Rethinking everything Roth/Traditional

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Topic Author
Paradise
Posts: 14
Joined: Mon Dec 18, 2017 6:15 am

Rethinking everything Roth/Traditional

Post by Paradise » Mon Feb 11, 2019 12:55 pm

I made a post last week about bonds, and the replies that I got have made me start to rethink my entire strategy. I know that my strategy isn't bad, but perhaps it's not ideal.

Facts:
Married filing jointly, 35/31
24% marginal tax rate, 0% state (FL).
I make 95k/yr + 10k in dividends from taxable + 12k in ESPP sales = 117/yr. Insurances go through my employer.
She makes 115k/yr
20k in cash
450k in taxable stocks (fairly liquid, tax loss harvesting has kept a decent chunk at low gains)
100k tIRA from previous employer 401k (when I rolled this over, I didn't really know what I was doing)
50k r401k from current employer
10k t401k from wife's previous employer (still 401k)
wife just starting new 401k, roth as well.
Priced out of IRA, severely for traditional, slightly for roth. Cannot do backdoor due to my large IRA. My current 401k plan allows for a roll in.
AA: 12% bonds (BND), 55% domestic (VTI or equivalent for TLH), 33% foreign (VXUS or equivalent).

Assumptions/Strategy:
We have 1 kid and 1 on the way -- looking to have more. I guess I should start here. Both my wife and I put high emphasis on education. Our children will most likely be going to private schools and colleges with very high costs. Our general strategy has been to use Roth to maintain flexibility to use the principal to help pay for their college or perhaps start a business when we have more kids and get tired of the 9 to 5. I never liked the idea of money being locked up until 55-60. How easy is it to get t401k money out for education? I know that it's a no go for non college private schools, but I've read that it's not really doable for college either.

Problems:
1) Contributing 37k to Roth instead of Traditional is a big cost. Having that kind of tax savings would push us into being able to straight contribute to Roth IRAs, invest more into taxable, etc. I feel like I will have a higher tax bracket in retirement because of business investments and RMDs, but 24% is a lot, and that's a big bet. I mean at current rates, we'd have to be getting another 100k to move to another bracket.

2) If I do the roll in of my IRA, traditional and roth money will be lumped together and invested at a %. I can't just put bonds for traditional and stocks for roth. If I do that roll in and continue investing in roth for my 401k, I either lose a ton of the tax flexibility of the tIRA (if I bias towards stocks) or the entire point of a roth (if I bias towards bonds).

I'm thinking that the solution is that I do t401 for my account, roll it in and use that as my bond area and my wife continues Roth as a compromise. This will enable the backdoor Roth (perhaps even set me up to be able to do actual Roth IRA contributions). Then my wife's r401k + rIRAs will be used for schools/investment, and mine will be for our personal retirement.

Anything here look wrong? Suggestions for improvement? Everything seems like such a mess right now. I'd like to have a clear and easy strategy.

Thanks ahead of time. I really love this community and you guys have helped me so much after losing so much potential in my early investment life picking individual winners (****ing BlackBerry). :oops:

bloom2708
Posts: 5494
Joined: Wed Apr 02, 2014 2:08 pm
Location: Fargo, ND

Re: Rethinking everything Roth/Traditional

Post by bloom2708 » Mon Feb 11, 2019 3:59 pm

I think you are on the right track.

I would move your Traditional IRA into your 401k. I would look into moving your wifes old 401k into her current 401k (not as urgent as it won't mess with Back Door Roths).

Because I do not see mention of pensions, I would switch both of you over to Pre-tax 401k for the $19k each for 2019. Say you are touching the 24% tax bracket. That could keep you in the 22% top bracket. It could keep you being able to do Front Door Roth.

Now, you defer 22% of $19k in tax. $4,180 in tax savings x 2 + if state tax is applicable. That means your check is bigger by almost the amount of 2 Front or Back Door Roth IRAs.

I know people are strongly in favor of paying tax and getting Roth dollars (I am not). With your large taxable account, I think you need more traditional. If you both get up around $500k + in your Pre-tax 401k (this will take work and time), then look again.

You are right that the cost of putting Roth 401k dollars is high. You want a good mix of Traditional and Roth. Especially in the 59.5 to SS years where your income is low and pulling from traditional sources fills up all the lower brackets (whatever they may be).

Everyone wants to save a pile, but don't do the things that actually keep you from saving a pile. Like paying 24% tax + state when you can defer it down the road 20+ years. This is not a slam dunk as some will say to do Roth for everything. If you save the tax savings, you will come out ahead.

Worst case is you pay the tax way down the road. Having the Roth 401k balances you do won't hurt anything. That tax is paid. Can't go back. It will roll to your Roth IRA when you end work (if you choose).

Hopefully others can speak to the timing. If you can get your Traditional IRA moved into your 401k, does that make 2019 off limits for back door Roth or is it ok to consider once moved?

The next horizon is tax efficient placement. Bonds in 401k, stock index funds in Taxable and Roth. Your large taxable account may mean you have some tax-exempt bonds there to fulfill your bond allocation.

