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I never liked to be proven wrong in my past. In fact, it still stings when it happens today but the difference is I welcome a challenge! I want to get better at life and that means allowing for corrections. My choice to max out a Roth IRA was under a false assumption on my part. I’ve been challenged and am switching to traditional IRA!
Why I chose a Roth IRA
As I’ve revealed in multiple places on my blog and most recently in my article on 2019 contribution limits, I’m maxing out three tax-advantaged accounts:
- Employer-Sponsored Simple IRA ($12,500 for 2018 ; $13,000 for 2019)
- HSA ($3,450 for 2018; $3,500 for 2019)
- Roth IRA ($5,500 for 2018; $6,000 for 2019)
I made the false assumption that I could not max both a simple IRA and a traditional IRA and deduct the contributions both. Why? Because I failed to verify.
Why I’m switching to a Traditional IRA
“Trust, but verify” – Russian proverb also made popular by President Ronald Reagan
Under that false assumption, I thought I might as well still get some tax benefit by contributing to a Roth IRA.
Then I received the following comment on my article:
It was a great question and so I spent some time researching and reading. The following two articles are amongst the best I’ve found on the topic:
- The Only Reason to Ever Contribute to a Roth IRA by Financial Samurai
- Traditional IRA vs. Roth IRA – The Best Choice for Early Retirement by Mad Fientist
Furthermore, I went to the IRS website and confirmed that I can contribute to an employer-sponsored IRA and a traditional IRA. If you are covered by a retirement plan at work, Traditional IRA contributions deductions do have limits:
In my case, I’m single and my modified adjusted gross income is below the $63k threshold for 2018 and $64k threshold for 2019 so I can take the full deduction on my traditional IRA contributions in addition to my Simple IRA.
Lastly, I conferred with a tax accountant and he confirmed that I’m indeed in the sweet spot. He then said something that really resonated with me. We never know what is going to change in the future so why not enjoy the tax benefit which is certain today. One in the hand…
I would say that is some serious verifying. I’m convinced and am switching to a traditional IRA. That being said I will be able to reduce my taxable income in 2019 by $22,500:
- $13,000 (Simple IRA)
- $6,000 (Traditional IRA)
- $3,500 (HSA)
Another change I’m making for 2019
So I’ve written on the magic of HSAs and was able to convince my boss to offer an HSA qualified plan to our company. Initially, when I opened my HSA account I invested 75% and kept 25% in a debit account for health expenses. I think I was scared to invest it all.
I’d read the Mad Fientist’s article on HSAs and understood that it would be more optimal to invest it all, pay out of pocket for health expenses, and save my receipts. After all, there is no expiration on reimbursing ourselves from our HSA accounts for qualified medical, dental, and vision expenses.
Well now that I’m comfortable with maxing out my retirement accounts and cash flowing my expenses, I’ve changed my account so that 100% of my HSA contributions will be invested for 2019.
Okay, so 2019 is looking a bit more optimal!
You know what they say about assumptions…
So let’s talk a little bit about being wrong. I made some decisions off of some assumptions. I felt confident about what I thought I knew.
“It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.” – Mark Twain
Gosh, I love Mark Twain quotes! My lesson in this is to be careful about what I think I know for sure.
Don’t get me wrong I didn’t make a terrible mistake. Heck, we are talking about which investment account is going to help me maximize on taxes. This is a good problem to have, right?
Being wrong with grace
I’ve felt my pride rise up when I realize I’m wrong and someone points it out to me. Pride prevents us from getting better in life. Pride says, “I don’t need help; I can do it myself.” Additionally, pride says, “I’m going to keep doing things my way.”
Pride is ugly.
I simply don’t want it in my life. Sure it rears its ugly head from time to time, but when it does, I do my best to repent, turn away, and instead embrace a growth mindset. When we look at things in the world as a problem waiting to be solved or a puzzle ready to be put together, we are not intimidated by being wrong.
“I have not failed. I’ve just found 10,000 ways that won’t work.” Thomas Edison
Thomas Edison certainly rocked a growth mindset!
Babe Ruth struck out more times than any other player in Major League Baseball (MLB) and look how that turned out for him? I’d say he achieved rockstar status.
So my point is to embrace being wrong. I say take a chance on something you’ve been wanting to do but have held off out of fear or concern about getting it “right”. Look at me, I started a personal finance blog and have been challenged on some things. I’m the better for it.
I knew I wanted to get better at investing so by starting this blog I knew I’d be forced to learn stuff. What better way to be held accountable, eh?
Now that I’m out of debt, I like being optimal with my finances but I’m certainly not perfect. This journey is about getting a little bit better all the time. 🙂
I’ve got a new strategy for the new year which will allow me to optimize on my taxes, invest for my retirement, and cruise on autopilot. Choosing the traditional IRA over the Roth IRA is the optimal choice for me while I’m in this sweet spot. I plan on growing my income so this sweet spot may only be around for a short while.
How about you? What are your strategies for 2019?