What would you do? Backdoor Roth IRA conversion question

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Ka5
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Joined: Mon Mar 12, 2018 8:20 am

What would you do? Backdoor Roth IRA conversion question

Post by Ka5 » Mon Mar 12, 2018 8:38 am

So I recently found out about the backdoor Roth IRA and really wishing I knew about this earlier.

Traditional IRA- $90k
Amount of non deductible contributions: $55k

The difference is a $2500 deductible contribution and the gains in an investment account. No option to roll over this amount into a 401(k) as I stay at home full time while my spouse is the wage earner.

Current tax bracket: 39.6%
Estimated tax bracket at retirement- hard to say as we’re looking 20 years down the line. Hopefully retirement portfolio will be in the low to mid 7 figures.

When I put this into an online calculator, it says that we will owe about $13,500 in federal taxes and about $2,400 in state.

Is it worth it to take the big tax bite now in order to grow my Roth? I know there are options for converting this money a little at a time at the time of retirement but not sure how that all works. Again, tax laws and retirement account rules 20 years from now could look very different so it’s hard to know the best option at this point.

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FiveK
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Joined: Sun Mar 16, 2014 2:43 pm

Re: What would you do? Backdoor Roth IRA conversion question

Post by FiveK » Mon Mar 12, 2018 2:09 pm

Ka5 wrote:
Mon Mar 12, 2018 8:38 am
Is it worth it to take the big tax bite now in order to grow my Roth?
It may be.

See Roth Conversion - Math check - Bogleheads.org (that post in particular, but the rest of the thread as well) for how you might analyze it.

Ka5
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Joined: Mon Mar 12, 2018 8:20 am

Re: What would you do? Backdoor Roth IRA conversion question

Post by Ka5 » Mon Mar 12, 2018 10:51 pm

Thanks- I figured this has been asked before!

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celia
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Location: SoCal

Re: What would you do? Backdoor Roth IRA conversion question

Post by celia » Mon Mar 12, 2018 11:17 pm

With your tax bracket, it probably doesn't matter when you convert it since you will "always" pay taxes at a high tax rate. I would want to get that into a Roth asap and invest it aggressively as it would grow tax-free. The longer you leave it in a traditional IRA, the more taxes you will pay (in dollar amounts) as the account value should continue to increase over time.

If it seems like a huge chunk to move all at once (it is to me!), I would move some each quarter, maybe have some being moved next year. But meanwhile, if the markets dropped 10% or more, I would take advantage of the dip and convert more shares (as they are then cheaper). That can save you a little on taxes. But, then, there is also the chance the markets will instead basically increase and you might end up paying more in taxes.
A dollar in Roth is worth more than a dollar in a taxable account. A dollar in taxable is worth more than a dollar in a tax-deferred account.

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

Re: What would you do? Backdoor Roth IRA conversion question

Post by JW-Retired » Tue Mar 13, 2018 7:07 am

Ka5,
I'm with celia, do the Roth conversion ASAP. It's only tax on $35k. That pre-taxed amount is just going to grow if you keep waiting for a lower bracket.

I would contribute another $11k for 2017 & 2018 and then convert the whole thing. Then you are clear to do tax free backdoor contributions for as long as someone is working. Or perhaps split the conversion between this year and next year if it would keep it in little lower tax bracket, but you sound like it wouldn't.
JW
Retired at Last

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