Retirement 201 - Maxing, what's next

[ssmjlm]

So DH and I are both hitting the max this year with employer retirement accounts.  We make too much for a traditional Roth IRA.

What's next?  Help me adult.

And if my back of the envelope math is right, I will hit the max next year and may have to lower my per paycheck contributions to not hit the cap before end of year.

[archiethedragon]

Back door roth if you can

[azalea]

Backdoor Roth... thefinancebuff.com/the-backdoor-roth-ira-a-complete-how-to.html

[azalea]

Do you have HSA eligible healthcare accounts? We both contribute the max each year and 'save' those accounts for future usage. Make sure to invest the balance. Holding as cash will severely stunt long-term growth. Triple tax advantage. Tax-free in, tax-free growth, and tax-free withdrawal for eligible health expenses in the future.

Have you considered a Donor Advised Fund (DAF) to reduce tax liability or to donate appreciated stock?

[goldengirlz]

This may not be the right answer, but we just invest in a regular brokerage account. We’ve taken our tax breaks; now I just want growth and flexibility. And capital gains tax is lower than income tax.

[dragon's breath]

Yes to all the above-- Backdoor Roth, HSA, and then I think you'll need to start looking at taxable. I know some people love real estate, but being a landlord would be a nightmare for me, so I don't see myself ever going that route.

I've backed way off on contributions in order to focus elsewhere for a couple years, but I'll be in this position myself in the future.

[sometimesrunner]

Backdoor Roths, then taxable accounts.

[k3am]

Oct 2, 2020 14:43:47 GMT -5 goldengirlz said:

This may not be the right answer, but we just invest in a regular brokerage account. We’ve taken our tax breaks; now I just want growth and flexibility. And capital gains tax is lower than income tax.

This is what we do as well. And DH has some segregated funds that he’s “actively playing with” that don’t perform any better than our primary brokerage account that we manage less aggressively.

[ssmjlm]

I’m a fed, so no HSA since I have amazing insurance for now.

I’ll look into a backdoor Roth, but am not the most financial savvy.

DH and my dad both said to just throw more into our vanguard fund. And then divert more to charitable giving.

[dragon's breath]

Do you take advantage of the FSA? If not, do that.

There are a lot of "how to"s for a backdoor Roth online, but you should be able to do it with Vanguard since you use them already. Open a traditional IRA (if you don't have any others), contribute $6k *into the money market account, wait until it all clears, then move it from the traditional IRA into the Roth IRA.

*Put it into the money market account to keep it as close to $6k as possible for the few days it will be in there. You don't want to end up with a gain before you get it moved, and then have to deal with taxes on that.

[tcu2003]

Oct 2, 2020 18:25:15 GMT -5 ssmjlm said:

I’ll look into a backdoor Roth, but am not the most financial savvy.

I had my reservations about the ease of doing this, but it really is relatively easy! We opened traditional and Roth IRA accounts with Vanguard last year for my DH and me, and it’s really not hard to do the backdoor conversion. Promise!

[mich1]

If they are ineligible for a Roth, it might not make sense to backdoor Roths as those would be taxed at their highest marginal tax level, which will be 24-32%.

My suggestion is start looking at taxable accounts. This will give you more flexibility, especially if you want to retire early.

[azalea]

Oct 5, 2020 16:07:11 GMT -5 mich1 said:

If they are ineligible for a Roth, it might not make sense to backdoor Roths as those would be taxed at their highest marginal tax level, which will be 24-32%.

My suggestion is start looking at taxable accounts. This will give you more flexibility, especially if you want to retire early.

What do you mean? Roth IRA contributions are post-tax income. Once it is a Roth IRA (via the backdoor method), the growth is tax-free. Plus, after 5 years, money can be withdrawn from a Roth IRA without penalty.

If that same money is invested in a taxable account, you are paying taxes on the growth.

[mich1]

Oct 5, 2020 16:45:51 GMT -5 azalea said:

Oct 5, 2020 16:07:11 GMT -5 mich1 said:

If they are ineligible for a Roth, it might not make sense to backdoor Roths as those would be taxed at their highest marginal tax level, which will be 24-32%.

