Married filing jointly)

We have no interest in pooling all our resources beyond what we already contribute to our joint household account. This is non-negotiable. Thanks.

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TPaine said:   I started a new job where I can contribute to a 403(b) AND a 457 plan to the maximum, so $36k total next year.

My partner has no tax advantaged plans available from her job. What we'd like to do is have me contribute 18k to one plan and her 18k the other. Of course, the money will all come out of my salary pre-tax.

How much should she pay me back in cash to compensate for my deferred salary contribution to "her" half? 18K minus 18k times our effective tax rate? (Married filing jointly)

We have no interest in pooling all our resources beyond what we already contribute to our joint household account. This is non-negotiable. Thanks.

 You would use marginal tax rate, not effective tax rate.  Also consider your state marginal tax rate and FICA reduction, if applicable.

EDIT: This is assuming, of course, that your goal is to have your spouse pay you the exact amount of money that would give you the same tax-home pay as if you had only made $18,000 in contributions instead of $36,000.

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GamingG said:   This is assuming, of course, that your goal is to have your spouse pay you the exact amount of money that would give you the same tax-home pay as if you had only made $18,000 in contributions instead of $36,000.
Yes, your assumption is exactly correct.  Thanks. 

Out of curiosity, why marginal rate vs. effective rate?

We file jointly and make just about the same salaries, and basically split any tax bill or refund from the joint account. I'm thinking my salary would be taxed at the effective rate when all is said and done. The $18k would not push us into a higher marginal bracket. Had I not contributed the 'double'  $36k to retirement accounts, we'd each have a greater tax burden overall, and I do suppose that 18k would then be taxed at the highest marginal rate. But we essentially split all tax burdens or benefits that come out of filing together.  It's impossible to determine ownership on whose money is taxed at the lower (or higher) brackets, so I would think using the effective rate accounts for that.

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The "tax benefit" that you get for the additional 18k contribution is at the marginal tax rate. That is what you should use.

Out of curiosity, how d you plan to settle this later --- I mean, years down the road, when you are retirement? Or is this return of money to you the end of it all.

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fwuser12 said:   Out of curiosity, how d you plan to settle this later --- I mean, years down the road, when you are retirement? Or is this return of money to you the end of it all.
 

 We are settling it up now with her paying me cash- the account and everything that goes with it we treat as hers.

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delete due to dupes.

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Hello,

I just have a quick question regarding of traditional IRA and hope you don't mind to help me understand it a bit better. My wife and I are thinking of opening a traditional IRA account for each of us in 2014. Per my research, I understand that each of us can contribute an amount of $5500 but am still not clear on the income limits for tax deductions.

I found the below during my online search:

http://www.irs.gov/Retirement-Plans/Plan-Participant,-Employee/2... 

Does it really mean that if our AGI is more than 116K, we can't take any deduction of $1100 for me and my wife IRA contributions? Right now only me who has 401K at work and my wife does not.


Thanks for your help!
 

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"If you're covered by a retirement plan at work..."

So your wife can deduct the IRA contribution if she is not covered by a retirement plan at work.

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"Beginning in 2015, you can make only one rollover from an IRA to another (or the same) IRA
in any 12-month period, regardless of the number of IRAs you own"

http://www.irs.gov/Retirement-Plans/IRA-One-Rollover-Per-Year-Ru...

Thankfully there are 2 exceptions:

* Trustee-to-trustee transfers between IRAs are not limited
* Rollovers from traditional to Roth IRAs ("conversions") are not limited

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TPaine said:   
GamingG said:   This is assuming, of course, that your goal is to have your spouse pay you the exact amount of money that would give you the same tax-home pay as if you had only made $18,000 in contributions instead of $36,000.
Yes, your assumption is exactly correct.  Thanks. 

Out of curiosity, why marginal rate vs. effective rate?

We file jointly and make just about the same salaries, and basically split any tax bill or refund from the joint account. I'm thinking my salary would be taxed at the effective rate when all is said and done. The $18k would not push us into a higher marginal bracket. Had I not contributed the 'double'  $36k to retirement accounts, we'd each have a greater tax burden overall, and I do suppose that 18k would then be taxed at the highest marginal rate. But we essentially split all tax burdens or benefits that come out of filing together.  It's impossible to determine ownership on whose money is taxed at the lower (or higher) brackets, so I would think using the effective rate accounts for that.

  I say marginal tax rate because the taxes saved by contributing an additional $18,000 would come off the top of your joint income, so it would reduce your tax burden by (your marginal rate * $18,000).  I was simply comparing two scenarios that are mostly identical, only differing in that you make the $18,000 spousal contribution in one and don't make it in the other.  Feel free to do whatever is best for your household setup, of course.

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Sorry if this has been asked before, but everywhere I looked there is only Traditional vs Roth IRA comparison, but do you have to choose? Can I open both? Can I have multiple Roth/Traditional IRA accounts at different institutions and fund them to the max each? If I'm married filing jointly, does it mean we can only have one Roth between the two of us and max at $5500 or is it $5500 for each of us?

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SteelRing said:   Sorry if this has been asked before, but everywhere I looked there is only Traditional vs Roth IRA comparison, but do you have to choose? Can I open both? Can I have multiple Roth/Traditional IRA accounts at different institutions and fund them to the max each? If I'm married filing jointly, does it mean we can only have one Roth between the two of us and max at $5500 or is it $5500 for each of us?
  You can IRA accounts at multiple institutions/custodians, both Traditional and Roth. However the annual limit is across all such accounts combined.

The I in IRA stands for individual. All limits apply per individual. IOW, 5.5k each for both spouses (as long as you have earned income to cover that). For MFJ, as long as one spouse has earned income, the non-earning spouse is eligible to contribute.

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Thank you so much, now does that mean the Roth+Traditional = 5.5K or is it just Roth=5.5K and how much is the limit for Traditional? Also if you also have 401(k)? In short, if you have the cash and want to maximize those accounts, how would one couple MFJ go about it?

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SteelRing said:   Thank you so much, now does that mean the Roth+Traditional = 5.5K or is it just Roth=5.5K and how much is the limit for Traditional? Also if you also have 401(k)? In short, if you have the cash and want to maximize those accounts, how would one couple MFJ go about it?
  Roth + Trad. = 5.5k total (split anyway you like)
401k limit is independent of IRA. The max for 2014 is 17.5k each. It has to be payroll deduction, so both spouses must employed to take max. advantage.
If you have the cash, both spouses can together contribute 46k between them in 401k and IRA.
If you qualify for an HSA, you could consider contributing to that as well. Max is 6.55k if you have a family plan.

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Thank you.... that's really helpful. Good stuff.

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Is there any reason not to do traditional IRA to Roth conversions in low or zero income tax years? The TIRA money was deductible and would have been taxed otherwise at much higher rates.

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TravelerMSY said:   Is there any reason not to do traditional IRA to Roth conversions in low or zero income tax years? The TIRA money was deductible and would have been taxed otherwise at much higher rates.
  Indeed, Roth conversion in a low/zero income year (to the extent you can use up the lower tax brackets) is a good strategy.

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Only reason I can think of is if you can't wait out the 5 year clock before taking a distribution.

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