I still don't understand the value of a Backdoor Roth for high income earners

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abyan
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I still don't understand the value of a Backdoor Roth for high income earners

Post by abyan »

UPDATE: I did not realize that a non-deductible IRA contribution would NOT be counted towards the $62k max contribution I can make to my solo 401k this year. In that case, the backdoor roth is a no-brainer since it's free money, in essence.
____
A financial guy just recommended I consider a backdoor roth. But, this year at least, I'm in the 35% marginal federal tax bracket. Why wouldn't I instead max out my solo 401k with a $62k contribution? As I understand it, wouldn't contributing, say, $5000 to an after-tax IRA (in order to do the Roth conversion tax free) still require me to lower my pre-tax Solo 401k contribution by $5k -- and I'd be paying taxes right now on that $5k at a really high rate. Why wouldn't it make sense for me to skip the backdoor Roth, and arbitrage my taxes by paying less in taxes after I'm retired? And, if I really want more Roth space, I can just convert the pre-tax retirement investments I already have and just pay the taxes on those - why go thru the trouble of a backdoor Roth?

I'm just not understanding the benefit of a backdoor Roth for anyone in a higher tax bracket today, who expects to be in a lower bracket at retirement.
Last edited by abyan on Wed Aug 07, 2019 10:04 am, edited 1 time in total.
edge
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Re: I still don't understand the value of a Backdoor Roth for high income earners

Post by edge »

Well ya. You would max out 401k before ROTH but high earners should take advantage of all good tax opportunities.
bradpevans
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Re: I still don't understand the value of a Backdoor Roth for high income earners

Post by bradpevans »

For high earners it is often Roth and Traditional (as opposed to Roth instead of traditional)
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JonnyDVM
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Re: I still don't understand the value of a Backdoor Roth for high income earners

Post by JonnyDVM »

Contributing to a back door Roth has no effect on your contributions to a solo 401k. You get tax free growth forever on the Roth. Clearly thats beneficial to you or you wouldn’t have to go through the backdoor to take advantage.

You max out your solo 401k. Then you contribute to a traditional IRA and convert to a Roth. You do both. Roth space is the best space (after HSA). Decades of compounded growth, no tax.
Last edited by JonnyDVM on Tue Aug 06, 2019 9:17 pm, edited 1 time in total.
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mhalley
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Re: I still don't understand the value of a Backdoor Roth for high income earners

Post by mhalley »

You are right to be skeptical at that high of a tax bracket. Physician on Fire did some calculations that put the value of the backdoor vs taxable investment as $30 to $50 per yr per spouse. In addition, having a variety of accounts to draw from in retirement gives some tax diversification and may help if tax laws change.
Link to some posts
https://www.physicianonfire.com/taxable-account-roth/

https://www.physicianonfire.com/?s=Backdoor+Roth
EddyB
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Re: I still don't understand the value of a Backdoor Roth for high income earners

Post by EddyB »

abyan wrote: Tue Aug 06, 2019 9:05 pm A financial guy just recommended I consider a backdoor roth. But, this year at least, I'm in the 35% marginal federal tax bracket. Why wouldn't I instead max out my solo 401k with a $62k contribution? As I understand it, wouldn't contributing, say, $5000 to an after-tax IRA (in order to do the Roth conversion tax free) still require me to lower my pre-tax Solo 401k contribution by $5k[?]
I think your presumption is wrong. Contributing to a traditional IRA doesn’t change your 401(k) availability. Your traditional IRA contribution isn’t deductible either way, at your income level, but you can shield growth and dividends on the amount you convert to a Roth IRA. What sounds like it may be an issue is that your existing traditional IRA balances (if greater than your non-deductible contributions) may cause some of your conversion to be taxable.
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Re: I still don't understand the value of a Backdoor Roth for high income earners

Post by Stinky »

abyan wrote: Tue Aug 06, 2019 9:05 pm
I'm just not understanding the benefit of a backdoor Roth for anyone in a higher tax bracket today, who expects to be in a lower bracket at retirement.
If you're able to plow a lot of money into your solo 401(k), you might have very large RMDs by the time you're required to take them. And tax laws can change over time, and rates may very well be higher than today when you retire. So I wouldn't count on you being in a materially lower tax bracket once RMDs start.

I was in a high tax bracket for years while I was working. I took advantage of opportunities to contribute to both Roth 401(k) and backdoor Roth IRA during those years. Now in retirement, I'm glad that I have buckets of money in each of taxable, tax-deferred, and tax-free accounts. It gives me a lot of flexibility.
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abyan
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Re: I still don't understand the value of a Backdoor Roth for high income earners

Post by abyan »

JonnyDVM wrote: Tue Aug 06, 2019 9:15 pm Contributing to a back door Roth has no effect on your contributions to a solo 401k. You get tax free growth forever on the Roth. Clearly thats beneficial to you or you wouldn’t have to go through the backdoor to take advantage.

You max out your solo 401k. Then you contribute to a traditional IRA and convert to a Roth. You do both. Roth space is the best space (after HSA). Decades of compounded growth, no tax.
Okay, this is something I've never clearly understood. Let's say with my salary this year I can contribute the full $62,000 to my Solo401k, since I'm old :). I can still contribute to an after-tax IRA? I thought I had to add up the total of all my IRAs/401ks, and they couldn't exceed the max, in my case $62k. (And yes, quite familiar with pro rata rule.)

