IRA versus Roth IRA

Deciding factors: if the contribution is deductible, tax bracket in retirement versus tax bracket today, income levels today, current age, and availability of  retirement plan at work.

If the question is whether you should invest in an IRA account (including traditional and Roth), then the answer is YES (capital bold yes)*. If the question is whether you should contribute to a traditional IRA or a Roth IRA, then the answer is ‘it depends’.

It primarily depends on several factors. Two of these factors are the most important: whether the contributions are taxable in the current taxable year, and whether you expect your tax rate to be higher or lower (as compared to the current rate) in retirement.

The basic idea of an IRA account (traditional and Roth) is 'Money is taxed by the IRS only once' - either you get taxed now OR you get taxed when you withdraw the money in retirement.

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My Roth IRA crosses $100,000 (2011 – 2015)

From $0 in 2011, my Roth IRA reached $100,000 in 2015. I will explain in detail with screenshots everything that I did in these 4 years.

The below table summarizes the entire process from 2011 – till date 2015:

Six Figure Roth IRA ($100,000+)

Six Figure Roth IRA ($100,000+)

We will get into specific details but broadly speaking here is what I have done:

  1. Maxed out my Roth IRA contributions in 2011
  2. Maxed out my Traditional IRA contributions and rollover over to Roth every year (2012 – 2015)
  3. I maxed out my After-tax (Thrift) contributions to the 401k plan
  4. Periodically rolled over the After-tax 401k money to Roth IRA (paying taxes on earnings)

Let me break up the above table and explain each section in a little more detail, along with my commentary. Continue reading

Back door entry to the Roth IRA?

Anyone can contribute to a Roth IRA, irrespective of their income. It is true that IRS has an income limit on who can contribute to the Roth IRA but it has a really neat (and simple) workaround.

For the year 2015, IRS rules (IRC – Internal Revenue Code, to be specific) specify that single filers making more than $131,000 and married filers filing jointly making more than $193,000 cannot contribute to Roth IRA.

Now here comes the neat trick and it has two parts - contribute to traditional IRA and do a Roth conversion.

Yes, it is that simple and achieves what you would have achieved by being able to contribute directly to a Roth IRA. Once the money is in Roth IRA, the money is there in the Roth IRA – irrespective of whether you made the contribution from your checking account or a rollover from your traditional IRA account.

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