Increasing Roth contributions

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Topic Author
ball241
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Increasing Roth contributions

Post by ball241 »

I would like to increase my Roth contributions In both a 403 B and 457. Doing this however will eliminate ability to contribute to Roth IRA. I would prefer to maintain the ability to contribute to Roth IRA. I realize the backdoor option exists for 2021 but not sure after that on if it will be allowed.

If I were to continue pretax for these and then do a Roth conversion for the same amount of contributions yearly from a traditional IRA to a Roth. This would effectively cause the same amount of tax to be owed and based on how MAGI is calculated for Roth purpose still allow for direct contribution to ROTH IRA. I could simply set taxes aside from paycheck that will be owed on conversion and it will be exactly as if the contribution was made directly.

Wanted to confirm if this makes sense to think of it this way
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celia
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Re: Increasing Roth contributions

Post by celia »

I’m lost after reading your post. How can you make Roth contributions to accounts while they stay as pre-tax? Making contributions to employer plans also does not impact your ability to contribute to IRAs yourself.

I suspect there is a terminology problem here.
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.
Topic Author
ball241
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Re: Increasing Roth contributions

Post by ball241 »

celia wrote: Wed Nov 24, 2021 9:38 pm I’m lost after reading your post. How can you make Roth contributions to accounts while they stay as pre-tax? Making contributions to employer plans also does not impact your ability to contribute to IRAs yourself.

I suspect there is a terminology problem here.
I would continue making pretax contributions within 403 B and 457. This would keep AGI to allow for Roth IRA contributions directly, otherwise I am over and can’t contribute to Roth IRA.

Then I would do a Roth conversion yearly for the amount of the pretax contributions from a traditional IRA to a Roth. This does not raise MAGI for Roth purposes but effectively helps me increase Roth space.

I no longer want to increase pretax space which is why I am considering this

I’m sorry if my original post is confusing
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celia
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Re: Increasing Roth contributions

Post by celia »

But this statement:
ball241 wrote: Wed Nov 24, 2021 8:54 pm If I were to continue pretax for these and then do a Roth conversion for the same amount of contributions yearly from a traditional IRA to a Roth.
sounds like you already have pre-tax money in a tIRA, which means any Roth conversion you do, including the non-deductible contribution, will have the pro rata rule applied.

See our Backdoor Roth wiki page for a full description of that. It also seems like that applies to all your IRA contributions.

Ask here if you have any questions before you do this. And manually fill out Form 8606 before you do a Backdoor Roth so you don’t end up with any surprises at tax time.


Is your goal to add more than $6,000 to your Roth IRA each year? If so, how much do you have in all your IRAs that are not Roth and not Inherited?

How much of that is pre-tax and how much is post-tax (non-deductible)? Include all your IRAs even if they are held at different custodians.
Last edited by celia on Wed Nov 24, 2021 10:34 pm, edited 1 time in total.
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.
Topic Author
ball241
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Re: Increasing Roth contributions

Post by ball241 »

celia wrote: Wed Nov 24, 2021 10:22 pm But this statement:
ball241 wrote: Wed Nov 24, 2021 8:54 pm If I were to continue pretax for these and then do a Roth conversion for the same amount of contributions yearly from a traditional IRA to a Roth.
sounds like you already have pre-tax money in a tIRA, which means any Roth conversion you do, including the non-deductible contribution, will have the pro rata rule applied.

See our Backdoor Roth wiki page for a full description of that. It also seems like that applies to all your IRA contributions.

Ask here if you have any questions before you do this. And manually fill out Firm 8606 before you do a Backdoor Roth so you don’t end up with any surprises at tax time.
Thanks

Yea I guess I could just make contributions to the 403b and 457 straight Roth designations but like I said then I’ll lose Roth IRA eligibility. I’m not sure if backdoor Roth IRA will be allowed after this year.

Thanks
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celia
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Re: Increasing Roth contributions

Post by celia »

ball241 wrote: Wed Nov 24, 2021 10:29 pm Yea I guess I could just make contributions to the 403b and 457 straight Roth designations but like I said then I’ll lose Roth IRA eligibility.
I wouldn’t make Roth contributions to an existing employer account. But a separate account that is totally Roth would be fine. If your employer allows you to make non-deductible contributions to the same account your pre-tax dollars are in and all the money is considered co-mingled, the results when you withdraw may not be what you expect.

