(x-post) Questions from a newly married couple:

[likeruth]

1. Can we both contribute $6000 each towards Roth IRA for tax year 2020? (We got married during the lockdowns in a public park with 2 people in attendance. 10/10 decision tbh) Guessing anyone is fine for Roth IRA among Schwab, ETrade, Fidelity etc. from the wiki.
2. Can we use 1098-T for tuition credits if one of us was a student during the year?
3. Our combined AGI would come out somewhere around $130K-$140K with incomes pretty evenly matched. Are the any advantages of contributing to traditional IRA as opposed to Roth IRA? We were thinking Roth IRA since there are no further tax implications when we withdraw it.

 

[bbredenkamp]

@likeruth You need to find out how much the traditional IRA tax benefits will actually save you. This is a question for your accountant. It matters. Tax deductions that you already take may make the IRA tax benefits equal very little. Or it could equal a lot.

But if you are saving, say, 25%.... That's $3k/yr between the 2 of you. If you invest that $3k savings every year for 40 years, that's $1.5M extra in retirement. Likely to come out WAY ahead of a Roth. However, that means you have to know exactly what you are actually saving, and you have to actually invest it.

Roth is amazing for lower and middle income earners who wouldn't see much, if any, tax benefits from a traditional. But once you are earning more, traditional can be a much smarter choice. You need to know your numbers, though.

Just some food for thought.

 

[joann36]

@bbredenkamp I’m still trying to wrap my head around the trad vs Roth tax benefits for higher earners. In what scenario is a trad better?

 

[bbredenkamp]

@joann36 I literally wrote that in my comment. You need to know your numbers. If the tax benefits on a traditional are substantial in your case, it's likely a traditional will come out way ahead of a Roth if you invest those savings. Usually this isn't until someone is in to the six figures, but I hate to give specific numbers. You need to know your own numbers and taxes, and knowing what a traditional will save shouldn't be hard to figure out.

See what your actual savings will be on a traditional. Then just use a compound interest calculator for how many years you will be working and investing the tax savings. For me, the numbers are about $2.5M at market average. I'll take $2.5M over a Roth...

Though I'll probably have my post downvoted by Roth fanboys who are bad at math.

 

[alexis001]

@bbredenkamp Your math is correct. A reason for Roth would be that you never have to take it in retirement if you don’t need to, so you can pass it on, or at least strategize when to take it. The other reason is the uncertainty of taxes going up significantly in the future. Another is that some people know they will inherit or are able to invest so much very early that they know they are likely to have a larger income in retirement than during their working years. You are absolutely correct that everyone should make the best assumptions given their situation and run the numbers.

Edit: One more reason, you can take the contributions out without penalty, allowing tax advantaged cushion or tuition savings to be invested.

 

[likeruth]

@bbredenkamp Umm.. I don’t get the example. Can you explain again please?

 

[malatsi]

@likeruth

1. Yes
2. Sorry I don’t know this for certain. I believe you can claim up to $2000 in credits but I’m not fully aware if there are any conditions.
3. Roth vs traditional IRA... really depends on your outlook on future rates. I personally lIke the option of having tax free returns in future vs. tax deferred as would be the case in a traditional IRA. There isn’t really a clear cut answer here though. There are plenty of good articles online comparing the two, I’d recommend reading up so you can see which apply best to your situation.