As for diversifying, I already have half my retirement funds in a Roth, converted at a much lower marginal tax rate!
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Re: I still don't understand the value of a Backdoor Roth for high income earners

Post by EddyB »

mhalley wrote: Tue Aug 06, 2019 9:16 pm You are right to be skeptical at that high of a tax bracket. Physician on Fire did some calculations that put the value of the backdoor vs taxable investment as $30 to $50 per yr per spouse. In addition, having a variety of accounts to draw from in retirement gives some tax diversification and may help if tax laws change.
Link to some posts
https://www.physicianonfire.com/taxable-account-roth/

https://www.physicianonfire.com/?s=Backdoor+Roth
No, that “calculation,” only applies to people who will realize capital gains at a 0% rate. My state income tax rate alone would be 10%, and I expect to pay (under current rates) at least a further 15%. But sure, ignoring that 25%+ tax rate, they’re the same.
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MP123
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Re: I still don't understand the value of a Backdoor Roth for high income earners

Post by MP123 »

You should max out your solo 401k, HSA, and any other eligible tax deferred accounts.

Then what ever is left over (that you can't fit into a tax deferred account) will be taxed at your high rate. Once you've paid the taxes on that income the question is what do you do with it? Your choices are stick it in a taxable account or do a backdoor Roth on a small portion.

The backdoor Roth is done with money that has already been taxed and you really can't avoid having that money taxed if you've already maxed out your tax deferred accounts. But at least it won't be taxed again.

At least that's the way I think of it.
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Ben Mathew
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Re: I still don't understand the value of a Backdoor Roth for high income earners

Post by Ben Mathew »

abyan wrote: Tue Aug 06, 2019 9:05 pm I'm just not understanding the benefit of a backdoor Roth for anyone in a higher tax bracket today, who expects to be in a lower bracket at retirement.
A high income earner who has maxed out 401ks etc and wishes to save more, faces the choice of saving in:

(a) non deductible contributions to traditional IRA
(b) Roth IRA (through the backdoor)
(c) taxable

Of these, the Roth IRA is clearly the best option. You pay the same amount of taxes today on all of them (because none of them are deductible), but the Roth IRA is the only one that avoids future taxes.
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MP123
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Re: I still don't understand the value of a Backdoor Roth for high income earners

Post by MP123 »

abyan wrote: Tue Aug 06, 2019 9:22 pm Okay, this is something I've never clearly understood. Let's say with my salary this year I can contribute the full $62,000 to my Solo401k, since I'm old . I can still contribute to an after-tax IRA? I thought I had to add up the total of all my IRAs/401ks, and they couldn't exceed the max, in my case $62k. (And yes, quite familiar with pro rata rule.)
Yes, that's the beauty of the backdoor Roth, they're separate limits. Don't confuse with a SEP-IRA.
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abyan
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Re: I still don't understand the value of a Backdoor Roth for high income earners

Post by abyan »

Okay, so I can contribute the full $62k to my solo401k, and an additional $7000 (I believe -- I'm 55) to a nondeductible IRA that I then convert to a Roth. And I just have to be careful with the pro rata rule -- I do have some IRAs at Vanguard, so they need to be rolled over into a 401k. I seem to recall in the old days Vanguard wouldn't do that, has that changed?
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Re: I still don't understand the value of a Backdoor Roth for high income earners

Post by miamivice »

abyan wrote: Tue Aug 06, 2019 9:05 pm I'm just not understanding the benefit of a backdoor Roth for anyone in a higher tax bracket today, who expects to be in a lower bracket at retirement.
I am in complete concurrence with you. In fact, I think the attractive feature is that a backdoor Roth IRA sounds like a tax loophole, and everyone wants to benefit from a loophole.

Doing the math, I don't see it purposeful and have never done it myself.
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Re: I still don't understand the value of a Backdoor Roth for high income earners

Post by JonnyDVM »

abyan wrote: Tue Aug 06, 2019 9:22 pm
JonnyDVM wrote: Tue Aug 06, 2019 9:15 pm Contributing to a back door Roth has no effect on your contributions to a solo 401k. You get tax free growth forever on the Roth. Clearly thats beneficial to you or you wouldn’t have to go through the backdoor to take advantage.

You max out your solo 401k. Then you contribute to a traditional IRA and convert to a Roth. You do both. Roth space is the best space (after HSA). Decades of compounded growth, no tax.
Okay, this is something I've never clearly understood. Let's say with my salary this year I can contribute the full $62,000 to my Solo401k, since I'm old :). I can still contribute to an after-tax IRA? I thought I had to add up the total of all my IRAs/401ks, and they couldn't exceed the max, in my case $62k. (And yes, quite familiar with pro rata rule.)

As for diversifying, I already have half my retirement funds in a Roth, converted at a much lower marginal tax rate!
Yes. You can contribute to an after tax IRA after maxing out all tax advantaged space then convert that contribution to a Roth. The issue in your case if I’m understanding correctly is that you may have SEP SIMPLE or traditional IRA money already saved. That subjects you to tax if try to covert the newly contributed traditional IRA money to a Roth. You have to roll that existing IRA money into your 401K first. It’s all unnecessarily complicated tbh. White cost investor explains how to do it pretty well step by step. Forgive me for not linking but I’m sure you can find it pretty easily.