For example, if your 403b is all bonds and valued at 30K, if you add 10K as Roth and invest it in a stock fund, the account value will be $40K, with 1/4 being Roth. But in the next year, if the bond fund grows 1% and adds $300 and the stock fund adds 7% (ie, $700), your $41,000 account now has 1/4 in Roth ($10,250) instead of the $10,700 you would expect. This is because all the dollars are being co-mingled within the account.

Note that I have introduced the concept of Tax-efficient Fund Placement here where Roths should hold stock funds (to maximize future tax-free growth) and Tax-deferred accounts should hold bonds. If the entire 403b is in a Target date fund instead, this doesn’t apply (and your portfolio is not as tax-efficient as it could be).


Have you considered rolling over the pre-tax part of your IRA(s) to an employer plan that would accept it? If you have all your tIRA accounts empty at the end of the year, that enables you to do a Backdoor Roth regardless of what your MAGI is. Note that the rollovers need to be direct, meaning the money is transferred electronically or the check is made out to the 403b custodian rather than you. Do NOT request a check be made out to YOU.

If this idea might apply to you, start by understanding the wiki page referenced above and Form 8606.
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.
Topic Author
ball241
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Re: Increasing Roth contributions

Post by ball241 »

celia wrote: Wed Nov 24, 2021 11:26 pm
ball241 wrote: Wed Nov 24, 2021 10:29 pm Yea I guess I could just make contributions to the 403b and 457 straight Roth designations but like I said then I’ll lose Roth IRA eligibility.
I wouldn’t make Roth contributions to an existing employer account. But a separate account that is totally Roth would be fine. If your employer allows you to make non-deductible contributions to the same account your pre-tax dollars are in and all the money is considered co-mingled, the results when you withdraw may not be what you expect.

For example, if your 403b is all bonds and valued at 30K, if you add 10K as Roth and invest it in a stock fund, the account value will be $40K, with 1/4 being Roth. But in the next year, if the bond fund grows 1% and adds $300 and the stock fund adds 7% (ie, $700), your $41,000 account now has 1/4 in Roth ($10,250) instead of the $10,700 you would expect. This is because all the dollars are being co-mingled within the account.

Note that I have introduced the concept of Tax-efficient Fund Placement here where Roths should hold stock funds (to maximize future tax-free growth) and Tax-deferred accounts should hold bonds. If the entire 403b is in a Target date fund instead, this doesn’t apply (and your portfolio is not as tax-efficient as it could be).


Have you considered rolling over the pre-tax part of your IRA(s) to an employer plan that would accept it? If you have all your tIRA accounts empty at the end of the year, that enables you to do a Backdoor Roth regardless of what your MAGI is. Note that the rollovers need to be direct, meaning the money is transferred electronically or the check is made out to the 403b custodian rather than you. Do NOT request a check be made out to YOU.

If this idea might apply to you, start by understanding the wiki page referenced above and Form 8606.
Mu understanding is that the decision to make Roth or pretax should be based on an estimate of your current vs future marginal tax rate. If going be lower in future favors pretax and vice versa. I am thinking I could be close to same and thus want diversify with greater Roth contributions now to provide flexibility later.

In terms of mixing Roth vs pretax in an employee account like a 403b. I am told they are kept separate and you can designate upon withdrawal which account you are withdrawing from. Maybe someone can offer how this is done and if they found it to be an issue. The 457 I am told is done same way by administrator

In terms of rollover I do not have a plan that will accept rollover

Happy thanksgiving
KlangFool
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Re: Increasing Roth contributions

Post by KlangFool »

If the tax rate between now and future is the same, Trad wins.

Why would you want to pay IRS now when you can pay it Later? $1000 now is worth a lot more than $1000 later.

