need help, a few questions about Trad/Roth IRA and 401k

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Topic Author
barranquilla
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Joined: Fri Nov 15, 2019 5:07 pm

need help, a few questions about Trad/Roth IRA and 401k

Post by barranquilla » Fri Nov 15, 2019 5:50 pm

hello all

I am new to investing / personal finance and I have a few things that I would like to be cleared up

I am a new locums physician, independent contractor / 1099

as a training medical resident I opened a traditional IRA in 2015 with betterment. I only put 100$/ month so from about 2015 - 2018 I had put about 3500$ into this IRA
(I realize I should have done Roth now :annoyed )
this year in 2019 I have maxed the traditional IRA
now as an independent contractor I am in the process of opening up a solo 401k with e-trade
because of bills due etc etc, I will not be able to fully max out the solo 401k before the end of 2019. my projected income is about 250K for this year (I had lots of catching up to do)

my questions

1. once I open and start funding my solo 401k , my contribution to my traditional IRA no longer becomes tax deductible correct ? so I should do a backdoor Roth ?

2. I was told by someone that I "probably should not be doing a backdoor Roth if you can’t afford to maximize your available pretax retirement space by maxing out your 401k first", but if my traditional ira becomes non-deductible if I open my solo 401k why shouldn't I backdoor Roth regardless if my solo 401k is maxed out for the year or not ? can someone explain or expand on this please ?

3. if I should backdoor Roth regardless, does it matter if I backdoor Roth before my solo 401k is maxed out? as I stated above I do not think I will be able to max it out in 2019, but I anticipate being able to max it out in 2020 before I file my taxes. or should I wait for my solo 401k to be maxed out first ? can I still backdoor Roth in 2020 for the year 2019 before I file my taxes ?

I hope my questions make sense. thanks so much for all the help.

HomeStretch
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Re: need help, a few questions about Trad/Roth IRA and 401k

Post by HomeStretch » Sat Nov 16, 2019 9:07 pm

Welcome!
barranquilla wrote:
Fri Nov 15, 2019 5:50 pm
1. once I open and start funding my solo 401k , my contribution to my traditional IRA no longer becomes tax deductible correct ? so I should do a backdoor Roth ?
With $250k of 1099 income, your modified adjusted gross income is likely too high to take a tax deduction for a traditional IRA (tIRA) contribution and too high for a Roth IRA contribution.

Regardless of income level, you can make a non-deductible tIRA contribution that can be converted to a Roth IRA, known as a “Backdoor Roth”. To avoid the pro-rata rule, you cannot have any pretax IRA balance. If you do, a portion of your conversion will be subject to taxes. To avoid this, you can rollover your Wealthfront tIRA balance into your E*Trade Solo 401k. Once the rollover is complete and all pretax IRA balances will be zero on December 31, you can do the backdoor Roth.

Here is a link to the BH wiki page about Backdoor Roth:
https://www.bogleheads.org/wiki/Backdoor_Roth
2. I was told by someone that I "probably should not be doing a backdoor Roth if you can’t afford to maximize your available pretax retirement space by maxing out your 401k first", but if my traditional ira becomes non-deductible if I open my solo 401k why shouldn't I backdoor Roth regardless if my solo 401k is maxed out for the year or not ? can someone explain or expand on this please ?
With a low-cost 401k plan and as a high earner, the tax benefit of making the maximum pretax 401k employee deferrals/employer contributions is likely more advantageous for you than contributing after-tax dollars to a Roth IRA via a backdoor Roth. It’s likely a non-issue after 2019 as with your high income you should easily be maxing the 401k and backdoor Roth each year.
3. can I still backdoor Roth in 2020 for the year 2019 before I file my taxes ?
Yes, you can make a non-deductible tIRA contribution for tax year 2019 in 2020 by your tax filing deadline (usually April 15). Be sure when making the contribution that it is designated for tax year 2019. You can convert the contribution to a Roth IRA anytime afterwards but it’s best to do it as soon as possible to minimize tIRA earnings (which are pretax). But, to avoid the conversion pro rata rule, you need to have a zero balance in your pretax IRAs as of December 31 of the tax year in which you do the Roth conversion.