My suggestion is start looking at taxable accounts. This will give you more flexibility, especially if you want to retire early.

What do you mean? Roth IRA contributions are post-tax income. Once it is a Roth IRA (via the backdoor method), the growth is tax-free. Plus, after 5 years, money can be withdrawn from a Roth IRA without penalty.

If that same money is invested in a taxable account, you are paying taxes on the growth.

To backdoor Roth contributions, you are likely going to pay more taxes on this money than you will at retirement....especially if your income exceeds the Roth contribution limit now.

If that same money is invested, long term capital gains is 15%.  That is less than the 24-32% (depending upon how much over they are) as a marginal tax rate for backdoor Roth rates.

While Roth contributions, you are still hampered by Roth rules.  If you have taxable investment accounts and want to retire at 50, you have access to everything.  If you want to retire at 50 with a Roth, while you can remove your contributions, you cannot remove the earnings.  Depending upon age, contributions are going to be far less than earnings.

We are doing this now.  You just have to do the math with your data.

[freshsqueezed]

Oct 2, 2020 18:25:15 GMT -5 ssmjlm said:

I’m a fed, so no HSA since I have amazing insurance for now.

I’ll look into a backdoor Roth, but am not the most financial savvy.

DH and my dad both said to just throw more into our vanguard fund. And then divert more to charitable giving.

I just wanted to say I’m a fed and have an HSA. I switched plans to an HDHP last year. The net deductible isn’t much higher and the plan itself I found to be way better. Just throwing that out there since that jumped out at me.

[dragon's breath]

Oct 5, 2020 20:24:12 GMT -5 mich1 said:

Oct 5, 2020 16:45:51 GMT -5 azalea said:

What do you mean? Roth IRA contributions are post-tax income. Once it is a Roth IRA (via the backdoor method), the growth is tax-free. Plus, after 5 years, money can be withdrawn from a Roth IRA without penalty.

If that same money is invested in a taxable account, you are paying taxes on the growth.

To backdoor Roth contributions, you are likely going to pay more taxes on this money than you will at retirement....especially if your income exceeds the Roth contribution limit now.

If that same money is invested, long term capital gains is 15%.  That is less than the 24-32% (depending upon how much over they are) as a marginal tax rate for backdoor Roth rates.

While Roth contributions, you are still hampered by Roth rules.  If you have taxable investment accounts and want to retire at 50, you have access to everything.  If you want to retire at 50 with a Roth, while you can remove your contributions, you cannot remove the earnings.  Depending upon age, contributions are going to be far less than earnings.

We are doing this now.  You just have to do the math with your data.

Maybe it's lack of sleep, but you're paying 24-32% on that money whether you back-door roth it or not, correct?  It's already after taxes, so where you invest it doesn't cancel out having to pay those taxes.  Going roth or taxable for the investment just determines whether or not the gains are taxed, not the investment itself.  So, either untaxed gains but locked away until you're old enough to withdraw, or taxed gains accessible at any time.  Either way, you're paying the income taxes on the invested money the year you earn it.

Unless you are taxed again when you move it from a traditional (after tax and non-deductible for anyone making a a pretty decent wage) IRA into a roth (after tax) IRA.  I've never heard of that happening though.  It's only if you're pulling untaxed money from somewhere and moving it into a Roth that taxes come into play at that point.  For most people, I believe they are putting $6k, after tax, into an IRA and then turning around and moving the same $6k into a Roth IRA (that $6k is not reduced to $4560, with the other $1440 going to taxes again).

[mich1]

Oct 6, 2020 10:59:48 GMT -5 dragon's breath said:

Oct 5, 2020 20:24:12 GMT -5 mich1 said:

To backdoor Roth contributions, you are likely going to pay more taxes on this money than you will at retirement....especially if your income exceeds the Roth contribution limit now.

If that same money is invested, long term capital gains is 15%.  That is less than the 24-32% (depending upon how much over they are) as a marginal tax rate for backdoor Roth rates.

