Late Career Roth Value

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jr6857
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Late Career Roth Value

Post by jr6857 » Sat Mar 09, 2019 3:57 pm

Hi everyone and thanks in advance for your input. I am just turning 60 (same age as wife) and expect to work four more years. Some details on my financial position are below. My key question relates to the value/benefit of rolling over my tIRA (with Vaguard in index funds) into my 401-K (with Fidelity and includes a decent range of index funds) to permit future backdoor Roth contributions for both my wife and I (she is a homemaker) at this stage of my career/life. Regardless, I will max out my 401-K contributions annually until retirement. The alternative that I am evaluating is to invest the potential Roth funds in our taxable account instead of the Roth plus tIRA rollover.

Due to MAGI typically well above Roth contribution limits and the existence of a tIRA, my wife and I have small Roth accounts (~$3K each) with Vanguard. I currently have a good sized tIRA at Vanguard (~$700K) and a much smaller 401-K at Fidelity (~$200K). Taxable investments are $1.1M. Excluding a relatively small position in company stock which I am required to hold, all investments are in index funds at a 60/40 overall allocation. In addition, I also have some unvested restricted and performance shares in my employer that will continue to vest through retirement (~$300K) along with new shares that will be received.

Until the recent tax law changes, I was reluctant to roll over the tIRA into my 401-K to allow access to backdoor Roth contributions. With the change in tax law, obviously the risk of this strategy is completely removed. My 401-k at Fidelity offers similar index funds to those held in the Vanguard IRA with the exception that 5% of our overall portfolio (as per my investment policy) is in the REIT index fund which is not offered in my 401-K.

So the key question – given the relatively short time frame that I will continue to work and the minor hassle of rolling over my IRA to the 401-K, what are your thoughts on the merits of going the backdoor route? As a couple, we can contribute ~$56K ($7K each per year) to Roth’s over the next four years if we went this route. Alternatively, we’d invest the $56K in the taxable account. [Regardless, I expect to add further investments to the taxable account.] Given the hassle factor, I’ve rationalized that I will likely leave to our children whatever is left after our passing and they will achieve a step-up in basis on taxable investments at that time. If I assume that this is the last-in investment money, the only impact if invested in a taxable account is tax leakage from dividends along the way.

Am I looking at this correctly?

ExitStageLeft
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Re: Late Career Roth Value

Post by ExitStageLeft » Sat Mar 09, 2019 6:50 pm

Roth beats taxable every time. If your spouse does not have a tIRA then you should be maxing out the backdoor Roth for her every year until you retire.

For you, it seems to me to be worth the hassle to get the tIRA off the books. Your Roth assets may end up never being touched and pass on to the children. I still think Roth is better than taxable when inheriting assets, but I haven't really given it a lot of thought. My focus is on getting from tax-deferred to Roth.

Edit to add: You can still do a back-door Roth for your wife for 2018.

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jr6857
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Re: Late Career Roth Value

Post by jr6857 » Sat Mar 09, 2019 8:22 pm

Thaanks for your thoughts and feedback. It is helpful to receive different perspectives. I honestly wasn’t aware that I could contribute to wife’s Roth under the circumstances. I will have to read up on that option since it is easy to implement.

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Earl Lemongrab
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Re: Late Career Roth Value

Post by Earl Lemongrab » Sun Mar 10, 2019 5:54 pm

jr6857 wrote:
Sat Mar 09, 2019 3:57 pm
Until the recent tax law changes, I was reluctant to roll over the tIRA into my 401-K to allow access to backdoor Roth contributions. With the change in tax law, obviously the risk of this strategy is completely removed.
Which changes to the tax law do you mean?
This week's fortune cookie: "Your financial life will be secure and beneficial." So I got that going for me, which is nice.

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TomatoTomahto
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Re: Late Career Roth Value

Post by TomatoTomahto » Sun Mar 10, 2019 6:13 pm

ExitStageLeft wrote:
Sat Mar 09, 2019 6:50 pm
Roth beats taxable every time. If your spouse does not have a tIRA then you should be maxing out the backdoor Roth for her every year until you retire.
+1
It’s only 5 years, but Roth is worth its weight in gold.
Okay, I get it; I won't be political or controversial. The Earth is flat.

ralph124cf
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Re: Late Career Roth Value

Post by ralph124cf » Sun Mar 10, 2019 6:53 pm

It sounds like you will be retiring at 64 or 65. Between retirement and age 70.5 when you must take RMDs is usually the best time to do ROTH conversions, especially if you also delay SS until age 70.

