|Not that Ira.|
Disclaimer: the following post includes discussion of both taxes and investments, two painfully boring topics that are liable to put you to sleep. It is strongly recommended that you drink no fewer than two espressos prior to reading this blog post, and wait at least an hour before operating a motor vehicle or heavy machinery. Additionally, nothing contained below constitutes tax or investment advice.
We just filed our taxes, and got back about seven hundred dollars. This is just as we’d hoped for: to land within spitting distance of what we owe. With a couple of rental properties that might have unexpected expenses, and whose tenants might vacate unexpectedly, too, it’s tough to predict a whole year’s income and expenses ahead of time.
This uncertainty plays a little havoc with our IRAs, too. We’re never quite sure if our MAGI (Modified Adjusted Gross Income) will allow for a Traditional IRA contribution at all and, even if it will, how much can be deductible. The rub is that we can’t really accurately calculate our MAGI for 2016 until we did our taxes in 2017.
Still, it turns out I could have contributed about $1,400 into a Traditional IRA and the remaining $4,100 into a Roth IRA, rather than putting the entire $5,500 into a Roth as I did. And since The Mad Fientist has proven the Traditional IRA is superior, in an ideal world, I’d put as much as I could into the Traditional, and avoid about $350 in taxes (we are in the 25% marginal tax bracket).
But it’s tricky to put this plan into action: if I don’t know what my MAGI is until the following year, how do I know how much to put into the Traditional every month, and when to stop?
See, aren’t you glad you had those espressos?
- Tax efficiency: I’ll be able to deduct the maximum amount from our taxable income
- No penalties: by waiting until 2018 to make all the contributions, I don’t have to worry about contributing too much by accident
- Less Tax-free Growth: The $5500 contributed throughout 2017 will be sitting in taxable account all year, rather than sitting in an IRA all year (i.e. – We’ll pay taxes on the dividends thrown off by the investments)
- Cash Crunch: that $5,500 I have to contribute all at once in 2018 has to come from somewhere, and it’s not like we keep that kind of money just sitting around in cash. It figures to be a pretty tight couple months in the beginning of 2018.