Roth IRA and 401(k)

Today TaxMama hears from Ken in Los Angeles, who tells us “I’ve maxed out my regular 401K contribution ($15,500 I think) for the year. Are there any negative tax consequences if I start contributing to a ROTH IRA?
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Dear Ken,

While it’s always great to see high-income individuals saving aggressively, the Roth IRA is one of the worst choices you can make before the end of the year.

Why? Well, if your income as a single man exceeds $99,000, your Roth contribute limit will phase out. It phases out to $0 at $114,000. (The range is $156,000 to $166,000 for couples filing jointly.)

Why does this especially apply to you? You’re working for a company with a generous stock option plan. If you exercise any of those options at year-end, your income will skyrocket and kick you out of the Roth realm instantly.

Of course, since you are covered by a retirement plan at work, you can’t dedjuct a regular IRA either, since your income is well over the phase-out range of $52,000 to $62,000 for singles and Heads of Household. [$83,000 to $103,000 for a married couple filing a joint return or a qualifying widow(er).]

There are some good notes here on the PENSCO Trust Company site in President Tom Anderson’s Blog that will explain more about the various limits.

What can you do if you want tax-free or tax-deferred investments?

Well, in the tax deferred arena there are annuities and certain US Savings Bonds. Not the most appealing of options, are they?
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In the tax-free or relatively tax-free area, you’ll find Municipal Bonds, Municipal Bond Funds and certain real-estate investment trusts and LLCs whose rental income is sheltered by the depreciation. And there is appreciation due to the increased values of the buildings which are generally sold every few years.

And remember, you’ll find answers to lots of questions about Roths and IRAs and other tax information, free.
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Where? At

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