The only reason to do a rollover of the IRA to the 401(k) would be if you have contributed after tax money to the IRA. Do you have basis in your IRA currently now? If not then you are able to do conversions now, but you would still pay your max tax rate.

If you do a backdoor now you are paying max income tax rates.

Ralph

sawdust60
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Re: Late Career Roth Value

Post by sawdust60 » Sun Mar 10, 2019 10:36 pm

No question that you should fully utilize 10% and 12% tax brackets prior to starting social security.

Model your future income streams to see if/when Roth conversions at 22%+ tax make sense. Marginal tax rates for pension, and other non-SS income are different once you begin SS. Tax rates for qualified dividends and LTCG can also be impacted.
- - - some prior posts
link to wiki and other examples/discussion
one with reference to 'The Hump' 40.7% marginal tax rate

WildBill
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Re: Late Career Roth Value

Post by WildBill » Sun Mar 10, 2019 11:49 pm

Howdy

Check out the options for your 401 K by checking with the administrator.I was able to make after tax contributions to my 401 K, which I could then roll into my Roth. It is called an inservice rollover.

You may also be able to accumulate after tax contributions in your 401 K and then roll them into your Roth when you retire.

Again, not all plans have this option, but many do, and it is a superior plan to what you are proposing because you can make very substantial after tax contributions, up to the total of all retirement plans that is about $56,000 now, or something like that number.

In my last 4 years of employment I did this with circa $25,000 per year, after my pretax contributions were made.

Good luck

W B
"Through chances various, through all vicissitudes, we make our way." Virgil, The Aeneid

WildBill
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Re: Late Career Roth Value

Post by WildBill » Sun Mar 10, 2019 11:58 pm

Howdy

By the way, here is the wiki link.

https://www.bogleheads.org/wiki/After-tax_401%28k%29

W B
"Through chances various, through all vicissitudes, we make our way." Virgil, The Aeneid

KingRiggs
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Re: Late Career Roth Value

Post by KingRiggs » Mon Mar 11, 2019 10:40 am

I think some of the responses are confusing the OP's question.

He is asking if 4 years of backdoor Roth contributions are worth it at this stage in life (age 60-64). Or whether they should just put it all in taxable investments.

He is NOT asking about Roth conversions after retirement but before drawing Social Security. He already stated he plans to do that.

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TomatoTomahto
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Re: Late Career Roth Value

Post by TomatoTomahto » Mon Mar 11, 2019 11:09 am

KingRiggs wrote:
Mon Mar 11, 2019 10:40 am
I think some of the responses are confusing the OP's question.
He is asking if 4 years of backdoor Roth contributions are worth it at this stage in life (age 60-64). Or whether they should just put it all in taxable investments.
He is NOT asking about Roth conversions after retirement but before drawing Social Security. He already stated he plans to do that.
+1
And, to repeat myself, OP, YES it is worth it to do a backdoor Roth.

It will likely grow considerably over the decades, and tax diversity is invaluable.
Okay, I get it; I won't be political or controversial. The Earth is flat.

retiringwhen
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Re: Late Career Roth Value

Post by retiringwhen » Mon Mar 11, 2019 11:16 am

TomatoTomahto wrote:
Mon Mar 11, 2019 11:09 am
KingRiggs wrote:
Mon Mar 11, 2019 10:40 am
I think some of the responses are confusing the OP's question.
He is asking if 4 years of backdoor Roth contributions are worth it at this stage in life (age 60-64). Or whether they should just put it all in taxable investments.
He is NOT asking about Roth conversions after retirement but before drawing Social Security. He already stated he plans to do that.
+1
And, to repeat myself, OP, YES it is worth it to do a backdoor Roth.

It will likely grow considerably over the decades, and tax diversity is invaluable.

