The biggest traditional IRA tax mistake and how to avoid.
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- เผยแพร่เมื่อ 10 มี.ค. 2020
- Usually, we talk about income limits for the Roth IRA but today we're looking at a big tax mistake retirement investors make with the income limits on the traditional IRA. While there is no income limits on contributions there is an income limit on the deduction you get if you are covered by a retirement plan at work and today we'll help you avoid the trap of having pre and post-tax money in your traditional IRA.
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You just saved my whole life! Thank you
Thank you! Just what I needed.
Thank you!
This REALLY helped me ALOT!!!! Thank you
My opinion is the RMD fear is overblown by those pushing Roth conversions. The reality is RMDs are not going to be a problem for 99% of people. Example. You are 60 years old today so your first RMD is 15 years away, plenty of time to tax plan so your only income at that point is SS and RMDs. even if you have $5m in your IRA at RMD age the year one distribution will be less than $200k. After 15 years of inflation that seems like a reasonable amount to live comfortably on but not overkill. With annual adjustments to the standard deduction and tax brackets, your AVERAGE tax rate will be less than 20%. You couldn’t come close to making a dent by converting today without being at least in the 22% or 24% bracket.
Do you have another video explaining how the form 8606 play into the tax on T IRAs? I’m curious how that works. Thanks.
Thank for this info
Wow thx Dustin!
Thanks so much for sharing this valuable information. I learned a lot from it.
I think what you did is scare people from using a traditional IRA more than try to inform them about a tax technicality.
Do your comments about a 401k plan also apply to a Roth 401k?
Super helpful… what are the benefits of a traditional IRA if I don’t qualify for tax deductions? (Ie… if 2019 I contribute $6k post tax with $150k salary… 2020 do the same… 2021 do the same…)
Why don't you convert that ~$18,000+ traditional IRA to Roth IRA?
When you say "So if you have a traditional ira, and you put money in it, and you are cover by a 401k plan at work."
Do you mean I have to have a Traditional ira besides just my 401k plan to be able to take the deduction? Or Traditional ira, means 401k plan?
IRA is separate from a work 401k
Best explanation in TH-cam! Thank you.
WOW! Good to know! Thank you! I was just thinking about stopping to contribute to my 401 K and contribute to my IRA instead. Now I realize it's not that simple. Need to do more research. Thank you!!!
So your advice is....if i don't qualify for a deduction because i make too much... don't bother with a traditional IRA? what about the advantage that it's a tax deferred form of retirement? Thus my gains grow tax free until age 59? Of course I'll pay taxes on it then but the growth was still deferred until then. I feel it's still a good bucket to take advantage of even if i make too much.
use *_back_** **_door_* Roth IRA
Good old Form 8606
Wow great information thank you
Fill out and file your Form 8606 with your Fed. income tax. Keep a copy! Do the same for every year you have to and keep the copies! They are cumulative,you need last year's to fill out this year's and you will need them and to fill out another when you take distributions or do Roth conversions. Don't lose the forms and they will follow you around for the rest of your life most likely unless you exhaust the IRA. (The 8606 form deals with mixed deductible and non deductible contributions and how much tax you pay later at distribution or Roth conversion)
Use form 8606. That separates the amounts for you.
does this still count if you have a 403b? or strictly 401ks?
This is really great stuff man. you are really helpful.
Does this apply to Rollover IRA?
Can you invest in anything in the Traditional/Roth IRA, like MLP, REIT, etc… and not worry about the tax?
I think so - for a traditional IRA lots of options are available and taxes would be paid when you withdraw it after 59 yrs I think based on the tax bracket you are in. Hope I am on the right track?
I hate to ask a dumb question... I am about to open a roth ira. I am 20 years old. Here is my question. I know that I put in money from my paycheck since its already taxed. Could I put in money that I get from cash tips as a server at a restaurant since I'm being tipped in cash and I only get taxed on credit card tips? Another example is say I get 100$ as a gift for my birthday etc. Or does it have to be only money from my income that has already been taxed?
As long as you have earned income (a job) it doesn't matter which money you actually use to fund your Roth IRA.
This def helped me out with my traditional IRA, thanks so much
Awesome Dustin. Watching this in Jan 2022 :) This is one of the best videos that explains when and why on Traditional IRA with respect to covered or not covered by Employee sponsored 401 plans! I have been searching for the last couple of days for this info and was unable to find it. I have been following you for a couple of weeks but just happened to click on this video today and helped answer my question. Thank you!
Thanks Dustin good to know the rules and weather they have changed.
getting ready to retire have over $400k in my 401K account looking at buying some property overseas and would like to use $100k from my 401k account rollover Roth or traditional?
Sounds like a good situation to find yourself in. I am a financial advisor and wouldn't mind helping you out.
