Why get an IRA if you have a (401)k?

[kenya123]

@mitchrad Being able to tax shelter even more money.

Do you like paying taxes?

 

[thevisionary]

@mitchrad There is also another benefit. Because the Roth is not taxable upon withdrawal as income you can use it to balance out your need to withdrawal from your taxable retirement funds and possibly lower your effective tax rate.

 

[gergely]

@mitchrad If you can afford to max both there's no downsides to it. There are four major types of investment accounts, each with their own pros and cons:

• 401k: Pros: Tax deferred growth, Lower federal and potentially state income taxes, can get employer match from deposits (free money), student loan payments can be used for employer match; Cons: Can have high expense ratio, income tax paid in retirement, funds (mostly) locked until retirement and penalty for withdrawing early, RMDs required, taxes must be paid on account when inherited
• Roth IRA: Pros: Can have very low expense ratio, tax free growth, contributions (not gains) can be withdrawn without paying penalty, don't require RMDs, can leave tax free inheritance; Cons: Taxes paid before deposit, funds (mostly) locked until retirement and penalty for withdrawing early.
• HSA: Pros: Tax deferred growth, HSA converts to 401k in retirement, money used for healthcare is never taxed; Cons: Low contribution limit, income tax paid in retirement (for non-healthcare expenses), funds (mostly) locked until retirement and penalty for withdrawing early.
• Brokerage: Pros: Money is not locked up and can be withdrawn at any time with no penalty and only taxes paid on the gains when sold; Cons: Post-tax money is used for purchases and gains / dividends may also be taxed.

 

[masteroftheart]

@mitchrad The case for traditional IRA when you're beyond the income limit is pretty thin. You get growth free of capital gains, but you'd have to pay income tax on that money twice and more work every year come tax time to avoid double-taxation. Probably a not much of a net winner, particularly given the dollar limits on IRA contributions.

However, you can go with a Roth IRA up to some other income limit... $150k single or thereabouts? Then the money comes out unburdened and you pay 0% capital gains taxes in the meantime.

If you're beyond the Roth IRA contribution limit, then Backdoor Roth works -- Make traditional IRA contribution and immediately roll it over into a Roth IRA. You don't get double-taxed on the money, so functionally there's no income limit to Roth IRA contributions, just an extra hoop you have to jump through.

So, the answer is 0% capital gains taxes, but the path to get there will vary depending on income.

 

[andass]

@masteroftheart If you fund your traditional IRA with after tax dollars and file a form 8606 with the IRS every year claiming the after tax amount you contribute, they will not tax you again on those contributions (the basis amount) upon withdrawal. They will tax the earnings only upon withdrawal, but you won’t be “double taxed” on the basis.

https://skloff.com/iras-avoid-double-taxation-on-withdrawals-080116/

 

[masteroftheart]

@andass Ooh good point, I forgot that was a thing entirely. Updated post to reflect my stupid.

 

[andass]

@masteroftheart No problem. You scared me for a minute there!!

 

[mitchrad]

@masteroftheart Yes! Based on this and other comments I’m opening a Roth IRA asap (I’m below that income limit) and then would pursue back door IRA once I (presumably) go above that limit

 

[masteroftheart]

@mitchrad Rock on! If you have an HSA, aim to max that too -- it's the most flexible account of all.

 

[godschild08]

@mitchrad We max out our 403b, 457 and Solo k but still have some room left to get out of the 22% bracket. We put enough in each of our Traditional IRAs to reduce our taxable income to the top of the 12% bracket and then put the remaining amount in a Roth IRA.

 

[jewelsarah]

@godschild08 How would you be able to max out 3 employee retirement vehicles.. you are only allowed to max one out per person.. so if you were doing the 403b ($22,500) and then your spouse the 457 ($22,500)you could not open a solo 401k and do another $22,500. You could do a Traditional or Roth IRA, though.

 

[godschild08]

@jewelsarah Not true. I actually have three through my employer: a 401(a), a 403(b) and a 457(b). My spouse has a Solo 401(k).

And the max for us is 30k each for the 403, 457 and the Solo including the $7,500 catch-up. Plus the 401a, which includes my contribution and the employer match, and the employer portion for the Solo K.

We then each have IRAs we max out as well, a mix of traditional and Roth.

 

[jewelsarah]

@godschild08 You can work and have multiple employer plans, yes.. but you cannot put more than the max away per social security number, no. So yes if your over 50 this year, that’s $30k total, not including your match, profit sharing or a cash balance plan.
You CANNOT though do a deferred comp, putting $30k away into your solo 401k, employer 457 and employer 403b.
Unless you are leaving out that your employer does a defined benefit (pension) which is not your contribution..
which by the sounds of it, I am ASSUMING you are a public school teacher, since you have 403b (TSA) and 457 / 401a.
The 401a, depending on your by laws, will allow contributions up to IRS limits of ($66k) again.. this would eat into your total employer plan contributions (if defined contribution plans).

Individual IRAs, would be $7,500, if your over 50, which sounds like you are.

Again, not trying to be contentious, just trying to help eliminate a tax headache and having to do an excess contribution removal

 

[godschild08]

@jewelsarah Please read again. I never said I have a Solo K. My spouse does.

And you are also flat out wrong about everything else. I put 30k in my 457 and 403b each. 60k total every year. Plus my 401a contributions and my employer match to that. No defined benefit plan. Single employer. Not a public school teacher.

 

[april123]

@mitchrad I would definitely do both a 401K and IRA..
The extra match alone.. is compounding on each paycheck...
And the access to borrow from yo6u 401K..and pay back interest to your own account...and especially if you compound in the IRA too....

Shiiiddd.... that's the way to go !!!

 

[nidge]

@mitchrad I think you confused IRA as being something not related to stocks. An IRA is a type of account in which you can trade financial instruments such as stocks.

A deductible trad IRA is worth it to defer taxes now, if you think you'll be at a lower tax bracket when you are ready to withdraw. Nondeductible Trad IRA is good if you want to backdoor roth. Roth IRA is good because no tax on gaimss when ready to withdraw

 

[johanzo88]

@mitchrad You can shelter more money. I suggest maxing out a Roth 401k, if possible, as well as a Roth IRA.

 

[lady_t]

@mitchrad Very little usefulness if you have access to a 401k. Also if your income is low enough to make a deductible contribution to a tIRA you’re probably better off contributing to a Roth than a tIRA.

 

[mitchrad]

@lady_t It’s not, it’s just low enough to contribute to a Roth

 

[underestimated]

@mitchrad Unless you’re going to perform the back-door maneuver then I agree you’re better off investing in a taxable account than putting non-deductible contributions in an IRA. I’d rather have the liquidity and pay capital gains and not lock it up for decades and pay ordinary income later. Tax deferral of gains not attractive enough to sway me to the other side