I thought I understood backdoor Roth but now I'm confused

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tmhudg
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I thought I understood backdoor Roth but now I'm confused

Post by tmhudg » Sat Feb 22, 2014 9:46 am

Hello,

After thinking I would do some backdoor Roth conversions, further reading has confused me about tax implications and now I'm not sure what is best to do.

Me: I'm currently contributing solely to my 401(k). I have about 8K in a Roth and a TIRA with basically nothing that was going to act as the source of backdoor funds for the Roth.

Wife: Has a 401(k) from an old employer. She now works part-time and has her own small business.

Initially, I was thinking that I should increase my allocation to Roth IRAs to avoid taxes when I retire (we are both 52) so I was planning on shifting some contributions from my 401 into the TIRA and then backdooring to the Roth. I was also going to rollover my wife's 401k to a TIRA and then roll that into a Roth for her and then contribute to her TIRA and do the backdoor on that as well.

Now, after reading more and more articles on the details of doing all this, I'm getting more and more confused about 1) whether this is really such a good idea and 2) the tax implications of doing it all. I also saw something about setting up a personal 401(k) for her. Frankly, my head starts to spin when considering all the options and what-ifs and marginal tax rates, etc. In general, I prefer to keep things as simple as possible at tax time.

If anyone could give me some advice/pointers, I'd appreciate it. I'm not sure if I should include all my portfolio stuff so I'll leave that out for now but let me know if that needs to be considered.

Thanks much.

Texas hold em71
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Re: I thought I understood backdoor Roth but now I'm confuse

Post by Texas hold em71 » Sat Feb 22, 2014 9:59 am

Back door Roth and a conversion are very closely related but not quite the same.

Moving money from 401(k) to Roth or deductible TIRA to Roth is a conversion. It is a taxable event. You pay taxes on the value on conversion date. It will be at your marginal tax rate or more if you go into a new bracket or lose deductions and credits.

Back door Roth is when you put money into a non deductible TIRA and within a short period of time convert it to a Roth. Taxesare due on earnings in the account, but these are usually quite small and taxes insignificant. Be careful of the pro rata rule (see wiki) if you have deductible TIRAs.

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damjam
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Re: I thought I understood backdoor Roth but now I'm confuse

Post by damjam » Sat Feb 22, 2014 10:09 am

Just for background let me say that a backdoor Roth is when you make a non-deductible contribution to a tIRA and then immediately convert that to a Roth IRA. This is done because the person's income is too high for either taking the deduction for a tIRA contribution or making a Roth IRA contribution directly.

Given the information you provided, it sounds like it would be a good idea for your wife to explore setting up some type of retirement plan from her business.

To really answer your questions we would need more information about your tax bracket, the choices in your 401k, the amount you are setting aside each year, etc.

If I were you I would consider submitting your information according to the format listed here.

tmhudg
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Re: I thought I understood backdoor Roth but now I'm confuse

Post by tmhudg » Sat Feb 22, 2014 11:10 am

Here's my updated info.

Emergency funds: I use my HELOC for buffer cash
Debt: Mortgage:59K @4.625% 15 yr, Home Eq: 9K @ 2.5%
Tax Filing Status: Married Filing Jointly
Tax Rate: 28% Federal, 5% State
State of Residence: MA
Ages: 52, 52
Desired Asset allocation: 60% stocks / 40% bonds (I guess? Need advice here as well)
Desired International allocation: ??% of stocks - Again, not sure what I want to do here.

Portfolio: Mid 6 figures.