At a high income you want to max out all the tax advantaged space you can, 401K, HSA, Roth. Then invest in taxable after that. If we’re picking and choosing I like Roth money over 401k money because I can put my least tax efficient holdings in there and know I’ll never have to pay tax on it again. All respect to physician on fire that article cited has a couple of notable holes to be poked in it. Living on 120k per year (don’t plan to) and investing taxable in things that don’t pay dividends (no thanks I like total stock market index funds). Fortunately, if you make enough money which if your slamming 62k into a solo 401k it’s pretty obvious that you are, there’s no need to pick and choose. You just do both.
Last edited by JonnyDVM on Tue Aug 06, 2019 9:48 pm, edited 1 time in total.
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abyan
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Re: I still don't understand the value of a Backdoor Roth for high income earners

Post by abyan »

It only makes sense if it's an ADDITIONAL $7000 I can put into a non-deductible IRA AFTER I already max out my Solo 401k. Then it's a free Roth, rather than keeping that $7000 in a regular brokerage account.
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abyan
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Re: I still don't understand the value of a Backdoor Roth for high income earners

Post by abyan »

Thanks Jonny. And yes, I've read White Coat's writings on this, and will again before I attempt this, but just always got confused about how it did, or didn't, affect my solo 401k contribution limits. Now I just have to find out if I can roll my Vanguard IRAs into Vanguard 401ks...
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MP123
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Re: I still don't understand the value of a Backdoor Roth for high income earners

Post by MP123 »

Yes, you're old enough for $7k through the backdoor.

Last I heard Vanguard still didn't allow incoming rollovers to a solo 401k. Schwab does for sure.
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Re: I still don't understand the value of a Backdoor Roth for high income earners

Post by JonnyDVM »

abyan wrote: Tue Aug 06, 2019 9:48 pm Thanks Jonny. And yes, I've read White Coat's writings on this, and will again before I attempt this, but just always got confused about how it did, or didn't, affect my solo 401k contribution limits. Now I just have to find out if I can roll my Vanguard IRAs into Vanguard 401ks...
If it’s helpful at all I have a sizable rollover IRA and currently am on a SIMPLE IRA plan at my small business so I cannot contribute to a backdoor Roth. My wife has a solo 401k from her last job (independent contractor) and now a regular 401k from her W2 employee position and so we can do the backdoor either for her annually. It’s that existing IRA money that complicates things. If you can roll it over into a 401k great problem solved. If not, it mucks up the whole thing.

Edit- this may be more confusing than helpful. Sorry if it is!
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Re: I still don't understand the value of a Backdoor Roth for high income earners

Post by decapod10 »

miamivice wrote: Tue Aug 06, 2019 9:45 pm
abyan wrote: Tue Aug 06, 2019 9:05 pm I'm just not understanding the benefit of a backdoor Roth for anyone in a higher tax bracket today, who expects to be in a lower bracket at retirement.
I am in complete concurrence with you. In fact, I think the attractive feature is that a backdoor Roth IRA sounds like a tax loophole, and everyone wants to benefit from a loophole.

Doing the math, I don't see it purposeful and have never done it myself.
What is the alternative though? If you are a high earner, you're probably maxing out your 401k. I would assume you would always choose Roth IRA over taxable and traditional IRA will not be deductible, unless there is an alternative place you are putting your money? I'd be interested to hear if there is an opportunity I am missing.
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Re: I still don't understand the value of a Backdoor Roth for high income earners

Post by MoneyMarathon »

mhalley wrote: Tue Aug 06, 2019 9:16 pm Physician on Fire did some calculations that put the value of the backdoor vs taxable investment as $30 to $50 per yr per spouse.
It's wrong. Whatever other good things Physician on Fire has said, this advice is terrible, about as bad as it gets without telling you to, literally, light money on fire.
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Re: I still don't understand the value of a Backdoor Roth for high income earners

Post by EddyB »

miamivice wrote: Tue Aug 06, 2019 9:45 pm
abyan wrote: Tue Aug 06, 2019 9:05 pm I'm just not understanding the benefit of a backdoor Roth for anyone in a higher tax bracket today, who expects to be in a lower bracket at retirement.
I am in complete concurrence with you. In fact, I think the attractive feature is that a backdoor Roth IRA sounds like a tax loophole, and everyone wants to benefit from a loophole.

Doing the math, I don't see it purposeful and have never done it myself.
I have no choice but to pay income taxes on the money that goes into my Roth, so i guess it depends on what the numbers are ... Even disregarding capital gains (because maybe I wouldn’t have sold if I could only use a taxable account), I’m already saving nearly $4,000 a year on the taxes on dividends inside my Roth (and that’s assuming all the dividends would be qualified), with more than 20 years to go before traditional retirement age. And then at the withdrawal stage, I won’t pay state taxes or capital gains taxes on the growth, so I don’t see how it can be anything other than an advantage.
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Re: I still don't understand the value of a Backdoor Roth for high income earners

Post by decapod10 »

MoneyMarathon wrote: Tue Aug 06, 2019 10:08 pm
mhalley wrote: Tue Aug 06, 2019 9:16 pm Physician on Fire did some calculations that put the value of the backdoor vs taxable investment as $30 to $50 per yr per spouse.
It's wrong. Whatever other good things Physician on Fire has said, this advice is terrible, about as bad as it gets without telling you to, literally, light money on fire.
I read one of the linked articles, the author goes through various scenarios. The couple that FIREs and only keeps the money in the IRA 5 years gets $60 per year. On the other hand, the second couple he mentions makes $500k per year and leaves the money in the Roth IRA until they are 100 and he calculates a $1.6 million tax savings.

