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Tax Question

Discussion in 'Off topic' started by Shwafta, Jan 10, 2019.

  1. mgarbowski

    mgarbowski Senior Member Elite Donor Donor Seasoned Supporter

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    But you can always do a Roth IRA conversion, no matter your income level. You just deposit the money every year into a regular IRA, then immediately "convert" it into your Roth. It's a stupid rule that forces people into a moderately byzantine process, but any decent financial service provider should make it easy.
    It only really gets tricky if you first build up a bunch of funds in a traditional IRA, but our young friend here won't have that problem.

    https://www.rothira.com/roth-ira-conversion-rules
     
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  2. Shwafta

    Shwafta Regular Member

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    why is this worth it vs other things?
     
  3. mgarbowski

    mgarbowski Senior Member Elite Donor Donor Seasoned Supporter

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    Also
    I emphatically endorse the advice to save 'til it hurts, then save some more.
     
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  4. 413Blue

    413Blue Active Member Seasoned Supporter

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    Take the higher paying job, unless the lower paying one has better future opportunities attached to it.
    Also I just want to reinforce what everyone is saying about the 401k and IRA. Put as much as possible away. I could show you some charts and graphs that demonstrate how much a difference a few years of savings in your 20's make in the future, but I don't want to sicken some of the older posters on here who did not save early and are now paying dearly! Save save save.
     
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  5. mgarbowski

    mgarbowski Senior Member Elite Donor Donor Seasoned Supporter

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    Because the Roth IRA is better, especially at higher income levels.

    At lower income levels, and I have no idea what the cutoffs are, you can put pretax income in a regular IRA. That means you don't pay income taxes (but you do pay SS and Medicare taxes) on your contribution. But when you take money out of the regular IRA decades later in retirement, you pay income taxes on the withdrawal.
    In a Roth it is reversed. You pay income taxes on your full salary, and your Roth IRA contribution does not reduce it. But, when you take the money out it is gloriously tax free.
    Obviously a lot of factors go into the calculation, but unless we eliminate the income tax or reduce it to something negligible, the Roth benefit of tax free withdrawals is almost always more valuable, especially with a long time period before retirement, even though it just hurts more when you are young and saving.

    But, at higher income, it's not even a trade off, because when you're above the income threshold and use a regular IRA, you have to pay income tax both when you first earn it and again when you withdraw (you get a partial credit for the contributions -- super simplified example: if you contribute $100k over the years and with cap gains, dividends and interest it is worth $300k when you start withdrawing, you pay taxes on 2/3 of every withdrawal, but it's actually really complicated). Since you have no choice but to pay taxes when you contribute you definitely want to convert to Roth and get the tax free withdrawals.

    Finally, if you think: hey I'll use regular IRA when really young because I have no cash on hand and I want to reduce my initial tax bite, and I'll switch to Roth a bit later, well, just remember that I said "It only really gets tricky if you first build up a bunch of funds in a traditional IRA..." Because then converting to Roth, even just for your new annual contributions, gets both complicated and expensive.
     
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  6. Shwafta

    Shwafta Regular Member

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    So if my job contributes to a 401k, would it be worthwhile to ask them about contributing to a Roth IRA instead, or are saving in a 401k and a Roth IRA separate and should both be done separately?
     
  7. Shwafta

    Shwafta Regular Member

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    you could pm me :p
     
  8. 413Blue

    413Blue Active Member Seasoned Supporter

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    Many companies now offer Roth 401k options.
     
  9. mgarbowski

    mgarbowski Senior Member Elite Donor Donor Seasoned Supporter

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    Both and separate if you can afford it. Any IRA is something you handle apart from your job, payroll and HR.
    Also, to complicate things more, there is something called a Roth 401k. Same idea as Roth 401k. You give up the tax benefit when you contribute in favor of getting it when you withdraw. But not all employers offer them. And some people think it makes sense, if you want to split the tax benefits up, to do regular 401k and Roth IRA. For sure, if you contribute the max to a Roth 401k and a Roth IRA you are foregoing a substantial amount of current tax benefits. The cost/benefit calculation gets even more complicated.