Current retirement assets

Taxable (I haven't really considered these strictly "retirement" assets frankly - more like money to use for "things that might include retirement")

1.53% | ALLIANCEBERNSTEIN HIGH INCOME CLASS A | AGDAX | 0.91
6.69% | WELLS FARGO PREMIER LARGE CO GRWTH A | EKJAX | 1.24
1.59% | SPTN Long Term Treasury Bond Fund | FLBAX | 1.22
4.56% | SPTN Extended Mkt Indx | FSEVX | 1.5
1.16% | SPTN 500 Index Advantage | FUSVX | .05
.58% | TEMPLETON GLOBAL BOND CLASS A | TPINX |0.91
8.04% | (my employer stock |<>

His 401k at Fidelity
23.15% | Spartan 500 Index | FXSIX | .04
11.42% | Fidelity Low price Stock Fund |FLPKX |0.76
8.04% | AF EuroPac Growth R6 |RERGX |0.5
22.1% |PIMCO total Ret |PTTRX |0.46
1% | SPTN Extended Mkt Indx | FSEVX | 1.5
23.15% | SPTN 500 Index Advantage | FUSVX | .05
4.02% |Vanguard REIT IDX Inst | VGSNX |

His Roth IRA at Fidelity
1% |FIDELITY Select Multimedia | FBMPX |

Her 401k at Fidelity
0.74% |SPTN 500 INDX |FXSIX |0.72%

Contributions

New annual Contributions

His 401k (I've recently adjusted contributions to this;
15% of Gross Salary split as below
30% | SPTN 500 INDEX INST |FXSIX |0.04
30% | SPTN Ext Mkt Index |FSEVX |0.07
40% | Vanguard REIT INDX |VGSNX |0.08
Company match varies but is around 10%

We are not contributing to her 401k or the Roth.

Available funds

Funds available in his 401(k) - This is a big list...
AF WASH MUTL INV R6 (RWMGX) Stock Investments Large Cap 0.31%
FID CONTRAFUND K (FCNKX) Stock Investments Large Cap 0.63%
SPTN 500 INDEX INST (FXSIX) Stock Investments Large Cap 0.05%
TRP VALUE (TRVLX) Stock Investments Large Cap 0.85%
FID LOW PRICED STK K (FLPKX) Stock Investments Mid-Cap 0.76%
GS MIDCAP VALUE INST (GSMCX) Stock Investments Mid-Cap 0.75%
SPTN EXT MKT IDX ADV (FSEVX) Stock Investments Mid-Cap 0.07%
TRP INST MDCPEQ GTH (PMEGX) Stock Investments Mid-Cap 0.63%
FID SMALL CAP STOCK (FSLCX) Stock Investments Small Cap 1.12%
AF EUROPAC GROWTH R6 (RERGX) Stock Investments International 0.50%
TIFI TEMPL FORGN EQU (TFEQX) Stock Investments International 0.80%
VANG REIT IDX INST (VGSNX) Stock Investments Specialty 0.08%
FID PURITAN K (FPUKX) Blended Fund Investments*N/A 0.48%
PYR INX LFC 2000 U Blended Fund Investments* N/A 0.19%
PYR INX LFC 2005 U Blended Fund Investments* N/A 0.19%
PYR INX LFC 2010 U Blended Fund Investments* N/A 0.19%
PYR INX LFC 2015 U Blended Fund Investments* N/A 0.19%
PYR INX LFC 2020 U Blended Fund Investments* N/A 0.19%
PYR INX LFC 2025 U Blended Fund Investments* N/A 0.19%
PYR INX LFC 2030 U Blended Fund Investments* N/A 0.19%
PYR INX LFC 2035 U Blended Fund Investments* N/A 0.19%
PYR INX LFC 2040 U Blended Fund Investments* N/A 0.19%
MIP II CL 2 Bond Investments Stable Value 0.41%
PIM HIGH YIELD INST (PHIYX) Bond Investments Income 0.55%
PIM TOTAL RT INST (PTTRX) Bond Investments Income 0.46%
FID INST MMKT (FMPXX) Short Term Investments N/A 0.21%

I also participate in a company stock purchase plan where I contribute 7% of my pay and buy company stock at a 15% discount. I've also got around $30K of stock options that have not vested that I did not include here.