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FiveK
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Re: need help, a few questions about Trad/Roth IRA and 401k

Post by FiveK » Sun Nov 17, 2019 1:48 am

barranquilla wrote:
Fri Nov 15, 2019 5:50 pm
can I still backdoor Roth in 2020 for the year 2019 before I file my taxes ?
Yes and no, if I've deciphered your intent correctly. ;)

A conversion is always subject to tax in the same tax year as the calendar year in which you do it, so that may be the "no" part.

You may, however, make an IRA contribution through April 15 of a subsequent year for the previous year, and if you get your pre-tax IRA balance to $0 by 31-Dec-2019 then there will be essentially no pro-rata impact if you do the t->R IRA conversion in early 2020.

Perhaps the best way to understand how this will work is to fill out draft forms 8606 for 2019 and 2020 now, so you can see the difference between a $0 and non-zero pre-tax IRA balance on 31-Dec of the year in which you do a conversion - and all this is just repeating HomeStretch's advice in different words.

Caduceus
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Re: need help, a few questions about Trad/Roth IRA and 401k

Post by Caduceus » Sun Nov 17, 2019 2:14 am

I think you only have to elect to make the contribution by Dec 31, 2019 for your Solo 401k. That's not the same thing as actually putting money in. If you are a sole proprietor, you have until 2020 tax filing deadline (so if you file an extension, it will be October) to make the actual contribution. If so, you still have plenty of time to make the contribution.

I don't even think you have to file any paperwork for the election. You just have to figure out the calculation, and write it down somewhere for your own records. Your custodian isn't going to ask for it and there's no special election form you fill out. So it seems very simple if you intend to max out that 401k space, you have more time. But maybe Spirit Rider or someone who knows more will chime in.

Topic Author
barranquilla
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Joined: Fri Nov 15, 2019 5:07 pm

Re: need help, a few questions about Trad/Roth IRA and 401k

Post by barranquilla » Sun Nov 17, 2019 1:22 pm

HomeStretch wrote:
Sat Nov 16, 2019 9:07 pm
Welcome!
barranquilla wrote:
Fri Nov 15, 2019 5:50 pm
1. once I open and start funding my solo 401k , my contribution to my traditional IRA no longer becomes tax deductible correct ? so I should do a backdoor Roth ?
With $250k of 1099 income, your modified adjusted gross income is likely too high to take a tax deduction for a traditional IRA (tIRA) contribution and too high for a Roth IRA contribution.

Regardless of income level, you can make a non-deductible tIRA contribution that can be converted to a Roth IRA, known as a “Backdoor Roth”. To avoid the pro-rata rule, you cannot have any pretax IRA balance. If you do, a portion of your conversion will be subject to taxes. To avoid this, you can rollover your Wealthfront tIRA balance into your E*Trade Solo 401k. Once the rollover is complete and all pretax IRA balances will be zero on December 31, you can do the backdoor Roth.

Here is a link to the BH wiki page about Backdoor Roth:
https://www.bogleheads.org/wiki/Backdoor_Roth
2. I was told by someone that I "probably should not be doing a backdoor Roth if you can’t afford to maximize your available pretax retirement space by maxing out your 401k first", but if my traditional ira becomes non-deductible if I open my solo 401k why shouldn't I backdoor Roth regardless if my solo 401k is maxed out for the year or not ? can someone explain or expand on this please ?
With a low-cost 401k plan and as a high earner, the tax benefit of making the maximum pretax 401k employee deferrals/employer contributions is likely more advantageous for you than contributing after-tax dollars to a Roth IRA via a backdoor Roth. It’s likely a non-issue after 2019 as with your high income you should easily be maxing the 401k and backdoor Roth each year.
3. can I still backdoor Roth in 2020 for the year 2019 before I file my taxes ?
Yes, you can make a non-deductible tIRA contribution for tax year 2019 in 2020 by your tax filing deadline (usually April 15). Be sure when making the contribution that it is designated for tax year 2019. You can convert the contribution to a Roth IRA anytime afterwards but it’s best to do it as soon as possible to minimize tIRA earnings (which are pretax). But, to avoid the conversion pro rata rule, you need to have a zero balance in your pretax IRAs as of December 31 of the tax year in which you do the Roth conversion.
ok I think I understand.