This idea covers all the questions I’ve been trying to search. Thank you so much!
I had that epiphany a couple years ago while looking at my paystub...I felt so stupid😂... Quickly stopped the direct deposit into that traditional IRA....except I don't know what I can do to correct it now. I think it was under 2-3k though
yeah interesting.....what other options would be possible if due to the income limits we are unable to contribute to Roth IRA? Either do a brokerage account or keep contributing to a traditional IRA and not get the deductions in April but money will still be invested and saved for retirement? I am not expert but many of us are in the same situation....hence trying to see if anyone has better options! Thanks!
You look like a magician writing on the board. What tech are you using for your studio?!
Newbie here! Great advice. My husband and I just opened an IRA account and come to find out we don’t qualify since we’re filing married separate for 2021 (income wise, we make under the limit, but the filing status is the problem :/)
So what’s the average Traditional IRA balance for someone in their 50’s? Asking for a friend. LOL!!!!
lol! I would say try not to compare yourself to others and do what you can now to reach your goals :)
Nicely explained, in other words for higher income, the advice is to move the money yearly to a Roth account after placing it in a traditional IRA, it had already been taxed, so traditional IRA is the wrong place for it to be but due to income limitation, it can't go to a Roth directly.
What happens is the $6000 was put in a seperate IRA account 20 years ago and not deducted. I want to close it now -- How do I tell the IRS that it's not taxable. (I do have a different IRA in a different bank.)
this is still confusing lol. would it be a good idea to just open up a brokerage account ?
It's okay to open up a taxable brokerage account but generally better to start and fully fund ($6,000) with a traditional or Roth IRA brokerage account first.
Good advice. I guess that means use the Employer plan and don't put $ into the traditional IRA, unless it's deductible.
When you initially think his background is a green screen! Nice setup.
What if one partner is covered by an employer plan and one partner isn't? Does each partner fall under a different set of rules?
it depends on how you file your taxes married filing jointly or seperate.
@@lalew2 so they are filing jointly!
I setup a SDIRA so I could contribute, then they tell me I can’t! I need help
Amazing thanks for the information. What about this scenario, person has a Roth which is maxed every year. Has an Ira with 5K but only because of a job change and that job'ss 401k got rolled over. Should I keep the ira and keep contributing to it or should I roll the money to the Roth and consolidate it. Any advantage to having both?
Im 18 and i got a traditional ira put 100$ into it should i continue adding i think i qualify for the deduction but am not sure
New here. Wow. I did not know the IRS limits shifting from a traditional into a Roth. Sigh. Curious, retirement plan for teachers - does this exclude me from the deduction too? When you say get it out of there, do you mean just convert to a Roth?
Hello Mrs.A, I am more than willing to help explain this you. I am a financial advisor and have help people understand this is the past.
This is my question too. I have a 457 Plan and 403b instead of 401k, so I wonder if the same issue applies.
I guess this is a good video. I already knew all of this, except for all the nitty, gritty traps which don't apply if you do it right the first time (put your money in a Roth IRA not a Trad IRA.) This seems like basic IRA stuff. Like page 1 of the rules. But whatever, from the comments this seemed to help a lot of people. Great job!
This is my second year contributing $6000 towards non deductible IRA. Basis calculation in the form 8606 would be cumulative of previous year's non deductible portion of the contributions or just for the current year? So for this year my basis would be $12000 or just $6000. I'll appreciate any response to it.
Will this apply if I have a separate account for deductable IRA and non-deductable IRA ?
So if you make a capital gains for example 5k for the year and choose to put that 5k in IRA, does that mean you won't have to pay capital gains tax on that? I understand the brackets, single, married and income ranges, short term gains vs long term gains all over, just wanted see if someone has answer on the investing the gains on traditional IRA would keep me from paying taxes? Probably not, but wishful thinking
Lmao probably just pay the damn taxes:) plan ahead
that 5k is taxable. The money going into the IRA needs to be preTax
Roths have to be funded by W-2 income. If it’s the same for traditional then that would be a no.
If i have 100k in traditional ira contributions, and when i retire the balance is 0. Do i still owe taxes on the 100k that didnt pay taxes? Thanks!
If the balance is zero then you owe no taxes. You're only taxed on withdrawals from a traditional IRA and if the account balance is zero there are no withdrawals.
@@johngill2853 thank u for the response!
Great info! If I understand there is a distinction between the DEDUCTION you receive for traditional IRA contributions vs. the CREDIT you receive for contributing post-tax earnings to the IRA. Do the AGI amounts included in the video apply only to the deduction component or also the credit component?
If you don't get a deduction then put the money in a Roth and avoid all the hassle. You have to keep accounting for this nonsense until you finally deplete all your non-Roth IRAs.