Backdoor Roth or Taxable Accounts

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div
Posts: 10
Joined: Wed Aug 08, 2018 6:52 pm

Backdoor Roth or Taxable Accounts

Post by div » Wed Aug 08, 2018 7:27 pm

Need some advice for first time investor.

Current situation:
Age 31. 98k salary.
Tax status is MFJ and bracket is 24%.
Wife has employer 401k with $170k in it and maxes it every year.

I want to start saving for retirement from now on. My employer does not offer a 401k and I never had an IRA. I was looking at opening an IRA but our joint MAGI exceeds $200k. So from what I have been reading, my options are:
1. Start with Nondeductible tIRA and backdoor conversion to Roth
2. Taxable accounts

Which one is better?
If #1 is recommended, how long should I wait before I can convert to Roth?

Also not sure whether to choose robo advisors or Vanguard.
Last edited by div on Wed Aug 08, 2018 10:41 pm, edited 1 time in total.

mathguy3021
Posts: 80
Joined: Sat Apr 09, 2011 9:30 pm

Re: Backdoor Roth or Taxable Accounts

Post by mathguy3021 » Wed Aug 08, 2018 7:55 pm

Based on your joint MAGI and the fact that you never had an IRA before, #1 is definitely the better choice over the long term. Over time the tax savings on dividends and capital gains distributions vs. a taxable account will compound in a Roth IRA. It's best to convert to a Roth as soon as possible so that the taxes on any gains are minimal or zero. If I was in your position, I would max out the non deductible Traditional IRA contribution and convert the entire amount to a Roth IRA before investing the money.

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

Re: Backdoor Roth or Taxable Accounts

Post by FiveK » Wed Aug 08, 2018 8:42 pm

mathguy3021 wrote:
Wed Aug 08, 2018 7:55 pm
Based on your joint MAGI and the fact that you never had an IRA before, #1 is definitely the better choice over the long term. Over time the tax savings on dividends and capital gains distributions vs. a taxable account will compound in a Roth IRA. It's best to convert to a Roth as soon as possible so that the taxes on any gains are minimal or zero. If I was in your position, I would max out the non deductible Traditional IRA contribution and convert the entire amount to a Roth IRA before investing the money.
+1

div, mathguy3021 has given a great summary. See Backdoor Roth IRA - Bogleheads and links therein for some details (e.g., how to complete Form 8606).

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PhysicianOnFIRE
Posts: 408
Joined: Fri Jan 08, 2016 3:46 pm
Location: Up North

Re: Backdoor Roth or Taxable Accounts

Post by PhysicianOnFIRE » Wed Aug 08, 2018 8:55 pm

Do both.

$5,500 each in a backdoor Roth. Use Vanguard. Google "Vanguard backdoor Roth" for step-by-step instructions. Then, start filling a taxable account with any monies left over.

No need to wait on the conversion. Congress has blessed the backdoor as legit. I've converted the day after contributing five years running.

:beer
-PoF

PFInterest
Posts: 2684
Joined: Sun Jan 08, 2017 12:25 pm

Re: Backdoor Roth or Taxable Accounts

Post by PFInterest » Wed Aug 08, 2018 8:57 pm

div wrote:
Wed Aug 08, 2018 7:27 pm
Need some advice for first time investor.

Current situation:
Age 31. 98k salary.
Tax status is MFJ and bracket is 28%.
Wife has employer 401k with $170k in it and maxes it every year.

I want to start saving for retirement from now on. My employer does not offer a 401k and I never had an IRA. I was looking at opening an IRA but our joint MAGI exceeds $200k. So from what I have been reading, my options are:
1. Start with Nondeductible tIRA and backdoor conversion to Roth
2. Taxable accounts

Which one is better?
If #1 is recommended, how long should I wait before I can convert to Roth?

Also not sure whether to choose robo advisors or Vanguard.
The 28% bracket no longer exists so please edit that.
Backdoor rIRA beats taxable every day.
You only need to wait till the funds settle. See the TCJA.
Vanguard beats robo every day. It doesn't take much to learn what you are doing.