On the right path I think. Good luck!
Last edited by bloom2708 on Tue Feb 12, 2019 10:43 am, edited 2 times in total.
"A Stoic believes they don’t control the world around them, only how they respond--and that they must always respond with courage, temperance, wisdom, and justice." --Daily Stoic

megabad
Posts: 961
Joined: Fri Jun 01, 2018 4:00 pm

Re: Rethinking everything Roth/Traditional

Post by megabad » Mon Feb 11, 2019 8:49 pm

Paradise wrote:
Mon Feb 11, 2019 12:55 pm
Assumptions/Strategy:
We have 1 kid and 1 on the way -- looking to have more. I guess I should start here. Both my wife and I put high emphasis on education. Our children will most likely be going to private schools and colleges with very high costs. Our general strategy has been to use Roth to maintain flexibility to use the principal to help pay for their college or perhaps start a business when we have more kids and get tired of the 9 to 5. I never liked the idea of money being locked up until 55-60. How easy is it to get t401k money out for education? I know that it's a no go for non college private schools, but I've read that it's not really doable for college either. How easy is it? I guess easy...and expensive. Not sure why you would want to do this and pay tax and penalties. I would take a 401k loan out before "getting the money out". 401k accounts (Traditional or Roth) are not good college savings accounts in my opinion. You would want to use an IRA. I guess if you were planning on losing your job/retiring prior to child attending college, you could then roll over to IRA and then access funds penalty free.

Problems:
1) Contributing 37k to Roth instead of Traditional is a big cost. Having that kind of tax savings would push us into being able to straight contribute to Roth IRAs, invest more into taxable, etc. I feel like I will have a higher tax bracket in retirement because of business investments and RMDs, but 24% is a lot, and that's a big bet. I mean at current rates, we'd have to be getting another 100k to move to another bracket.
Is 24% "a lot"? In 2017, if you made half of what you make now, you would be paying 25% marginal. All relative. Needing 100k to move to another bracket this year is not relevant. It is your future marginal rate that matters. A balanced approach is my preferred method to avoid being too damaged by any future conditions. If you intend to retire early (and do not have massive business income during this time), you may want to plan for Roth conversions by leaning heavily pretax in your retirement investments. If not, this balance may shift a little more toward Roth as this will allow you to shelter more than pretax contributions would (if you are maxing out all accounts). You are the best predictor of your future income prospects, other elements are relatively unknown.

2) If I do the roll in of my IRA, traditional and roth money will be lumped together and invested at a %. I can't just put bonds for traditional and stocks for roth. If I do that roll in and continue investing in roth for my 401k, I either lose a ton of the tax flexibility of the tIRA (if I bias towards stocks) or the entire point of a roth (if I bias towards bonds).

I'm thinking that the solution is that I do t401 for my account, roll it in and use that as my bond area and my wife continues Roth as a compromise. This will enable the backdoor Roth (perhaps even set me up to be able to do actual Roth IRA contributions). Then my wife's r401k + rIRAs will be used for schools/investment, and mine will be for our personal retirement.
I hear what your are saying here but I wouldn't overthink it. $100k may sound like a lot today, but you and spouse are really great savers and have amassed a fairly large portfolio already with many years of savings to come. I think you will find that the extra tax advantaged space (via backdoor Roth) is worth the lost flexibility.

Anything here look wrong? Suggestions for improvement? Everything seems like such a mess right now. I'd like to have a clear and easy strategy.
I did not review your other posts, but are you averse to other savings vehicles for child's education? Why not just use a 529 or I-bonds instead of using Roth 401ks where you will be hit with penalties or restricted to $50k loans (<1 yr of tuition/fees at some private schools)? If there is a state tax deduction for 529s that makes them even more attractive.

Topic Author
Paradise
Posts: 14
Joined: Mon Dec 18, 2017 6:15 am

Re: Rethinking everything Roth/Traditional

Post by Paradise » Tue Feb 12, 2019 10:01 am

Thanks for the help, guys.

After speaking with my wife, I'm going to go with this plan:

1) Keep my tIRA out of the 401k. I like the flexibility of having a large self directed pre-tax account to hold bonds. I'll forfeit the Backdoor Roth contribution for 2018.
2) Backdoor Roth my wife for 2018. She has no tIRA money.
3) Change all future 401k money to traditional. This will put us into range of front door Roth moving forward. We spoke about goals and noted that even if we have a business in our golden years, we don't have to take distributions. I believe that we'll probably end up traveling and enjoying life like the rest of you guys anyways. :sharebeer
4) Max out both front door Roth IRAs from 2019 on. The tax savings from the 401k change essentially pays for this.
5) Look into setting up a 529 for each kid. I'll look for good selling points in my taxable to move funds there + whatever loose change we have. I believe that since we live in Florida, we can take penalty free distributions for mid/high school. Since we're essentially 100% sending our kids to private school, this will be important.

02nz
Posts: 1301
Joined: Wed Feb 21, 2018 3:17 pm

Re: Rethinking everything Roth/Traditional

Post by 02nz » Tue Feb 12, 2019 10:11 am

Paradise wrote:
Mon Feb 11, 2019 12:55 pm
I never liked the idea of money being locked up until 55-60.
This is a good overview of the ways of getting money out early. It's a lot more flexible than many people realize.

https://www.madfientist.com/how-to-acce ... nds-early/

User avatar
FiveK
Posts: 6173
Joined: Sun Mar 16, 2014 2:43 pm

Re: Rethinking everything Roth/Traditional

Post by FiveK » Tue Feb 12, 2019 2:14 pm

If needed, you can borrow for your children's education, but you can't borrow for your retirement. See Investment Order for some thoughts on prioritization. In the end, of course, it's up to you.

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