401k / IRA questions

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tindel
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Joined: Sun Nov 12, 2017 10:06 am

401k / IRA questions

Post by tindel » Sun Nov 12, 2017 11:08 am

So, I was laid off earlier this year. I plan to start my new job tomorrow (Monday the 13th, just in time for paid holidays! Yay!). Meaning that this is a great opportunity for me to contribute to roth 401k because I will be solidly in the 15% tax bracket for the last year ever probably. I do have a little in roth at this point in my life... but it's not a large part of my assets something like 8-9% of my NW. I contributed it the first two years after school while my income was lowish.

However, next year I will be solidly in the 25% tax bracket for the first time. Meaning t401k will be my best option next year. I will also be phased out completely from the a tIRA, meaning that all of my contributions henceforth will be to rIRA until I phase out of that. My wife will have access to tIRA next year (no job based 401k).

So what makes more sense for my IRA contributions this year? I could put them in rIRA at a 15% tax hit, but starting next year I'll be force into rIRA for a 25% tax hit and will continue funding the rIRA at this level for some period of time. I could put them into my tIRA though because it may be the last time I ever get to contribute to my tIRA, but this only saves me a few bucks ($825) today, and I'll have to pay taxes later.

Some things to be aware of that my influence what I should do: I expect to be in the 15% tax bracket when I retire - assuming things stay the same, of course. I've already contributed ~$6k in t401k this year at my previous employer. Will probably contribute another ~$7.5k, for a total of ~$13.5k to my 401k. I will make a ~$13.5k contribution regardless of r401k or t401k. If we go 100% traditional I will get ~$3k tax return this year that I will probably not reinvest immediately. I plan to max out both IRA's for a total of 11k before the end of tax season (mine and my wifes).

gostars
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Re: 401k / IRA questions

Post by gostars » Sun Nov 12, 2017 7:16 pm

The only debate between Roth and traditional in the 15% bracket is if you don't have enough to max the contribution using after-tax dollars. Since you're planning to max out either way, Roth is the better choice.

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Duckie
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Re: 401k / IRA questions

Post by Duckie » Sun Nov 12, 2017 7:25 pm

tindel, welcome to the forum.
tindel wrote:I will also be phased out completely from the a tIRA, meaning that all of my contributions henceforth will be to rIRA until I phase out of that.
If you expect your future income to be high enough to disallow Roth IRA contributions then you may want to use the Backdoor Roth IRA method at that time. Having any non-Roth IRA assets will get in the way because of the pro-rata rule. So if high income is expected do not contribute to a TIRA.

tindel
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Joined: Sun Nov 12, 2017 10:06 am

Re: 401k / IRA questions

Post by tindel » Mon Nov 13, 2017 7:20 am

Well it seems that it's time for me to learn more about these backdoor Roths. It is possible that someday I'm phased out of Roth - I'm not counting on it, but it's possible.

Can you help me get a couple things straight? This whole backdoor roth conversion is very very confusing to me...
1. I currently have ~35k in a traditional IRA. Consider that I never put any more into a tIRA.
2. If I were to put in 5k into my tIRA once I'm making over 196k, and convert it to rIRA, only 5/40 = 12.5% would be tax free. What does tax free mean here? Does it mean that because I first contributed to a tIRA that a portion is actually tax-free when I put the money in AND when I pull the money out since it will be in a Roth?
3. Aren't I also phased out of a tIRA if I'm phased out of a rIRA? So how could I contribute and convert tax free?
4. It sounds like I should be able to rollover my tIRA to my t401k if my new employer allows for that? Right? Is there a time limit on this? This would allow me to have a $0 balance in my tIRA so that conversions could be 100% tax-free in the future.
5. I plan to be in the 15% tax bracket when I retire - does doing a backdoor roth in a 25%+ tax bracket even make sense?

kaneohe
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Joined: Mon Sep 22, 2008 12:38 pm

Re: 401k / IRA questions

Post by kaneohe » Mon Nov 13, 2017 9:37 am

tindel wrote:
Mon Nov 13, 2017 7:20 am
Well it seems that it's time for me to learn more about these backdoor Roths. It is possible that someday I'm phased out of Roth - I'm not counting on it, but it's possible.

Can you help me get a couple things straight? This whole backdoor roth conversion is very very confusing to me...
1. I currently have ~35k in a traditional IRA. Consider that I never put any more into a tIRA.
2. If I were to put in 5k into my tIRA once I'm making over 196k, and convert it to rIRA, only 5/40 = 12.5% would be tax free. What does tax free mean here? Does it mean that because I first contributed to a tIRA that a portion is actually tax-free when I put the money in AND when I pull the money out since it will be in a Roth?
3. Aren't I also phased out of a tIRA if I'm phased out of a rIRA? So how could I contribute and convert tax free?
4. It sounds like I should be able to rollover my tIRA to my t401k if my new employer allows for that? Right? Is there a time limit on this? This would allow me to have a $0 balance in my tIRA so that conversions could be 100% tax-free in the future.
5. I plan to be in the 15% tax bracket when I retire - does doing a backdoor roth in a 25%+ tax bracket even make sense?
2)When you make the 5K contribution to TIRA, you get no tax deduction and have 5K Basis in TIRA. When you convert that 5K to Roth, approx.
12.5% of that amount is basis and will not be taxed. When you withdraw from the Roth, there will be no tax/penalties assuming you meet the age rules for you/first Roth or conversion.
3)You can always contribute to TIRA. What phases out is the deductibility of contribution.
4)Yes. No time limit but you want the transfer to 401K to happen before yr. end of the yr. when you do Roth conversion.
5)Best to move deductible part of TIRA to 401K so you don't get taxed.

