First Post, Simplifying and any advice welcome

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Lafder
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First Post, Simplifying and any advice welcome

Post by Lafder »

I have been reading this site for the past several years and really appreciate all of the wisdom and perspectives. I have learned a lot here as well as done a lot of the recommended reading! I was finally ready to post when I realized my husband's 401k sold/transferred a fund to an "equivalent" small/midcap stock fund with much higher management fees. I think we have too much small cap now and not enough international. I am also unsure about % stock/bond I want to aim for. Our accounts feel too complicated and I would like to simplify!

Excuse any errors in format. It was pretty confusing to gather all of this information. All funds we have a choice are at Vanguard. His 401k is Fidelity. Percentages are percent of investment accounts, not cash/ongoing expense/emergency funds. (It ended up 99% due to rounding off tenths)

Emergency funds yes. (Plus relatively stable long time jobs)

Debt:
415k mortgage at 3.62% (14 1/2 years to go)
124k home equity loan at prime (payments only $350/month)
car loan 14k left @ 0.9% (about a year left, our 15 year old car died)
Credit cards used as much as possible for mileage and cash back,paid off monthly

Tax filing status: Married filing jointly
Tax rates: 28% federal 5.7 % state
Age: Her 45, Him 48 (12 and 14 yo kids)

Desired Asset Allocation: 80% stock. 20% bond (I am not stuck on this)
Desired International: 25% (I am not stuck on this either)

Size of investment portfolio: mid-high 6 figures

(Non money assets: realistic real estate equity probably about mid-high 6 figure in 3 houses. We still own our former house, that has the home equity loan. When it sells we should be able to either pay off new home mortgage and HELOC, and/or invest that $. Will reassess what to do with the $ when it sells. We also own a small rental home with no mortgage. We have about 30% equity in our new home due to large downpayment, pulled from taxable investments.)

Investment Assets: % total $ investments/ticker/name/(expense ratio)

Taxable:

Theirs at Vanguard:
4% / VSMAX /V. Small Cap Stock Index fund/ (0.10)
9% / VTSAX /V. Total Stock Market Index fund/ (0.05)

Theirs Vanguard brokerage individual stocks, low cost basis, have had many years.
1% / CAT /Caterpillar
1% / RHT /Redhat

Nontaxable/Retirement Accounts:

Her Vanguard rollover IRA(Any Vanguard funds available):
18% / VTSAX /V. Total Stock Market Index/ (0.05)
Her Vanguard SEP (Any Vanguard funds available):
10% / VBTLX / V. Total Bond Market / (0.10)
6% / VITAX / V. Total International Stock Index (0.16)

His Vanguard Rollover IRA (any Vanguard funds available)
2.5% / VBTLX/ V. Total Bond Market / (0.10)
18% / VTSAX / V. Total Stock Market / (0.05)
Vanguard SEP (no ongoing contributions, any Vanguard funds available)
1% VBTLX / V. Total Bond Market/ (0.10)
11% VTIAX / V. Total International Stock Index Fund/ (0.16)

His Fidelity 401k with good employer matching (the naming gets confusing):
2.5% / TPR1 / BTC ACWI XUS Index/ (0.10)
2 % / Company stock (? shares of fund, not actual shares of [Company name removed --admin LadyGeek] / (0.0036)
2% / DFSTX / DFA US Small Cap 1 / (0.37)
7 % / ? ticker/ Fid US EQ INDX CL 2/ (0.02)
4% / ? ticker/ SSGA US BOND INDEX/ (0.06)

His additional available Fidelity 401k funds:
(Target Date funds not listed)
Stock:
FCNKX/Fidelity Contrafund K/ (0.63)
FGCKX/Fid Growth Co K/ (0.77)
TILCX/ TRP Inst LG Cap Value/ (0.59)
? ticker/ Hard LOEV EMG MKTS S / (0.86)
?ticker/ Blackrock Completion / (0.24)
FTFGX/ Templeton Foreign RG/ (0.76)
TDHC/ LKCM Small Mid cap / (0.88) the one I just moved out of, should have asked first!
Bond:
No ticker/ Interest Income Fund/ (0.24)
FTHRX/ Fid Intermed Bond Fund/ (0.45)

If I just look at the Vanguard site it tells me we have: 82.6 stock/17.4 bond, with 75 % US stock, and 25% International. And it says all bonds are domestic.