I would assume most people are somewhere in between the 2 extremes
Last edited by decapod10 on Tue Aug 06, 2019 10:51 pm, edited 1 time in total.
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Re: I still don't understand the value of a Backdoor Roth for high income earners

Post by TravelforFun »

Ben Mathew wrote: Tue Aug 06, 2019 9:30 pm
abyan wrote: Tue Aug 06, 2019 9:05 pm I'm just not understanding the benefit of a backdoor Roth for anyone in a higher tax bracket today, who expects to be in a lower bracket at retirement.
A high income earner who has maxed out 401ks etc and wishes to save more, faces the choice of saving in:

(a) non deductible contributions to traditional IRA
(b) Roth IRA (through the backdoor)
(c) taxable

Of these, the Roth IRA is clearly the best option. You pay the same amount of taxes today on all of them (because none of them are deductible), but the Roth IRA is the only one that avoids future taxes.
̣(a) is not good because the gain will be taxed as regular income. Do (a) only if you intend to do (b) with the money you put in (a)
(b) may not work if you have a large IRA. Your backdoor would be pro-rata.
(c) would be the best option as the long term gain is taxed at a very favorable rate.

TravelforFun
mottooscillator
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Re: I still don't understand the value of a Backdoor Roth for high income earners

Post by mottooscillator »

re: POF

I read both articles again after seeing them mentioned in this thread. I just completed my second and third backdoor Roth conversions and wanted to make sure I wasn't making any mistake before I pulled the trigger. His writing had given me some pause.

I think the most charitable reading of POF's posts are that the benefits of a backdoor Roth *may* be overstated for someone with a short time horizon for retirement (e.g. the "Rothschilds"). I think this is a valid criticism of some financial advice that could be considered "hair splitting" especially for a novice who doesn't understand which order to prioritize their financial improvement steps in.

That said, there is no harm in doing it and the conversion is pretty easy. As long as you take care of tIRAs and avoid the pro rata rule, I say go for it.
Last edited by mottooscillator on Tue Aug 06, 2019 10:55 pm, edited 1 time in total.
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Re: I still don't understand the value of a Backdoor Roth for high income earners

Post by EddyB »

TravelforFun wrote: Tue Aug 06, 2019 10:48 pm
Ben Mathew wrote: Tue Aug 06, 2019 9:30 pm
abyan wrote: Tue Aug 06, 2019 9:05 pm I'm just not understanding the benefit of a backdoor Roth for anyone in a higher tax bracket today, who expects to be in a lower bracket at retirement.
A high income earner who has maxed out 401ks etc and wishes to save more, faces the choice of saving in:

(a) non deductible contributions to traditional IRA
(b) Roth IRA (through the backdoor)
(c) taxable

Of these, the Roth IRA is clearly the best option. You pay the same amount of taxes today on all of them (because none of them are deductible), but the Roth IRA is the only one that avoids future taxes.
̣(a) is not good because the gain will be taxed as regular income. Do (a) only if you intend to do (b) with the money you put in (a)
(b) may not work if you have a large IRA. Your backdoor would be pro-rata.
(c) would be the best option as the long term gain is taxed at a very favorable rate.

TravelforFun
To clarify (and I think it’s only a clarification), your conclusion in (c) is a constrained “best option” that assumes the condition in (b). If the condition in (b) is not true, then (b) is the “best option.”
miamivice
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Re: I still don't understand the value of a Backdoor Roth for high income earners

Post by miamivice »

EddyB wrote: Tue Aug 06, 2019 10:11 pm
miamivice wrote: Tue Aug 06, 2019 9:45 pm
abyan wrote: Tue Aug 06, 2019 9:05 pm I'm just not understanding the benefit of a backdoor Roth for anyone in a higher tax bracket today, who expects to be in a lower bracket at retirement.
I am in complete concurrence with you. In fact, I think the attractive feature is that a backdoor Roth IRA sounds like a tax loophole, and everyone wants to benefit from a loophole.

Doing the math, I don't see it purposeful and have never done it myself.
I have no choice but to pay income taxes on the money that goes into my Roth, so i guess it depends on what the numbers are ... Even disregarding capital gains (because maybe I wouldn’t have sold if I could only use a taxable account), I’m already saving nearly $4,000 a year on the taxes on dividends inside my Roth (and that’s assuming all the dividends would be qualified), with more than 20 years to go before traditional retirement age. And then at the withdrawal stage, I won’t pay state taxes or capital gains taxes on the growth, so I don’t see how it can be anything other than an advantage.
I guess it partly depends on individual situations. For our family, we can sink up to about $38,000 a year pretax into 401ks because we are a two income family. We don't put that much in every year, so we always have pretax space leftover. For us, it doesn't make sense.

if I were a one income family that could only put $19,000 into pretax 401k, I might have a different opinion.
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Re: I still don't understand the value of a Backdoor Roth for high income earners

Post by miamivice »

decapod10 wrote: Tue Aug 06, 2019 10:00 pm
miamivice wrote: Tue Aug 06, 2019 9:45 pm
abyan wrote: Tue Aug 06, 2019 9:05 pm I'm just not understanding the benefit of a backdoor Roth for anyone in a higher tax bracket today, who expects to be in a lower bracket at retirement.
I am in complete concurrence with you. In fact, I think the attractive feature is that a backdoor Roth IRA sounds like a tax loophole, and everyone wants to benefit from a loophole.