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Earl Lemongrab
Posts: 5813
Joined: Tue Jun 10, 2014 1:14 am

Re: Backdoor Roth or Taxable Accounts

Post by Earl Lemongrab » Fri Aug 10, 2018 2:58 pm

Do you have a spouse with a 401(k) or similar plan? If not, and since you don't, then if neither of you had such a plan this there is no limit for deducting IRA contributions.

Update: Not applicable to this situation.
Last edited by Earl Lemongrab on Fri Aug 10, 2018 3:15 pm, edited 1 time in total.
This week's fortune cookie: "Your financial life will be secure and beneficial." So I got that going for me, which is nice.

aristotelian
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Joined: Wed Jan 11, 2017 8:05 pm

Re: Backdoor Roth or Taxable Accounts

Post by aristotelian » Fri Aug 10, 2018 3:03 pm

At your income you should easily be able to do both. If forced to choose, Roth is better, tax free gains with no downside.

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FiveK
Posts: 5814
Joined: Sun Mar 16, 2014 2:43 pm

Re: Backdoor Roth or Taxable Accounts

Post by FiveK » Fri Aug 10, 2018 3:03 pm

Earl Lemongrab wrote:
Fri Aug 10, 2018 2:58 pm
Do you have a spouse with a 401(k) or similar plan?
div wrote:
Wed Aug 08, 2018 7:27 pm
Wife has employer 401k with $170k in it and maxes it every year.
Good thing to consider though.

User avatar
Earl Lemongrab
Posts: 5813
Joined: Tue Jun 10, 2014 1:14 am

Re: Backdoor Roth or Taxable Accounts

Post by Earl Lemongrab » Fri Aug 10, 2018 3:14 pm

FiveK wrote:
Fri Aug 10, 2018 3:03 pm
Earl Lemongrab wrote:
Fri Aug 10, 2018 2:58 pm
Do you have a spouse with a 401(k) or similar plan?
div wrote:
Wed Aug 08, 2018 7:27 pm
Wife has employer 401k with $170k in it and maxes it every year.
Good thing to consider though.
Bah, missed it. Good catch.
This week's fortune cookie: "Your financial life will be secure and beneficial." So I got that going for me, which is nice.

MotoTrojan
Posts: 2583
Joined: Wed Feb 01, 2017 8:39 pm

Re: Backdoor Roth or Taxable Accounts

Post by MotoTrojan » Fri Aug 10, 2018 3:29 pm

Keep maxing the 401k, max the Roth for both of you, and then taxable.

Make sure you research tax-efficient fund placement (Bogle wiki is a great start) and keep ER in mind with fund choice in 401k. Look at entire portfolio as one entity.

ExitStageLeft
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Joined: Sat Jan 20, 2018 4:02 pm

Re: Backdoor Roth or Taxable Accounts

Post by ExitStageLeft » Fri Aug 10, 2018 4:34 pm

MotoTrojan wrote:
Fri Aug 10, 2018 3:29 pm
Keep maxing the 401k, max the Roth for both of you, and then taxable.
Just want to reiterate this. If she has no tIRA then you both can make backdoor Roth contributions. Max both of those before saving in taxable.

retiredjg
Posts: 34372
Joined: Thu Jan 10, 2008 12:56 pm

Re: Backdoor Roth or Taxable Accounts

Post by retiredjg » Fri Aug 10, 2018 5:23 pm

I'd like to say that using the back door to get money into Roth is not a forgone conclusion.

Yes, it is somewhat better financially. But many people mess it up and find that unwinding their mistakes is time consuming and frustrating. It may not be worth that for some people.

If you decide to use the back door, download the forms and figure the forms out before using the back door.. The back door maneuver is easy - a few clicks of a mouse. The paperwork is not hard, just not intuitive. If you can't figure out the paperwork ahead of time, I suggest not using the back door and putting the money into taxable instead. Done wrong, the back door can become a bit of a nightmare.

div
Posts: 10
Joined: Wed Aug 08, 2018 6:52 pm

Re: Backdoor Roth or Taxable Accounts

Post by div » Fri Aug 10, 2018 5:47 pm

Thanks all for your responses. Both me and my spouse created tIRAs to convert them to Roth later.

