U.S. Treasury Investment (2) – Traditional IRA vs Roth IRA (+Backdoor Roth IRA)

U.S. Treasury Investment Journey

1. U.S. Treasury Investment (1) – Opening Fidelity IRA/CMA Accounts
2. U.S. Treasury Investment (2) – Traditional IRA vs. Roth IRA (+Backdoor Roth IRA)
3. U.S. Treasury Investment (3) – Direct Purchase vs. ETF Side Note
4. 2024 Pension Portfolio Plan
5. U.S. Bond Investment (4) – Real-world Bond Purchase

Regarding U.S. Treasury investment, you can buy directly through a brokerage general account or treasurydirect.gov. However, aiming for retirement readiness, we prefer using an IRA account in the U.S. There are two main types of IRA accounts: Traditional IRA and Roth IRA, as discussed in a previous post comparing the U.S. and Korean pension systems & investment accounts.

Comparison of US Pension Account and Korea Pension Account

To simplify, in Korean terms, Traditional IRA is similar to pension savings funds or IRP accounts. Let’s examine the characteristics of these two accounts:

Traditional IRA vs Roth IRA

Traditional IRA:

• Tax-deductible: Tax benefits for contributions.
• Tax Treatment: Profits are taxed, and withdrawals are taxable.
• Required Minimum Distributions (RMDs): Mandatory minimum distribution from age 72.
• Early Withdrawals: 10% penalty before age 59.5.
• No Income Limits: No income limit for contributions.
• Annual Contribution Limits: $7,000 in 2024 ($8,000 for age 50 and above).

Roth IRA:

• Non Tax-deductible: No tax benefits for contributions.
• Tax Treatment: Profits are tax-free.
• No Required Minimum Distributions: No mandatory minimum distribution.
• Early Withdrawals: Penalty-free withdrawals of contributions.
• Income Limits: Contribution income limit – $161,000 (single), $240,000 (married) in 2024.
• Annual Contribution Limits: $7,000 in 2024 ($8,000 for age 50 and above).

Each account has pros and cons. We need to decide whether to maximize tax benefits for contributions or enjoy tax-free benefits on profits during year-end settlements. For long-term goals like retirement planning, the latter is beneficial. Note that in the U.S., you can even buy private stocks in a Roth IRA account. If you invest in a startup that goes public after a few years, all the profits in this account remain tax-free. Such opportunities would be fantastic.

Roth IRA Issue and Backdoor Roth IRA Solution:

Returning to Roth IRA, there’s a potential problem if your annual total income exceeds $161k (single) or $240k (married) in ’24. For those seeking tax benefits, this can be a significant setback. However, the Backdoor Roth IRA method provides a solution:

1. Contribute the desired amount to Traditional IRA with no income limits (same limit).
2. Immediately transfer funds from Traditional IRA to Roth IRA.
3. Start operating the account with funds in Roth IRA.

Fortunately, the deadline for ’23 contributions is until April 15 in 2024! Although I regret not contributing in ’23, luckily, there’s ample time to include last year’s contribution. In the next post, I’ll explain the procedure for converting from Traditional IRA to Roth IRA.