If I just look at Fidelity, it says 65% Domestic stock, 15% Foreign stock, 20 % bond

We maximize our SEP and 401k every year, and plan to continue to do so.
Her annual contribution is approximately 18k/year, his plus employee match is about 30k/year. We have been putting "extra" into paying off mortgages and home repairs, rather than taxable accounts at Vanguard.

My main hope is that readers can make more sense of all of this than me, and help me simplify the overall portfolio (the less accounts the better). I am open to all suggestions to simplify and meet my desired allocations, or even change them.

It is hard for me to get my head around all of the different accounts at 2 companies. It keeps feeling like comparing apples to oranges, and different varieties at that. And it seems some parts of the websites have slightly out of synch information than the rest of their own site. It all makes my head hurt!

I am already a boglehead by nature. I buy and hold, rebalance occasionally, and tend to be frugal (I know the home loans may seem contrary to that).

Thanks in advance and let me know what clarification would help. I think I am over invested in small cap ? And need more international? I am not sure what I need or want, so it helps to get a fresh perspective. Should some of the smallest accounts be adjusted/sold,moved to get into lower fee Admiral shares at Vanguard? I am not sure why different accounts should have duplicate investments, such as her SEP, his Rollover and SEP all having some of the same bond fund?

I am fine doing some rebalancing, and/or adjusting future investment allocations.

I am getting less comfortable with 80/20, but I find it hard to make changes and decide where to move to/from.

Thanks in advance!
Lafder
Last edited by Lafder on Tue Aug 06, 2013 11:23 pm, edited 2 times in total.
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Re: First Post, Simplifying and any advice welcome

Post by LadyGeek »

Welcome! I removed the company name from His Fidelity 401k. It's personally identifying information that could be found in a google search, so we're careful to keep this information off the internet. We don't need to know the name, just that it's "company stock." To answer your question, that "company stock" fund is probably a mixture that's mostly company stock with some cash-based investments thrown in. Consider it as company stock at a higher price.

Under additional available Fidelity 401k funds:
?ticker/ Blackrock Completion / (0.24) - A completion fund contains holdings that are intended to "complete" the composition of the US total stock market. I suspect it contains small- and mid-cap holdings. See: Extended Market Index Fund in the wiki.
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Lafder
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Re: First Post, Simplifying and any advice welcome

Post by Lafder »

To add to my confusion, I remembered and just calculated that 2.4% of the investment total is "after tax contributions" to his 401k.

I have adjusted annual contributions to just exceed pretax, so minimal aftertax new investments going into the 401k.

I am confused about the difference between 401k "after tax" versus Roth IRA.

I understand I can rollover the after tax amounts to a Roth IRA, which would be yet another account to keep track of. But I am not seeing the advantage to a Roth since both are taxed at income tax rates when withdrawn?

lafder
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Re: First Post, Simplifying and any advice welcome

Post by LadyGeek »

Here's the key points, which I think you may be confused on:

A "traditional" IRA or 401(k) takes your contributions before taxes are taken out. With a contribution of $5 and an income of $100, you are taxed on $95 = $100 - $5. They take out the $5 first.
- When it comes time to withdrawal, you pay taxes on what you withdrawal. IOW, the taxes are deferred until this time. Hence, the name "tax-deferred" account.

A Roth IRA or 401(k) takes your contributions after taxes are taken out. With a contribution of $5 and an income of $100, you are taxed on $100 (then they take out the $5).
- When it comes time to withdrawal, you don't pay any taxes. IOW, you've paid them at the time of contribution.

Which one do you use? It depends on what you'll need at retirement and where your tax bracket will be. That's a bet which you have no way of knowing in advance. So, do some of each. I think most people do the traditional IRA first, then the Roth as it seems appropriate.