+2, i am in a very similar situation to OP, made the decision to roll the IRA into my 401K and am busy Back-door Rothing away. Every analysis I have done says it is the best path to go down. It never has a downside for me in part due to the fact I see my taxes flat or Up in retirement and we have a strong legacy motive and the Roth is the lowest risk place to put money you hope to leave to the next generation. (If you heirs will be very low tax after inheriting the legacy, it may be arguably better in a Traditioanal IRA, but that is a hypothetical that cannot be really decided upon now for the most part...)

bloom2708
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Re: Late Career Roth Value

Post by bloom2708 » Mon Mar 11, 2019 11:21 am

A Roth dollar is as valuable as the tax you paid to get it there. I assume you are maxing pre-tax items like 401k/HSA.

If you are in the 35% tax bracket + state tax, those are expensive Roth dollars. They are also expensive taxable/brokerage dollars. Not much you can do when in the highest marginal brackets.

Even with Roth Conversions to the top of the 24% bracket once you are done working, they would still be cheaper Roth dollars. But, if your choice is a taxable dollar or a Roth dollar (tax already paid), then choose Roth. Just not at the expense of any pre-tax dollars.

The value of putting Roth dollars in (after pre-tax 401k) is that you have a long window for the earnings to grow. With only 4 years, you won't get much growth and if you are paying top dollar to get those Roth dollars it might be more of a toss-up. The nice thing is you can leave Roth dollars to "the end" and still give them 20 years of growth.

All that said, I would roll the Traditional IRAs to the 401k and do 4 x $7k for each for the 4 years. Once done working then Roth Conversions should be considered.
"We are not here to agree with you; we are here to provoke thoughtfulness..." Unknown Boglehead

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TomatoTomahto
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Re: Late Career Roth Value

Post by TomatoTomahto » Mon Mar 11, 2019 11:33 am

retiringwhen wrote:
Mon Mar 11, 2019 11:16 am
Every analysis I have done says it is the best path to go down. It never has a downside for me in part due to the fact I see my taxes flat or Up in retirement and we have a strong legacy motive and the Roth is the lowest risk place to put money you hope to leave to the next generation. (If you heirs will be very low tax after inheriting the legacy, it may be arguably better in a Traditioanal IRA, but that is a hypothetical that cannot be really decided upon now for the most part...)
I might be wrong about this, and perhaps a tax/estate maven will correct me, but AFAIK, there is no distinction made for the tax category of bequests. In Massachusetts, our state, inheritances get taxed after estate size of $1M, beginning at 80bps and rising to 14% on the entire estate. So, since I can get (rough numbers) $1.50 into a tIRA with the same “expenditure” as $1 into a Roth, I will hit tax brackets “later” with a Roth bequest.

Also, hope springs eternal. One hopes that, either through their success or more “progressive” tax rates, our heirs will be subject to tax rates no lower than ours.
Okay, I get it; I won't be political or controversial. The Earth is flat.

retiringwhen
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Re: Late Career Roth Value

Post by retiringwhen » Mon Mar 11, 2019 11:49 am

TomatoTomahto wrote:
Mon Mar 11, 2019 11:33 am
retiringwhen wrote:
Mon Mar 11, 2019 11:16 am
Every analysis I have done says it is the best path to go down. It never has a downside for me in part due to the fact I see my taxes flat or Up in retirement and we have a strong legacy motive and the Roth is the lowest risk place to put money you hope to leave to the next generation. (If you heirs will be very low tax after inheriting the legacy, it may be arguably better in a Traditioanal IRA, but that is a hypothetical that cannot be really decided upon now for the most part...)
I might be wrong about this, and perhaps a tax/estate maven will correct me, but AFAIK, there is no distinction made for the tax category of bequests. In Massachusetts, our state, inheritances get taxed after estate size of $1M, beginning at 80bps and rising to 14% on the entire estate. So, since I can get (rough numbers) $1.50 into a tIRA with the same “expenditure” as $1 into a Roth, I will hit tax brackets “later” with a Roth bequest.

Also, hope springs eternal. One hopes that, either through their success or more “progressive” tax rates, our heirs will be subject to tax rates no lower than ours.
I was looking at it from the perspective of distributions to the beneficiary. Not estate taxes, but your point is a good one. The estate is reduced ahead of time so it has a chance to stay under the caps. I stopped worrying as much recently since NJ finally dropped its estate tax as of 1/1/2018.

