The biggest traditional IRA tax mistake and how to avoid.

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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[crybarry]

You just saved my whole life! Thank you

[keithmachado-ppfv]

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.

[lovepraysign]

This REALLY helped me ALOT!!!! Thank you

[abcdLeeXY]

This idea covers all the questions I’ve been trying to search. Thank you so much!

[lisatran]

Thanks so much for sharing this valuable information. I learned a lot from it.

[takman]

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…)

[erikathony]

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!!!

[getawayandgo]

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.

[MightyCrazy]

Best explanation in Youtube! Thank you.

[bubbathenaslover]

This def helped me out with my traditional IRA, thanks so much

[davidpowell]

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)

[warko]

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!

[warqaaakram]

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.

[efrainvega]

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?

[robcasais]

Do you have another video explaining how the form 8606 play into the tax on T IRAs? I’m curious how that works. Thanks.

[kenglatzer]

Use form 8606. That separates the amounts for you.

[brittneyayers]

Do your comments about a 401k plan also apply to a Roth 401k?

[PadresW]

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?

[emailv]

I think what you did is scare people from using a traditional IRA more than try to inform them about a tax technicality.

[TK-setophaga]

Good advice. I guess that means use the Employer plan and don't put $ into the traditional IRA, unless it's deductible.