Probably not the first "Back Door" Roth question

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whatshappeninman
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Probably not the first "Back Door" Roth question

Post by whatshappeninman »

You guys rock. Thanks for any help/advice/information you can give.

I turn 50 this year and have been boning up as best I can on tax-advantaged retirement accounts, but alas, I am still pretty confused.

Here are the facts. I'm married but am focusing mostly on my end of the equation for now...

* Debt free, house paid off (thank God)
* My base salary: $175000, bonus typically (but probably not this year) puts me around 200. Wife similar. Not Roth eligible if I understand correctly
* My 401(k) is maxed out, bumped it to $26000 immediately for my first pay stub this year. Employer match is 6% or $10,500
* Balance for 401(k) mentioned above is currently $576K. It's all in VFIAX. Fund options are limited but they finally put VFIAX in a few years ago
* Son's 529 (he's 6) gets the IRS gift maximum of $15K every year on the first business day. Current balance: $145,000.00. Preparing for top-end schools
* I have around $200K in a regular non-tax-advantaged account in Vanguard and put about $1000/month into VFIAX.
* I opened a trad IRA last month (Dec '20) and put in $6k. You guessed it... VFIAX

I'm gunning for the most comfortable retirement I can get and/or the earliest retirement I can get. I assert that this logically means investing as much as I can can in some form of tax-advantaged situation but I'm a little perplexed by the Trad/Roth IRA rules and want to make sure I'm not making some obvious mistake by doing or not doing something I should or should not be doing.

Question 1: Should I roll the Trad IRA into a Roth (once? periodically?) Should I roll it back into my 401(k)? Should I do nothing but just keep putting funds into the Trad IRA and my 401(k)? Retirement wise, anything I should be doing? Doing differently? Not be doing?

Question 2: If you had a 6 year old and wanted to be financially prepared to send him to a top-end/Ivy school, would you be comfortable with my progress were you in my shoes? Wife has about $60K in UTMA/529 but is a lot more sporadic with the contributions and amounts and is a much more emotional investor (tries to time the market, dollar-cost-averaging, etc.). Not my style - all in, stay buckled in until you're ready to get off the ride for good.

Thanks for any help you can give.
Last edited by whatshappeninman on Wed Jan 13, 2021 3:10 pm, edited 1 time in total.
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whatshappeninman
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Re: Probably not the first "Back Door" Roth question

Post by whatshappeninman »

Welp, read the sticky after posting. I think I covered the pertinent facts anyway, but here they are in the requested format:

Emergency funds: Good shape here

Debt: None, house paid off

Tax Filing Status: Married Filing Jointly

Tax Rate: I THINK we're around 32% bracket. Household income is 350 to 400K

State of Residence: NJ

Age: I turn 50 this year

Desired Asset allocation: Running and gunning for the biggest retirement balance as quickly as I can - currently 100% index funds
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Re: Probably not the first "Back Door" Roth question

Post by placeholder »

Given your income level and having a 401k then tira contribution was non-deductible so it can't be rolled into the 401k therefore you should convert it right away unless you want to do a 2021 contribution first but don't wait around because any earnings will taxable.
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whatshappeninman
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Re: Probably not the first "Back Door" Roth question

Post by whatshappeninman »

placeholder wrote: Wed Jan 13, 2021 3:14 pm Given your income level and having a 401k then tira contribution was non-deductible so it can't be rolled into the 401k therefore you should convert it right away unless you want to do a 2021 contribution first but don't wait around because any earnings will taxable.
Thanks for this. Is the $6K taxable also? Just want to make sure I have an idea of how much I need to cough up to roll it over.

Also, anyone else having trouble getting Vanguard on the phone? I left a call back number multiple times and waited for aeons - no luck getting a person on the phone.
exodusNH
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Re: Probably not the first "Back Door" Roth question

Post by exodusNH »

whatshappeninman wrote: Wed Jan 13, 2021 3:04 pm Question 1: Should I roll the Trad IRA into a Roth (once? periodically?) Should I roll it back into my 401(k)? Should I do nothing but just keep putting funds into the Trad IRA and my 401(k)? Retirement wise, anything I should be doing? Doing differently? Not be doing?
If you have no other traditional IRAs (tIRA), you should convert it to Roth. Since you're not eligible to deduct the tIRA contributions, there's no benefit in NOT doing it. (Unless you have other tIRAs, in which case you can be in for a big tax bill.)

