Let’s talk about Roth IRA versus other options to save for retirement. I am using my self as a case study. Current finance situation: 32 y.o, $180k current mortgage principal balance on a 14 years track, $10.8 k car loan debt, $120k 401k account, $70k cash saving, $30k stock investment. Simple goals: saving as much as possible for retirement, lower taxable income, saving for my first rental property.
* Just last week, I discovered that my company only allowed me to contribute a maximum 6% of my paycheck towards my 401ks retirement plan. Because I am a pharmacy director, my salary is considered as highly compensated.
* Normal max 401ks limit is at $19,000 for 2019. Six percent 401ks contribution from every paycheck ( x 26 paychecks) will only get me close to $9,000 at the end of this year. This isn’t such great news since I will lose out on lowering my taxable income and maximizing my retirement contribution. To find out why out max out my 401ks, here is the blog I wrote. One of the best advantage of investing that a lot people don’t understand is compound interest.
* Today’s topic: If already maxing out 401ks, what other options that can both help me save for retirement and lower my taxable income at the same time? A few possibilities that first came to mind were Roth Individual Retirement Account (IRA) and Traditional IRA.
ELIGIBILITY?
Traditional IRA
1) Income restriction :(NOT ELIGIBLE): for 2019, filing status is single, I can’t contribute if my income is $74,000 or more.
2) Age restriction :(ELIGIBLE): must be under age 70½
3) Contribution Limit: For tax year 2019, the most an individual is allowed to contribute annually to a Roth or traditional IRA is $6,000, or $7,000 a year if you’re age 50 or older
Roth IRA
Roth IRA contribution limits for 2018 and 2019
1) Income restriction :(NOT ELIGIBLE): for 2019, my Modified Adjusted Gross Income (MAGI) has to be less then $137,000. In 2018, my MAGI was over $137,000. To calculate your MAGI, you can see this article on TURBO TAX
2) Age restriction :(ELIGIBLE):can contribute at any age
3) Contribution Limit: under age 50, you can contribute up to $6,000
TAX DEDUCTION PERK?
Traditional IRA
Tax-deferred growth and tax-deductible contributions. This is good because I can reduced my taxable income. For those who already contribute to 401ks, or your spouse has some sort of retirment account, you can find out more about your tax situation from Vanguard.
Roth IRA
Since the money is already after tax, I can’t apply any of this contribution to lower my taxable income. This is not a great option for me since my goal is to deduce my taxable income.
WITHDRAW RULES?
Traditional IRA
Oh no: I have to pay tax on withdrawals of all traditional IRA earnings and on any contributions I originally deducted on my taxes.
To read more about IRA withdrawal.
ROTH IRA
Not so bad: I can make a withdraw on the money I put into the account; not earnings — at any time without having to pay income taxes or an early withdrawal penalty.
This is not so bad in my situation. As I mentioned earlier, one of the goal I have is to save money for a rental property. If I decided to put money in Roth and earning starts to generate, I can withdraw the amount out to fund for my rental property without any penalties.
To understand more about the differences, you can find out more at:
- Nerdwallet: Roth IRA vs. Traditional IRA
- RothIRA: Traditional IRA vs. Roth IRA
- Vanguard: Roth vs. traditional IRAs: A comparison
- Fidelity: Compare Roth IRA vs. Traditional IRA
- Investopedia: Roth IRA vs. Traditional IRA: What’s the Difference?
- Fool: Traditional IRA vs. Roth IRA: What’s the Difference?
