IRA /Roth IRA Question

[Rickt]

My son recently started on his 1st job and I explained to him the difference between a regular IRA & Roth IRA. I also advised him to max his employer sponsored 401K plan and open a Roth IRA account account with either Schwab or Fidelity and start contributing to it each month upto $5,500 per calendar.

I now notice that he has opened an IRA account in Fidelity, a Roth IRA account in Schwab and is contributing $450/m in each of those accounts. As per IRS regulations, can he contribute $5,500 to an IRA and $5,500 to a Roth IRA for a total of $11,000 in one calendar year?

 

[panacea]

No, he can do a Traditional or a Roth but not both.

 

[RunningBum]

No, he can do a Traditional or a Roth but not both.

Not exactly true, he can do both, but there is a total limit of $5500.

Retirement Topics - IRA Contribution Limits

For 2013 and 2014, the maximum you can contribute to all of your traditional and Roth IRAs is the smaller of:

• $5,500 ($6,500 if you’re age 50 or older), or
• your taxable compensation for the year.

 

[Rickt]

Thank you panacea. That's what I thought.

 

[RunningBum]

And it should be easy enough to convert the tIRA to a Roth if he wants to go all Roth.

 

[Rickt]

That's awesome runningbum.
I can advise him to stop now that he has contributed $5,500 for this calendar year.

 

[38Chevy454]

That's awesome runningbum.
I can advise him to stop now that he has contributed $5,500 for this calendar year.

Yes, for the initial Roth contribution through his employer this is true. But if he can save additional after tax money he can convert to Roth to effectively increase the limits above the $5500. The back-door Roth conversion is the method. There are others on here that can explain better than me.

 

[Rickt]

Yes, for the initial Roth contribution through his employer this is true. But if he can save additional after tax money he can convert to Roth to effectively increase the limits above the $5500. The back-door Roth conversion is the method. There are others on here that can explain better than me.

38Chevy, what is the "back-door roth conversion"? Is there any info available on it? Thanks

 

[RunningBum]

Backdoor Roth IRA - Bogleheads

It's just contributing to a tIRA and immediately converting to a Roth IRA. It's normally used for people who are over the income limit to contribute to a Roth IRA but still want to do so. In your son's case it can be used to convert contributions made to a tIRA that he would really rather have gone to a Roth IRA, just as I suggested.

I don't see how a backdoor Roth increases the limits above the $5500, unless 38Chevy means that a $5500 Roth contribution is worth more than a $5500 deductible IRA contribution because you've already paid the taxes on it.

 

[38Chevy454]

Backdoor Roth IRA - Bogleheads

It's just contributing to a tIRA and immediately converting to a Roth IRA. It's normally used for people who are over the income limit to contribute to a Roth IRA but still want to do so. In your son's case it can be used to convert contributions made to a tIRA that he would really rather have gone to a Roth IRA, just as I suggested.

I don't see how a backdoor Roth increases the limits above the $5500, unless 38Chevy means that a $5500 Roth contribution is worth more than a $5500 deductible IRA contribution because you've already paid the taxes on it.

Maybe my wording was not exactly correct, I added effectively to mean he can save more than $5500 in a Roth IRA by doing the conversion. You can't exceed the $5500 limit for taxes. But you can save more than $5500 in the Roth IRA within a year by doing the conversion.

I am an engineer, not an accountant or financial planner, so my logic and words may not be the exact technical terms

The big advantage for OP's son would be to max out the Roth IRA total in younger years. Not knowing his tax rate, hard to say whether pre-tax traditional IRA is better than after-tax as required by the Roth IRA.

 

[panacea]

Not exactly true, he can do both, but there is a total limit of $5500.

Retirement Topics - IRA Contribution Limits

You are correct- this is a more accurate answer.

 

[LOL!]

That's awesome runningbum.
I can advise him to stop now that he has contributed $5,500 for this calendar year.

I would do this differently with my kids. I would say something like, "I think one can only contribute a total of $5,500 to any combination of traditional or Roth IRAs in a year. Have you checked that out? What does the IRS web site say? Can you really put $5,500 into each in a single year?"

Then I would wait for the answer. If they refuse to look it up, then later on when it comes to correcting the mistake, I will tell them where to look that up, too.

 

[pb4uski]

I think you may have put the cart before the horse. What is his current marginal tax bracket and what does he expect his marginal tax bracket to be when he uses this savings.

If his current tax bracket is the same or lower than the tax bracket he expects to be in when retired, he should go all Roth; otherwise he may come out ahead with traditional.

 

[retire2020]

My DD will have first time earned income(about 2K) this year and I'm planning to open a Roth IRA at Vanguard for her. I had few small conversations about Roth/Traditional and why Roth is better for her but at her teen age(almost 18) she is not interested. But I know some day she'll understand and appreciate that she opened Roth IRA.
I'll let her spend money she earned and will match the equal amount to put in her Roth - sort of reward to get a real job.

 

[RetireAge50]

I like how LOL! put it. Have him check the advice from an official source instead of just relying on what someone said.

Another idea (to research) may be to use Roth 401k if available while income is low (marginal tax rate is below 25%). Annual limits for this are higher (I think $17,500).

 

[Rickt]

Thank you all so much. I really appreciate all your suggestions/advice. This is really a great site with so many caring & wonderful members.