What is the deal with a Roth IRA?

[Anonymous]

Anonymous wrote:

Anonymous wrote:A few years ago, Congress created a work-around the income limits for contributing to a Roth IRA to help fund a tax cut. This workaround waived income limits for people who converted a traditional IRA into a Roth. It raised money in the near-term because the conversion itself was a taxable event. From a long-term perspective, however, it's a huge revenue-loser for the government since once the money is in a Roth it can never be taxed again (until Congress changes the law).

So, basically, people at about your income level, who earn too much to contribute outright to a Roth but suspect income taxes may be higher when they retire (because eventually we're going to have to get a handle on this national debt thing) have started to contribute to regular IRAs and immediately convert them to Roths.

Also, there are no income limits on Roth 401K contributions, I believe.

OP here. Thank you so much for this. So, does the Roth 401K (TSP) function the same as a Roth IRA? I'm confused because the money all goes tot he same place. It seems difficult to track which of my contributions were taxed already and which were not?

Right. It does.

The question is do you want to pay tax now or later.

Say you contribute $1,000 a month to retirement.

If you put it into a regular 401k, that saves you maybe $300 in taxes now, but you have to pay ordinary income taxes on it when you withdraw during retirement.

If you put into the Roth, you get no tax savings now, but any gains in your account are tax-free forever.

So the fundamental question is what tax bracket do you anticipate being in in you retirement. If higher than no, you want to max out your Roth and bite the tax bullet now. If lower, take your deduction now.

[Anonymous]

Anonymous wrote:Resurrecting this old thread because these are the exact issues I still have. Can someone break this down for me or even give me the IRS code sections or refer me to a fee only financial advisor in NW DC? Our HHI is about $200k and we each contribute to our company's 401k. Not sure what people mean when they say to max it out but I contribute up to 4% because that's what my company matches. I have a standard IRA that I stopped contributing to long ago but it has $30k and wonder if I should covert if to a Roth IRA. I opened a ROTH IRA through Vanguard a few years ago and contributed $5k in 2013. We are in the process of preparing our taxes with our tax accountant and will soon find our our AGI. A little worried that our AGI is above the income limits for a Roth, if so, can I transfer the Roth contributions into our kids 529 plan before April 15? Going forward, should we contribute to the standard IRA and have it automatically roll over into a Roth? Are we supposed to contribute to the 529 from post tax or pre tax income? I know- lots of novice questions! After years of working hard but earning much much lower HHI, we finally hit $200k and are able to save more aggressively for kids college and retirement. We don't have any debt - just 1 joint family credit card we pay off every month and the mortgage. Help me with the financial strategy - it's all new to us.

"Maxing" the 401k means putting in the most you are allowed - 17,500/year for most. I would do that before worrying about IRAs. Maxing your and your spouses traditional 401k would probably lower your agi to the point that you could contribute to Roth IRAs, if you are financially prepared to go from saving 8k to 46k/year (17,500x2 401ks, 5,500x2 IRAS)

I would not do a backdoor Roth with your existing IRA unless you really feel like paying 10k in tax and expect your income in retirement to be higher than it is now, or expect tax rates to increase significantly.