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by rajathagasthya 3404 days ago
Some great answers here. As a financial noob and only 2 years into his career, I have a question about Roth vs Traditional for software engineers. Why would you choose traditional IRA when you expect software engineer salaries to mostly go up while you advance in your career? I understand Roth IRA has limited contribution, but what is a good alternative? I see a lot of articles about this topic on the internet, but I don't see specific advice for folks in the tech industry.
2 comments
Jtsummers 3404 days ago
It can be beneficial early on for the tax advantage to increase your net income for the year, but you'll probably want the Roth later. Also, look into the Saver's Credit. If your AGI (adjusted gross income) is low enough (easier if married), you get a percentage of your retirement savings back as a tax credit. Traditional IRA and 401(k) accounts reduce your AGI and make hitting this mark easier, and increase the tax credit you'll receive.

I did some back-of-the-envelope calculations yesterday. As a single adult (non-dependent), if you were to max a Traditional IRA, Traditional 401(k), you could make up to around $70-75k in gross income, and still be able to qualify for the Saver's Credit. Your AGI after contributions, standard deduction, personal exemption, and deductions for things like medical insurance premiums, could reduce your total income to $37k or lower. You'd then get 10% of your contributions, up to $2000, back as a credit. At ~$37k AGI, your tax burden is approximately $5k, with the credit, it's approximately $3k (numbers crunched on excel on another computer, these are estimates from memory).

If you're married the max AGI to qualify for 2017 is $62k. Looking at my tax forms from early on in my mid career, I definitely could've swung that if I'd been married and sometimes did (but wasn't married so no credit), and at the start of my career I could have hit that $37k AGI by making additional retirement contributions, had I known about it.

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rajathagasthya 3404 days ago
Thank you! Learnt a lot from your other comment too. :)
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csp256 3403 days ago
Traditional IRA's are more appealing than they seem, even for low income earners. It is entirely possible to pay $0 tax on withdraw from a traditional IRA.

https://www.kitces.com/blog/understanding-the-mechanics-of-t...

The attractiveness of a traditional IRA only increases as your marginal tax rate does.

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