Help me understand the traditional IRA
May 9, 2013 10:17 AM   Subscribe

Currently I max out my Roth IRA, and I have a 401(k) with a small employer match. I contribute enough to be able to take advantage of the maximum match they offer. However, I still have money leftover I would like to invest.

My spouse and I make under the 2013 maximum of $95,000 or less, and from what I understand, this makes me eligible to contribute to a traditional IRA...yes?

And a few more questions about a traditional IRA:
1. Am I correct that the max. deductible amount on my taxes is 5,500?
2. Is it worthwhile to invest beyond that amount into the IRA (non-deductible)?
3. In future years, if my income is lower, can I move some of the non-deductible IRA monies into either a deductible IRA or Roth IRA account?
posted by nanook to Work & Money (9 answers total) 9 users marked this as a favorite
 
My spouse and I make under the 2013 maximum of $95,000 or less, and from what I understand, this makes me eligible to contribute to a traditional IRA...yes?

Yes... and just to be precise, you would be eligible to contribute if you made more than that, but you wouldn't be eligible to deduct the full contribution.

In your case you can make the full deductible contribution.

1. Am I correct that the max. deductible amount on my taxes is 5,500?

Yes.

2. Is it worthwhile to invest beyond that amount into the IRA (non-deductible)?

You cannot contribute more than $5,500 (combined) to IRAs, deductible or not. But you could contribute additional amounts to your 401(k).
posted by payoto at 10:20 AM on May 9, 2013


I just saw that you max out a Roth IRA. In that case you cannot contribute anything directly to a traditional IRA.
posted by payoto at 10:23 AM on May 9, 2013


You can only do so much of a tax deduction, either with a traditional IRA or a 401(k).

I'd open a brokerage account and put any non-tax-deduction eligible money in it. You're not constrained by the choices of funds your employer offers in the 401(k), and it's liquid, should you wish to access it.
posted by Ruthless Bunny at 10:24 AM on May 9, 2013


If you max out your Roth, you cannot contribute to a deductible IRA. Source.
posted by MoonOrb at 10:24 AM on May 9, 2013


You could increase your contribution to your 401k up to the 17k limit. Unless your choice of funds are horrible, I don't see why you wouldn't pursue that option.
posted by politikitty at 10:25 AM on May 9, 2013 [1 favorite]


Also, it makes little sense to contribute to either a non-deductible IRA or a taxable account if you are not fully contributing to your 401k. Your 401k choices may stink, but when you leave your employer you can then roll these into a traditional IRA, anyway, and the amount you save in taxes this year should more than make up for the (presumably) crappy 401k options you have.
posted by MoonOrb at 10:27 AM on May 9, 2013


You can contribute more if you're over 50. IRS link.
posted by mareli at 10:28 AM on May 9, 2013


This is not tax or legal advice, and I am not your tax or legal advisor. Talk to a tax lawyer and seek advice of a financial planner.

The IRA cap is for all of your accounts, traditional and Roth. So if you are maxed in your Roth, you can't make further IRA contributions. See IRS site here.

The nondeductible IRA comes into play above certain income limits. That's not your facts, as presented.

There isn't such a thing as moving a nondeductible IRA into a traditional IRA. A "nondeductible IRA" is just a traditional IRA for which, in a given year, you were not eligible to take a deduction for the contribution.

You could covert all or a part of a traditional IRA (deductible or otherwise) into a Roth, whenever you want. You pay a tax on it when you do, and there are disincentives for converting less than the full amount (the "pro rata rule"). Some take this approach for the "backdoor Roth" as described above. Again, this seems beyond your facts, so if it's something you're interested in, talk to a tax lawyer and financial advisor.

There are tradeoffs ahead for your extra money. If you contribute to your 401(k), you'll benefit from deferral, but the money is locked away, and there will be distribution limitations and requirements. If you hold the money outside the 401(k), you are subject to tax on any dividends or gains, but are liquid. You probably know this, but it bears repeating.

Talk to a fee based financial planner (and a tax lawyer). For planners, check out the listings here.
posted by Admiral Haddock at 10:32 AM on May 9, 2013


Do you already own a house? Do you have any debt?
posted by empath at 1:00 PM on May 9, 2013


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