Overview: Mr R & I were planning on starting to contribute to an IRA last year (our first year married and earning a stable income) but with me getting sick and everything, it just fell through the cracks.
Neither of our works offer any kind of retirement plan options so I guess we open an IRA through a bank (?).
Our combined income from W-2s and my fellowships was around 55k. We owe a decent amount in taxes since I received far more in grants than I expected. Which is fine, we can afford it and it’s my mistake for not taking into account that a semester had been switched from a position where the uni takes my taxes out to a fellowship position where tax payments are on me. (This entire upcoming year, I’m in non-fellowship positions so this is a one-time “oops.”)
Anyway, turbotax has informed me that contributing to an IRA before the middle of April can reduce the taxes owed. Since this is something we were planning on doing anyway, I figure this is as good a time as any.
So I really have basic questions:
-How do we open an IRA? Does it make a difference where we open one?
-Does anyone know how taxes are affected by IRA contributions?
I guess I’m just a little lost by everything and googling is not helping!! :((
Probably people out there far more informed than I, however, for what it’s worth, I would open one up through Vanguard. They are massive, user friendly, easy to track online, low cost and non-profit. There is a reason why they are so popular, and you can get all the information you are looking for on their website.
Do you really need the tax break at this time? How much will it save you in taxes? At 55K, you still are probably paying a very low rate (even though I know it doesn’t feel like it)! The very best option when you’re in a low tax bracket is to contribute to a Roth IRA. While it is after tax money and will not lower your taxes, this money will never be taxed. If you put money in a Roth every year, starting when you are young, it will eventually grow to a large amount, and never, ever be taxed. But if you put it in a regular IRA and it grows to a million dollars at age 60, you will pay taxes on the entire amount when you withdraw it. This is one of the truly great deals left, and I doubt that it will last. Chances are, you’ll be in a higher tax bracket in the future, and that might be the time to consider a regular IRA to reduce taxes.
I have three IRAs at my credit union and possibly one through the company which administers the other investments I have. If you have an IRA certificate of deposit, the interest rate will be fixed (and probably quite low). According to this web page, you can put IRA amounts into almost any type of investment: http://www.money-rates.com/basicguides/moneymarket/ira-money-market.htm
I agree with bus.
If you can afford to not get the tax break now, I’d go ahead and contribute to a ROTH, up to as much as you can afford, or the max you can each contribute. Then the earnings won’t be taxed, and you’re getting the advantage of your relatively low tax rate now.
I’d just stick it in the Vanguard fund based on your projected retirement date (I think they do it in 5 year increments).
Good for you for paying attention and getting started with this early. It really matters.
I started contributing just about 5% of my salary at age 22, and increased the amount as I could afford it, and I’ve got a substantial retirement account balance. My H, who went to school and had fellowships through about 30, started contributing at 30. Our balances 25 years later are very different.
I wholeheartedly agree with Bus. Both on the Vanguard option and the Roth as opposed to a traditional IRA. You are at a low tax rate now. Whatever you put in the Roth will not save you taxes now, but it will earn money over your lifetime and when you retire, you will probably be in at least as high a tax bracket as you’re in now, or probably even higher. Then when you take it out it will be tax free. That is a huge advantage. Not only that, but there are limits to what you can make to contribute to a Roth so you want to take advantage of it while you can. And you never know when this option will be taken away. Do it!!!
No, the tax break is certainly not necessary right now and I am very much open to other options!
I will look at these. I’ve never even heard of the Vanguard option so I will definitely look into that.
I also have a very small 401k from a former job that I’m figuring out what to do with… I don’t know if ages make a difference to anything but we’re both 26 now (I was 25 on Dec 31).
I would roll that 401K from where it is to your new Vanguard account. You can either roll it into a traditional IRA if that’s what you want, or convert it to a Roth. I would do the latter but you have to be willing to pay the tax on it now. Age makes a difference because if you were contemplating retirement soon, this may not necessarily apply. But at your age the benefit of that Roth IRA growing tax free until retirement is huge.
At your age, I would definitely recommend a Roth IRA. My D has hers at Fidelity, primarily because that is where my retirement money is. Although you won’t get the tax break now, the money is available to be used, tax free and without penalty, whenever. My hope is that my D will leave hers in till retirement but if she needs money for a down payment on a home at some point, that would be an excellent use. You have until April 15 to contribute to an IRA for the prior tax year. I usually calculate my taxes using various different amounts for H’s SEP contribution and figure out how much to put in depending on the refunds or payments. I would rather put more into the account than pay it out in taxes.