IRAs and Roth IRAs are tracked to each person. IOW, your accounts and your husband's accounts must be kept separately.

The wiki has background info: Traditional IRA, Roth IRA, and Traditional versus Roth. This is way more information than you need, just focus on the basic concepts. Once you get your portfolio figured out, you can come back and fine-tune things.
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Re: First Post, Simplifying and any advice welcome

Post by JW-Retired »

Lafder wrote: To add to my confusion, I remembered and just calculated that 2.4% of the investment total is "after tax contributions" to his 401k.
I have adjusted annual contributions to just exceed pretax, so minimal aftertax new investments going into the 401k.
I am confused about the difference between 401k "after tax" versus Roth IRA.
I understand I can rollover the after tax amounts to a Roth IRA, which would be yet another account to keep track of. But I am not seeing the advantage to a Roth since both are taxed at income tax rates when withdrawn?
lafder
Depending on the specifics of your employer plan, you can have a traditional pre-tax 401k or a Roth 401k, or perhaps both. In addition, you can often make after-tax contributions to the traditional 401k in excess of the pre-tax limit (now $17,500), it depends on the plan. The future earnings of these after-tax contributions will be taxed on withdrawal but the contribution amount (your basis) will not be taxed again. Since the earnings on this after-tax component will be taxed, this is much less desirable investment than putting money in a Roth 401k. The growth of the after-tax contribution money is typically tracked separately (at least it is for my account) and also when RMDs begin this after-tax account pot (contributions+earnings) will be drawn from first. In my case this makes the first few years of 401k RMDs taxed at a lower overall rate.

(errant part deleted)
JW
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Re: First Post, Simplifying and any advice welcome

Post by dickenjb »

I don't see where you are doing a lot that is suboptimal.

You could simplify things by not owning everything everywhere. In other words, own S&P in one account, completion index elsewhere, international somewhere else. That reduces the number of holdings. Maybe have all three (TSM, TISM, TBM in one tax deferred account to simplify rebalancing).
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Re: First Post, Simplifying and any advice welcome

Post by pkcrafter »

Here's a summarized breakdown of your portfolio.

Total Portfolio
Total stock market = 45%
S&P 500 = 7%
Indiv stock = 2%
company stock = 2%
sm cap = 6%
62% domestic stock, 9.6% small (not counting small in total stock market)
Int - 19.5% (24% of equity)
Total equity 81.5%
Bond - 17.5%
99% Total

To simplify, eliminate individual stocks, and consolidate any multiple holdings of <5-6% in tax deferred accounts into one account. Find out if you can transfer his IRA (old 401k) into current 401k. Asset allocation is very high for your age and financial position, consider dropping to ~60%.

No IRAs or Roths? Fund TIRA if eligible. If not eligible, fund Roth for each of you.

Paul
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Re: First Post, Simplifying and any advice welcome

Post by Default User BR »

JW Nearly Retired wrote:Depending on the specifics of your employer plan, you can have a traditional pre-tax 401k or a Roth 401k, or perhaps both. In addition, you can often make after-tax contributions to the traditional 401k in excess of the pre-tax limit (now $17,500), it depends on the plan. The future earnings of these after-tax contributions will be taxed on withdrawal but the contribution amount (your basis) will not be taxed again. Since the earnings on this after-tax component will be taxed, this is much less desirable investment than putting money in a Roth 401k.
Where this is most useful is when the plan also allows in-service distribution of after-tax contributions. These can then be rolled into a Roth IRA, effectively increasing the amount contributed there.
JW Nearly Retired wrote:If your plan allows it, IMO your best option would be to have both a trad 401k and a Roth 401k, with it set up for any excess contributions to go into the Roth. That option was finally added to my 401k plan but far too late for it to do me any good.
I'm not sure what you're saying here. The total limit for deferred plus Roth 401(k) contributions is 17.5k. If you contribute that amount to deferred, there are no excess contributions to go into Roth. They could go into the after-tax non-Roth discussed above.