Doing the math, I don't see it purposeful and have never done it myself.
What is the alternative though? If you are a high earner, you're probably maxing out your 401k. I would assume you would always choose Roth IRA over taxable and traditional IRA will not be deductible, unless there is an alternative place you are putting your money? I'd be interested to hear if there is an opportunity I am missing.
We have $38,000 of pretax retirement space which we don't fill, so if have extra (which is rare) we just increase our 401k contributions. We put in maybe $25,000 a year and employer matches brings it to $40,000 a year which I think is plenty for retirement savings.
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Re: I still don't understand the value of a Backdoor Roth for high income earners

Post by Ben Mathew »

EddyB wrote: Tue Aug 06, 2019 10:55 pm
TravelforFun wrote: Tue Aug 06, 2019 10:48 pm
Ben Mathew wrote: Tue Aug 06, 2019 9:30 pm
abyan wrote: Tue Aug 06, 2019 9:05 pm I'm just not understanding the benefit of a backdoor Roth for anyone in a higher tax bracket today, who expects to be in a lower bracket at retirement.
A high income earner who has maxed out 401ks etc and wishes to save more, faces the choice of saving in:

(a) non deductible contributions to traditional IRA
(b) Roth IRA (through the backdoor)
(c) taxable

Of these, the Roth IRA is clearly the best option. You pay the same amount of taxes today on all of them (because none of them are deductible), but the Roth IRA is the only one that avoids future taxes.
̣(a) is not good because the gain will be taxed as regular income. Do (a) only if you intend to do (b) with the money you put in (a)
(b) may not work if you have a large IRA. Your backdoor would be pro-rata.
(c) would be the best option as the long term gain is taxed at a very favorable rate.

TravelforFun
To clarify (and I think it’s only a clarification), your conclusion in (c) is a constrained “best option” that assumes the condition in (b). If the condition in (b) is not true, then (b) is the “best option.”
Yes, I should have said that I am assuming there is no existing large traditional IRA balance interfering with the backdoor Roth.
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Re: I still don't understand the value of a Backdoor Roth for high income earners

Post by Ddd7651 »

For our situation, we use a Roth IRA for two purposes. 1. If we would otherwise put money in a taxable account after other considerations, we max our Roth at that point since it grows tax free and we can take contributions right back out anytime. (Note: not earnings). 2. Earlier retirement - We have sizable contributions that can be taken out at this point at anytime so we could start pulling from that prior to 59 1/2 if that is our personalized goal and bridge the gap until the earnings can be taken out penalty and tax free. It buys us an earlier retirement in our circumstances. The higher the contributions, the more time we get prior to everything being without penalties.
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Re: I still don't understand the value of a Backdoor Roth for high income earners

Post by Bacchus01 »

miamivice wrote: Tue Aug 06, 2019 10:59 pm
decapod10 wrote: Tue Aug 06, 2019 10:00 pm
miamivice wrote: Tue Aug 06, 2019 9:45 pm
abyan wrote: Tue Aug 06, 2019 9:05 pm I'm just not understanding the benefit of a backdoor Roth for anyone in a higher tax bracket today, who expects to be in a lower bracket at retirement.
I am in complete concurrence with you. In fact, I think the attractive feature is that a backdoor Roth IRA sounds like a tax loophole, and everyone wants to benefit from a loophole.

Doing the math, I don't see it purposeful and have never done it myself.
What is the alternative though? If you are a high earner, you're probably maxing out your 401k. I would assume you would always choose Roth IRA over taxable and traditional IRA will not be deductible, unless there is an alternative place you are putting your money? I'd be interested to hear if there is an opportunity I am missing.
We have $38,000 of pretax retirement space which we don't fill, so if have extra (which is rare) we just increase our 401k contributions. We put in maybe $25,000 a year and employer matches brings it to $40,000 a year which I think is plenty for retirement savings.
You’re not the target audience for a Backdoor Roth. You’re likely not a high earner if you aren’t maxing you’re pretax space.
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Re: I still don't understand the value of a Backdoor Roth for high income earners

Post by miamivice »

Bacchus01 wrote: Wed Aug 07, 2019 7:14 amYou’re not the target audience for a Backdoor Roth. You’re likely not a high earner if you aren’t maxing you’re pretax space.
We make around 230k a year which is a higher earner in my book. We just don't see it valuable to max out 401k each year since we have good company matches and lots of pretax space.
Girya
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Re: I still don't understand the value of a Backdoor Roth for high income earners

Post by Girya »

MP123 wrote: Tue Aug 06, 2019 9:26 pm You should max out your solo 401k, HSA, and any other eligible tax deferred accounts.

Then what ever is left over (that you can't fit into a tax deferred account) will be taxed at your high rate. Once you've paid the taxes on that income the question is what do you do with it? Your choices are stick it in a taxable account or do a backdoor Roth on a small portion.

The backdoor Roth is done with money that has already been taxed and you really can't avoid having that money taxed if you've already maxed out your tax deferred accounts. But at least it won't be taxed again.

At least that's the way I think of it.
Abyan; the reason for the Backdoor Roth is to get every bit of money that high earners can set aside into a tax protected space. This argument only works if you've maxed out your 401k, your HSA, and maybe even made significant tax-deductible contributions to your children/grandchildren's 529. But at that point, you're left with a pile of money. Do you: A) Buy a (boat/horse/first class vacation/etc.) or B) Invest in a taxable account or C) Put 6k for yourself/12k if married through the Backdoor? I vote for C, then B, and only then A (you get to do all of that in retirement :sharebeer :sharebeer ).

