When I realized I would be earning too much this year to qualify for a Roth IRA, I cried a little bit. Ok, that’s overly dramatic, but I have been so proud of myself for saving my pennies each year of my $20k to $50k / year income to max out my Roth IRA that I felt a little empty knowing my savings this year could not be invested in tax-free growth.
So I thought I’d do the second-best thing… open a traditional IRA and deduct the money now, pay taxes on it later. Not the best option in the world, but at least I’d get to deduct the money from my rather high single tax rate.
This morning I found out that I was completely wrong about that. I admit it’s my fault for not doing my research appropriately, but now I’m totally bummed. Apparently the income you’re allowed to have to get the benefits of a traditional IRA is LOWER than that of a Roth IRA. This makes absolutely no sense to me right now because why would anyone want to invest in a traditional IRA if you are in a low-ish tax bracket?
I guess if you do not have a retirement plan at work you are allowed to deduct up to $5k for your traditional IRA in each tax year. Funny how this is the first year of my life I will have access to a retirement plan… a 401k (no match or anything, of course, god forbid I work for a company that would match my contributions.) I signed up for it, and I am supposed to start making contributions in mid July. I wanted to max out my 401k and my IRA for the maximum deduction to reduce my AGI. But it looks like that’s not happening.
The only reason I can see a traditional IRA having some benefit is that I think I can still put up to $5k in there each year and $16.5k into the 401k and later, when I’m not making a lot of money over the year, I can convert both of those accounts to a Roth IRA and pay taxes in a lower tax bracket. Given that I obviously don’t understand tax law very well, I may be off on this logic as well. At least then I can see why a traditional IRA has some value. But as this conversion thing is fairly new – why would anyone want to open a traditional IRA? Is there ever a good reason for this?
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