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Roth IRA @ Max Income Bracket

Posted: Wed Nov 05, 2014 10:59 am
by mpowered
Does it make sense to make non-deductible contributions to a Roth IRA when I am at the max income bracket?

If I expect my marginal rate to go down by the time I am going to be withdrawing, wouldn't I actually be hurting myself by converting what will likely be capital gains into ordinary income?

Re: Roth IRA @ Max Income Bracket

Posted: Wed Nov 05, 2014 2:42 pm
by Duckie
mpowered wrote:Does it make sense to make non-deductible contributions to a Roth IRA when I am at the max income bracket?

If I expect my marginal rate to go down by the time I am going to be withdrawing, wouldn't I actually be hurting myself by converting what will likely be capital gains into ordinary income?
When you talk about "non-deductible contributions" are you talking about the 
Backdoor Roth IRA
 method or just a normal Roth IRA contribution? Either way, withdrawals from a Roth IRA (assuming you follow the rules) are not taxable.

Re: Roth IRA @ Max Income Bracket

Posted: Wed Nov 05, 2014 2:44 pm
by livesoft
mpowered wrote:…, wouldn't I actually be hurting myself by converting what will likely be capital gains into ordinary income?
Yes, you would be hurting yourself. But a Roth IRA has no taxes on gains, so if you really had this in a Roth IRA, you would not be hurting yourself. From your statements, it is not clear if you are talking about a Roth IRA or not.

Re: Roth IRA @ Max Income Bracket

Posted: Wed Nov 05, 2014 2:46 pm
by thenextguy
If you are in the top income tax bracket, I don't think you can contribute to a Roth IRA.

Re: Roth IRA @ Max Income Bracket

Posted: Wed Nov 05, 2014 2:57 pm
by mpowered
Yeah. Sorry. I'm talking about converting my Rollover IRA to a Backdoor Roth IRA.

Edit: okay. I got a few concepts mixed up in my head.

#1 Would making after-tax contributions to a traditional IRA be hurting myself (per the question above) and

#2 Would it make sense to convert my Rollover IRA to a Roth IRA (backdoor IRA)? How is this conversion taxed?

Edit #2:

Sorry. Here is my situation.

I have a Rollover IRA with Vanguard, with roughly $100K. All of it is from 401K that has been rolled over into Vanguard, thus, all of it is pre-tax money. I am currently in the max tax bracket. Is there anything I can do to reduce my tax liability in the future?

I have been reading about this Backdoor IRA concept, but now that I'm looking at it more closely, I don't think it applies to me. Sounds like I have to first contribute after-tax money into a Traditional IRA, which I then convert into a Roth IRA (backdoor IRA concept).

Then, when I hit 59.5, I can withdraw the money from my Roth IRA (converted from a traditional IRA), tax free. Is my understanding correct?

Re: Roth IRA @ Max Income Bracket

Posted: Wed Nov 05, 2014 3:05 pm
by livesoft
If you have a large rollover traditional IRA, then

#1 Yes.

#2 No. A conversion of a tax-deferrred traditional iRA (rollover or any other kind) would increase your adjusted gross income by the amount converted. It could be a huge tax hit. If you have a 401(k) available, it would be better to roll such an IRA into the 401(k) assuming the 401(k) has reasonable low-expense-ratio funds because that would no be tax hit and would change the answer to question #1.

Re: Roth IRA @ Max Income Bracket

Posted: Wed Nov 05, 2014 3:07 pm
by kenyan
mpowered wrote:Yeah. Sorry. I'm talking about converting my Rollover IRA to a Backdoor Roth IRA.

Edit: okay. I got a few concepts mixed up in my head.

#1 Would making after-tax contributions to a traditional IRA be hurting myself (per the question above) and

#2 Would it make sense to convert my Rollver IRA to a Roth IRA (backdoor IRA)? How is this conversion taxed?
1. After-tax contributions to a traditional IRA are generally not recommended, if you plan to leave them in the traditional IRA. Taxable investing (in a tax-efficient manner) is preferred. However, if you are making these after-tax contributions, and then immediately converting to a Roth IRA, this is what is known as the Backdoor Roth IRA, which is an excellent way for high-income individuals to gain some extra tax-advantaged investment space. This option is complicated, though, if you have any pretax IRAs, such as the Rollover IRA you mention in your next question...

2. Firstly, this is not a Backdoor Roth IRA - see my answer for #1 to define that term. This is simply a Roth conversion. This conversion is taxed at your full marginal state + federal income tax rate for every dollar converted (assuming you have no basis - that means that your IRA was from pretax contributions and the investment gains thereof). Whether or not this is a good decision depends upon your personal circumstances. It will enable you to perform the Backdoor Roth IRA conversion every year if you convert all of your pretax IRAs, but it can trigger a very hefty tax bill, possibly one that is much higher than if you wait until retirement or another time when your income may be lower.

Re: Roth IRA @ Max Income Bracket

Posted: Wed Nov 05, 2014 3:09 pm
by Zabar
mpowered wrote:Yeah. Sorry. I'm talking about converting my Rollover IRA to a Backdoor Roth IRA.

Edit: okay. I got a few concepts mixed up in my head.

#1 Would making after-tax contributions to a traditional IRA be hurting myself (per the question above) and

#2 Would it make sense to convert my Rollver IRA to a Roth IRA (backdoor IRA)? How is this conversion taxed?
I think you're confusing a few things. You can convert a rollover IRA to a Roth IRA at any income level simply by paying your marginal earned income tax rates in federal and state taxes. You don't need a "backdoor."

A backdoor Roth only makes sense if you don't have any tIRA accounts. Otherwise you'll have to deal with the pro rata rule.

Re: Roth IRA @ Max Income Bracket

Posted: Wed Nov 05, 2014 4:44 pm
by rkhusky
Zabar wrote: A backdoor Roth only makes sense if you don't have any tIRA accounts. Otherwise you'll have to deal with the pro rata rule.
Backdoor Roth is okay if tIRA is sufficiently small that you don't mind paying taxes on the portion that would also be converted.

Re: Roth IRA @ Max Income Bracket

Posted: Wed Nov 05, 2014 10:06 pm
by mpowered
Got it. I think the only strategy that makes sense at this point is to roll over the IRA back into a 401k, contribute post tax money into the IRA, then do a back door conversion.