KlangFool
40% VWENX | 12.5% VFWAX/VTIAX | 11.5% VTSAX | 16% VBTLX | 10% VSIAX/VTMSX/VSMAX | 10% VSIGX| 40% Wellington 40% 3-funds 20% Mini-Larry
Triple digit golfer
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Re: Increasing Roth contributions

Post by Triple digit golfer »

KlangFool wrote: Thu Nov 25, 2021 7:48 am If the tax rate between now and future is the same, Trad wins.

Why would you want to pay IRS now when you can pay it Later? $1000 now is worth a lot more than $1000 later.

KlangFool
I don't understand exactly what the OP is trying to accomplish so I cannot offer advice, but this is incorrect. It comes out the same if the tax rate is the same.

Assume 22% tax rate and 6% annual return.

Traditional: $6k a year for 10 years comes to $79,085. Take 22% for taxes and it is worth $61,686.

Roth: $6k a year minus 22% for taxes is $4,680. $4,680 a year for 10 years comes to $61,686.
KlangFool
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Re: Increasing Roth contributions

Post by KlangFool »

Triple digit golfer wrote: Thu Nov 25, 2021 7:56 am
KlangFool wrote: Thu Nov 25, 2021 7:48 am If the tax rate between now and future is the same, Trad wins.

Why would you want to pay IRS now when you can pay it Later? $1000 now is worth a lot more than $1000 later.

KlangFool
It comes out the same if the tax rate is the same.
Triple digit golfer,

It does not.

If you contribute to Roth 401K, you had paid the IRS. You cannot get the money back. If you contribute to Trad 401K, you have a choice to pay IRS when you want to. That option is ONLY available to you when you contribute to Trad 401K.

KlangFool
40% VWENX | 12.5% VFWAX/VTIAX | 11.5% VTSAX | 16% VBTLX | 10% VSIAX/VTMSX/VSMAX | 10% VSIGX| 40% Wellington 40% 3-funds 20% Mini-Larry
Topic Author
ball241
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Re: Increasing Roth contributions

Post by ball241 »

KlangFool wrote: Thu Nov 25, 2021 8:14 am
Triple digit golfer wrote: Thu Nov 25, 2021 7:56 am
KlangFool wrote: Thu Nov 25, 2021 7:48 am If the tax rate between now and future is the same, Trad wins.

Why would you want to pay IRS now when you can pay it Later? $1000 now is worth a lot more than $1000 later.

KlangFool
It comes out the same if the tax rate is the same.
Triple digit golfer,

It does not.

If you contribute to Roth 401K, you had paid the IRS. You cannot get the money back. If you contribute to Trad 401K, you have a choice to pay IRS when you want to. That option is ONLY available to you when you contribute to Trad 401K.

KlangFool
This makes sense but I have concern pretax accounts could cause large RMD in future. So am running scenarios to consider using Roth within employer retirement accounts.

With pension and social security I’m concerned about higher bracket in future. Currently 24 federal without pretax contributions and 6 state. So 30%

It’s hard to pass on 30% and I’m not sure on what amount pretax should cause this switch.

Will retire at 55 so have window on conversions. Married 43, wife 42
retiredjg
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Re: Increasing Roth contributions

Post by retiredjg »

ball241 wrote: Wed Nov 24, 2021 8:54 pm I would like to increase my Roth contributions In both a 403 B and 457. Doing this however will eliminate ability to contribute to Roth IRA. I would prefer to maintain the ability to contribute to Roth IRA. I realize the backdoor option exists for 2021 but not sure after that on if it will be allowed.

If I were to continue pretax for these and then do a Roth conversion for the same amount of contributions yearly from a traditional IRA to a Roth. This would effectively cause the same amount of tax to be owed and based on how MAGI is calculated for Roth purpose still allow for direct contribution to ROTH IRA. I could simply set taxes aside from paycheck that will be owed on conversion and it will be exactly as if the contribution was made directly.

Wanted to confirm if this makes sense to think of it this way
I think I understand what you are trying to do, but let's back up a little bit to see just what kinds of accounts you have. This is how I interpret your original post:
  • 403b - traditional only so far?

    governmental 457b - traditional only far?

    tIRA - deductible contributions only?