Brian
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Re: First Post, Simplifying and any advice welcome

Post by LadyGeek »

pkcrafter wrote:Find out if you can transfer his IRA (old 401k) into current 401k.
I would not go down this path, as you would be taking something that's under your control back into something that's under the employer's control. I suspect there will be additional fess to do the transfer and manage the account, in addition to now being subject to the employer's 401(k) plan rules.

The OP wants simplicity, but I'm fairly sure that the employer will still need to track this money as a separate account inside the 401(k) (but invested in the funds of choice). So, there will still be separate accounts - nothing has been simplified.
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Re: First Post, Simplifying and any advice welcome

Post by pkcrafter »

The OP wants simplicity, but I'm fairly sure that the employer will still need to track this money as a separate account inside the 401(k) (but invested in the funds of choice). So, there will still be separate accounts - nothing has been simplified.
If a roll-in has to be tracked as a separate account, then I agree, it's not such a good idea. Lafder, you might check to see if a transfer is allowed, and how it would work.

Paul
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Re: First Post, Simplifying and any advice welcome

Post by Default User BR »

LadyGeek wrote:The OP wants simplicity, but I'm fairly sure that the employer will still need to track this money as a separate account inside the 401(k) (but invested in the funds of choice). So, there will still be separate accounts - nothing has been simplified.
While the custodian has to manage separate accounts, that's usually not apparent to the employee in regards to the tracking and management of assets. That already happens in most 401(k)s just because employee deferrals and employer contributions are separate accounts.

My 401(k) often has four separate sub-accounts, employee deferral, employer matching, employee after-tax contributions (towards the end of the year), and rollover contributions. However, from my account view, I just have four funds. Those funds are divided up in some fashion under the hood among the various sub-accounts. This only becomes evident when one wants to take distribution of some of the money. Then you find out that, for example, the after-tax is split up according to the contribution allocation at the time.


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Re: First Post, Simplifying and any advice welcome

Post by Default User BR »

pkcrafter wrote:If a roll-in has to be tracked as a separate account, then I agree, it's not such a good idea. Lafder, you might check to see if a transfer is allowed, and how it would work.
As I mentioned, the separate accounting is a custodian requirement and generally not evident to the account holder. Usually separate accounting is good thing, as it gives more flexibility.


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Re: First Post, Simplifying and any advice welcome

Post by LadyGeek »

The "under the hood" sub-accounts are where the complexity lies and what I was trying to simplify. The employer is tracking it differently, which will add confusion at some point in the process. How it appears on your fund statements doesn't remove the internal accounting for these funds. At some point, such as during a withdrawal, tax time (cost basis, perhaps?), or fund transfer; it's going to re-emerge. Certainly, this can be managed, but the OP may not be ready to handle this level of detail. First things first - make this easy.
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Re: First Post, Simplifying and any advice welcome

Post by JW-Retired »

Default User BR wrote:
JW Nearly Retired wrote:If your plan allows it, IMO your best option would be to have both a trad 401k and a Roth 401k, with it set up for any excess contributions to go into the Roth. That option was finally added to my 401k plan but far too late for it to do me any good.
I'm not sure what you're saying here. The total limit for deferred plus Roth 401(k) contributions is 17.5k. If you contribute that amount to deferred, there are no excess contributions to go into Roth. They could go into the after-tax non-Roth discussed above.
Brian
Thanks, what I said can't be right. Not sure where I got the idea my Roth plan allowed it. I'll edit it out of my previous post.
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Lafder
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Re: First Post, Simplifying and any advice welcome

Post by Lafder »

I have reread the plan info. All of the following is from the employer plan brochure online. Indeed I can select Roth. Here are the choices I fill in the % of income I want invested, in another section, I select what percent of the total new investment goes in the available accounts previously listed.

Pre-Tax Basic 0-6%
Pre- Tax Supplemental 0-19%
Roth Basic 0-6%
Roth Supplemental 0-19%
After -Tax Basic 0-6%
After - Tax Supplemental 0-19%

Maximum total of above 25%

(I have selected 6% Pre-Tax Basic, and 8% Pre-tax Supplemental, for a total of 14%. Which gets the company match and just passes $17,500 into the Post-Tax contribution amount(I do not want to miss any pre-tax contributions). We are far from hitting the 25% of salary or 49k/year total contribution limit.)