While Roth contributions, you are still hampered by Roth rules.  If you have taxable investment accounts and want to retire at 50, you have access to everything.  If you want to retire at 50 with a Roth, while you can remove your contributions, you cannot remove the earnings.  Depending upon age, contributions are going to be far less than earnings.

We are doing this now.  You just have to do the math with your data.

Maybe it's lack of sleep, but you're paying 24-32% on that money whether you back-door roth it or not, correct?  It's already after taxes, so where you invest it doesn't cancel out having to pay those taxes.  Going roth or taxable for the investment just determines whether or not the gains are taxed, not the investment itself.  So, either untaxed gains but locked away until you're old enough to withdraw, or taxed gains accessible at any time.  Either way, you're paying the income taxes on the invested money the year you earn it.

Unless you are taxed again when you move it from a traditional (after tax and non-deductible for anyone making a a pretty decent wage) IRA into a roth (after tax) IRA.  I've never heard of that happening though.  It's only if you're pulling untaxed money from somewhere and moving it into a Roth that taxes come into play at that point.  For most people, I believethey are putting $6k, after tax, into an IRA and then turning around and moving the same $6k into a Roth IRA (that $6k is not reduced to $4560, with the other $1440 going to taxes again).

The OP is not eligible to contribute to a Roth with her income, regardless of the source of the contribution.  Or at least she cannot in a normal way.  You cannot contribute to a Roth directly if your income is (currently) over $206K (this is where it is totally phased out, it starts at $196K) for MFJ. I just had to claw back my 2019 contribution. 

If your income is over a certain amount, the only way you are going to contribute to a Roth is to take untaxed income you have in a traditional IRA and recharacterize it to a Roth as a backdoor Roth. When you backdoor, you are paying taxes at your marginal tax rate for any untaxed contributions in an IRA. If your income is high enough that you cannot contribute to a Roth, you need to do the math to determine whether it it worth it to you to pay 24-32% on that money in retirement right now or wait until your income is lower to switch.  Since DH's income has varied the last several years, we are contributing to our backdoor Roth up to a certain marginal tax rate.  After a certain point, it doesn't make sense.  

This is where it might make sense to start contributing to taxed accounts.  Yes, you have to pay taxes on your gains.  However, if you hold onto those funds for over a year, you are only taxed at 15%.  If you hold onto them for a shorter time, you pay your marginal tax rates (so you need to pay attention to dates).  The advantage of this is that if you decide to retire early, you are not hampered by the IRS rules for distribution of IRA or 401K money. 

This gets really complicated fast, but we have been playing this game the last several years.  Just saying backdoor Roth doesn't always make sense.  

[Poppy]

Oct 6, 2020 12:21:03 GMT -5 mich1 said:

If your income is over a certain amount, the only way you are going to contribute to a Roth is to take untaxed income you have in a traditional IRA and recharacterize it to a Roth as a backdoor Roth. When you backdoor, you are paying taxes at your marginal tax rate for any untaxed contributions in an IRA.

No. Not how it works.

You contribute TAXED money to the traditional IRA and convert it.

You pay income taxes on it either way (backdoor Roth vs regular "taxable" investment). Then with the Roth, the withdrawals will all be post tax so no capital gains like the alternative "taxable" account.


It seems like you are thinking about conversation of an existing pot of pre-tax ("untaxed") traditional IRA funds, maybe from a rollover from a 401k. That is NOT a backdoor Roth.*

*Edit: That is NOT the type of backdoor Roth people are suggesting

[Poppy]

OP, I agree backdoor Roth makes sense unless you have a rolled over IRA (like with money from a previous 401k) and then it gets a little harder. Backdoor Roth truly is not that hard to execute.

[dragon's breath]

Oct 6, 2020 14:25:47 GMT -5 Poppy said:

Oct 6, 2020 12:21:03 GMT -5 mich1 said:

If your income is over a certain amount, the only way you are going to contribute to a Roth is to take untaxed income you have in a traditional IRA and recharacterize it to a Roth as a backdoor Roth. When you backdoor, you are paying taxes at your marginal tax rate for any untaxed contributions in an IRA.

