No Choice but to Roth

Hello everyone!  I know the article title may seem puzzling, trust me, as I didn’t like typing that phrase out myself.  However, there are certain things that you “know” when starting the year, that you may struggle to come to light with, when it comes to your finances and this happens to be one of them.  Obviously this isn’t a purely negative article, but it’s something I have had to come to light with – if I want to contribute to an IRA account this year, no matter what, I have to do a portion into my roth account.  Find out why below!

ROth ira situation

As one normally would, during the planning phase for the goals of 2017 – I also look at how much I think I can invest and into which accounts.  Instances, such as, maximizing the whole 401(k), which I HIGHLY recommend (due to the pre-tax efforts, opening up more cash now to put to work!!), the Health Savings Account (HSA) – again, highly recommend due to the triple tax advantage (pre-fed, state and FICA taxes), the taxable account and also – the individual retirement accounts or IRAs.  Therefore, in the beginning of the year I knew a few of these were going into play, however, the IRA was the question mark account, as the amounts you can contribute to the traditional IRA is dependent on your modified adjusted gross income or MAGI for short (Chart below, thanks uncle Chuck Schwabb).

The MAGI is starting to creep up there for me, with dividend income growing year after year, each year, thus adding to my overall taxable income.  I have done the research on somehow to keep this at bay (while being an employee) – I could do tax-loss harvesting strategy within my taxable investment account, but after bouncing a few of these ideas off of Bert to see what he thinks, I decided to lay off of that due to the unpredictability of the market, and also being unsure if it’ll even bring me down to a low enough level to fully invest into the traditional IRA, as there are other estimates or unknowns for the year.  The tax-loss harvesting strategy is essentially how it reads – you can take the losses and reduce your income on the losers of your portfolio, can wait 31+ days and re-purchase the shares back; thus keeping the shares but receiving the tax benefit of the loss.  Those estimates/unknowns, however, also include, this year are – salary increases, bonuses, a new potential career, taxable incomes may grow more than expected, etc..  Therefore, with the many unknowns plus the small risk related to tax-loss harvesting has reduced the opportunity or chance to invest fully into a traditional IRA.  Honestly, though, I’m pulling hairs here!  I am lucky and fortunate enough to have saved money and am able to invest with the money saved from what my employer is paying me.  Even though the busy seasons are long, daunting, stressful, awful, aging, wait… sorry I went off topic – I still am able to receive a salary that allows me to be in these situations.  If it’s a Roth or traditional IRA – I am still, very lucky.

The Tax Chart for MAGI, related to Traditional IRA phase outs for single/not married individuals (as I’m sure if my girlfriend reads this, the word “single” has a different, but unusual connotation here!):

Current plan

My current plan of action is this.  Obviously using the Dividend Diplomat Stock Screener as much as I can, and establishing the minimum threshold for a dividend yield above 4.25%, due to higher yields being more advantaged in a retirement based account for not having to pay current taxes on them.  However, I won’t be transferring the funds in their quite yet, as I’d like to earn a bit of interest prior to doing that, as well as – having more access to cash than not (even though I could always withdraw the cash placed into a Roth due to already paying taxes on it) and that this damn market is hard showing signs of any opportunities!  The hand has been dealt and due to the circumstances I have laid out above – the Roth IRA will for sure be used this year.

When calculating out, based on the MAGI expected, I believe I will have to do at least $3,500 into the Roth IRA and will wait until tax time next year of 2018 for 2017, to see if the eligibility of the traditional IRA is still there – as I would love to reduce my tax burden at the federal and state level, big time!  What’s funny about all of this, or not funny depending, is that I used to pump up the Roth, even saying to invest for 10 years straight to forget about it – a set it and forget it – philosophy.

Roth ira conclusion

In the end, everything’s all okay, as I’m still lucky and able to invest.  I still am able to use a Roth IRA for those specific tax advantages, so all is okay.  At least I know this will be tax-free for sure coming out and I could always withdraw the contributions made to a roth account at any time due to paying taxes already on those funds.  Would I have loved to take a full advantage of the tax breaks?  Of course.  However, I know everything will be okay and that money is and will be invested, regardless.  I more than likely won’t be making any move on the IRA accounts due to these unknowns, but I can safely say that I will be able to contribute a comfortable $3,500 without question.

What would you have done?  Tax-loss harvested?  Funded the roth, already?  Or would you have done what I’m doing – knowing that you can invest a certain amount into the Roth, more than likely, and if an opportunity presents itself – jumping on it, within that account?  Investment decisions occasionally isn’t about the stock, haha, but more about what type of account you do it in!  Pumped to hear everyone’s thoughts on the situation, what I’m planning on doing and what YOU’D do!!  Thank you for sharing and talk soon.

-Lanny

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6 thoughts on “No Choice but to Roth

  1. Although I personally rather invest my money into other forms of retirement savings, I do however see the advantages of diversifying ones 401k saving vehicles. I think that it is a wise decision though. I also don’t like the idea of not being able to touch these funds well into my 60’s

  2. Hey Lanny,

    I am a huge fan of Roth’s but that is due to my specific situation. The Traditional IRA ladder conversion will not work for my wife and I due to the elevated expenses we expect. It would push to a level where we would owe quite a bit in conversion taxes. I like Roth’s because my contributions are free to be withdrawn at anytime, leaving the earnings to grow tax-free. I like the flexibility it provides.

    Holden

    • Holden –

      Glad you are investing, first off. Secondly – congrats on the tax-advantaged account and also – know that you can always withdraw what you have put into there!

      Also – makes sense, as you wouldn’t want to convert if you’ll pay higher taxes than today, based on a discounted model and if it costs more tmrw to do today Makes sense if that’s the case.

      -Lanny

  3. To answer your question, I would have chosen Roth already. A few years ago I was debating between Roth and Traditional but went with Roth because of the simplicity of not worrying about what my taxes are going to be when I withdraw and not having to worry about the minimum required distribution when you’re of age.

    There are numerous other factors to consider, but given my age (under 40), those were two of my primary reasons for choosing the Roth IRA.

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