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damjam
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Re: I thought I understood backdoor Roth but now I'm confuse

Post by damjam » Sat Feb 22, 2014 11:32 am

Just quickly looking at the information you provided, I'm finding a discrepancy.
You say you are in the 28% tax bracket, yet you also say that you are contributing 15% of your income to your 401k. Both can not be true.
In order to be in the 28% tax bracket you would need a minimum income of $166,400.
$146,000 is the bottom of the bracket for 2013 and you are entitled to a standard deduction of $12,200 and two exemptions of $3,900.

An gross income of $166,400, where you are contributing 15% to your 401k, would imply a contribution of $24,960. That amount exceeds the maximum possible contribution of $17,500 + $5,500 = $23,000.

So either your tax bracket is incorrect, or you were a little loose with your estimate of your contribution level to the 401k. You can check your tax bracket for 2013 here. NB: the calculator asks for taxable income. Taxable income can be found on line 43 on page 2 of the 1040. You will note that amount is income after the standard or itemized deduction has been taken. It is also after taking your personal exemptions.

I'm only bringing this up because many posters find they are mistaken about their tax bracket. In addition, your tax bracket is important in deciding whether you would rather contribute to a Roth or a pre-tax vehicle such as a 401k.

By the way, does your state allow pre-tax contributions to a 401k to not be taxed at the state level in the year of contribution?

tmhudg
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Re: I thought I understood backdoor Roth but now I'm confuse

Post by tmhudg » Sat Feb 22, 2014 12:18 pm

Yeah, you are probably right in that it's not the full 15% contribution. It is configured to do 15% but it ends when it hits the 23K contribution late in the year. Does that make sense?

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damjam
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Re: I thought I understood backdoor Roth but now I'm confuse

Post by damjam » Sat Feb 22, 2014 12:43 pm

Makes complete sense.

OK. Given the fact that you are in the 28% tax bracket and you are also paying 5% state tax, I would say you want to maximize pre-tax vehicles. It is very possible that most of the money you withdraw in the future will be in a lower bracket than you are now. Of course no one knows the future, but we make plans based on the information we have available today.

Your wife could look into a solo 401k for her business. There is also the SEP-IRA. Back in the day when I had a consulting business with my spouse, we had a SEP because it was easier to set up. Apparently the rules have gotten easier to comply with for solo 401ks since then. Check out Vanguard's site for information comparing 401ks to SEP IRAs to Simple IRAs. You do not have to set up the plan at Vanguard, if you like Fidelity I'm sure they have plans as well. Others can speak to the subtleties between providers.

There is an argument to be made for diversifying your retirement assets between pre-tax vehicles and Roth type vehicles. It's a judgement call.

If you max out both your 401k and your wife's soon to be retirement plan, then you could put any additional money toward backdoor Roths for each of you.

I haven't fully analyzed your 401k plan, but you have some good choices in there. I did notice that you have a few funds that have higher expense ratios (> .75%). I would try to structure the portfolio such that you are investing in areas you need through your wife's plan that do not have low cost options in your own. Although to be honest your plan is pretty good.

As to asset allocation, a 60/40 split is fine. I'm about the same age and that is the split I have. There are endless threads on this issue. In addition there is info in the WIKI.
There are also many discussions on the proper weight to give international assets. Some say 0% is the OK, that includes Jack Bogel himself. Others try to match the market weight, which is something over 50% I think. You'll have to read some more before you decide.

Luckily, you do not have to figure this all out today.

tmhudg
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Re: I thought I understood backdoor Roth but now I'm confuse

Post by tmhudg » Sat Feb 22, 2014 1:57 pm

Thanks for the replies. So to recap and confirm, being in the 28% bracket now, makes it more likely that I'll be in a lower bracket at retirement. I guess that makes sense but I thought the draw for a Roth was that it's looking more likely that taxes will go up in the future (regardless of my bracket) and it would be better to get things that won't be taxed on withdrawal. I get that nobody really knows this of course.

Regarding my wife's old 401k, I still want to roll the funds out of that into something else. I should be able roll it into a rollover IRA with no tax consequences right? Is there a difference between a rollover IRA and a TIRA?

