I just got my first "real" job and I want to put away some retirement money but I'm a little confused about some aspects of IRAs. I was hoping you all could give me some suggestions on whether I should go traditional or Roth.
My understanding is this:
- With a Roth IRA you use your taxed dollars to contribute but are never taxed on earnings, even when withdrawing.
- With a traditional IRA you contribute pre-tax dollars and you are taxed on the earnings only once you withdraw money in retirement.
- Because you contribute to a traditional IRA after your paycheck has been taxed, you deduct the amount you contributed to your traditional IRA and you get whatever taxes you paid on that contributed amount in your tax return, thus making that amount "untaxed" for the time being.
- The ability to deduct the traditional IRA contributions is limited (assuming you have a retirement plan through your job) to those making under $76,000/year, and those making more than that are unable to deduct the amount they contribute.
- This means that such people contribute to their traditional IRA with money they paid taxes on, and those taxes will not be returned because they are ineligible for the deduction. Thus, people making over $76,000 cannot make "pre-tax" contributions to a traditional IRA.
I will be making over $76,000 and under $125,000, so I am not eligible for the traditional IRA deduction but I can contribute the full $6,000/year to a Roth IRA. If my understanding is correct, I should go with the Roth IRA because either way I will not be making pre-tax contributions, but with Roth I get tax-free earning while with traditional the earnings are just tax-deferred.
However, I feel like I must be misunderstanding this, because the wiki says that "high earners are usually better off contributing to a traditional IRA, as this allows them to avoid paying their current high marginal tax rate" and the way I am understanding this means that high-earners are still contributing after-tax dollars to a traditional IRA.
Sorry if I'm being dumb here, but could somebody explain to me how a traditional IRA benefits high earners if they're above the deduction eligibility threshold? And which would you recommend to me, assuming I will make the full $6,000/year contribution and will be contributing at least the employer match to my 401k?
Thank you so much.
Submitted October 19, 2021 at 12:23AM by DeadFIL https://ift.tt/3C1Iv9y
