Retirement Plan & 403b: TIAA vs. Fidelity

[coolswimmer800]

Oh, do check on the Roth IRA contributions limits.  IF you make too much, you phase out and lose the ability to contribute to regular and Roth IRA accounts  (I think that the number is $139K in 2020 for singles)

I believe that you can contribute to a Traditional IRA, up to $6k for 2020, regardless of how much money you make or what other retirement plans are available to you. The thing that phases out is the tax benefits you get from doing so, but you can still contribute up to the max amount regardless of your income (as long as you have enough earned income to cover the contribution, which doesn't sound like an issue here) and even if you are covered by a retirement plan at work. I am looking here for this information: https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-ira-contribution-limits.

If you make too much money to contribute to a Roth IRA directly, you can contribute to a Traditional IRA and then roll the money over to a Roth. You would pay taxes on any money that your contribution to the Traditional IRA made prior to the rollover, but if you do the rollover relatively quickly after the contribution, it will not have had a chance to make (or lose) money yet.

I think you are right, thanks for the heads up! I did a Google search and the Charles Schwab website indicates there are no income limits for Traditional IRA (https://www.schwab.com/ira/understand-iras/roth-vs-trad-ira).

I never considered opening a Traditional IRA since I'm pretty sure I will be in a higher tax bracket and there will be increased taxes when I retire. Your idea about immediately rolling over the Traditional to Roth IRA does sound tempting. I need to look into whether there are any restrictions, I never heard of folks using that approach to circumvent the Roth IRA income limits.

[arcturus]

I never considered opening a Traditional IRA since I'm pretty sure I will be in a higher tax bracket and there will be increased taxes when I retire. Your idea about immediately rolling over the Traditional to Roth IRA does sound tempting. I need to look into whether there are any restrictions, I never heard of folks using that approach to circumvent the Roth IRA income limits.

It is known as the "back door" Roth process. You can google "back door Roth" and learn lots of advice on the process. It is straight forward if you do not have funds in traditional (pre-tax) IRAs of any sort. You will need to fill out form 8606 every year that you do this. It is sometimes helpful to fill out a form 8606 first, just to make certain that you are aware of any hiccups (like having funds in a traditional (pre-tax) IRA on December 31 of the year that you do the conversion from traditional (post-tax) to Roth). You can still do this if you have funds in a traditional (pre-tax) IRA, but you will be subject to the pro-rata rule, which may make it a less useful prospect.

Note that there will be different recommendations regarding how long your funds should sit in the traditional IRA account. The common consensus is that the Tax Cut and Jobs Act explicitly acknowledged that it is ok to put funds into a traditional IRA and almost immediately convert to a Roth. Doing the conversion shortly after the traditional contribution limits the amount of gains (for which you will need to pay taxes) or losses (for which you will have paperwork, but no tax consequence). It is also recommended to leave the traditional IRA account open (with 0 dollars) so that you can do this again the next year without creating new accounts each year. I have had no problems doing this at Vanguard, and I have heard that it is easy at most firms (Fidelity, Schwab, etc).

[clean]

It is straight forward if you do not have funds in traditional (pre-tax) IRAs of any sort.

You can still do this if you have funds in a traditional (pre-tax) IRA, but you will be subject to the pro-rata rule, which may make it a less useful prospect.

That is the problem for me.  I started using IRAs as soon as I was employed full time, long before Roth IRAs were available.  The pro-rata rule would be a huge pain in the rear for me at withdrawal time. Instead of doing a 'back door IRA' , I just increased contributions to the 457 plan.   IF I didnt have any traditional IRAs and was unable to use the 457 plan I would use that option.

So if you are 'older' &/or have other IRA plans, then consider that the backdoor may be a land mine of paperwork in the future!  It may even be better to simply pay taxes on a traditional investment account (or pay off your house, etc).  You dont want to be spending your retirement doing the accounting because you did the 'back door' version!  (especially if congress gets around to closing that loop hole!     

[arcturus]

It is straight forward if you do not have funds in traditional (pre-tax) IRAs of any sort.

You can still do this if you have funds in a traditional (pre-tax) IRA, but you will be subject to the pro-rata rule, which may make it a less useful prospect.

That is the problem for me.  I started using IRAs as soon as I was employed full time, long before Roth IRAs were available.  The pro-rata rule would be a huge pain in the rear for me at withdrawal time. Instead of doing a 'back door IRA' , I just increased contributions to the 457 plan.   IF I didnt have any traditional IRAs and was unable to use the 457 plan I would use that option.

So if you are 'older' &/or have other IRA plans, then consider that the backdoor may be a land mine of paperwork in the future!  It may even be better to simply pay taxes on a traditional investment account (or pay off your house, etc).  You don't want to be spending your retirement doing the accounting because you did the 'back door' version!  (especially if congress gets around to closing that loop hole!     

I realize that expecting "logic" in our tax laws is unrealistic, but the present set-up seems to penalize people who do not have access to 401k or 403b plans and/or contributed to traditional (pre-tax) IRAs early on in their career. Rather than making higher income folks jump through the backdoor Roth hoops, I think they should just remove the income limits entirely, so that everyone has access.  In the meantime, I am lucky enough to have no traditional (pre-tax) IRA funds and can continue to backdoor my Roth IRA contributions every year with only the added complications of an extra click of the button (to convert from traditional to Roth account) and filing form 8606 (which is trivial, with only the single year's contribution and conversion).

ETA: The land mine of paper work for the backdoor Roth IRA is in the present, not the future. Once it has been converted, there is no additional paperwork (unless, of course, you want to access the funds before you are 59 1/2 years of age and the funds have not "aged" (5 years) appropriately...but that would be even more paperwork for a traditional (pre-tax) IRA...). But, yes, if you have significant funds in a pre-tax traditional IRA and exceed the Roth IRA income limits, investing in a taxable account may be a better choice than trying to do the backdoor Roth IRA.

[Ruralguy]

That was my conclusion as well. At that point, just invest in a normal account. Its of course more prone to abuse due to lack of self-discipline of the holder, but that's not the fault of the account.