PFInterest
Posts: 2684
Joined: Sun Jan 08, 2017 12:25 pm

Re: Backdoor Roth or Taxable Accounts

Post by PFInterest » Fri Aug 10, 2018 6:26 pm

retiredjg wrote:
Fri Aug 10, 2018 5:23 pm
I'd like to say that using the back door to get money into Roth is not a forgone conclusion.

Yes, it is somewhat better financially. But many people mess it up and find that unwinding their mistakes is time consuming and frustrating. It may not be worth that for some people.

If you decide to use the back door, download the forms and figure the forms out before using the back door.. The back door maneuver is easy - a few clicks of a mouse. The paperwork is not hard, just not intuitive. If you can't figure out the paperwork ahead of time, I suggest not using the back door and putting the money into taxable instead. Done wrong, the back door can become a bit of a nightmare.
there are step by step walkthroughs online, so no. the backdoor rIRA remains superior to taxable.

retiredjg
Posts: 34372
Joined: Thu Jan 10, 2008 12:56 pm

Re: Backdoor Roth or Taxable Accounts

Post by retiredjg » Fri Aug 10, 2018 6:58 pm

PFInterest wrote:
Fri Aug 10, 2018 6:26 pm
there are step by step walkthroughs online, so no. the backdoor rIRA remains superior to taxable.
What you are saying is correct, but it is not entirely accurate.

Every year we have dozens of people who need help because they messed up their back door contributions to Roth IRA. For that reason, I no longer make the suggestion that people use the back door. I stopped doing that a few years ago because of the mess that so many people made of it.

I do still try to help people do it if that is their choice. I just no longer think that suggesting "the back door" is a good choice for every poster who comes along.

For posters who figure out the paperwork before doing the deed, I think the back door is fine. Otherwise, it can often be a recipe for disaster.

I agree with you that back door contributions to Roth are somewhat superior to investing in taxable. But for people who don't figure out the details ahead of time, it can turn into a tax nightmare... about two years later. Many of those people wish they had never gone down that pathway.

PFInterest
Posts: 2684
Joined: Sun Jan 08, 2017 12:25 pm

Re: Backdoor Roth or Taxable Accounts

Post by PFInterest » Fri Aug 10, 2018 7:03 pm

retiredjg wrote:
Fri Aug 10, 2018 6:58 pm
PFInterest wrote:
Fri Aug 10, 2018 6:26 pm
there are step by step walkthroughs online, so no. the backdoor rIRA remains superior to taxable.
What you are saying is correct, but it is not entirely accurate.

Every year we have dozens of people who need help because they messed up their back door contributions to Roth IRA. For that reason, I no longer make the suggestion that people use the back door. I stopped doing that a few years ago because of the mess that so many people made of it.

I do still try to help people do it if that is their choice. I just no longer think that suggesting "the back door" is a good choice for every poster who comes along.

For posters who figure out the paperwork before doing the deed, I think the back door is fine. Otherwise, it can often be a recipe for disaster.

I agree with you that back door contributions to Roth are somewhat superior to investing in taxable. But for people who don't figure out the details ahead of time, it can turn into a tax nightmare... about two years later. Many of those people wish they had never gone down that pathway.
true. it will always amaze me the # of people who cannot follow directions.

retiredjg
Posts: 34372
Joined: Thu Jan 10, 2008 12:56 pm

Re: Backdoor Roth or Taxable Accounts

Post by retiredjg » Fri Aug 10, 2018 7:33 pm

A lot of it is just not finding out what directions to follow.

Everyone says "do the back door" and people follow that advice without knowing what is involved. And so many of them messed up and had to fix it. So many messes to fix.

So I no longer make the suggestion to do the back door. I do still try to help people who mess it up.