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TomatoTomahto
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Re: Late Career Roth Value

Post by TomatoTomahto » Mon Mar 11, 2019 12:42 pm

retiringwhen wrote:I stopped worrying as much recently since NJ finally dropped its estate tax as of 1/1/2018.
Having recently moved from NJ to MA, estate tax might be the one area where it wasn’t a clear “win,” but as we know, tax rules can change at any time.
Okay, I get it; I won't be political or controversial. The Earth is flat.

retiringwhen
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Re: Late Career Roth Value

Post by retiringwhen » Mon Mar 11, 2019 1:14 pm

TomatoTomahto wrote:
Mon Mar 11, 2019 12:42 pm
retiringwhen wrote:I stopped worrying as much recently since NJ finally dropped its estate tax as of 1/1/2018.
Having recently moved from NJ to MA, estate tax might be the one area where it wasn’t a clear “win,” but as we know, tax rules can change at any time.
I agree, things may be good in place or time, but history says that will not be a static truth, prepare for change....

bradpevans
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Re: Late Career Roth Value

Post by bradpevans » Tue Mar 12, 2019 10:21 pm

TomatoTomahto wrote:
Sun Mar 10, 2019 6:13 pm
ExitStageLeft wrote:
Sat Mar 09, 2019 6:50 pm
Roth beats taxable every time. If your spouse does not have a tIRA then you should be maxing out the backdoor Roth for her every year until you retire.
+1
It’s only 5 years, but Roth is worth its weight in gold.
The five years is on gains not contributions

You lose Tax Loss Harvest / tax gain Harvest (to fill the 0 LTCG bucket, but that’s a small price to pay)

Fill the 401 then spill into Roth

Your current taxable (especially high value but minimal gsins) can fund your lifestyle and Roth conversions once you retire

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TomatoTomahto
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Re: Late Career Roth Value

Post by TomatoTomahto » Wed Mar 13, 2019 4:39 am

bradpevans wrote:
Tue Mar 12, 2019 10:21 pm
TomatoTomahto wrote:
Sun Mar 10, 2019 6:13 pm
ExitStageLeft wrote:
Sat Mar 09, 2019 6:50 pm
Roth beats taxable every time. If your spouse does not have a tIRA then you should be maxing out the backdoor Roth for her every year until you retire.
+1
It’s only 5 years, but Roth is worth its weight in gold.
The five years is on gains not contributions
You lose Tax Loss Harvest / tax gain Harvest (to fill the 0 LTCG bucket, but that’s a small price to pay)
Fill the 401 then spill into Roth
Your current taxable (especially high value but minimal gsins) can fund your lifestyle and Roth conversions once you retire
The 5 years I was referring to were years until retirement, which OP gave as 4, but often you can contribute 5 times (unless you retire December 31st).
Okay, I get it; I won't be political or controversial. The Earth is flat.

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jr6857
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Re: Late Career Roth Value

Post by jr6857 » Wed Mar 13, 2019 5:11 pm

Thanks for all the feedback and comments. I am fully funding my 401-K over the period plus additional taxable savings that will be above $14K per year (e.g. combined potential wife and my Roth backdoor investments).

Although a long time Boglehead and avid personal finance reader, somehow I missed that my wife can contribute today to a spousal backdoor Roth since she does not own a tIRA. Thus we can immediately fund $7K per year for her spousal Roth until my retirement regardless of the decision on rolling my tIRA into my 401-K. This immediately reduces the impact of my original question related to the value of my Roth space versus investing in taxable. As one respondent noted, i do believe I will be able to fund five years of Roth contributions due to the timing of my retirement four years from April 2019.

It should be noted that I am a Pennsylvania resident which has an inheritance tax on the entire estate regardless of size. When passing to kids over 21, the rate is 4.5%. Not sure if we will ultimately retire here but I need to keep it in mind. [On the positive side, there is no state tax on social security or IRA/401K withdrawals ].

So at the end of the day I can now reduce the problem to a decision on rolling over my tIRA with Vanguard to my 401-K with Fidelity in return for a backdoor Roth contribution. A little simpler problem now with overall a reduced overall impact regardless of the direction selected.

Again, thanks for all of the helpful comments which are truly appreciated and help me think this through to a good decision for me.

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