    Roth IRA - direct contributions (no backdoor) so far?
You are proposing to continue traditional 403b and traditional 457 to get your AGI under the Roth IRA limit, contribute the usual amount to Roth IRA, and do some conversions from the tIRA to the Roth IRA.

Yes. I think that works.
retiredjg
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Re: Increasing Roth contributions

Post by retiredjg »

celia wrote: Wed Nov 24, 2021 10:22 pm But this statement:
ball241 wrote: Wed Nov 24, 2021 8:54 pm If I were to continue pretax for these and then do a Roth conversion for the same amount of contributions yearly from a traditional IRA to a Roth.
sounds like you already have pre-tax money in a tIRA, which means any Roth conversion you do, including the non-deductible contribution, will have the pro rata rule applied.
I don't think there is a non-deductible contribution in this poster's plan.
Topic Author
ball241
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Joined: Sun May 24, 2020 6:38 am

Re: Increasing Roth contributions

Post by ball241 »

retiredjg wrote: Thu Nov 25, 2021 8:38 am
ball241 wrote: Wed Nov 24, 2021 8:54 pm I would like to increase my Roth contributions In both a 403 B and 457. Doing this however will eliminate ability to contribute to Roth IRA. I would prefer to maintain the ability to contribute to Roth IRA. I realize the backdoor option exists for 2021 but not sure after that on if it will be allowed.

If I were to continue pretax for these and then do a Roth conversion for the same amount of contributions yearly from a traditional IRA to a Roth. This would effectively cause the same amount of tax to be owed and based on how MAGI is calculated for Roth purpose still allow for direct contribution to ROTH IRA. I could simply set taxes aside from paycheck that will be owed on conversion and it will be exactly as if the contribution was made directly.

Wanted to confirm if this makes sense to think of it this way
I think I understand what you are trying to do, but let's back up a little bit to see just what kinds of accounts you have. This is how I interpret your original post:
  • 403b - traditional only so far?

    governmental 457b - traditional only far?

    tIRA - deductible contributions only?

    Roth IRA - direct contributions (no backdoor) so far?
You are proposing to continue traditional 403b and traditional 457 to get your AGI under the Roth IRA limit, contribute the usual amount to Roth IRA, and do some conversions from the tIRA to the Roth IRA.

Yes. I think that works.
That’s correct, I would covert the amount of contributions and effectively increase my Roth space. I would also then be able to do Roth IRA

I do have a very small amount of non deductible contribution in the tIRA but understand how do form and that should not affect things.
Last edited by ball241 on Thu Nov 25, 2021 8:56 am, edited 1 time in total.
retiredjg
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Re: Increasing Roth contributions

Post by retiredjg »

ball241 wrote: Thu Nov 25, 2021 8:35 am This makes sense but I have concern pretax accounts could cause large RMD in future. So am running scenarios to consider using Roth within employer retirement accounts.

With pension and social security I’m concerned about higher bracket in future. Currently 24 federal without pretax contributions and 6 state. So 30%
If you do not do the Roth conversions, do your tax-deferred contributions to 403b and 457 get you into the 22% bracket?

If you do the Roth conversions, will they push you into the 32% bracket? I think that going from the 22% or 24% bracket up to 32% might be too much of a sacrifice.
cas
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Re: Increasing Roth contributions

Post by cas »

ball241 wrote: Wed Nov 24, 2021 8:54 pm I would like to increase my Roth contributions In both a 403 B and 457. Doing this however will eliminate ability to contribute to Roth IRA. <-- I assume you mean because then your W-2 Box 1 increases, which increases the MAGI (as calculated for Roth IRA contribution purposes) above the threshold where direct ("front door")Roth IRA contributions are allowed.

I would prefer to maintain the ability to contribute to Roth IRA. <--I assume you mean you want to maintain the ability to contribute the $6000 directly (by the "front door") to a Roth IRA, above and beyond your contributions to workplace plans (403B, 457)

If I were to continue pretax for these and then do a Roth conversion for the same amount of contributions yearly from a traditional IRA to a Roth. This would effectively cause the same amount of tax to be owed <--Yes.

and based on how MAGI is calculated for Roth purpose still allow for direct contribution to ROTH IRA. <--Yes. MAGI as calculated for Roth IRA contribution purposes does indeed have the oddity that you get to subtract out Roth conversion amounts from AGI. So this version of MAGI ends up different depending on whether you
- switch from pre-tax contributions to Roth contributions to a workplace plan
or
-maintain pre-tax contributions to workplace plan, but convert existing tIRA to Roth IRA.

