IRA or 401k

H

hornbri

25+ Posts
I currently invest 6% to my employee 401k (limit they match).

I would like to invest about another 5k a year in either a 401k or a IRA . Some more background.

- 30 Years old, single
- Cannot deduct the IRA contributions (Income over limit).

Which should I do?

Redardless of what I should do ongoing. Should I just go ahead and open a IRA right now for the 2007 limit (4k)? I figure I already did not put it in a 401k so that seams like a good place for it.
 
If a Roth IRA is not an option, contributing to your 401(k) is the best bet as long as you are happy with the funds available through your plan.

RR
 
If you can (and I suggest that you do), max your 401K and then put an additional 5K in a trad IRA.

In 2010 convert the trad IRA balance to Roth and take the tax hit.
 
Gardner,

Elementary question here, but what changes in 2010? Another question, is there any Roth IRA equivalent for folks making over the income limit (not at that point yet, but will be in the next year)?
 
I make over the limit and I put the money in a "Traditional IRA". You will not be able to deduct the income like you would for a trad IRA if you were below the income level but in 2010, you will be able to convert to a Roth by recognizing the amount you convert as income.

So, from what I understand, it works like this:

You make 175K in 2010 and have 20K to convert to Roth. Thus, in 2010 you would recognize tazes at the level of 195K and get to move the IRA over to a Roth that you can withdraw tax free like any other roth contribution.
You can do this with roll over 401Ks in trad IRAs as well.

Also, I think that you are able to split the tax hit between 2010 and 2011 (but only can rollover in 2010).

If you make below 100K you can do this any year and recognize the rollover income.

Here is a website that explains the situation The Link

I could be very wrong on some of this so dont go doing something with your retirement income and justify it by saying that "some dude, gardner barnes, on hornfans said to do this"
 
Correct me if I'm wrong but in that case it sounds like he is getting taxed twice on the contribution to the IRA (once upon intial deposit as he is not able to take the IRA deduction and then upon conversion).

RR
 
In GB's scenario, then only thing subject to tax during the conversion is the earnings on the non-deductible IRA contributions. Since his contributions were already post-tax, those do not have to be claimed as income.
 
Anyone can put $ in a trad IRA. You cant take an Income deduction if you are over the income limit. Remember that a trad IRA operates much like a 401K in that it is pre-tax income that is taxed when you take it out.

A roth IRA or 401K is after tax money that can be withdrawn tax free. In the case of a Roth, you cant contribute at all if you are over the limit. I had to "reallocate" some Roth contributions a few years ago. It was not hard, but made for more work at tax time.

96 Buff is correct: You are only taxed on your earnings or anything you took a deduction on (i.e. the portion of an old 401K that you rolled over)
 
Thanks for all the good info. I did not know about the 2010 Roth conversion.

I think I am going to try to max the 401k and then do a trad IRA with anything more I can get away with (up to 4k).
 
If you're eligible to make a Roth, I don't see why you would want to make a nondeductible IRA contribution.

For 2007, the Roth phaseout begins at $99K and it's $101K in 2008. The phaseout for a traditional IRA begins at $52K for 2007. If your adjusted gross income is less than $99K, you should make a Roth IRA contribution.
 
There's some slight misinformation about the Traditional IRA here.
The Traditional IRA is funded with either after-tax or pre-tax money (that depends on whether you're able to take the contribution as a deduction on your taxes) and it grows tax-deferred meaning all growth earnings are taxed at time of withdrawal. IF you also are able to deduct your contributions, then those are also subject to taxation upon withdrawal. If you're contributing only post-tax dollars, then only earnings/growth is taxable.

The Roth IRA is always funded with post-tax dollars and all earnings/growth is tax-free.

Keep in mind that this is as currently legislated. Our wonderful Congress can alwways change their minds.
 
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