If I at some point want to do a backdoor from her (or my) TIRA into a Roth, what happens tax-wise? That's the part I'm unclear about with regards to backdooring into Roths. I understand about making a non-deductible contribution to a TIRA and backdooring that into a Roth and paying tax on any small gain that I would have seen in that short time but what about an IRA that was funded by a 401 rollover? If I roll that into a Roth, what is taxed?

Thanks again

placeholder
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Re: I thought I understood backdoor Roth but now I'm confuse

Post by placeholder » Sat Feb 22, 2014 2:13 pm

Where is the information for her 401k and why do you want to roll it over?

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sometimesinvestor
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Re: I thought I understood backdoor Roth but now I'm confuse

Post by sometimesinvestor » Sat Feb 22, 2014 3:09 pm

I believe rolling over from a 401k to a TIRA is probably just wrong.For a backdoor Roth you need to look only at the amount in TIRA accounts.The amounts in 401ks don't matter If you have none for example a backdoor Roth means opening up a non dedctable IRA than immediately converting to a Roth with little or no taxes owned.This is a way outside the income limitation (can't earn too much) to open up a Roth

tmhudg
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Re: I thought I understood backdoor Roth but now I'm confuse

Post by tmhudg » Sat Feb 22, 2014 4:47 pm

placeholder wrote:Where is the information for her 401k and why do you want to roll it over?

Sorry, I didn't include those but it's held at Fidelity with what looks like a fairly good set of choices. The reason I want to move it to an IRA is because 1) It's one of the choices of "What to do with a 401 from a past employer" with one of the reasons being you don't know when that employer is going to change handlers and to open up more choices. Other than that, there's no real reason I suppose but I didn't think there was any reason *not* to do it - am I missing something?

sometimesinvestor wrote:I believe rolling over from a 401k to a TIRA is probably just wrong.


Can you explain why? Ignoring the whole backdoor Roth question, is there a reason *not* to rollover the 401 to a TIRA?

For a backdoor Roth you need to look only at the amount in TIRA accounts.The amounts in 401ks don't matter If you have none for example a backdoor Roth means opening up a non dedctable IRA than immediately converting to a Roth with little or no taxes owned.This is a way outside the income limitation (can't earn too much) to open up a Roth


Sorry if I'm just not getting it but this just confuses me more. "The amounts in the 401s don't matter" - well they have been rolled into the TIRA so they are zero anyway right? It seems like I might be getting crossed up on a deductible vs. non-deductible TIRA perhaps? If I roll a 401k to a TIRA that would be considered a deductible TIRA correct? Can I convert that to a Roth or can I only convert a non-deductible TIRA to a Roth. I know a Roth is for getting around the income limitation. I'm trying to understand the tax implications of doing it.

Thanks

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damjam
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Re: I thought I understood backdoor Roth but now I'm confuse

Post by damjam » Sat Feb 22, 2014 4:57 pm

See the WIKI on Backdoor Roth. Read the caution section, it explains the problem with having additional tIRAs when you want to do backdoor Roths.
If you have money in a 401k that does not get factored into the equation for converting a tIRA to a Roth IRA.
If you do not wish to do backdoor Roths there is no reason I can think of not to rollover your wife's 401k to a tIRA. Unless she has access to something really great in that 401k that she can't get on her own.

DSInvestor
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Re: I thought I understood backdoor Roth but now I'm confuse

Post by DSInvestor » Sat Feb 22, 2014 4:57 pm

There is no non-deductible TIRA or deductible TIRA. Contributions to TIRA can be deductible or non-deductible. Non-deductible contributions to TIRA has already been taxed so that money is not taxed on withdrawal or conversion.

Folks who are using backdoor into Roth IRA need to be careful about rolling over 401k assets into IRA as that would introduce pre-tax assets into IRA and complicate the conversion step of the Roth IRA conversion. This applies even if the rollover happens after the conversion. IRS Form 8606 asks for the balance of all Traditional IRA, SEP-IRA, SIMPLE-IRA on Dec 31 to determine the taxable and non-taxable amounts of conversion. The more pretax assets you have on Dec 31, the more of your conversion will be taxable.