Even though you end up with the same overall Roth vs pre-tax assets either way.


I could simply set taxes aside from paycheck that will be owed on conversion and it will be exactly as if the contribution was made directly. Yes. I'm assuming "the contribution" means to the workplace plan in this sentence. (As opposed to the Roth IRA.)

Wanted to confirm if this makes sense to think of it this way <--I have been doing this for several years. All the 1099-Rs and Turbotax entries and maintaining Roth IRA contribution eligibility works out as planned.
Last edited by cas on Thu Nov 25, 2021 9:04 am, edited 2 times in total.
Triple digit golfer
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Re: Increasing Roth contributions

Post by Triple digit golfer »

KlangFool wrote: Thu Nov 25, 2021 8:14 am
Triple digit golfer wrote: Thu Nov 25, 2021 7:56 am
KlangFool wrote: Thu Nov 25, 2021 7:48 am If the tax rate between now and future is the same, Trad wins.

Why would you want to pay IRS now when you can pay it Later? $1000 now is worth a lot more than $1000 later.

KlangFool
It comes out the same if the tax rate is the same.
Triple digit golfer,

It does not.

If you contribute to Roth 401K, you had paid the IRS. You cannot get the money back. If you contribute to Trad 401K, you have a choice to pay IRS when you want to. That option is ONLY available to you when you contribute to Trad 401K.

KlangFool
You said nothing about controlling withdrawals. You said if the tax rate is the same. A reasonable person would assume that you meant tax rate on the withdrawals.
Topic Author
ball241
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Re: Increasing Roth contributions

Post by ball241 »

retiredjg wrote: Thu Nov 25, 2021 8:55 am
ball241 wrote: Thu Nov 25, 2021 8:35 am This makes sense but I have concern pretax accounts could cause large RMD in future. So am running scenarios to consider using Roth within employer retirement accounts.

With pension and social security I’m concerned about higher bracket in future. Currently 24 federal without pretax contributions and 6 state. So 30%
If you do not do the Roth conversions, do your tax-deferred contributions to 403b and 457 get you into the 22% bracket?

If you do the Roth conversions, will they push you into the 32% bracket? I think that going from the 22% or 24% bracket up to 32% might be too much of a sacrifice.
Conversions would push to 24% not 32%. Also pay 6% state, which is why I am having hard time deciding. Have always done pretax for both 403b and 457. Also have done Roth IRA for both of us. The greater contributions limits on employer plans has caused a lot more in pretax.

I would prefer more of a balance

Are there Any good calculators to run these projections?I have been using pencil and paper.

It’s close based on current rates and I think I then prefer Roth option
Last edited by ball241 on Thu Nov 25, 2021 9:06 am, edited 2 times in total.
Topic Author
ball241
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Re: Increasing Roth contributions

Post by ball241 »

cas wrote: Thu Nov 25, 2021 8:56 am
ball241 wrote: Wed Nov 24, 2021 8:54 pm I would like to increase my Roth contributions In both a 403 B and 457. Doing this however will eliminate ability to contribute to Roth IRA. <-- I assume you mean because then your W-2 Box 1 increases, which increases the MAGI (as calculated for Roth IRA contribution purposes) above the threshold where direct ("front door")Roth IRA contributions are allowed.

I would prefer to maintain the ability to contribute to Roth IRA. <--I assume you mean you want to maintain the ability to contribute the $6000 directly (by the "front door") to a Roth IRA, above and beyond your contributions to workplace plans (403B, 457)

If I were to continue pretax for these and then do a Roth conversion for the same amount of contributions yearly from a traditional IRA to a Roth. This would effectively cause the same amount of tax to be owed <--Yes.

and based on how MAGI is calculated for Roth purpose still allow for direct contribution to ROTH IRA. <--Yes. MAGI as calculated for Roth IRA contribution purposes does indeed have the oddity that you get to subtract out Roth conversion amounts from AGI. So this version of MAGI ends up different depending on whether you
- switch from pre-tax contributions to Roth contributions to a workplace plan
or
-maintain pre-tax contributions to workplace plan, but convert existing tIRA to Roth IRA.