    ETA: I was just beat to the Roth 401k mention
     
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  10. 413Blue

    413Blue Active Member Seasoned Supporter

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    Yeah as mgarbowskimgarbowski alluded to, the conventional wisdom in the financial world is to put your money in this order.
    1. 401k: Contribute enough to get the full match from your employer.
    2. Roth IRA: Contribute the max ($6,000 in 2019)
    3. 401k: Contribute beyond the match up to the limit.


    Once you get a good grasp of all this, dig a little deeper and research HSA's. This makes things even more complicated, but it's another great tool, and the money does not need to be locked away until retirement.

    Which reminds of another great benefit of a Roth IRA, you can withdraw your contributions at any time without penalties or complications.
     
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  11. Shwafta

    Shwafta Regular Member

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    oh boy it just gets more and more complicated, doesn't it. lol.
    I'll have to read up more on it as soon as possible to see if i can get a better understanding!
    I'll keep all this in mind. Thanks to all of you for your help!
     
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  12. QuigrNYCFC

    QuigrNYCFC Junior Member Seasoned Supporter

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    Reddit has a very helpful flow-chart about how to handle money in general. It simplifies it down nicely.
    https://i.imgur.com/lSoUQr2.png
    I wish I had seen this when I was 21.
     
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  13. joe

    joe Senior Member Elite Donor Donor Seasoned Supporter

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    I've read the roth conversion rules so many times and always get dizzy. Maybe 2019 will be the year to figure it out.
     
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  14. Ulrich

    Ulrich Senior Member Elite Donor Donor Seasoned Supporter

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    Sure, but the Roth IRA has a phase out of $200k for a married couple on adjusted income, and the conversion from a traditional IRA is really only feasible if you haven’t already built it up too large from rolling over past 401K’s because you have to convert the entire account (or so I was told) that becomes a big tax hit on the conversion with a high tax rate.

    Also, I thought the conventional wisdom was to max out the 401k first as a *high earner* because the chances of your tax bracket being high in retirement is slim so you’re benefiting on thefront end and also the back side, whereas with a Roth you pay high taxes on the front with no benefit.
     
  15. FredMertz

    FredMertz Senior Member Elite Donor Donor Seasoned Supporter

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    All true, but if your company offers a Roth 401k, you can do it regardless of income, which is not fair at all.

    Also, the ability to deduct contributions to an IRA start phasing out at $64k, so hopefully he won't have that option soon!
     
  16. FredMertz

    FredMertz Senior Member Elite Donor Donor Seasoned Supporter

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    That has been the conventional wisdom, but with the way this country is heading, I wouldn't bank on that.

    Also, in depressing news, my accountant told me that I'm now old enough that I should stay connecting to a traditional 401k rather than the Roth I had been doing.
     
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  17. FredMertz

    FredMertz Senior Member Elite Donor Donor Seasoned Supporter

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    If I could give you one piece of advice, echoing others, I would say to worry more about putting money into any of these rather than worry about which one you use.

    Also:

    1) buy term life insurance, never whole or annuities
    2) at your age, Roth is better than traditional and will be for a while
    3) start with an amount you won't miss too bad and set up automatic annaal increases.
     
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  18. mgarbowski

    mgarbowski Senior Member Elite Donor Donor Seasoned Supporter

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    True but young padawan doesn't have that problem, and I previously mentioned the problem of converting if you already have a regular IRA stash twice in pervious posts.
    That's one form of conventional wisdom, and not necessarily wrong. But equally strong currents believe the opposite, either because they think you should plan for an income in retirement similar to your earning years, or because they expect income taxes are likely to be higher in the future at all levels, or other valid but uncertain reasons. Once you're planning for the future, a lot of your conclusions depend on your starting assumptions.
     
  19. mgarbowski

    mgarbowski Senior Member Elite Donor Donor Seasoned Supporter

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    This thread is starting to remind me of this:
     
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  20. hatt91

    hatt91 Junior Member Elite Donor Seasoned Supporter

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    All of this investment and retirement talk is solid gold and you should listen to it. In addition, you should set up a savings account where you put 4-6 months worth of expenses into it. Then leave it alone. That is your emergency oh shit fund. Don’t tie this money up, it should be very liquid. If God forbid something happens where you can’t work and you lose your job, you should be able to live 100% off of that savings account.
     
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