After tax is helpful because a) you won't pay taxes on the withdrawals and b) it won't impact your income when you do withdraw, which can affect social security taxes and how much you pay for medicare.
whatshappeninman wrote: Wed Jan 13, 2021 3:04 pm Wife has about $60K in UTMA/529 but is a lot more sporadic with the contributions and amounts and is a much more emotional investor (tries to time the market, dollar-cost-averaging, etc.). Not my style - all in, stay buckled in until you're ready to get off the ride for good.
Yeah, she's costing herself money there. Dollar-cost averaging is fine if you've got it set as an automatic process. That way you're not thinking about it. Remind her (I'm sure you have!) that all the stock market returns you see are AFTER all the ups and downs.
whatshappeninman wrote: Wed Jan 13, 2021 3:04 pm Question 2: If you had a 6 year old and wanted to be financially prepared to send him to a top-end/Ivy school, would you be comfortable with my progress were you in my shoes?
"Top end" schools generally don't give you a better education. Most of the classes are taught by adjuncts (contractors) or grad students. I went to the University of New Hampshire in Durham. Heisenberg's son was one of the physics professors and actually taught classes. Ken Appel was my combinatorics professor and was chair of the math department. He proved the Four Color Theorem with the first mathematical proof that was accepted that was partially done with a computer. At MIT, both of those people would have been too busy on research to deal with undergrads.

The "top end" schools are more valuable for the connections that you have access to than for their academic rigor.
exodusNH
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Re: Probably not the first "Back Door" Roth question

Post by exodusNH »

whatshappeninman wrote: Wed Jan 13, 2021 3:19 pm Thanks for this. Is the $6K taxable also? Just want to make sure I have an idea of how much I need to cough up to roll it over.
No, you've already paid taxes on it. Not sure about the earnings, though.
whatshappeninman wrote: Wed Jan 13, 2021 3:19 pm Also, anyone else having trouble getting Vanguard on the phone? I left a call back number multiple times and waited for aeons - no luck getting a person on the phone.
There have been a number of complaints over the past few days about customer service issues.
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whatshappeninman
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Re: Probably not the first "Back Door" Roth question

Post by whatshappeninman »

exodusNH wrote: Wed Jan 13, 2021 3:20 pm If you have no other traditional IRAs (tIRA), you should convert it to Roth. Since you're not eligible to deduct the tIRA contributions, there's no benefit in NOT doing it. (Unless you have other tIRAs, in which case you can be in for a big tax bill.)

After tax is helpful because a) you won't pay taxes on the withdrawals and b) it won't impact your income when you do withdraw, which can affect social security taxes and how much you pay for medicare.
Of course, this is all dependent on there not being some drastic change in the tax law, but nothing to be gained by focusing on things over which we have no control...

So assuming I've only gained a small amount, my tax bill for my conversion to Roth should be small, right? I know, YANAL... just want to get a high-level of what to expect.

Also, should I repeat this every year? Put in $7K, then roll over immediately?
exodusNH wrote: Wed Jan 13, 2021 3:20 pm Yeah, she's costing herself money there. Dollar-cost averaging is fine if you've got it set as an automatic process. That way you're not thinking about it. Remind her (I'm sure you have!) that all the stock market returns you see are AFTER all the ups and downs.
Oh, yes... I have. I admonish her about this every time she does it (particularly trying to time the market).

Sometimes life is about the wisdom of knowing the difference between the things you CAN change... and...

This is one of the reasons why I am mostly focused on my accounts - at least for the time being. She has come around quite a bit over the years with some pleading, prodding and a little hard-won lessons. One day at a time...
exodusNH wrote: Wed Jan 13, 2021 3:20 pm "Top end" schools generally don't give you a better education. Most of the classes are taught by adjuncts (contractors) or grad students. I went to the University of New Hampshire in Durham. Heisenberg's son was one of the physics professors and actually taught classes. Ken Appel was my combinatorics professor and was chair of the math department. He proved the Four Color Theorem with the first mathematical proof that was accepted that was partially done with a computer. At MIT, both of those people would have been too busy on research to deal with undergrads.

