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Please Clarify: Why Roth IRA?

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  • #16
    If you have an employer account, there is an income limit for being able to deduct traditional IRA contributions ($71,000 single, $118,000 married joint, $10,000 married separate...and at that low income level Roth is prob better anyway).

    There is an income limit for making Roth IRA contributions ($133,000 single, $196,000 married joint). You also can't contribute if you're married filing separately.

    So, if your income is high, then you can't deduct it to a TIRA, and you can't contribute it to Roth...

    ...however, anyone with earned income can still *contribute* to a traditional, and anyone can *convert* traditional to Roth..., the solution to getting tax-advantaged IRA money is to make a traditional IRA contribution, don't deduct it, and convert it to Roth before it earns. This is what a "backdoor Roth" is.


    • #17

      The issue is that, as a physician, a pre-tax TIRA is not an option for you.
      Click to expand…

      I guess I don’t fully understand that statement. If I invest in a TIRA, does it not get deducted that year?


      Thank you
      Click to expand...

      You make too much for those contributions to be tax deductible.

      *Oops, DMFA explains it better above.  Didn't see his post until after I posted my comment.


      • #18
        IRA is not like employer accounts where it's reported to the IRS for you and is automatically removed from your taxable income because it's a salary reduction.

        With traditional IRAs, the ability to deduct contributions is variable. You don't tell your institution whether you're deducting your contribution or not. That's between you and the IRS when you file taxes. It's an active are declaring your non-deducted contributions (basis) and conversions each year.

        Non-deducted traditional IRAs are inferior to taxable accounts imo. The only positive is no tax drag from dividends and turnover. The negatives are early withdrawal penalties, required minimum distributions, and most of all, taxation at the higher income rate than long-term capital gain rate. None of those are worth it without a high-bracket deduction up front.

        Unless you think you'll need it before retirement, or at least not within five years, backdoor Roth is superior to taxable for tax-free growth (dividends and CGs) and tax-free withdrawal.

        In a standard taxable brokerage account, all dividends and CGs are taxed (hence the name), though qualified dividends and long-term capital gains are taxed at a lower rate. You can withdraw at any time without penalty, unless you consider the short-term capital gains tax (< 1 year, equal to income bracket rate) a penalty.


        • #19
          Most docs will have too high an income to be able to deduct a traditional IRA, or contribute fully to a roth. for 2017, the limits are

          Roth IRA Income Limits (for single filers) Phase-out starts at $118,000; ineligible at $133,000

          Roth IRA Income Limits (for married filers) Phase-out starts at $186,000; ineligible at $196,000

          So most docs are looking at either a backdoor roth vs taxable investing.

          Even Financial Samuari, who is an opponent of the "regular" roth IRA, posted an article about how the backdoor roth might be a good idea if you are pessimistic about future taxation.

          "While it’s pretty straightforward to create a backdoor Roth, is it really worth the hassle? $5,500 a year in extra saving isn’t exactly going to make you rich. But if you’ve maxed out your 401k, are saving even more in after-tax accounts, have extra liquidity to spare, are still in the 28% single or joint federal income tax bracket, and bullish about your income growth, then a backdoor Roth is a reasonable move for retirement diversification purposes. If you’re in the 35% federal income tax bracket or higher ($411,500+ for singles and married couples), I wouldn’t bother. You’re already getting fleeced! "