Another thing that's super nice about the Backdoor Roth is that, if you don't think you'll need it in retirement, you can invest aggressively and pass it on to your kids/grandkids without a stepped up basis. So they are nice inheritance vehicles.
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TomatoTomahto
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Re: I still don't understand the value of a Backdoor Roth for high income earners

Post by TomatoTomahto »

miamivice wrote: Wed Aug 07, 2019 8:32 am
Bacchus01 wrote: Wed Aug 07, 2019 7:14 amYou’re not the target audience for a Backdoor Roth. You’re likely not a high earner if you aren’t maxing you’re pretax space.
We make around 230k a year which is a higher earner in my book. We just don't see it valuable to max out 401k each year since we have good company matches and lots of pretax space.
I don’t want to get into what’s a high earner, but I think if you would be putting those dollars into taxable, a backdoor Roth is preferable. Also, if you have funds going into taxable, putting a portion into Roth 401k (if available) instead is preferable.

If you’re going to pay taxes on the funds anyway, better to have them go into Roth.
Okay, I get it; I won't be political or controversial. The Earth is flat.
miamivice
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Re: I still don't understand the value of a Backdoor Roth for high income earners

Post by miamivice »

TomatoTomahto wrote: Wed Aug 07, 2019 8:41 am
miamivice wrote: Wed Aug 07, 2019 8:32 am
Bacchus01 wrote: Wed Aug 07, 2019 7:14 amYou’re not the target audience for a Backdoor Roth. You’re likely not a high earner if you aren’t maxing you’re pretax space.
We make around 230k a year which is a higher earner in my book. We just don't see it valuable to max out 401k each year since we have good company matches and lots of pretax space.
I don’t want to get into what’s a high earner, but I think if you would be putting those dollars into taxable, a backdoor Roth is preferable. Also, if you have funds going into taxable, putting a portion into Roth 401k (if available) instead is preferable.

If you’re going to pay taxes on the funds anyway, better to have them go into Roth.
TomatoTomahto,

We use after-tax money to pay daycare, pay our mortgage, and put food on the table. If there is extra after-tax money available (which is rare) we use that to pay down the money I borrowed a couple years ago for our mystery asset. Bottom line is that we're not saving much in after-tax dollars at the moment.

We do have a hearty taxable account. This money is intended for us to to build a custom (forever) home, hopefully before retirement.

We have no taxable accounts that are intended for use in retirement.
miamivice
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Re: I still don't understand the value of a Backdoor Roth for high income earners

Post by miamivice »

Girya wrote: Wed Aug 07, 2019 8:39 am ... and maybe even made significant tax-deductible contributions to your children/grandchildren's 529.
Contributions to 529s are NEVER tax deductible. 529 money is after tax dollars, similiar to a Roth.
marcopolo
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Re: I still don't understand the value of a Backdoor Roth for high income earners

Post by marcopolo »

miamivice wrote: Wed Aug 07, 2019 8:32 am
Bacchus01 wrote: Wed Aug 07, 2019 7:14 amYou’re not the target audience for a Backdoor Roth. You’re likely not a high earner if you aren’t maxing you’re pretax space.
We make around 230k a year which is a higher earner in my book. We just don't see it valuable to max out 401k each year since we have good company matches and lots of pretax space.
You may be a high earner, but you are not a "high saver" for whom the backdoor Roth is very beneficial.

As a number of people have stated, At high tax rates, one would first max out 401k, HSA, and then for dollars that would otherwise go into taxable savings, one would put them into a backdoor Roth instead.

To turn it around, what would be the benefit putting it into taxable instead of the Roth?
Once in a while you get shown the light, in the strangest of places if you look at it right.
Busdrvr
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Re: I still don't understand the value of a Backdoor Roth for high income earners

Post by Busdrvr »

I rolled over a large TIRA into my 401k in order to do the BDRoth, but only after I was also maxing the 401k @62k and HSA. I like that Roth could possibly be passed on to heirs and no RMD's.
EddyB
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Re: I still don't understand the value of a Backdoor Roth for high income earners

Post by EddyB »

miamivice wrote: Wed Aug 07, 2019 8:57 am
TomatoTomahto wrote: Wed Aug 07, 2019 8:41 am
miamivice wrote: Wed Aug 07, 2019 8:32 am
Bacchus01 wrote: Wed Aug 07, 2019 7:14 amYou’re not the target audience for a Backdoor Roth. You’re likely not a high earner if you aren’t maxing you’re pretax space.
We make around 230k a year which is a higher earner in my book. We just don't see it valuable to max out 401k each year since we have good company matches and lots of pretax space.
I don’t want to get into what’s a high earner, but I think if you would be putting those dollars into taxable, a backdoor Roth is preferable. Also, if you have funds going into taxable, putting a portion into Roth 401k (if available) instead is preferable.

If you’re going to pay taxes on the funds anyway, better to have them go into Roth.
TomatoTomahto,

We use after-tax money to pay daycare, pay our mortgage, and put food on the table. If there is extra after-tax money available (which is rare) we use that to pay down the money I borrowed a couple years ago for our mystery asset. Bottom line is that we're not saving much in after-tax dollars at the moment.