so since my solo 401k accepts IRA rollovers, I should backdoor roth since the contribution to my IRA for 2019 will be non-deductible regardless.


and going forward I should try to max my solo 401k before I contribute to my IRA since those contributions will be non-deductible

does that sound right?

thanks a million for all the help

Topic Author
barranquilla
Posts: 6
Joined: Fri Nov 15, 2019 5:07 pm

Re: need help, a few questions about Trad/Roth IRA and 401k

Post by barranquilla » Sun Nov 17, 2019 1:25 pm

FiveK wrote:
Sun Nov 17, 2019 1:48 am
barranquilla wrote:
Fri Nov 15, 2019 5:50 pm
can I still backdoor Roth in 2020 for the year 2019 before I file my taxes ?
Yes and no, if I've deciphered your intent correctly. ;)

A conversion is always subject to tax in the same tax year as the calendar year in which you do it, so that may be the "no" part.

You may, however, make an IRA contribution through April 15 of a subsequent year for the previous year, and if you get your pre-tax IRA balance to $0 by 31-Dec-2019 then there will be essentially no pro-rata impact if you do the t->R IRA conversion in early 2020.

Perhaps the best way to understand how this will work is to fill out draft forms 8606 for 2019 and 2020 now, so you can see the difference between a $0 and non-zero pre-tax IRA balance on 31-Dec of the year in which you do a conversion - and all this is just repeating HomeStretch's advice in different words.
I will definitely check out those forms. I think I get what you're saying.

since I've already made my maximum contribution of 6000$ to a traditional IRA for 2019, I should do the Roth conversion before this year ends, correct ?

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JAZZISCOOL
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Re: need help, a few questions about Trad/Roth IRA and 401k

Post by JAZZISCOOL » Sun Nov 17, 2019 1:29 pm

FYI

You may have already discovered this site, but if not, there are a lot of good articles/info for docs and other high earners (also a good podcast).

https://www.whitecoatinvestor.com/

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

Re: need help, a few questions about Trad/Roth IRA and 401k

Post by FiveK » Sun Nov 17, 2019 1:58 pm

barranquilla wrote:
Sun Nov 17, 2019 1:25 pm
I will definitely check out those forms. I think I get what you're saying.

since I've already made my maximum contribution of 6000$ to a traditional IRA for 2019, I should do the Roth conversion before this year ends, correct ?
What will your traditional IRA balance (i.e., the thing that goes on line 6 of Form 8606) be on 31-Dec-2019? How much of that will be pre-tax and how much will be non-deducted?

Topic Author
barranquilla
Posts: 6
Joined: Fri Nov 15, 2019 5:07 pm

Re: need help, a few questions about Trad/Roth IRA and 401k

Post by barranquilla » Sun Nov 17, 2019 4:43 pm

FiveK wrote:
Sun Nov 17, 2019 1:58 pm
barranquilla wrote:
Sun Nov 17, 2019 1:25 pm
I will definitely check out those forms. I think I get what you're saying.

since I've already made my maximum contribution of 6000$ to a traditional IRA for 2019, I should do the Roth conversion before this year ends, correct ?
What will your traditional IRA balance (i.e., the thing that goes on line 6 of Form 8606) be on 31-Dec-2019? How much of that will be pre-tax and how much will be non-deducted?
currently my traditional IRA Is at about 10,500. I opened it in dec 2015, and I had just set it to auto-deposit about 100/month

about 2200$ of that was contributed when I was a training medical resident (dec 2015 - dec 2017, missing 2 months), it was tax-deductible contribution, I did not have a 401k or 403b at that time, and was making roughly 65-70K

in 2018 I contributed 1200$ , my income for this year was about 120K, again not covered by 401k or 403b, so I believe it would have been tax-deductible

in 2019 I have maxed out the IRA so 6000$, so that's 9400 total I have contributed , and the rest is from earnings / dividends. I am in the process of opening up an e-trade solo 401k and I am making roughly 250K this year, so I do not think contributions will be tax deductible

Topic Author
barranquilla
Posts: 6
Joined: Fri Nov 15, 2019 5:07 pm

Re: need help, a few questions about Trad/Roth IRA and 401k

Post by barranquilla » Sun Nov 17, 2019 4:44 pm

JAZZISCOOL wrote:
Sun Nov 17, 2019 1:29 pm
FYI

You may have already discovered this site, but if not, there are a lot of good articles/info for docs and other high earners (also a good podcast).

https://www.whitecoatinvestor.com/
definitely ! I actually read the white coat investor book cover to cover, but im still a total noob at finance.