Even though you end up with the same overall Roth vs pre-tax assets either way.


I could simply set taxes aside from paycheck that will be owed on conversion and it will be exactly as if the contribution was made directly. Yes. I'm assuming "the contribution" means to the workplace plan in this sentence. (As opposed to the Roth IRA.)

Wanted to confirm if this makes sense to think of it this way <--I have been doing this for several years. All the 1099-Rs and Turbotax entries and maintaining Roth IRA contribution eligibility works out as planned.
Thanks makes sense.
retiredjg
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Re: Increasing Roth contributions

Post by retiredjg »

You are planning to retire early at 55 and possibly planning to use the 457 for your living expenses until 59.5. Here is something you need to know.

If you have both traditional 457 and Roth 457, your plan may have some inflexible rules about which you can withdraw. I think you have already looked into this.

For the part you withdraw from Roth 457...you must take a pro-rated distribution of Roth contributions and pre-tax earnings from those Roth contributions until you are 59.5. This is not optimal because you have to pay tax and I think a 10% penalty on the earnings portion. This leaves you with 3 good choices.

1. Keep the 457 all traditional, no Roth

2. If you do use Roth 457, take only from traditional 457, not Roth 457, until you are 59.5 (if the plan allows you to make that choice)

3. Roll the Roth 457 to Roth IRA where you can take just the contributions without the earnings.



By the way, the same thing will be true of the 403b if you decide to use the rule of 55 to take distributions from the 403b.

All in all, I think your original plan sounds Ok and you will actually be building what some people call a "Roth conversion ladder" with those conversions you are considering. Be sure you keep good records of how and when all your dollars get into Roth IRA.
Topic Author
ball241
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Re: Increasing Roth contributions

Post by ball241 »

retiredjg wrote: Thu Nov 25, 2021 9:09 am You are planning to retire early at 55 and possibly planning to use the 457 for your living expenses until 59.5. Here is something you need to know.

If you have both traditional 457 and Roth 457, your plan may have some inflexible rules about which you can withdraw. I think you have already looked into this.

For the part you withdraw from Roth 457...you must take a pro-rated distribution of Roth contributions and pre-tax earnings from those Roth contributions until you are 59.5. This is not optimal because you have to pay tax and I think a 10% penalty on the earnings portion. This leaves you with 3 good choices.

1. Keep the 457 all traditional, no Roth

2. If you do use Roth 457, take only from traditional 457, not Roth 457, until you are 59.5 (if the plan allows you to make that choice)

3. Roll the Roth 457 to Roth IRA where you can take just the contributions without the earnings.



By the way, the same thing will be true of the 403b if you decide to use the rule of 55 to take distributions from the 403b.

All in all, I think your original plan sounds Ok and you will actually be building what some people call a "Roth conversion ladder" with those conversions you are considering. Be sure you keep good records of how and when all your dollars get into Roth IRA.
Yes, thank you. This makes complete sense

I believe I can specify just pretax for 457 withdrawals which is what I would plan to do
retiredjg
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Re: Increasing Roth contributions

Post by retiredjg »

ball241 wrote: Thu Nov 25, 2021 8:57 am
retiredjg wrote: Thu Nov 25, 2021 8:55 am
ball241 wrote: Thu Nov 25, 2021 8:35 am This makes sense but I have concern pretax accounts could cause large RMD in future. So am running scenarios to consider using Roth within employer retirement accounts.

With pension and social security I’m concerned about higher bracket in future. Currently 24 federal without pretax contributions and 6 state. So 30%
If you do not do the Roth conversions, do your tax-deferred contributions to 403b and 457 get you into the 22% bracket?