No. Not how it works.

You contribute TAXED money to the traditional IRA and convert it.

You pay income taxes on it either way (backdoor Roth vs regular "taxable" investment). Then with the Roth, the withdrawals will all be post tax so no capital gains like the alternative "taxable" account.


It seems like you are thinking about conversation of an existing pot of pre-tax ("untaxed") traditional IRA funds, maybe from a rollover from a 401k. That is NOT a backdoor Roth.

Yes, this is what I'm looking at.  If you have an existing IRA with pre-tax money, it's more complicated.  If you don't have an existing IRA, you use post tax money, put it in an IRA, then as soon as the transactions clear you can move it into a Roth IRA.

This is the only way you can do it if you don't have an IRA already.  You're using taxed money at this year's income rate anyway, so may as well use further tax advantages if you won't need the money soon (before 5 years or 59 1/2).

If you have a pre-existing IRA that had been rolled over from an old 401k or something (that was pre-tax), then I agree moving it into a roth during high earning years is not the best thing to do.  

We are looking at two very different situations.  What OP should do depends on if they already have traditional (untaxed) IRAs or not.

[dragon's breath]

Personally, I do not have an existing traditional IRA. When I am in a situation to max everything, I'll max my tsp, open a traditional IRA, contribute $6k to the money market fund (after tax money), allow a few days for the transfers to go through, and then move that money right into my Roth IRA.

I make too much to claim a deduction on the IRA contribution, so there is no way for me to avoid the income tax no matter where I put it. It makes more sense for me to max a backdoor Roth before contributing to a taxable account. (Money not needed before 59 1/2).

[waverly]

We have rollover IRA and reading about back door roth scared me from the IRS perspective. I just didn’t see how to differentiate the untaxed versus taxed money.

We are putting extra funds towards savings, paying off debt, and investments.

[RockNVoll]

Oct 6, 2020 14:25:47 GMT -5 Poppy said:

Oct 6, 2020 12:21:03 GMT -5 mich1 said:

If your income is over a certain amount, the only way you are going to contribute to a Roth is to take untaxed income you have in a traditional IRA and recharacterize it to a Roth as a backdoor Roth. When you backdoor, you are paying taxes at your marginal tax rate for any untaxed contributions in an IRA.

No. Not how it works.

You contribute TAXED money to the traditional IRA and convert it.

You pay income taxes on it either way (backdoor Roth vs regular "taxable" investment). Then with the Roth, the withdrawals will all be post tax so no capital gains like the alternative "taxable" account.


It seems like you are thinking about conversation of an existing pot of pre-tax ("untaxed") traditional IRA funds, maybe from a rollover from a 401k. That is NOT a backdoor Roth.

Both scenarios could be considered a backdoor Roth. Under the old rules you wouldn't have been able to convert a traditional to a Roth over certain income limits. Now that anyone can do it, those who previously couldn't would be taking a backdoor approach.

[Poppy]

Oct 7, 2020 9:28:54 GMT -5 RockNVoll said:

Oct 6, 2020 14:25:47 GMT -5 Poppy said:

No. Not how it works.

You contribute TAXED money to the traditional IRA and convert it.

You pay income taxes on it either way (backdoor Roth vs regular "taxable" investment). Then with the Roth, the withdrawals will all be post tax so no capital gains like the alternative "taxable" account.


It seems like you are thinking about conversation of an existing pot of pre-tax ("untaxed") traditional IRA funds, maybe from a rollover from a 401k. That is NOT a backdoor Roth.

Both scenarios could be considered a backdoor Roth. Under the old rules you wouldn't have been able to convert a traditional to a Roth over certain income limits. Now that anyone can do it, those who previously couldn't would be taking a backdoor approach.

Semantically I think you are right and I edited to correct.

But people *here* are using the term backdoor Roth to describe a contribution then conversion of post-tax money. The terminology can feel overwhelming so I hate to get too into the weeds and make the backdoor Roth feel like it's too hard to do. It's not.

mich1's assertion that it was tax-unfavorable was incorrect.