tindel
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Joined: Sun Nov 12, 2017 10:06 am

Re: 401k / IRA questions

Post by tindel » Tue Nov 14, 2017 1:55 am

kaneohe wrote:
Mon Nov 13, 2017 9:37 am
tindel wrote:
Mon Nov 13, 2017 7:20 am
2. If I were to put in 5k into my tIRA once I'm making over 196k, and convert it to rIRA, only 5/40 = 12.5% would be tax free. What does tax free mean here? Does it mean that because I first contributed to a tIRA that a portion is actually tax-free when I put the money in AND when I pull the money out since it will be in a Roth?
2)When you make the 5K contribution to TIRA, you get no tax deduction and have 5K Basis in TIRA. When you convert that 5K to Roth, approx.
12.5% of that amount is basis and will not be taxed. When you withdraw from the Roth, there will be no tax/penalties assuming you meet the age rules for you/first Roth or conversion.
First, thanks for the help so far!

So let me make sure I have this right.

Assume I am phased out of the tIRA and the rIRA (Income > $196k). I choose however, to make a non-deductible contribution of $5k to my tIRA and pay the associated taxes on that $5k. If I then backdoor $5k to the roth, only 12.5% of that conversion is tax-free, and I end up paying additional taxes on $4812.50 of the contribution? Therefore, I then end up paying taxes on a total of $9812.50 for the year. The additional taxes on $4812.50 is because this money was originally contributed to the tIRA was made as a deductible contribution, and converting that portion to Roth, you're saying you no longer want it to be tax-deferred.

Now assume I'm able to get all of my tIRA moved to my t401k at my new employer. I now have $0 in my tIRA. I can then make that same non-deductible contribution of $5k to my tIRA, and then backdoor that money to the roth, with 100% of that being tax free ($5k/$5k=1)? So now I've contributed to the rIRA while still having a high income, and paid taxes on the $5k.

New questions:
1B) Is there a limit to how much money I can backdoor each year to my Roth $5500? I couldn't find anything with a google search.
2B) I'm assuming this also means that 5 years after the conversion, I can withdraw the contributions to the Roth tax and penalty free. Using it as a emergency fund.

overthought
Posts: 99
Joined: Tue Oct 17, 2017 3:44 am

Re: 401k / IRA questions

Post by overthought » Tue Nov 14, 2017 8:36 am

tindel wrote:
Tue Nov 14, 2017 1:55 am
New questions:
1B) Is there a limit to how much money I can backdoor each year to my Roth $5500? I couldn't find anything with a google search.
2B) I'm assuming this also means that 5 years after the conversion, I can withdraw the contributions to the Roth tax and penalty free. Using it as a emergency fund.
1B) I'm unaware of any limit. Normally people backdoor the full balance every time, so the practical limit going forward is the $5500 they contribute each year.

2B) For a one-time conversion, I believe you are correct. What I don't know is: If you convert another $5500 every year, does the five-year clock start over for the whole Roth, or just for the converted amount?

JW-Retired
Posts: 6471
Joined: Sun Dec 16, 2007 12:25 pm

Re: 401k / IRA questions

Post by JW-Retired » Tue Nov 14, 2017 10:14 am

tindel wrote:
Tue Nov 14, 2017 1:55 am
New questions:
........
1B) Is there a limit to how much money I can backdoor each year to my Roth $5500? I couldn't find anything with a google search.
The yearly limit on a contribution to a tIRA is $5500 ($6500 if age 50 or more ), and no limit on a Roth conversion. IRS doesn't have rules on a "backdoor" because it doesn't exist to them. It's just a convenient investor shorthand for doing the two independent steps.

When I was working on getting rid of my tIRA I was making a yearly non-deductible contribution and then Roth converting some multiple of that. The IRS 8606 form didn't mind that a bit. You should convert "all".

Always always dry run filling out your 8606 form so you really understand how it works.
JW
Retired at Last

overthought
Posts: 99
Joined: Tue Oct 17, 2017 3:44 am

Re: 401k / IRA questions

Post by overthought » Wed Nov 15, 2017 9:01 am

overthought wrote:
Tue Nov 14, 2017 8:36 am
tindel wrote:
Tue Nov 14, 2017 1:55 am
New questions:
2B) I'm assuming this also means that 5 years after the conversion, I can withdraw the contributions to the Roth tax and penalty free. Using it as a emergency fund.
2B) For a one-time conversion, I believe you are correct. What I don't know is: If you convert another $5500 every year, does the five-year clock start over for the whole Roth, or just for the converted amount?
Found the answer. All contributions come out before any conversions, and conversions come out oldest-first. Earnings come out last.

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