Additionally it spells out the following limits: (sorry if most of you know this already)

"Roth earnings are made After-Tax, but are included with the Pre-Tax contributions for the purposes of the annual deferral limits."

Maximum 2013 limit on Pre-Tax + Roth = $17,500

Pre-Tax + After-Tax + Roth can not exceed 25% of eligible earnings

"Section 415 of the Internal Revenue code further limits the annual amount of your After-Tax, Pre-Tax, Roth, enhanced contributions, and company match. These sources together can not exceed $49,000 (for 2011) or 100% of your W-2 compensation."

I do understand Roth and "after tax 401k contributions" are both after income-taxed money. I do not understand how they are different other than in name? How is "Post-Tax 401k" taxed, if income tax is already charged before it is invested? I thought that is what happens with a Roth? It seems you would only pay capital gains tax on both when you take the money out? Anyone have a simple explanation to clarify what I am missing here? It gets so confusing when there is also a "Roth supplemental" category to choose from.

Additional info, specific to our plan:

Company Match is 66 2/3 cents per dollar on up to 6% of eligible earnings

Enhanced Contribution : 6% of eligible earnings (This is something that was added for employees after a certain date due to elimination of a pension plan in place for prior hires).

Here is my understanding: I should first maximize pretax 401k because it allows me to put more $ in now to grow for the long term. So if I am reading correct, I will have hit the $17,500 total limit and not be eligible for any Roth?

I did not mean to diverge into 401k/Roth. But it is important since they are a main in on investing for many people. It seems the more I read, the more I know, but it also contradicts some of my prior "knowing."

I need to learn what maxing out the 401k Pre-Tax contribution does for allowable IRA contributions. I thought we were inelegible for simple IRAs due to maxing the 401k and SEP, and our total income?

Lafder
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Re: First Post, Simplifying and any advice welcome

Post by Lafder »

Thank you for the helpful comments. I am intrigued by Roth conversions. Especially of the already Post-Tax dollars in His company 401k. I appreciate the simplified breakdown of all of the funds. I don't know how to do that!

I do want to simplify the number of funds/accounts overall to make rebalancing easier.

I like Fidelity, just not the 401k/employers ability to control and make decisions on their own.

A SEP is a form of an IRA, right? It is a tax deferred retirement account with higher maximum contribution limits than a 401k or Roth. I am self employed.

I am reading so much contradictory info, even on the bogleheads wiki. It says things like "Roth withdrawls are not taxed unless exclusions apply." But it is hard to easily find the exclusions. (I saw the age and 5 year holdings rules, other than that? And what about the $ that exceeds the original Roth contributions? How is that taxed?)

I am reading that Roth contribution limits are 6000$/year, but not allowed for married couples filing jointly with greater than $169,000 income?

Does the upper income limit exclusion or 6000$ limit apply for backdoor conversions?

It seems the deeper I dig, the less clear I am.

Lafder
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Re: First Post, Simplifying and any advice welcome

Post by JW-Retired »

Maximum 2013 limit on Pre-Tax + Roth = $17,500

Pre-Tax + After-Tax + Roth can not exceed 25% of eligible earnings

"Section 415 of the Internal Revenue code further limits the annual amount of your After-Tax, Pre-Tax, Roth, enhanced contributions, and company match. These sources together can not exceed $49,000 (for 2011) or 100% of your W-2 compensation."