The "top end" schools are more valuable for the connections that you have access to than for their academic rigor.
I totally went to a "you've probably never heard of it" school and my wife isn't a big-time school graduate either, and I think it would be hard to argue it has held either of us back. But... those I love want this and dream about it, so I am doing what I can to prepare for it.
exodusNH
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Re: Probably not the first "Back Door" Roth question

Post by exodusNH »

whatshappeninman wrote: Wed Jan 13, 2021 3:36 pm So assuming I've only gained a small amount, my tax bill for my conversion to Roth should be small, right? I know, YANAL... just want to get a high-level of what to expect.
And maybe no tax burden, since the profit was on after-tax contributions. But I'm unsure of that. The $7K is definitely clear, though.
whatshappeninman wrote: Wed Jan 13, 2021 3:36 pm Also, should I repeat this every year? Put in $7K, then roll over immediately?
Yeah, if/until the tax law changes. Prior to 2017, most people suggested you wait a couple of days / weeks to do the conversion to avoid the ire of the IRS. But the 2017 tax changes explicitly permits this. It seems silly that they didn't just change the overarching law. If you don't convert right away, you usually have a small amount of profit, which is just a hassle to deal with. There was someone else who got a check for $0.10...

You'll get all sorts of scary warnings when you press the conversion button, but the vendor doesn't actually know your tax status.
whatshappeninman wrote: Wed Jan 13, 2021 3:36 pm Sometimes life is about the wisdom of knowing the difference between the things you CAN change... and...
:D
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whatshappeninman
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Re: Probably not the first "Back Door" Roth question

Post by whatshappeninman »

So when you convert tIRA to Roth IRA, do you close the traditional account and have to open a new one when you do it every year, or does it just roll the funds over?
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Re: Probably not the first "Back Door" Roth question

Post by little_star »

whatshappeninman wrote: Wed Jan 13, 2021 5:06 pm So when you convert tIRA to Roth IRA, do you close the traditional account and have to open a new one when you do it every year, or does it just roll the funds over?
My traditional IRA stays open with a balance of $0.00.
exodusNH
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Re: Probably not the first "Back Door" Roth question

Post by exodusNH »

whatshappeninman wrote: Wed Jan 13, 2021 5:06 pm So when you convert tIRA to Roth IRA, do you close the traditional account and have to open a new one when you do it every year, or does it just roll the funds over?
I think it depends on the brokerage. In my case, the IRA stays open with a $0 balance. It then gets rolled into the Roth IRA, which is the same year-to-year.
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Re: Probably not the first "Back Door" Roth question

Post by David Jay »

whatshappeninman wrote: Wed Jan 13, 2021 5:06 pm So when you convert tIRA to Roth IRA, do you close the traditional account and have to open a new one when you do it every year, or does it just roll the funds over?
The tIRA will stay open (but empty). You don’t convert the tIRA to Roth, you convert the money in the tIRA account to the Roth IRA account. Next year you will convert from the same tIRA into the same Roth.

The earnings are taxable, but go ahead and convert it all including earnings (and pay the tax on the tiny bit of earnings) but next year convert “immediately”.

The only limit on the process is the amount that you can contribute to the tIRA. You can convert as much as you want as often as you want. Starting at age 50 you can contribute $7000. Your spouse can also do a backdoor Roth if she has no tIRA or Simple-IRA pre-tax balance.
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius
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celia
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Re: Probably not the first "Back Door" Roth question

Post by celia »

I'm married but am focusing mostly on my end of the equation for now...
OP, I worry about you getting good answers here since you started the first post with YOUR accounts. In your second post, you said a little about YOUR WIFE's impact on family finances, but there is no comprehensive picture of your joint assets. Your income, for example, is irrelevant, if you don't also include your wife's. The responses will likely be different if she contributed a million to household income vs. $20K.

We also need to know if both of you have tIRAs with any money in them. As long as you are asking about Backdoor Roths, you might as well address it for both of you. If your accounts are different than your wife's, you need to know if the Backdoor Roth will work differently for each of you.

Be sure to read the referenced link. It is a lot to digest and may take more than one reading. But you should feel more comfortable about it after you understand it better. Then maybe you should ask questions that are useful for both of you at the same time. (I assume you file MFJ.) In fact, if you share this thread with her, she may come up with good questions for us to answer, too. Share your educational (Bogleheads.org) journey with her. You'll be surprised!
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whatshappeninman
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Re: Probably not the first "Back Door" Roth question

Post by whatshappeninman »

celia wrote: Wed Jan 13, 2021 6:48 pm OP, I worry about you getting good answers here since you started the first post with YOUR accounts. In your second post, you said a little about YOUR WIFE's impact on family finances, but there is no comprehensive picture of your joint assets. Your income, for example, is irrelevant, if you don't also include your wife's. The responses will likely be different if she contributed a million to household income vs. $20K.
I understand. It's a little tricky because she is much more privacy-oriented than I am and I am trying to be respectful of that while getting some badly needed advice from a source I frankly trust more than the local "advisor". Our incomes are fairly similar - I typically make a little more.
celia wrote: Wed Jan 13, 2021 6:48 pm We also need to know if both of you have tIRAs with any money in them. As long as you are asking about Backdoor Roths, you might as well address it for both of you. If your accounts are different than your wife's, you need to know if the Backdoor Roth will work differently for each of you.