Assets in 401k accounts are not counted by form 8606.

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Duckie
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Re: I thought I understood backdoor Roth but now I'm confuse

Post by Duckie » Sat Feb 22, 2014 5:51 pm

tmhudg has a portfolio of mid-six figures. Her old 401k at Fidelity is less than 1% of the portfolio. To me that makes it less than $8K. Given that, converting to a Roth IRA is fine.

Since she has a small business having her open a solo 401k at either Vanguard or Fidelity would be a good idea. It would create more tax-sheltered space.

tmhudg
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Re: I thought I understood backdoor Roth but now I'm confuse

Post by tmhudg » Sat Feb 22, 2014 6:10 pm

Alright so I could roll her 401 into a TIRA and that in itself would not be a bad thing. It's problematic to then backdoor that to a Roth because it's pre-tax money and the Roth is really designed for after-tax money.

So if I want to do the backdoor Roth, it's better to not roll the 401k into a TIRA (because of above) and just put non-deductible money into the TIRA and then convert that. That way I don't run into any of the pro rata stuff and additional tax - it's just on the (little) gain I might have between contribution and conversion. Do I have that part about right?

As I was writing this, Duckie posted that converting it to a Roth IRA is fine. I assume that means that the amount is small enough that all the tax gyrations wouldn't be that costly. Still, I hate the added complexity of doing that so I'm now leaning away from that and just leaving it in the 401k. Unless...

If she opens a Self-Employed 401k, can she roll her old 401k into that?

Thanks again

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Duckie
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Re: I thought I understood backdoor Roth but now I'm confuse

Post by Duckie » Sat Feb 22, 2014 7:30 pm

tmhudg wrote:Duckie posted that converting it to a Roth IRA is fine. I assume that means that the amount is small enough that all the tax gyrations wouldn't be that costly. Still, I hate the added complexity of doing that so I'm now leaning away from that and just leaving it in the 401k.

If she's doing the backdoor Roth anyway, the one-time extra conversion won't make it any more difficult, just more expensive in that year.

Unless...If she opens a Self-Employed 401k, can she roll her old 401k into that?

Yes, but to be absolutely sure check with the custodian.

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Pocket Cruiser
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Re: I thought I understood backdoor Roth but now I'm confuse

Post by Pocket Cruiser » Sat Feb 22, 2014 9:31 pm

Any pretax money in a TIRA will be subject to the pro rata rule. To get around this for your wife, she can open a solo 401k, and roll all her pretax money from all IRAs into it. Be sure to research different providers and verify that they allow incoming rollovers. Vanguard does not allow it. I believe these do, to name a few:

    TD Ameritrade Has pretty good selection of commission free ETFs
    Schwab So does Schwab
    Etrade Awards a credit of up to $600 for funding the plan. Although, has higher expense ratio commission free ETFs.

To shelter your pretax money in your IRAs you should find out if your 401k plan administrator allows incoming ira rollvers. If they do not, then you will have a tax bill if you do roth conversions. Do the math and decide if it's worth it.

As to wife's old 401k, you should check what investment options are available in it. There might be some good low ER choices that would justify keeping it.

Also, if you haven't done so yet, familiarize yourself with form 8606. You'll use it to keep track of your basis in the roth's.

EDIT: I just noticed in your post that you have no TIRAs. In that case, she doesn't need to set up a solo 401k, if the goal is to contribute to roths. If the goal is to shelter as much income as possible to taxation, the solo 401k would be nice as she can put away as much as $56,500 pretax.

All of that to say, as others have said, in the 28% bracket, I would fund TIRAs over RIRAs. You could both max a TIRA each year 6500+6500=13000 and that would save you 13000*28%=$3640. Of course in retirement, you'll be taxed on the withdrawals, but probably at a lower rate 25% or maybe even 15%.

tmhudg
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Re: I thought I understood backdoor Roth but now I'm confuse

Post by tmhudg » Sat Feb 22, 2014 10:11 pm

aws316 wrote: I would fund TIRAs over RIRAs. You could both max a TIRA each year 6500+6500=13000 and that would save you 13000*28%=$3640.


