Please register to participate in our discussions with 2 million other members - it's free and quick! Some forums can only be seen by registered members. After you create your account, you'll be able to customize options and access all our 15,000 new posts/day with fewer ads.
I was reading an article in Yahoo Finance. It talked about the changes for retirement accounts for 2013. One thing I found that I didnt know was that traditional IRAs lose their tax advantage as your AGI goes from mid-/hi-$50k to somewhere in the $60ks. I was looking to max out my 401k to take advantage that.... I believe, and please correct me if I'm wrong as my whole train of thought is based on this being correct, that because it is pre-tax when one files their income tax their AGI is lowered by the contribution amount. And because of that my AGI will be below the lower threshold for Roth IRAs (I believe $112k for 2013... I figure it out by then ) So I can continue maxing out my Roth contributions. But this had me wondering if 401Ks eventually lose their tax advantage if you earned too much.
Yep, you're right. Not sure why I thought otherwise....I had always done the 401(k) and Roth but now only the Roth because my new employer doesn't match and I can't afford more than my and my wife's Roths and my four kids' EIRAs anyway.
"Typically, a taxpayer must earn income to contribute to a traditional IRA and deduct the amount of his contribution on his federal tax return. If a worker participates in his employer's 401k plan, the IRS may limit or eliminate his ability to deduct his traditional IRA contribution if his MAGI is above certain thresholds. If a person who files his taxes as head of household records a MAGI of $56,000 or less on his federal return, the IRS permits him to deduct the full amount of his permissible IRA contribution. If the person's MAGI is between $56,000 and $66,000, the IRS allows him to partially deduct his traditional IRA contribution. If the worker reports a MAGI of $66,000 or above, the IRS does not permit him to deduct his IRA contribution on his federal tax return."
I contribute to a Roth IRA with a traditional 401k for the same reason. There is no tax advantage for the traditional IRA, after $68k.
Here is the IRS link to the modified AGI chart for deductible contributions for an IRA, if you are covered by a retirement plan at work. It also depends on filing status(single, married, head of household)
Here is the single filing status chart.
Modified AGI
<=$58k : full deduction
>$58k and < $68k : partial deduction
>=$68k : no deduction
If you are under $68k and under 50 yrs old, you can deduction up to 50% of the difference of your modified AGI and $68k. Once you hit $58k, you can deduction the full $5k. Fidelity has an easy to use calculator at http://personal.fidelity.com/product...refpr=IRAI0001 It will provide the tax deduction amount on the traditional IRA tab.
One related note: If you are above the threshold for a Roth IRA, you can contribute to a Traditional IRA (non-deductible, since you will be way over that limit as well) and then convert the funds to a Roth IRA. This loophole has been in place for a few year. While you won't get any immediate tax advantage, at least you can shelter your earnings in the long-term. (Do note that it you have funds in your traditional IRA that were deductible, converting to a Roth IRA will trigger a taxable event, so talk to your accountant if you have any questions.)
Sometimes I speak in riddles/tongues. My question really isn't about the traditional IRAs phase out of the tax advantage. Although thank you for clearing it up for me as far as the exact numbers go. The traditional IRAs phase out had me wondering if the same existed for a traditional 401k.
A fairly realistic possibility for 2013 in my new job is as follows:
Gross Income: $125,000
Traditional 401k Contribution: $17,500
I assume my working AGI at this point would be $125k - 17.5k .... $107,500
This is below the lower threshold for Roths where the max contribution begins to fade towards zero. So I could still contribute $5,500 in 2013. But if I can't modify my gross income from my 401k contributions then I can't max out my Roth.
From people's replies it seems it (phasing out the tax advantage) is only applicable to traditional IRAs and not traditional 401ks. Please let me know if I misunderstood.
...If you are above the threshold for a Roth IRA, you can contribute to a Traditional IRA (non-deductible, since you will be way over that limit as well) and then convert the funds to a Roth IRA. ... (Do note that it you have funds in your traditional IRA that were deductible, converting to a Roth IRA will trigger a taxable event, so talk to your accountant if you have any questions.)
I knew about that... but this has me curious. If this were done using the income I mentioned in my previous post (no tax advantage) would the conversion incur a double tax (both in and out)?
Yes but it would be taxes on two different items - Taxes in as paid on your income when you earned it, taxes out on those dollars when/if you made investment gains in the traditional 401(k).
If you planned to add to the traditional then convert quickly to the Roth, you wouldn't have much time to have any capital gains or income anyway.
This is interesting... so using this method it seems there is ultimately no income restriction on a Roth if I understand this correctly? It just requires a little more legwork.
Please register to post and access all features of our very popular forum. It is free and quick. Over $68,000 in prizes has already been given out to active posters on our forum. Additional giveaways are planned.
Detailed information about all U.S. cities, counties, and zip codes on our site: City-data.com.
Please register to participate in our discussions with 2 million other members - it's free and quick! Some forums can only be seen by registered members. After you create your account, you'll be able to customize options and access all our 15,000 new posts/day with fewer ads.
) So I can continue maxing out my Roth contributions. But this had me wondering if 401Ks eventually lose their tax advantage if you earned too much.