I am 99% certain she has only a 401(k) for tax-advantaged retirement assets. She is ahead of me significantly because I spent more paying off the house I owned when we met, along with other well-timed events (getting a job immediately after getting a check for 10 years of severance pay, while I got laid off in '08 and spent quite a bit of time looking, and had to rescue my parents from foreclosure).

The experts say you should be at 6x earnings at my age and while I think that's a pretty ambitious goal, I do want to get the retirement train going faster wherever I can. We do plan on moving somewhere substantially cheaper when our child gets to college (by which time we'll be pretty close to retirement age), which should allow us to live comfortably on less and also potentially leverage some of the liquidity from the house for more income when we move to a cheaper area.
celia wrote: Wed Jan 13, 2021 6:48 pm Be sure to read the referenced link. It is a lot to digest and may take more than one reading. But you should feel more comfortable about it after you understand it better. Then maybe you should ask questions that are useful for both of you at the same time. (I assume you file MFJ.) In fact, if you share this thread with her, she may come up with good questions for us to answer, too. Share your educational (Bogleheads.org) journey with her. You'll be surprised!
Thanks for that link - I had read it earlier and was still confused by this passage:
Convert the entire Traditional IRA to Roth, and pay tax on the pre-tax amount of the conversion. For a small Traditional IRA this may be the easiest and best option, but if the Traditional IRA is large, this will result in a large tax bill. If you are making Backdoor Roth IRA contributions, you are in a middle or high tax bracket, so this might be undesirable.


The "this" three words from the end is referring to an IRA with a large amount of pre-tax money in it, correct? In other words, this undesirable scenario does not apply to me? I scrambled to open my first-ever tIRA in late December and it has only $6K and has only grown just a little.
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Re: Probably not the first "Back Door" Roth question

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whatshappeninman wrote: Wed Jan 13, 2021 3:04 pm You guys rock. Thanks for any help/advice/information you can give.

I turn 50 this year and have been boning up as best I can on tax-advantaged retirement accounts, but alas, I am still pretty confused.

Here are the facts. I'm married but am focusing mostly on my end of the equation for now...

* Debt free, house paid off (thank God)
* My base salary: $175000, bonus typically (but probably not this year) puts me around 200. Wife similar. Not Roth eligible if I understand correctly
* My 401(k) is maxed out, bumped it to $26000 immediately for my first pay stub this year. Employer match is 6% or $10,500
* Balance for 401(k) mentioned above is currently $576K. It's all in VFIAX. Fund options are limited but they finally put VFIAX in a few years ago
* Son's 529 (he's 6) gets the IRS gift maximum of $15K every year on the first business day. Current balance: $145,000.00. Preparing for top-end schools
* I have around $200K in a regular non-tax-advantaged account in Vanguard and put about $1000/month into VFIAX.
* I opened a trad IRA last month (Dec '20) and put in $6k. You guessed it... VFIAX

I'm gunning for the most comfortable retirement I can get and/or the earliest retirement I can get. I assert that this logically means investing as much as I can can in some form of tax-advantaged situation but I'm a little perplexed by the Trad/Roth IRA rules and want to make sure I'm not making some obvious mistake by doing or not doing something I should or should not be doing.

Question 1: Should I roll the Trad IRA into a Roth (once? periodically?) Should I roll it back into my 401(k)? Should I do nothing but just keep putting funds into the Trad IRA and my 401(k)? Retirement wise, anything I should be doing? Doing differently? Not be doing?

Question 2: If you had a 6 year old and wanted to be financially prepared to send him to a top-end/Ivy school, would you be comfortable with my progress were you in my shoes? Wife has about $60K in UTMA/529 but is a lot more sporadic with the contributions and amounts and is a much more emotional investor (tries to time the market, dollar-cost-averaging, etc.). Not my style - all in, stay buckled in until you're ready to get off the ride for good.

Thanks for any help you can give.
This is not really answering your questions, but I am curious - with an annual salary of about $400k, you have less than $1million saved up? Or am I missing something or have you intentionally not shared your entire portfolio?