I feel like an idiot but I just don't follow this. I can't deduct TIRA contributions because I have a retirement plan at work (401k) and I make too much so how is this saving me money?

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Pocket Cruiser
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Re: I thought I understood backdoor Roth but now I'm confuse

Post by Pocket Cruiser » Sat Feb 22, 2014 11:31 pm

My mistake; you are correct. In your case, you should definitely fund backdoor roths.

However, one tactic that you may toy around with, depending on your wife's income level and how much you need to live on each year vs save, is to do the solo 401k and contribute enough to drop you down into a lower bracket and allow you to deduct TIRA contributions. Would that be a possible option, and would it drop your taxable income to under 96,000 for a full deduction or 116,00 to get a partial deduction?

retiredjg
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Re: I thought I understood backdoor Roth but now I'm confuse

Post by retiredjg » Sun Feb 23, 2014 11:28 am

Regarding Her old 401k, here's a summary that might help you figure it out.

    -If she leaves it where it is, it does not muck up her opportunity to use back door contributions to Roth IRA in the future; the choices in this old plan are fine; there is really no compelling reason to move this money other than to get rid of a tiny account in order to simplify.

    -If she rolls it into tIRA, that does muck up her opportunity to use back door contributions to Roth IRA in the future; but the account is small enough that it may not matter much (this was Duckies point) - just pay the taxes to also convert this small amount to Roth and go forward with future back door contributions to Roth. In fact, this old 401k can be directly transferred/converted to Roth IRA if she prefers to do it in one step instead of two steps.

    -If she chooses to open a Solo 401k based on her business, the old 401k can likely be rolled into the new Solo 401k. She would have to check with the provider before opening the new Solo 401k to be sure. If this happens (old rolled into new) there would be nothing to muck up her opportunity to use back door contributions to Roth IRA in the future.

    -She should not choose to use a SEP IRA for her business because that gets in the way of back door contributions to Roth IRA.




What is not clear to me is how much money you plan to save for retirement. You are filling up your 401k ($23,000) and apparently, everything else has just been flowing into the taxable account. Now you have decided to have some of that flow into Roth IRA through the back door. Or if she opens a Solo 401k, some could flow into that account as well.

I think it is good to have some tax-diversification (some money in traditional status and some in Roth status). But there is an argument to be made that putting money into Roth at 28% is not the best choice when you could be getting a tax-deferral instead. You'll just have to figure out your own comfort level on that question. Or you might be saving enough money to be doing both, I don't know. Or you might save enough in His 401k and Her 401k to drop into the 25% bracket and then divert money into Roth as already mentioned by aws316. Since we don't know much you are saving, it is hard to tell.


If you are also wanting help with your portfolio, I think some improvements can be made (in simplicity if nothing else), However, the portfolio does not add up to 100% unless I messed up (twice). Also we'd need to know how much money you plan to save. I think it would be best to make your decision on Her Old 401k and then work on the portfolio in a separate thread.

tmhudg
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Re: I thought I understood backdoor Roth but now I'm confuse

Post by tmhudg » Sun Feb 23, 2014 11:57 am

retiredjg wrote:Regarding Her old 401k, here's a summary that might help you figure it out.


Thank you! This helps a ton and aligns with what I've come to understand during this thread.

I think it is good to have some tax-diversification (some money in traditional status and some in Roth status). But there is an argument to be made that putting money into Roth at 28% is not the best choice when you could be getting a tax-deferral instead.


I see this now and agree that I might be able to get out of this bracket and that is appealing. I'm not clear on contribution limits for her (potential) solo 401k. Can we go up to 23K on hers too (based on our join income) or is it based on her self-employment income in some way?