I am trying to learn as much as I can though. just wanna get the fundamentals down first :P

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JAZZISCOOL
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Location: Colorado - 5,700 ft.

Re: need help, a few questions about Trad/Roth IRA and 401k

Post by JAZZISCOOL » Sun Nov 17, 2019 5:11 pm

Glad you already found the WCI website, book, etc.

For intro research, there is a lot of stuff here:

You may want to start here first and look at "beginning steps", etc.:

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

Here is a good read for a "3 fund" portfolio you may want to look at. It discusses asset allocation, etc.

https://www.bogleheads.org/wiki/Three-fund_portfolio

The BH Wiki at the top has a wealth of information IMO! :)

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FiveK
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Re: need help, a few questions about Trad/Roth IRA and 401k

Post by FiveK » Sun Nov 17, 2019 9:00 pm

barranquilla wrote:
Sun Nov 17, 2019 4:43 pm
currently my traditional IRA Is at about 10,500. I opened it in dec 2015, and I had just set it to auto-deposit about 100/month

about 2200$ of that was contributed when I was a training medical resident (dec 2015 - dec 2017, missing 2 months), it was tax-deductible contribution, I did not have a 401k or 403b at that time, and was making roughly 65-70K

in 2018 I contributed 1200$ , my income for this year was about 120K, again not covered by 401k or 403b, so I believe it would have been tax-deductible

in 2019 I have maxed out the IRA so 6000$, so that's 9400 total I have contributed , and the rest is from earnings / dividends. I am in the process of opening up an e-trade solo 401k and I am making roughly 250K this year, so I do not think contributions will be tax deductible
Assuming no further gains, if you
- do not roll the $4500 pre-tax into the solo 401k, and do a $6000 conversion to Roth this year, $2571 of that will be taxable.
- do roll the $4500 pre-tax into the solo 401k, and do a $6000 conversion to Roth this year, $0 of that will be taxable.

Is that how you see it also?

Topic Author
barranquilla
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Joined: Fri Nov 15, 2019 5:07 pm

Re: need help, a few questions about Trad/Roth IRA and 401k

Post by barranquilla » Mon Nov 18, 2019 8:22 am

FiveK wrote:
Sun Nov 17, 2019 9:00 pm
barranquilla wrote:
Sun Nov 17, 2019 4:43 pm
currently my traditional IRA Is at about 10,500. I opened it in dec 2015, and I had just set it to auto-deposit about 100/month

about 2200$ of that was contributed when I was a training medical resident (dec 2015 - dec 2017, missing 2 months), it was tax-deductible contribution, I did not have a 401k or 403b at that time, and was making roughly 65-70K

in 2018 I contributed 1200$ , my income for this year was about 120K, again not covered by 401k or 403b, so I believe it would have been tax-deductible

in 2019 I have maxed out the IRA so 6000$, so that's 9400 total I have contributed , and the rest is from earnings / dividends. I am in the process of opening up an e-trade solo 401k and I am making roughly 250K this year, so I do not think contributions will be tax deductible
Assuming no further gains, if you
- do not roll the $4500 pre-tax into the solo 401k, and do a $6000 conversion to Roth this year, $2571 of that will be taxable.
- do roll the $4500 pre-tax into the solo 401k, and do a $6000 conversion to Roth this year, $0 of that will be taxable.

Is that how you see it also?
yes I think that's what I will do

roll everything except the 6K into my solo 401k

2500$+ is a lot of money to pay lol

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FiveK
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Re: need help, a few questions about Trad/Roth IRA and 401k

Post by FiveK » Mon Nov 18, 2019 12:08 pm

barranquilla wrote:
Mon Nov 18, 2019 8:22 am
yes I think that's what I will do

roll everything except the 6K into my solo 401k

2500$+ is a lot of money to pay lol
You wouldn't have to pay $2571, just the tax on that amount of income, but your plan to avoid even that seems good.

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