I do understand Roth and "after tax 401k contributions" are both after income-taxed money. I do not understand how they are different other than in name? How is "Post-Tax 401k" taxed, if income tax is already charged before it is invested? I thought that is what happens with a Roth? It seems you would only pay capital gains tax on both when you take the money out? Anyone have a simple explanation to clarify what I am missing here? It gets so confusing when there is also a "Roth supplemental" category to choose from.
Roth and "after tax 401k contributions" are both after-tax contributions but the earnings are treated differently. Both the contributions and all their future earnings are never taxed when Roth withdrawals are made, whereas "Post-Tax 401k" contributions are not taxed when they are taken out but all the earnings from those contributions are taxed on withdrawal. The contribution amounts themselves are a cost basis that is tracked by the 401k admin company. Somewhere in your 401k statements should be a table that lists After-Tax Contributions amounts.
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Re: First Post, Simplifying and any advice welcome

Post by Lafder »

JW
Thank you for the reply.

So Roth distributions are not taxed at all? Not even the amount above the original contribution? Plus no minimum distributions? That sounds too good to be true, to get the "growth" in the account for no tax?

Are after Tax 401k distributions beyond the "costbasis" taxed at capital gains rates only, when it is taken out? So there is an extra tax on these versus a Roth. Than why ever have this over a Roth?

Post tax 401k contributions can bring the total annual contribution to $25,000/year per our plan, can then be converted to a backdoor Roth?

But, I am reading a Roth+ Pre tax 401k cannot exceed $17,500/year, per my plan (?federal) guidelines.

I also read married couples filing jointly with income greater than $169,000 are not eligible for any Roth contributions. Is this true? Does it apply to backdoor conversions?

What is the maximum that can be converted to a Roth per year, from a post tax 401k, and/or a pretax 401k?

I know this has been discussed before and I have spent hours reading many posts as well as wikis other sites and IRS publications trying to understand this. Thank you all for your patience.

Lafder
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Re: First Post, Simplifying and any advice welcome

Post by Default User BR »

Lafder wrote:So Roth distributions are not taxed at all? Not even the amount above the original contribution? Plus no minimum distributions? That sounds too good to be true, to get the "growth" in the account for no tax?
Correct, it's like a Roth IRA in treatment of earnings.
Lafder wrote:Are after Tax 401k distributions beyond the "costbasis" taxed at capital gains rates only, when it is taken out? So there is an extra tax on these versus a Roth. Than why ever have this over a Roth?
They are taxed as ordinary income. They are similar to non-deductible contributions to a traditional IRA. Usually they aren't very useful unless you can roll them over.
Lafder wrote:Post tax 401k contributions can bring the total annual contribution to $25,000/year per our plan, can then be converted to a backdoor Roth?
It depends on the plan. The plan can allow in-service distribution of after-tax non-Roth contributions if it chooses. If this allowed, you can roll those into a Roth IRA, effectively increasing Roth space. A relatively new feature that some plans offer is in-plan conversion to Roth. I'm not terribly familiar with the details of that.
Lafder wrote:But, I am reading a Roth+ Pre tax 401k cannot exceed $17,500/year, per my plan (?federal) guidelines.
Correct. See the link in the following reply.
Lafder wrote:I also read married couples filing jointly with income greater than $169,000 are not eligible for any Roth contributions. Is this true? Does it apply to backdoor conversions?
That is out of date. The 2013 phase out begins at $178,000 and at $188,000 no contributions can be made. That is MAGI, not gross income.

See: http://www.irs.gov/uac/2013-Pension-Plan-Limitations
Lafder wrote:What is the maximum that can be converted to a Roth per year, from a post tax 401k, and/or a pretax 401k?
There is no maximum. There are restrictions from taking distributions of employee deferrals from qualified plans.


Brian
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Re: First Post, Simplifying and any advice welcome

Post by Lafder »

Brian,

Thank You very much for your detailed reply.

Our adjusted income is above $188,000/year.

Are we ineligible for Roth conversions too, or just ineligible for direct Roth deposits?

Lafder
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Re: First Post, Simplifying and any advice welcome

Post by Default User BR »

Lafder wrote:Are we ineligible for Roth conversions too, or just ineligible for direct Roth deposits?
Everyone is eligible for conversions. Congress removed the income limit for that some years back. That's how the "backdoor Roth" came about. People who can't make Roth contributions can contribute to a traditional IRA and immediately convert it.


Brian
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