Another wrinkle: I just found out that it looks like I can contribute to a Roth 401k in my plan. I'm going to have to investigate that and see what that entails. That might be a way around the whole backdoor thing anyway.

If you are also wanting help with your portfolio, I think some improvements can be made (in simplicity if nothing else), However, the portfolio does not add up to 100% unless I messed up (twice).


Hmm, I'll have to check on that. It adds up in my spreadsheet but perhaps I copied things in wrong. I agree, a portfolio analysis is for another thread (that's why I didn't include it at first).

I really appreciate the help in this.

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damjam
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Re: I thought I understood backdoor Roth but now I'm confuse

Post by damjam » Sun Feb 23, 2014 12:07 pm

tmhudg wrote:
retiredjg wrote:I think it is good to have some tax-diversification (some money in traditional status and some in Roth status). But there is an argument to be made that putting money into Roth at 28% is not the best choice when you could be getting a tax-deferral instead.



I see this now and agree that I might be able to get out of this bracket and that is appealing. I'm not clear on contribution limits for her (potential) solo 401k. Can we go up to 23K on hers too (based on our join income) or is it based on her self-employment income in some way?

The amount your wife can contribute to her solo 401k will be based on the earnings of her business and her salary from that business. Your income does not come into play.

DSInvestor
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Re: I thought I understood backdoor Roth but now I'm confuse

Post by DSInvestor » Sun Feb 23, 2014 12:07 pm

tmhudg wrote:I see this now and agree that I might be able to get out of this bracket and that is appealing. I'm not clear on contribution limits for her (potential) solo 401k. Can we go up to 23K on hers too (based on our join income) or is it based on her self-employment income in some way?


Does her small business have any employees? Non-spouse employees will make her business ineligible for Solo 401(k).
Solo 401k contributions are based on the self employed income. Contribution limits are very high 52K. Solo 401k allows for employee salary deferral contributions and employer profit share contributions. Employee salary deferral is limited to 17.5K. Employer profit share is ~20 of sole proprietor net business income or 25% of self employed W-2 salary if incorporated. The sum of employee and employer contributions cannot exceed 52K if under age 50.

tmhudg
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Re: I thought I understood backdoor Roth but now I'm confuse

Post by tmhudg » Sun Feb 23, 2014 12:30 pm

damjam wrote:The amount your wife can contribute to her solo 401k will be based on the earnings of her business and her salary from that business. Your income does not come into play.


I was afraid of that. That's not going to help the overall plan much.

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Re: I thought I understood backdoor Roth but now I'm confuse

Post by retiredjg » Sun Feb 23, 2014 2:04 pm

Then it boils down to this.

    -Do open a Solo 401k and contribute as much as possible. If you are filling yours and she is filling hers, whatever money you save after that goes to Roth IRA by the back door method. Any money after that goes to taxable.

    -Do not open a Solo 401k because her business is so small that it won't be worth the extra effort. Leave Her Old 401k as it is. Both of you do back door contributions to Roth IRA. And money after that goest to taxable.

    -Do not open a Solo 401k, convert her Old 401k to Roth (at 28% which is high but if it is very small it might be worth it to just have one less account) and both of you do back door contributions to Roth IRA in the future. Any money after that goes to taxable.

In your tax bracket, I would NOT use Roth 401k. You need as much money being tax-deferred as possible. So why use Roth IRA? Because that money is going to be taxed anyway (since you have used all your tax-deferred space) so it may as well go to Roth.



One thing concerns me. Earlier you said you want your taxes to be a simple as possible. Before you actually do a back door contribution to Roth IRA, you should go through the paperwork to be sure you know how to do it. It is two steps, for each of you, and they are both captured on Form 8606.

First is a contribution to tIRA and that contribution is not deducted from your income (usually, there is an occasional exception if your state taxes work out better). Second is a conversion of that money to Roth IRA, hopefully to the exact penny so the paperwork zeros out each year and you start with a clean slate. For that to happen, it is best to invest the money in something that cannot grow or shrink between the contribution and the conversion - money market.

