Pay off all debt first and come back here in 2 years?

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BL
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Re: Pay off all debt first and come back here in 2 years?

Post by BL » Sat Apr 20, 2013 11:16 pm

Look up Backdoor Roth in the Wiki.

nyc1332
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Re: Pay off all debt first and come back here in 2 years?

Post by nyc1332 » Sat Apr 20, 2013 11:43 pm

Thanks. So the $5000 contribution limit to Roth IRAs is really in name only since it can be so easily contravened? Is there any particular reason the poster limited the backdoor total to $38k, or can one backdoor more than that?

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grabiner
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Re: Pay off all debt first and come back here in 2 years?

Post by grabiner » Sat Apr 20, 2013 11:47 pm

nyc1332 wrote:Thanks. So the $5000 contribution limit to Roth IRAs is really in name only since it can be so easily contravened? Is there any particular reason the poster limited the backdoor total to $38k, or can one backdoor more than that?
The contribution limit ($5500 for traditional and Roth combined for 2013) is still a limit. The backdoor Roth IRA allows you to contribute indirectly to a Roth IRA if you are over the income limit for a Roth contribution; you can do this with a non-deductible IRA, or with after-tax money contributed to a 401(k) if your 401(k) allows that (not all 401(k) plans do).
Wiki David Grabiner

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archbish99
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Re: Pay off all debt first and come back here in 2 years?

Post by archbish99 » Sun Apr 21, 2013 12:32 am

Note that not all employers permit that dance with a 401k, but anyone can do it with an IRA.
I'm not a financial advisor, I just play one on the Internet.

Niko
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Re: Pay off all debt first and come back here in 2 years?

Post by Niko » Sun Apr 21, 2013 8:07 am

nyc1332 wrote:Hi everyone - I'm checking in 7 months after my last post. My partner has now paid off all of his students loans. I've been able to pay off ~$47,000 so far and have only the $10k loan at 4% and $38k loan at 1%. So far we have been utilizing the "Dave Ramsey" gazelle intense method.
This is phenomenal progress is only 7 months! Well done!

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runner9
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Re: Pay off all debt first and come back here in 2 years?

Post by runner9 » Sun Apr 21, 2013 8:12 am

Niko wrote:
This is phenomenal progress is only 7 months! Well done!
+1 for sure!

YDNAL
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Re: Pay off all debt first and come back here in 2 years?

Post by YDNAL » Sun Apr 21, 2013 8:31 am

nyc1332 wrote:Hi everyone - I'm checking in 7 months after my last post. My partner has now paid off all of his students loans. I've been able to pay off ~$47,000 so far and have only the $10k loan at 4% and $38k loan at 1%. So far we have been utilizing the "Dave Ramsey" gazelle intense method.

However, now we're starting to think about using our tax advantaged space.
I would have not skipped 401K contributions to begin with, given your income/tax bracket.

Have you seen the reading list beyond the Bogleheads book?
http://www.bogleheads.org/readbooks.htm
I'm a little confused about the use of non-deductible IRAs and converting them to Roth IRAs. Is this whole process simply a work around the income restrictions, but otherwise you get the same advantages as a traditional Roth?
Here is a link: http://www.bogleheads.org/wiki/Backdoor_Roth_IRA
Landy | Be yourself, everyone else is already taken -- Oscar Wilde

Saving$
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Re: Pay off all debt first and come back here in 2 years?

Post by Saving$ » Sun Apr 21, 2013 12:50 pm

Great work on paying down the debt.

My previous advice still holds. DO NOT miss out on the power of compounding. You are young. I thought like you did when I was young - pay down debt. Today, I realize 1 or 1.5 extra years of debt and it's accompanying interest payments because I put +/-$40k in tax deferred accounts is nothing compared to that same _/-$40k getting compounded interest in a tax deferred or tax free account for 30-40 extra years. The problem is that you can NEVER get that tax free/tax deferred space back.

So...
1. Max out your 401k whether or not your employer matches = $17.5k (but won't cost you that much because you get the income tax deduction)
2. Max out HSA with a High Deductible health insurance plan = $3.1k (but won't cost you that much because you get the income tax deduction)
3. Max out IRA via traditional and then backdoor to a Roth = $5.5k
4. Max out any additional Roth 401k contributions you are allowed to make
5. Pay down debt

FedGuy
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Re: Pay off all debt first and come back here in 2 years?