We do have a hearty taxable account. This money is intended for us to to build a custom (forever) home, hopefully before retirement.

We have no taxable accounts that are intended for use in retirement.
So, disregarding the unnecessary characterization as “high earner” or not, you’re not the target audience. For those of us who max our pre-tax 401(k), can’t take a deductible traditional IRA, and want to invest more, the “backdoor” Roth and “mega-backdoor Roth” are great options.
miamivice
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Re: I still don't understand the value of a Backdoor Roth for high income earners

Post by miamivice »

marcopolo wrote: Wed Aug 07, 2019 8:59 am
miamivice wrote: Wed Aug 07, 2019 8:32 am
Bacchus01 wrote: Wed Aug 07, 2019 7:14 amYou’re not the target audience for a Backdoor Roth. You’re likely not a high earner if you aren’t maxing you’re pretax space.
We make around 230k a year which is a higher earner in my book. We just don't see it valuable to max out 401k each year since we have good company matches and lots of pretax space.
You may be a high earner, but you are not a "high saver" for whom the backdoor Roth is very beneficial.

As a number of people have stated, At high tax rates, one would first max out 401k, HSA, and then for dollars that would otherwise go into taxable savings, one would put them into a backdoor Roth instead.

To turn it around, what would be the benefit putting it into taxable instead of the Roth?
Again, we save plenty but as a two income family have a lot more space than a 1 income family does. I concur the backdoor roth doesn't make sense for us.

To answer your question, the benefit that taxable has instead of a Roth is flexibility. By keeping after tax dollars in a Roth, one has the flexibility to use it on daycare, a computer for the kids to use for schoolwork, a new car, an RV, a vacation house, a boat, or any of a number of things that folks like to spend their money on.

If one has space for $50k a year (including company matches) and still feels that a backdoor Roth is "necessary", that person is either way behind in the retirement savings department, or projects huge retirement spending needs.
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Re: I still don't understand the value of a Backdoor Roth for high income earners

Post by EddyB »

miamivice wrote: Wed Aug 07, 2019 8:58 am
Girya wrote: Wed Aug 07, 2019 8:39 am ... and maybe even made significant tax-deductible contributions to your children/grandchildren's 529.
Contributions to 529s are NEVER tax deductible. 529 money is after tax dollars, similiar to a Roth.
I get a 10% tax deduction for the first approx. $5,000 year, notwithstanding your claim of “never.” Your circumstances aren’t universal.
Girya
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Re: I still don't understand the value of a Backdoor Roth for high income earners

Post by Girya »

miamivice wrote: Wed Aug 07, 2019 8:58 am
Girya wrote: Wed Aug 07, 2019 8:39 am ... and maybe even made significant tax-deductible contributions to your children/grandchildren's 529.
Contributions to 529s are NEVER tax deductible. 529 money is after tax dollars, similiar to a Roth.
Yes they are after tax dollars, but can be deducted against state taxes in many (but not all states), and some states have no/a very high limit on the amount deductible per year. So they do offer a tax advantage.
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JonnyDVM
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Re: I still don't understand the value of a Backdoor Roth for high income earners

Post by JonnyDVM »

miamivice wrote: Wed Aug 07, 2019 8:58 am
Girya wrote: Wed Aug 07, 2019 8:39 am ... and maybe even made significant tax-deductible contributions to your children/grandchildren's 529.
Contributions to 529s are NEVER tax deductible. 529 money is after tax dollars, similiar to a Roth.
Not at a federal level but many of us do get a modest state tax deduction for contributing. I don’t think 529 money is germane to OPs question though. One would definitely want to fill up other tax advantaged saving avenues first.
I’d trade it all for a little more | -C Montgomery Burns
miamivice
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Re: I still don't understand the value of a Backdoor Roth for high income earners

Post by miamivice »

EddyB wrote: Wed Aug 07, 2019 9:07 am
miamivice wrote: Wed Aug 07, 2019 8:58 am
Girya wrote: Wed Aug 07, 2019 8:39 am ... and maybe even made significant tax-deductible contributions to your children/grandchildren's 529.
Contributions to 529s are NEVER tax deductible. 529 money is after tax dollars, similiar to a Roth.
I get a 10% tax deduction for the first approx. $5,000 year, notwithstanding your claim of “never.” Your circumstances aren’t universal.
Oh, you must be talking state taxes. I think of terms in federal taxes only, I don't consider state or local taxes.
EddyB
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Re: I still don't understand the value of a Backdoor Roth for high income earners

Post by EddyB »

miamivice wrote: Wed Aug 07, 2019 9:05 am
marcopolo wrote: Wed Aug 07, 2019 8:59 am
miamivice wrote: Wed Aug 07, 2019 8:32 am
Bacchus01 wrote: Wed Aug 07, 2019 7:14 amYou’re not the target audience for a Backdoor Roth. You’re likely not a high earner if you aren’t maxing you’re pretax space.
We make around 230k a year which is a higher earner in my book. We just don't see it valuable to max out 401k each year since we have good company matches and lots of pretax space.
You may be a high earner, but you are not a "high saver" for whom the backdoor Roth is very beneficial.

As a number of people have stated, At high tax rates, one would first max out 401k, HSA, and then for dollars that would otherwise go into taxable savings, one would put them into a backdoor Roth instead.

To turn it around, what would be the benefit putting it into taxable instead of the Roth?
Again, we save plenty but as a two income family have a lot more space than a 1 income family does. I concur the backdoor roth doesn't make sense for us.