Step one is captured on the front side of Form 8606 and step two is captured on the back side of Form 8606. You do one form for you and one form for her, each year.

tmhudg
Posts: 66
Joined: Fri Apr 26, 2013 10:56 am

Re: I thought I understood backdoor Roth but now I'm confuse

Post by tmhudg » Sun Feb 23, 2014 8:16 pm

retiredjg wrote:Then it boils down to this.

    -Do open a Solo 401k and contribute as much as possible. If you are filling yours and she is filling hers, whatever money you save after that goes to Roth IRA by the back door method. Any money after that goes to taxable.

    -Do not open a Solo 401k because her business is so small that it won't be worth the extra effort. Leave Her Old 401k as it is. Both of you do back door contributions to Roth IRA. And money after that goest to taxable.

    -Do not open a Solo 401k, convert her Old 401k to Roth (at 28% which is high but if it is very small it might be worth it to just have one less account) and both of you do back door contributions to Roth IRA in the future. Any money after that goes to taxable.


I think I'll leave her 401k as it is and possibly explore rolling that into a solo 401k but I'm going to leave that aside for the moment.

In your tax bracket, I would NOT use Roth 401k. You need as much money being tax-deferred as possible.

I see. I mistakenly thought I would have separate limits on the traditional 401k and the Roth 401k but I now see that the limit is across both and I should max the T401k to reduce taxable income.

One thing concerns me. Earlier you said you want your taxes to be a simple as possible. Before you actually do a back door contribution to Roth IRA, you should go through the paperwork to be sure you know how to do it. It is two steps, for each of you, and they are both captured on Form 8606.

Good plan. I just went through a test case as if I had contributed $6500 to a TIRA for 2013. It seems fairly straightforward since I have no basis. The only thing that is slightly confusing is the timing of the conversion to Roth. They ask "did you convert to a Roth in 2013?" I assume they mean the actual calendar year 2013 and not the IRA year 2013 which runs to April 15. If that's true, it doesn't really matter whether I do the conversion to Roth before or after April 15 since it wouldn't be in 2013 and therefore not go on this years 8606. Do I have that right? I would record the conversion for 2014 (that I do say, in a couple of weeks from now) on next year's 8606 - yes?

retiredjg
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Joined: Thu Jan 10, 2008 12:56 pm

Re: I thought I understood backdoor Roth but now I'm confuse

Post by retiredjg » Mon Feb 24, 2014 10:40 am

tmhudg wrote:Good plan. I just went through a test case as if I had contributed $6500 to a TIRA for 2013. It seems fairly straightforward since I have no basis. The only thing that is slightly confusing is the timing of the conversion to Roth. They ask "did you convert to a Roth in 2013?" I assume they mean the actual calendar year 2013 and not the IRA year 2013 which runs to April 15. If that's true, it doesn't really matter whether I do the conversion to Roth before or after April 15 since it wouldn't be in 2013 and therefore not go on this years 8606. Do I have that right? I would record the conversion for 2014 (that I do say, in a couple of weeks from now) on next year's 8606 - yes?


Yes, the conversion is reported for the calendar year in which it is actually done. So you could end up reporting a contribution for one year and a conversion of a previous year's contribution on the same form. Example, next year, you may report the conversion (done in 2014) of your 2013 contribution on the same form that you report the your 2014 contribution.

Hope that made sense.

tmhudg
Posts: 66
Joined: Fri Apr 26, 2013 10:56 am

Re: I thought I understood backdoor Roth but now I'm confuse

Post by tmhudg » Mon Feb 24, 2014 11:10 am

retiredjg wrote:Yes, the conversion is reported for the calendar year in which it is actually done. So you could end up reporting a contribution for one year and a conversion of a previous year's contribution on the same form. Example, next year, you may report the conversion (done in 2014) of your 2013 contribution on the same form that you report the your 2014 contribution.

Hope that made sense.


Yes, perfectly.

Thanks again to you and everyone who has helped clear this up for me.

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