What about a Roth AND a Traditional IRA?

I am pretty sure that you can only put $5,000.00 a year in to a Roth account but that just might be bassed on how much money you make a year, I am not sure if the amount can go up or down bassed on how much you make.

You can contribute to both a Roth and Traditional IRA in the same year, but the sum of your contributions to both can not exceed the contribution limit (I believe its $5000 this year if your under 50 and make less than $115,000 per year).

Gainfully Employed wrote:

You can contribute to both a Roth and Traditional IRA in the same year, but the sum of your contributions to both can not exceed the contribution limit (I believe its $5000 this year if your under 50 and make less than $115,000 per year).

Yeah, I'm familiar with the contribution limits. I'm a graduate student right now so I can't afford to make any contributions at the moment, but once I graduate and my job starts, I'll be able to fully fund my IRA(s) for both '08 and '09, which is the plan. I know I can do this thing, I'm just wondering if it's a sound bit of strategery.

cassio598 wrote:

Yeah, I'm familiar with the contribution limits. I'm a graduate student right now so I can't afford to make any contributions at the moment, but once I graduate and my job starts, I'll be able to fully fund my IRA(s) for both '08 and '09, which is the plan. I know I can do this thing, I'm just wondering if it's a sound bit of strategery.

it's not a bad idea, but i don't think you should bother. you seem to have a pretty good handle on these things, so i'm not going to go into a lot of detail. feel free to ask me to expand.

1) the practical point - it's unlikely that you can do the bracket math accurately enough until after the year end. you'd lose some benefit by not contributing the max as soon as possible, but this is a small point as long as you don't mind waiting. just know that there's not much point in following through with this plan unless you do wait.

2) the Roth rules effectively allow you to shelter more gains because the contribution limits for Roth and traditional are the same. in other words, for a Roth contribution you use post-tax money and for traditional pre-tax money. $1500 of post tax money is more than $1500 of pre tax money. the various roth vs. traditional calculators on the web take this into account by assuming that you will invest the taxes paid on the roth contribution money. that investment is fully taxable though. 25% is still a pretty low rate, so i think this aspect probably is enough on its own.

3) notwithstanding the above, there are good reasons to have a source of "traditional" and roth money available at retirement. if you are thinking of brackets and rates now, you should be able to understand this easily. you can pull first from taxable accounts (perhaps a pension plus your "traditional" funds) until you hit the maximum tax rate that you want to pay (say, for example, 28% and whatever dollar amount that means) and then pull from Roth funds. if you think about it, it is a complete waste to pull from Roth funds for the first $20,000 or so, which would be tax free in any event.

If I was you I would put all $5000 in the Roth. Certainly any income that will be taxed in the lower tax bracket should go into a Roth, and it sounds like you're going to have very little income taxed at the higher rate. You'll make everything more complicated trying to optimize something that's going to make very little difference, and that might cause you to make some big mistake that will make a big difference, like forgetting to do it at the end of the year.

You will probably have plenty of opportunity later in life to fund tax-deferred accounts and get yourself back into better balance between tax-deferred and tax-free retirement income sources.

Good answer. If I were the original poster, I would just do the Roth, and then when the 403b becomes available, contribute the max to that. Then if all is well and he's comfortable with his income level, then open a non-retirement fund of some sort -- could be index funds if you want. I might even start a non-retirement mutual fund even before maxing out the 403b, but I'd have to look more closely at the 403b before I would make that decision. It's not a bad idea to have a good source of non-retirement income to draw from if you need it.

Flagpole wrote:

Good answer. If I were the original poster, I would just do the Roth, and then when the 403b becomes available, contribute the max to that. Then if all is well and he's comfortable with his income level, then open a non-retirement fund of some sort -- could be index funds if you want. I might even start a non-retirement mutual fund even before maxing out the 403b, but I'd have to look more closely at the 403b before I would make that decision. It's not a bad idea to have a good source of non-retirement income to draw from if you need it.

What, no calculations this time that, "If you invest the max into the Roth, and the max into the 403b, and the limits do not go up, and you retire at this age, and blah, blah blah, you will have $44,243,456,123!!!!!!!"?

really? wrote:

What, no calculations this time that, "If you invest the max into the Roth, and the max into the 403b, and the limits do not go up, and you retire at this age, and blah, blah blah, you will have $44,243,456,123!!!!!!!"?

I like to keep the people guessing brother. Honestly I've got a big project for a client that I've got a lot of work to do on today, so my responses will be short and SWEET.

Wow, the three guys I was hoping would answer. Thanks for the advice, y'all. I've still got a few months before I have to make a decision, but knowledge is power, I guess.