To answer your question, the benefit that taxable has instead of a Roth is flexibility. By keeping after tax dollars in a Roth, one has the flexibility to use it on daycare, a computer for the kids to use for schoolwork, a new car, an RV, a vacation house, a boat, or any of a number of things that folks like to spend their money on.

If one has space for $50k a year (including company matches) and still feels that a backdoor Roth is "necessary", that person is either way behind in the retirement savings department, or projects huge retirement spending needs.
Do you know that Roth contributions and (after five years) conversions can be withdrawn without penalty? So the money isn’t as unavailable as you may expect. And of course, some people are trying to save for retirement (or potential retirement) in a shorter period than a 40-year working career. And some people do plan for significant retirement spending. Regardless, I don’t think anybody’s saying that using a Roth is necessary in these circumstances, just that there are circumstances for which it has major advantages over taxable investing. We get that you’re not in those circumstances.
Girya
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Re: I still don't understand the value of a Backdoor Roth for high income earners

Post by Girya »

EddyB wrote: Wed Aug 07, 2019 9:07 am
miamivice wrote: Wed Aug 07, 2019 8:58 am
Girya wrote: Wed Aug 07, 2019 8:39 am ... and maybe even made significant tax-deductible contributions to your children/grandchildren's 529.
Contributions to 529s are NEVER tax deductible. 529 money is after tax dollars, similiar to a Roth.
I get a 10% tax deduction for the first approx. $5,000 year, notwithstanding your claim of “never.” Your circumstances aren’t universal.
Yep. Varies by state but odds are better than good 529’s offer a benefit, if you like in one of the following states, and if you have kids, and if you want those kids to go to college:

https://www.savingforcollege.com/articl ... ally-worth
marcopolo
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Re: I still don't understand the value of a Backdoor Roth for high income earners

Post by marcopolo »

miamivice wrote: Wed Aug 07, 2019 9:05 am
marcopolo wrote: Wed Aug 07, 2019 8:59 am
miamivice wrote: Wed Aug 07, 2019 8:32 am
Bacchus01 wrote: Wed Aug 07, 2019 7:14 amYou’re not the target audience for a Backdoor Roth. You’re likely not a high earner if you aren’t maxing you’re pretax space.
We make around 230k a year which is a higher earner in my book. We just don't see it valuable to max out 401k each year since we have good company matches and lots of pretax space.
You may be a high earner, but you are not a "high saver" for whom the backdoor Roth is very beneficial.

As a number of people have stated, At high tax rates, one would first max out 401k, HSA, and then for dollars that would otherwise go into taxable savings, one would put them into a backdoor Roth instead.

To turn it around, what would be the benefit putting it into taxable instead of the Roth?
Again, we save plenty but as a two income family have a lot more space than a 1 income family does. I concur the backdoor roth doesn't make sense for us.

To answer your question, the benefit that taxable has instead of a Roth is flexibility. By keeping after tax dollars in a Roth, one has the flexibility to use it on daycare, a computer for the kids to use for schoolwork, a new car, an RV, a vacation house, a boat, or any of a number of things that folks like to spend their money on.

If one has space for $50k a year (including company matches) and still feels that a backdoor Roth is "necessary", that person is either way behind in the retirement savings department, or projects huge retirement spending needs.
You are right, a backdoor Roth is not beneficial for you.
It is beneficial for many other people in different circumstances.
Once in a while you get shown the light, in the strangest of places if you look at it right.
Spirit Rider
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Re: I still don't understand the value of a Backdoor Roth for high income earners

Post by Spirit Rider »

Generally, you do not do a Backdoor Roth because it is a Roth. You do it because you are maxing your pre-tax accounts and it is additional tax-advantaged contribution space.

As has been mention, If your income is high enough to fully require a Backdoor Roth, you might want to be maxing any 401k/403b accounts you have anyways.

$38K / $250K ~= 15%.
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abyan
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Re: I still don't understand the value of a Backdoor Roth for high income earners

Post by abyan »

Just a quick update. I opened my solo 401k at Schwab today -- well, filed the paperwork, it should be open in a day or two -- so I can do a direct rollover of my Vanguard SEP IRA into it -- Vanguard confirmed they still don't permit non-401ks to rollover into solo 401ks -- and then I'll contribute after-tax funds to my zeroed out traditional IRA, wait a few days, and then covert it to a Roth. And Vanguard confirmed that if I then want to move the solo401k back to vanguard, they can roll it over (or whatever the term is) directly into my existing solo 401k at Vanguard. So I'll end up with some good consolidation of my IRAs and 401ks, and some extra Roth space. And I'll be ready to do it in future years, should I be in the same situation (having maxed out my solo 401k contribution and still having money on hand in taxable). Thanks all for your feedback.
Bacchus01
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Re: I still don't understand the value of a Backdoor Roth for high income earners

Post by Bacchus01 »

miamivice wrote: Wed Aug 07, 2019 8:32 am
Bacchus01 wrote: Wed Aug 07, 2019 7:14 amYou’re not the target audience for a Backdoor Roth. You’re likely not a high earner if you aren’t maxing you’re pretax space.
We make around 230k a year which is a higher earner in my book. We just don't see it valuable to max out 401k each year since we have good company matches and lots of pretax space.
You implied you didn’t have enough to make more contribution.

F you do and you don’t, you’re leaving money on the table. But to each their own.
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