Post by FedGuy » Sun Apr 21, 2013 1:49 pm

Saving$ wrote:2. Max out HSA with a High Deductible health insurance plan = $3.1k (but won't cost you that much because you get the income tax deduction)
The 2013 limit for HSAs (for individuals) is $3,250, not $3,100.

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DiscoBunny1979
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Re: Pay off all debt first and come back here in 2 years?

Post by DiscoBunny1979 » Sun Apr 21, 2013 2:51 pm

Stop the presses for a minute. People are giving advice to someone that lives in an equitable distribution state. What does that mean? That means that while the people involved are not married (?), the OP might feel that their debt is joint debt (at least that's how it appears). To be clear, debt earned by a single person is that person's debt when the debt is obtained outside of "marriage" or "domestic partnership" or "union". (Is this a Partnership as in Business Partnership or a Relationship?) HOWEVER in an equitable distribution state, there only needs to be the assumption or paper trail or small evidence that both have treated the separate debt as joint. That means that separately held debt can be determined by a court to be joint if there was intention to treat it as such. Is that the intention of the OP?

maxim81
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Re: Pay off all debt first and come back here in 2 years?

Post by maxim81 » Sun Apr 21, 2013 3:46 pm

DiscoBunny1979 wrote:Stop the presses for a minute. People are giving advice to someone that lives in an equitable distribution state. What does that mean? That means that while the people involved are not married (?), the OP might feel that their debt is joint debt (at least that's how it appears). To be clear, debt earned by a single person is that person's debt when the debt is obtained outside of "marriage" or "domestic partnership" or "union". (Is this a Partnership as in Business Partnership or a Relationship?) HOWEVER in an equitable distribution state, there only needs to be the assumption or paper trail or small evidence that both have treated the separate debt as joint. That means that separately held debt can be determined by a court to be joint if there was intention to treat it as such. Is that the intention of the OP?
I highly doubt it.

nyc1332
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Re: Pay off all debt first and come back here in 2 years?

Post by nyc1332 » Sun Apr 21, 2013 4:08 pm

By partner I mean long term boyfriend - not a business partner - our debt is completely separate and we are both paying it separately.

Thanks for the debt encouragement! We have both been living very frugally. Christmas bonuses, which I forgot to factor into my original post, also helped pay the debt down.

So our plan this year and going forward is to:

1. Put 17.5k in our 401ks
2. Put 5.5k into non-deductible IRAs and backdoor it to a Roth IRA
Saving$ wrote: 4. Max out any additional Roth 401k contributions you are allowed to make
5. Pay down debt
As for #4 - how can I find out what additional Roth 401k contributions I'm allowed to make? I've just read this online: "the hitch [with Roth 401ks]: Those limits apply to contributions to all types of 401(k) plans, so you can't save $17,500 in a regular 401(k) and another $17,500 in a Roth 401(k)."

So it seems like if I've already maxed out a 401k, I wouldn't be able to contribute more to a Roth 401k, right?

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archbish99
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Re: Pay off all debt first and come back here in 2 years?

Post by archbish99 » Sun Apr 21, 2013 4:43 pm

That's a reference to making an after-tax contribution to a 401k (limit is much higher, and "after-tax" is not the same as "Roth"), then either doing an in-service distribution or waiting until you're separated from that company to roll it into a Roth IRA. Since you don't plan to stay with this company for more than a few years, you could consider making after-tax contributions up to the maximum allowed after you've hit the cap for Traditional contributions.

If the plan allows in-service distributions, you can then roll this to a Roth IRA, just like you can a non-deductible Traditional IRA. If not, you can do it once you've left the company. Either way, you'll pay taxes on the earnings when you make the conversion, and the money can grow tax-free for the rest of your working lifetime; some people have had success in splitting the basis and the earnings and putting the earnings into a Traditional IRA or another 401k, while putting just the already-taxed portion into a Roth IRA.
I'm not a financial advisor, I just play one on the Internet.

nyc1332
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Re: Pay off all debt first and come back here in 2 years?

Post by nyc1332 » Mon Apr 22, 2013 7:09 am

Thanks. That is pretty amazing.

bungalow10
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Re: Pay off all debt first and come back here in 2 years?

Post by bungalow10 » Mon Apr 22, 2013 7:22 am

Great progress, keep it up!
An elephant for a dime is only a good deal if you need an elephant and have a dime.

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