MotoTrojan
Posts: 2583
Joined: Wed Feb 01, 2017 8:39 pm

Re: Backdoor Roth or Taxable Accounts

Post by MotoTrojan » Fri Aug 10, 2018 7:56 pm

div wrote:
Fri Aug 10, 2018 5:47 pm
Thanks all for your responses. Both me and my spouse created tIRAs to convert them to Roth later.
You convert the contribution not the account. I have a tIRA with $0 in it every December, along with my Roth which has both regular contributions and converted (back door) ones.

Don’t wait more than a couple days between contributing and converting. Any growth will be taxed.

div
Posts: 10
Joined: Wed Aug 08, 2018 6:52 pm

Re: Backdoor Roth or Taxable Accounts

Post by div » Fri Aug 10, 2018 8:07 pm

MotoTrojan wrote:
Fri Aug 10, 2018 7:56 pm
div wrote:
Fri Aug 10, 2018 5:47 pm
Thanks all for your responses. Both me and my spouse created tIRAs to convert them to Roth later.
You convert the contribution not the account. I have a tIRA with $0 in it every December, along with my Roth which has both regular contributions and converted (back door) ones.

Don’t wait more than a couple days between contributing and converting. Any growth will be taxed.
Right, I understand. I thought of waiting at least until one statement cycle but looks like the tax paperwork later will get complicated if there is any growth. So I will just move quickly.

PFInterest
Posts: 2684
Joined: Sun Jan 08, 2017 12:25 pm

Re: Backdoor Roth or Taxable Accounts

Post by PFInterest » Fri Aug 10, 2018 8:16 pm

div wrote:
Fri Aug 10, 2018 8:07 pm
MotoTrojan wrote:
Fri Aug 10, 2018 7:56 pm
div wrote:
Fri Aug 10, 2018 5:47 pm
Thanks all for your responses. Both me and my spouse created tIRAs to convert them to Roth later.
You convert the contribution not the account. I have a tIRA with $0 in it every December, along with my Roth which has both regular contributions and converted (back door) ones.

Don’t wait more than a couple days between contributing and converting. Any growth will be taxed.
Right, I understand. I thought of waiting at least until one statement cycle but looks like the tax paperwork later will get complicated if there is any growth. So I will just move quickly.
However long it takes the money to settle is fine. Growth is not bad, nor is it more complex.

MotoTrojan
Posts: 2583
Joined: Wed Feb 01, 2017 8:39 pm

Re: Backdoor Roth or Taxable Accounts

Post by MotoTrojan » Fri Aug 10, 2018 8:33 pm

div wrote:
Fri Aug 10, 2018 8:07 pm
MotoTrojan wrote:
Fri Aug 10, 2018 7:56 pm
div wrote:
Fri Aug 10, 2018 5:47 pm
Thanks all for your responses. Both me and my spouse created tIRAs to convert them to Roth later.
You convert the contribution not the account. I have a tIRA with $0 in it every December, along with my Roth which has both regular contributions and converted (back door) ones.

Don’t wait more than a couple days between contributing and converting. Any growth will be taxed.
Right, I understand. I thought of waiting at least until one statement cycle but looks like the tax paperwork later will get complicated if there is any growth. So I will just move quickly.
No more complicated really. But do you like paying extra taxes?

PFInterest
Posts: 2684
Joined: Sun Jan 08, 2017 12:25 pm

Re: Backdoor Roth or Taxable Accounts

Post by PFInterest » Fri Aug 10, 2018 9:20 pm

MotoTrojan wrote:
Fri Aug 10, 2018 8:33 pm
div wrote:
Fri Aug 10, 2018 8:07 pm
MotoTrojan wrote:
Fri Aug 10, 2018 7:56 pm
div wrote:
Fri Aug 10, 2018 5:47 pm
Thanks all for your responses. Both me and my spouse created tIRAs to convert them to Roth later.
You convert the contribution not the account. I have a tIRA with $0 in it every December, along with my Roth which has both regular contributions and converted (back door) ones.