If you do the Roth conversions, will they push you into the 32% bracket? I think that going from the 22% or 24% bracket up to 32% might be too much of a sacrifice.
Conversions would push to 24% not 32%. Also pay 6% state, which is why I am having hard time deciding. Have always done pretax for both 403b and 457. Also have done Roth IRA for both of us. The greater contributions limits on employer plans has caused a lot more in pretax.

I would prefer more of a balance

Are there Any good calculators to run these projections?I have been using pencil and paper.

It’s close based on current rates and I think I then prefer Roth option
With a pension, I would also prefer more of a balance. You will not need nearly as large a tax-deferred account as someone without a pension.

It seems reasonable to me to go forward with your plan while tax rates remain so low. In 2026 when tax rates go back up (or with new tax law before then) you would need to re-evaluate and maybe fall back on your potential years of Roth conversions after early retirement. Keep in mind that it is not necessary to convert all your tax-deferred money to Roth.

Regarding calculators, there are several but each has its own little quirks that can lead people to get the wrong answers. So proceed carefully with the calculators. The ones that come to mind are firecalc, i-orp, and financial tool box. Check the Wiki for a page with financial calculators.
Topic Author
ball241
Posts: 153
Joined: Sun May 24, 2020 6:38 am

Re: Increasing Roth contributions

Post by ball241 »

retiredjg wrote: Thu Nov 25, 2021 9:20 am
ball241 wrote: Thu Nov 25, 2021 8:57 am
retiredjg wrote: Thu Nov 25, 2021 8:55 am
ball241 wrote: Thu Nov 25, 2021 8:35 am This makes sense but I have concern pretax accounts could cause large RMD in future. So am running scenarios to consider using Roth within employer retirement accounts.

With pension and social security I’m concerned about higher bracket in future. Currently 24 federal without pretax contributions and 6 state. So 30%
If you do not do the Roth conversions, do your tax-deferred contributions to 403b and 457 get you into the 22% bracket?

If you do the Roth conversions, will they push you into the 32% bracket? I think that going from the 22% or 24% bracket up to 32% might be too much of a sacrifice.
Conversions would push to 24% not 32%. Also pay 6% state, which is why I am having hard time deciding. Have always done pretax for both 403b and 457. Also have done Roth IRA for both of us. The greater contributions limits on employer plans has caused a lot more in pretax.

I would prefer more of a balance

Are there Any good calculators to run these projections?I have been using pencil and paper.

It’s close based on current rates and I think I then prefer Roth option
With a pension, I would also prefer more of a balance. You will not need nearly as large a tax-deferred account as someone without a pension.

It seems reasonable to me to go forward with your plan while tax rates remain so low. In 2026 when tax rates go back up (or with new tax law before then) you would need to re-evaluate and maybe fall back on your potential years of Roth conversions after early retirement. Keep in mind that it is not necessary to convert all your tax-deferred money to Roth.

Regarding calculators, there are several but each has its own little quirks that can lead people to get the wrong answers. So proceed carefully with the calculators. The ones that come to mind are firecalc, i-orp, and financial tool box. Check the Wiki for a page with financial calculators.
Ok thanks

Yes thank you. I will move forward with it and at very least it will keep all new money going Roth space. It’s an indirect way to do it but will work same.

Thanks for input and yes I am concerned about pretax balances built up with pension.

The early 55 retirement and limited cola on pension should help in those years in between after 55.
Topic Author
ball241
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Re: Increasing Roth contributions

Post by ball241 »

cas wrote: Thu Nov 25, 2021 8:56 am
ball241 wrote: Wed Nov 24, 2021 8:54 pm I would like to increase my Roth contributions In both a 403 B and 457. Doing this however will eliminate ability to contribute to Roth IRA. <-- I assume you mean because then your W-2 Box 1 increases, which increases the MAGI (as calculated for Roth IRA contribution purposes) above the threshold where direct ("front door")Roth IRA contributions are allowed.