With the six-year old's school money, the biggest concern would be if he is interested in attending! True story: I know a very smart dude, under 25, has his own tech company in the silicon valley. Parents are trying to force him to complete his degree - UCB, if you want to know - and he's like ho-hum!
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Re: Probably not the first "Back Door" Roth question

Post by whatshappeninman »

an_asker wrote: Wed Jan 13, 2021 11:07 pm This is not really answering your questions, but I am curious - with an annual salary of about $400k, you have less than $1million saved up? Or am I missing something or have you intentionally not shared your entire portfolio?
The household (combined) income is $350-400K as of this year. Taxable rate is lower than that as we both have 401(k)s, etc.

* Since 2005 (when I bought my first home), I've only had a mortgage for a little more than 2 years as I moved from 1BD condo to 2BD condo to our current house as I've always been vehement about wasting as little of our compensation on interest. The downside is that this did set me back some in my savings/investments.
* We are "house rich" in that we live in an expensive area (North NJ) - our paid-for house is around $1.5M, maybe a little more post-COVID
* Combined 401(k)s are ~$1.2M+ already. She is ahead of me because of the events I mentioned earlier - paying off my parents' mortgage to stave off foreclosure, her getting a job immediately after a 10 year severance check, my owning a paid-for $350K home when we got married, etc.
* I was prodded into buying my options upon a job exit 13 years ago - this set me back a big chunk and while it appears that a company sale is going to happen and I'll get some of it back, it was a loser of an investment and a mistake - maximum I can hope to recoup is $200K out of $160K I invested in 2008 (no dividend checks in 13 years either). So that will boost my situation by hopefully at least another $100K.

That's pretty much the whole picture, I believe. I got religion about debt and spending at a very early age from watching my Wharton-educated Dad (who was an investment pro for 50+ years) "finance" his way into endless money problems and debt. Once I had a reasonably steady job/career/income, I've lived pretty frugally and saved prodigiously. My wife also has pretty good inclinations/habits for the average person. My biggest mistake was not knowing how to invest and having way too much cash sitting on the sidelines for way too long.

I'll do everything I can to make sure my child doesn't make that mistake out of a lack of knowledge.
an_asker wrote: Wed Jan 13, 2021 11:07 pm With the six-year old's school money, the biggest concern would be if he is interested in attending! True story: I know a very smart dude, under 25, has his own tech company in the silicon valley. Parents are trying to force him to complete his degree - UCB, if you want to know - and he's like ho-hum!
I think about this all the time. Will he get in? Will he want to go? Unfortunately, life and tax law really only give me two choices - fail to save enough and be forced to raise it (or go into debt if that will even be possible) when I'm at or near retirement - or deal with taxes and penalties on a 529 fund that isn't used.

While both situations are not great, the former is a much bigger problem than the latter. Also, his mother is extraordinarily persuasive.
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Re: Probably not the first "Back Door" Roth question

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whatshappeninman wrote: Wed Jan 13, 2021 9:05 pm
Convert the entire Traditional IRA to Roth, and pay tax on the pre-tax amount of the conversion. For a small Traditional IRA this may be the easiest and best option, but if the Traditional IRA is large, this will result in a large tax bill. If you are making Backdoor Roth IRA contributions, you are in a middle or high tax bracket, so this might be undesirable.
The "this" three words from the end is referring to an IRA with a large amount of pre-tax money in it, correct? In other words, this undesirable scenario does not apply to me? I scrambled to open my first-ever tIRA in late December and it has only $6K and has only grown just a little.
Correct. This quote from the wiki page is in the "caution" section that applies if you have a pre-existing Traditional IRA with pre-tax money in it. The more pre-tax money there is in the TIRA, the more the taxes will be.
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Re: Probably not the first "Back Door" Roth question

Post by whatshappeninman »

Thanks for the input, folks - after some fumbling around in Vanguard's web portal, I figured out how to do a fund exchange into a new Roth IRA and executed it last night. I plan on doing the same $7K/year "back door" procedure every year from now on whenever possible.

I'll tell my wife about it when I think she'd be receptive to it.
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Re: Probably not the first "Back Door" Roth question

Post by celia »

whatshappeninman wrote: Thu Jan 14, 2021 10:46 am I'll tell my wife about it when I think she'd be receptive to it.
Hopefully she looks over the 2020 tax return before she signs it. It will now include a Form 8606 showing you made a non-deductible contribution. I give her extra credit if she notices and asks what is going on. In fact, you should prepare the taxes early since she may also want to stuff money into a Roth. You can make non-deductible contributions for 2020 up till April 15, 2021.

If she prepares the taxes, ..... :oops:
A dollar in Roth is worth more than a dollar in a taxable account. A dollar in taxable is worth more than a dollar in a tax-deferred account.
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