Would filling Roth space make sense with these conditions?

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Would filling Roth space make sense with these conditions?

Postby MnD » Fri Feb 08, 2013 4:20 pm

Five years from early (mid-50's retirement).
Low 7-figure investment portfolio, mostly in traditional 401-K and IRA's, some in taxable. Essentially nothing in Roth space ($6K).
In the middle of the 32.6% (28% fed + 4.6% state) marginal bracket now, will be in the middle of the 29.6% marginal bracket (25% fed+4.6% state) in retirement under current law and under our expected retirement spending budget and given sources from significant taxable pension, taxable 401-K withdrawals and down the road taxable social security.

We are unwilling to sacrifice any current additional free cash flow from earned income to fund Roth's therefore........
1) switching from 401-K to Roth 401-K would require lowering contribution %'s from current "maxed out" so switch would be cash flow neutral on take home pay.
2) Doing a back door Roth would mean taking funds from taxable annually to fund it and paying capital gains tax on a portion since all positions in taxable are at a unrealized gain.

My feeling is that Roth simply isn't for us in this situation, and regardless, the cake is pretty well baked here for better or worse.
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Re: Would filling Roth space make sense with these condition

Postby DSInvestor » Fri Feb 08, 2013 4:27 pm

What about collecting dividends received in the taxable accounts and use them for IRA contributions? If you have enough dividends, you wouldn't need to sell any shares and realize capital gains.

Backdoor IRA is not a good choice if you have substantial pre-tax IRA assets as IRS will make you prorate your IRA basis when you do Roth conversion step of the backdoor into Roth IRA. IRS form 8606 figures out the taxable and non-taxable portions of Roth conversions and it is an individual form. So if you have substantial pre-tax IRA assets but your spouse does not, your spouse would be a good candidate for backdoor into Roth IRA but you would not.
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Re: Would filling Roth space make sense with these condition

Postby MnD » Fri Feb 08, 2013 4:39 pm

DSInvestor wrote:What about collecting dividends received in the taxable accounts and use them for IRA contributions? If you have enough dividends, you wouldn't need to sell any shares and realize capital gains.

Backdoor IRA is not a good choice if you have substantial pre-tax IRA assets as IRS will make you prorate your IRA basis when you do Roth conversion step of the backdoor into Roth IRA. IRS form 8606 figures out the taxable and non-taxable portions of Roth conversions and it is an individual form. So if you have substantial pre-tax IRA assets but your spouse does not, your spouse would be a good candidate for backdoor into Roth IRA but you would not.


That's a great idea as dividends are now just reinvested in taxable - we do not "need them" for anything.
Taxable is well optimized for tax efficiency so not a lot of dividends however, we might get $20K into Roth space over the next 5 years using that approach.
The pre-tax IRA we have is an inherited IRA so we are both clear to fund Roth's without prorate issues.
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Re: Would filling Roth space make sense with these condition

Postby DSInvestor » Fri Feb 08, 2013 6:05 pm

Are you currently adding to your taxable accounts? You can reduce your contributions to taxable and fully fund the IRAs instead.

If you're withdrawing from the Inherited IRA, you could direct some of that money into your IRAs as well. If you don't need that money to meet expenses, why not fill up your annual tax advantaged contribution space?
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Re: Would filling Roth space make sense with these condition

Postby MnD » Fri Feb 08, 2013 6:29 pm

DSInvestor wrote:Are you currently adding to your taxable accounts? You can reduce your contributions to taxable and fully fund the IRAs instead.

If you're withdrawing from the Inherited IRA, you could direct some of that money into your IRAs as well. If you don't need that money to meet expenses, why not fill up your annual tax advantaged contribution space?


Again - great suggestions - thank you!
Unfortunately no, not adding to taxable since the kids hit college age and we now have two in college at the same time for the next two years.
We take a relatively small RMD from the inherited IRA, but it get snarfed up towards college costs.

But the taxable account dividends (currently reinvested in taxable) would come close to funding one Roth, and maybe we can scrape up enough for the other one.
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Re: Would filling Roth space make sense with these condition

Postby grabiner » Fri Feb 08, 2013 8:25 pm

Even if you would be paying capital-gains tax on the taxable account, you might as well use the account to fund a Roth IRA. You'll pay that tax eventually anyway, and you can get tax-free growth forever.

I agree that in your situation, traditional accounts are better than Roth accounts unless you have a bad 401(k) and better options in the Roth IRA. But once you have maxed out your traditional 401(k), Roth IRA investing is better than taxable savings. (Even if you need to withdraw from the Roth, you can withdraw contributions and back-door conversions without penalty before age 59-1/2.)

Another advantage of moving money from taxable to Roth is that the Roth balance will not be counted against you next year under the financial aid formulas. With two kids in college at once, you might be getting some need-based aid.
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Re: Would filling Roth space make sense with these condition

Postby bdpb » Fri Feb 08, 2013 8:56 pm

Sounds like you don't necessarily need Roths if you don't have enough contributions since you'll pay less tax in retirement.

You could borrow the money to fund the Roth and pay the debt back with future cash flows.
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