Understanding my Roth and IRA Contributions

[siankisr]

Currently my vanguard account looks like this.

Traditional IRA: 9K
Rollover Brokerage: 110K
Roth IRA: 150k
Others (after tax savings): 250K

What are the tax implications? Am I correct in assuming that, I don't have to pay taxes when I withdraw from the Roth IRA.

Also Once I have a Roth IRA account, am I dreaming in saying that Vanguard allows to contribute to Roth IRA even if your income above the MAGI limit? is that a loop hole to contribute to Roth IRA.

An additional Is it advisable to convert the Rollover and Traditional IRA to Roth if the market tanks substantially?

[NightFall]

Vanguard is not responsible for verifying your income with respect to roth ira limitations... you are. If you are over the income limitations for roth contributions, you may want to look into a backdoor ira. Though you'd probably want to convert the entire ira over, which would potentially produce additional taxes. Do you have access to a work place retirement account? If you are over the roth ira income limit, you would likely be better off with deductible, traditional contributions. I don't know what a rollover brokerage is. Are you implying this is a retirement account?

[krow36]

Currently my vanguard account looks like this.

Traditional IRA: 9K
Rollover Brokerage: 110K
Roth IRA: 150k
Others (after tax savings): 250K

What are the tax implications? Am I correct in assuming that, I don't have to pay taxes when I withdraw from the Roth IRA. You can withdraw your contributions with no taxes due. Withdrawing the earnings have rules that can result in income tax and also a 5% penalty for early withdrawal.
Also Once I have a Roth IRA account, am I dreaming in saying that Vanguard allows to contribute to Roth IRA even if your income above the MAGI limit? is that a loop hole to contribute to Roth IRA. You need to read about the Backdoor Roth in the BH Wiki. It's not a "loop hole". It's a legal, accepted way to contribute to a Roth IRA if your income is above the IRS limit for a direct Roth IRA contribution. You would need to roll your rollover and traditional IRAs into an employer-based account such as a 401k.

An additional Is it advisable to convert the Rollover and Traditional IRA to Roth if the market tanks substantially? I don't think so. Why would it?

[siankisr]

Vanguard is not responsible for verifying your income with respect to roth ira limitations... you are. If you are over the income limitations for roth contributions, you may want to look into a backdoor ira. Though you'd probably want to convert the entire ira over, which would potentially produce additional taxes. Do you have access to a work place retirement account? If you are over the roth ira income limit, you would likely be better off with deductible, traditional contributions.

Thanks. The reason I ended up with Roth IRA in the first place, when I rolled over some of my Roth 401k to Roth IRA in Vanguard. I got confused, when I see an option to contribute to this account and Vanguard does not ask me for MAGI requirements, but it does when I try to create a new Roth IRA account.

Yes, I do have a workplace retirement account for my current employer.

I don't know what a rollover brokerage is. Are you implying this is a retirement account?

This is the account which got created when I rolled over from the traditional 401k to Vanguard.

[siankisr]

You need to read about the Backdoor Roth in the BH Wiki. It's not a "loop hole". It's a legal, accepted way to contribute to a Roth IRA if your income is above the IRS limit for a direct Roth IRA contribution. You would need to roll your rollover and traditional IRAs into an employer-based account such as a 401k.

Thanks, I will take a look.

An additional Is it advisable to convert the Rollover and Traditional IRA to Roth if the market tanks substantially? I don't think so. Why would it?

I was thinking if the market tanks, I need to come up with lesser outside cash in order for me to convert the Traditional IRA to Roth IRA, Then it would be tax free during retirement. Does that make sense?

[arcticpineapplecorp.]

here's the link to backdoor Roth:

https://www.bogleheads.org/wiki/Backdoor_Roth_IRA

whether it makes sense to convert from tax deferred to Roth is more than just how much your investment declines. While it's true if a traditional IRA is $9k now and falls to $5k later and you convert you'd pay tax on the $5k not the $9k so in that sense you'd pay less taxes.

But the real distinction is whether you'd pay more in taxes now or later. If you're talking about a backdoor Roth that means your income is high (enough to not qualify for regular Roth) in which case you're in a high tax bracket now. Most are in a lower tax bracket in retirement than while they're working (the exception to this is if you have a generous pension in addition to SS).

So if you convert now you're paying at a high tax rate. Probably better to convert in retirement at a lower rate. You can also better manage conversions after you stop working. For instance, you could draw from taxable accounts and convert from trad to Roth and pay no taxes (or much less). Yes the trad IRA will have grown between now and then but there's also nothing that says you have to convert all at once. Many convert over several years between when they retire and when they collect SS (when they're living off taxable investments in the interim).

[siankisr]

Thank you for the detailed write up. It is making more sense to me. Based on some random intuition, I was putting 20-30% of 401K into a Roth 401K, just to hedge against the case when the taxes goes up slowly.

I am inclined to keep the traditional 401K and pay taxes later.

[PFInterest]

Also Once I have a Roth IRA account, am I dreaming in saying that Vanguard allows to contribute to Roth IRA even if your income above the MAGI limit? is that a loop hole to contribute to Roth IRA.

vanguard doesnt care. the tax code allowed you to convert a tIRA to a rIRA at any income.
its called the backdoor rIRA. you can read the hundreds of posts about it.
then youll see the problem you have assuming you are at a high enough income to need a backdoor rIRA.

[Miriam2]

Also Once I have a Roth IRA account, am I dreaming in saying that Vanguard allows to contribute to Roth IRA even if your income above the MAGI limit? is that a loop hole to contribute to Roth IRA.

It's called a "conversion" from a traditional IRA to a Roth IRA, and I wouldn't call it a "loop hole." It's a legal way, permitted by law and the IRS, of transferring your tIRA contributions to your Roth IRA when you make too much money to contribute directly to your Roth.

You can convert as much money as you want whenever you want from your tIRA to your Roth, but you have to pay the taxes on the amount of the converted money that has never been taxed. A "back door" Roth conversion generally refers to a conversion that is done quickly, into the tIRA then out to the Roth within a day or so to reduce the taxes owed on the converted money (because that money doesn't sit in the tIRA long enough to earn much more money).