Don’t wait more than a couple days between contributing and converting. Any growth will be taxed.
Right, I understand. I thought of waiting at least until one statement cycle but looks like the tax paperwork later will get complicated if there is any growth. So I will just move quickly.
No more complicated really. But do you like paying extra taxes?
Yes when it gives me a bigger rIRA. 5500 isn't enough.

MotoTrojan
Posts: 2583
Joined: Wed Feb 01, 2017 8:39 pm

Re: Backdoor Roth or Taxable Accounts

Post by MotoTrojan » Sat Aug 11, 2018 12:24 pm

PFInterest wrote:
Fri Aug 10, 2018 9:20 pm
MotoTrojan wrote:
Fri Aug 10, 2018 8:33 pm
div wrote:
Fri Aug 10, 2018 8:07 pm
MotoTrojan wrote:
Fri Aug 10, 2018 7:56 pm
div wrote:
Fri Aug 10, 2018 5:47 pm
Thanks all for your responses. Both me and my spouse created tIRAs to convert them to Roth later.
You convert the contribution not the account. I have a tIRA with $0 in it every December, along with my Roth which has both regular contributions and converted (back door) ones.

Don’t wait more than a couple days between contributing and converting. Any growth will be taxed.
Right, I understand. I thought of waiting at least until one statement cycle but looks like the tax paperwork later will get complicated if there is any growth. So I will just move quickly.
No more complicated really. But do you like paying extra taxes?
Yes when it gives me a bigger rIRA. 5500 isn't enough.
I think you are confused. The contribution is fixed at $5500. It has the same potential to grow before and after the conversion, but any growth occurring before is taxed.

Of course you can save more than this via a taxable account but that isn’t what I’m talking about.

gomsoon
Posts: 25
Joined: Mon Jul 03, 2017 10:05 pm

Re: Backdoor Roth or Taxable Accounts

Post by gomsoon » Mon Aug 13, 2018 6:08 pm

retiredjg wrote:
Fri Aug 10, 2018 6:58 pm
PFInterest wrote:
Fri Aug 10, 2018 6:26 pm
there are step by step walkthroughs online, so no. the backdoor rIRA remains superior to taxable.
What you are saying is correct, but it is not entirely accurate.

Every year we have dozens of people who need help because they messed up their back door contributions to Roth IRA. For that reason, I no longer make the suggestion that people use the back door. I stopped doing that a few years ago because of the mess that so many people made of it.

I do still try to help people do it if that is their choice. I just no longer think that suggesting "the back door" is a good choice for every poster who comes along.

For posters who figure out the paperwork before doing the deed, I think the back door is fine. Otherwise, it can often be a recipe for disaster.

I agree with you that back door contributions to Roth are somewhat superior to investing in taxable. But for people who don't figure out the details ahead of time, it can turn into a tax nightmare... about two years later. Many of those people wish they had never gone down that pathway.

Just curious. Do you have some examples on who people messed up backdoor Roth conversion? Wanted to know for my own education.

retiredjg
Posts: 34372
Joined: Thu Jan 10, 2008 12:56 pm

Re: Backdoor Roth or Taxable Accounts

Post by retiredjg » Mon Aug 13, 2018 6:45 pm

gomsoon wrote:
Mon Aug 13, 2018 6:08 pm
Just curious. Do you have some examples on who people messed up backdoor Roth conversion? Wanted to know for my own education.
Sorry, I don't. But if you use the google box above and search for things like messed up back door or how to fix back door mistake or CP2000 letter back door....you will likely see many examples of how people messed up their back door contributions or more likely messed up the paperwork for their back door contributions.

Some people use backdoor instead of back door so I suppose that might be a separate search.

Or just sit and wait till next April and May and see the topics that are posted then. That is when people get their letters indicating they have messed up 2 years previously.


The bottom line for me is that I used to suggest using the back door to Roth pretty freely. I stopped suggesting it in almost all cases about 3 or 4 years ago because so many people mess it up. I didn't like having any responsibility in their messed up tax problems that resulted from using the back door.

I still try to help people who indicate they want to do it or who did it and messed it up.

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