Another great thing about Vanguard is that you can roll your small 401K into something else like an IRA, and move it to Vanguard. They walk you through it, and you can have all your money in one place. I see a problem with people taking different jobs often, leaving small retirement funds all over, and losing track of them. But if every time you leave somewhere, you just roll it over into a Vanguard account, at least you can keep it at the same place.
I hate the thought of leaving money anywhere. In fact, when I got furloughed from my first real airline job, I didn’t even realize until months later, that they had been contributing money to a 401K for me. It was only about 14K, had no idea of what to do with it, so we rolled it into an IRA and gave it to a friend of my husbands, who was an investor. We also gave him about 6K for my husband’s IRAs. That 20K is now worth about 380K, because we gave it to him when we were much younger. Plus, we converted it to a Roth, so it will all be tax free. We could have easily used that money to buy a car, that would have been long gone by now.
Point is, if you can do this when you’re young, that little bit you put in now can be massive, many years later. And if it’s tax free? Hallelujah!
Question about rolling over the 401k: are there any fees or taxes that I should be aware of if I roll it over into something? All of the money in it is mine. I didn’t accumulate enough time in order for my employer’s contributions to actually go to me. (I know the word vesting should go in there somewhere but I hope that makes sense.)
The link in #2 has good basic information in it about the contribution limits for IRA’s.
You can set up an IRA account at your bank or broker. Traditional IRS’s create an adjustment to gross income. So if you earn $60K and contribute $5K you will be taxed on $55K. What you contribute into an IRA will grow tax free. When you withdraw the money you get taxed on the income. Thus, it is a deferred tax arrangement not an exclusion from income.
You can contribute a bit more once you above 55 as it says in the link.
Roth’s are a different kind of IRA that do not adjust income but are not taxable upon the withdrawals. They are both good and smart especially for folks not covered by an ER sponsored plan.
Romani, the rollover of IRA to IRA should not cost you anything. I believe the receiving institution will take care of the transaction. You will need to provide the holding account information and a signature.
It only costs you money in taxes to convert from a traditional IRA to a Roth IRA. We recommend our kids use Roth IRAs too. Sometimes there may be a small (under $100) administrative closing fee from wherever you are holding funds to close out the account and have it at another place. Some places also charge you an annual admin fee, particularly if your balance is below $1000 or some minimum. All fees should be published and jade apparent to you.
It is worthwhile to not have your finances too widely scattered for simplicity’s sake. Vanguard is a great place. If you want to be able to walk into a place and have face to face time with a person, Fidelity and Schwab are other places that work and have physical offices but pay attention to fees and what you may be referred to did investments with some of these brokerages. They do have some very low fee index funds with NO load and some very high ones with loads (extra fees). It makes a BIG difference, especially over time.
Check out bogleheads.org. It’s a free board and has great resources and forum.
Looks like good advice. I like low fee institutions (probably NOT a bank) that do not charge you an annual fee for holding your IRA account. Vanguard should be great. I have mine with Schwab because I can “self direct” it and buy/sell stocks, ETFs, funds, bonds as I choose. When you roll a 401K into an IRA just make sure the check is made out to the receiving institution, and ideally gets mailed directly to them. You don’t want the IRS to get the idea that you personally have received the funds or they will try to tax you on it. My current traditional IRA was funded over the years by 3 different 401K rollovers after leaving each of 3 fairly long term jobs.
Although a Roth IRA is likely better for you, to answer your original question - you are probably in the 15% bracket, so if you contribute $5,000 (before 4/15/17) to a traditional IRA your federal tax bill will be reduced by 15% of that, or $750. (You might also get a break on state income taxes too, depending on your state) So, weigh that immediate benefit of $750 vs the income tax you will owe 30 or 40 years from now, which will be zero if you open a Roth today.
Vanguard has been reliable and one of the lowest cost options since at least the nineties. We use USAA for our IRAs, (well I now have a SEP because I can deduct it as a business expense), but it’s only available to you if you have a military connection.
I had an IRA years ago and converted it to a Roth IRA. You pay taxes on what it’s worth now, because you get the tax benefit of the Roth when you withdraw it in the future. But if you converted it later when the balance is higher, you would pay more tax.
If you did the rollover/conversion now, it should not come into play until your 2017 tax return.
Unfortunately we won’t reach close to those limits right now. Getting sick majorly cut into our savings and we’re simultaneously trying to build into a savings account that we can liquidize if necessary.