I would prefer to maintain the ability to contribute to Roth IRA. <--I assume you mean you want to maintain the ability to contribute the $6000 directly (by the "front door") to a Roth IRA, above and beyond your contributions to workplace plans (403B, 457)

If I were to continue pretax for these and then do a Roth conversion for the same amount of contributions yearly from a traditional IRA to a Roth. This would effectively cause the same amount of tax to be owed <--Yes.

and based on how MAGI is calculated for Roth purpose still allow for direct contribution to ROTH IRA. <--Yes. MAGI as calculated for Roth IRA contribution purposes does indeed have the oddity that you get to subtract out Roth conversion amounts from AGI. So this version of MAGI ends up different depending on whether you
- switch from pre-tax contributions to Roth contributions to a workplace plan
or
-maintain pre-tax contributions to workplace plan, but convert existing tIRA to Roth IRA.

Even though you end up with the same overall Roth vs pre-tax assets either way.


I could simply set taxes aside from paycheck that will be owed on conversion and it will be exactly as if the contribution was made directly. Yes. I'm assuming "the contribution" means to the workplace plan in this sentence. (As opposed to the Roth IRA.)

Wanted to confirm if this makes sense to think of it this way <--I have been doing this for several years. All the 1099-Rs and Turbotax entries and maintaining Roth IRA contribution eligibility works out as planned.
In terms of timing of conversion do you just do this at beginning of year for your planned pretax contributions to workplace plan?

Thanks
KlangFool
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Re: Increasing Roth contributions

Post by KlangFool »

ball241 wrote: Thu Nov 25, 2021 8:35 am
This makes sense but I have concern pretax accounts could cause large RMD in future. So am running scenarios to consider using Roth within employer retirement accounts.

With pension and social security I’m concerned about higher bracket in future. Currently 24 federal without pretax contributions and 6 state. So 30%

It’s hard to pass on 30% and I’m not sure on what amount pretax should cause this switch.

Will retire at 55 so have window on conversions. Married 43, wife 42
<<This makes sense but I have concern pretax accounts could cause large RMD in future.>>

That only is a problem if everything went well until you are 70+ years old. And, it is a good problem. Having too much money at retirement and pay a lot of taxes is a good problem to have.

<<Will retire at 55 so have window on conversions. Married 43, wife 42>>

And, if you have too much money, you could retire early.

The risk is asymmetric.

Contribute to Trad 401K and having too much money at RMD is a good problem to have.

Contribute to Roth 401K and not having enough money when you retire is disastrous.

KlangFool
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cas
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Re: Increasing Roth contributions

Post by cas »

ball241 wrote: Thu Nov 25, 2021 10:02 am
cas wrote: Thu Nov 25, 2021 8:56 am
ball241 wrote: Wed Nov 24, 2021 8:54 pm Wanted to confirm if this makes sense to think of it this way <--I have been doing this for several years. All the 1099-Rs and Turbotax entries and maintaining Roth IRA contribution eligibility works out as planned.
In terms of timing of conversion do you just do this at beginning of year for your planned pretax contributions to workplace plan?
I have quite a few moving parts in my financial life, so I tend to push all optional income to the end of the year, when AGI for the year is much more definite. (The Roth contribution MAGI threshold isn't the only threshold I have to keep an eye on.)

If there is a big market swoon, like March 2020, I might do part of the conversion early.
Topic Author
ball241
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Re: Increasing Roth contributions

Post by ball241 »

KlangFool wrote: Thu Nov 25, 2021 10:14 am
ball241 wrote: Thu Nov 25, 2021 8:35 am
This makes sense but I have concern pretax accounts could cause large RMD in future. So am running scenarios to consider using Roth within employer retirement accounts.

With pension and social security I’m concerned about higher bracket in future. Currently 24 federal without pretax contributions and 6 state. So 30%

It’s hard to pass on 30% and I’m not sure on what amount pretax should cause this switch.

Will retire at 55 so have window on conversions. Married 43, wife 42
<<This makes sense but I have concern pretax accounts could cause large RMD in future.>>

That only is a problem if everything went well until you are 70+ years old. And, it is a good problem. Having too much money at retirement and pay a lot of taxes is a good problem to have.

<<Will retire at 55 so have window on conversions. Married 43, wife 42>>

And, if you have too much money, you could retire early.

The risk is asymmetric.

Contribute to Trad 401K and having too much money at RMD is a good problem to have.

Contribute to Roth 401K and not having enough money when you retire is disastrous.

KlangFool
All true. With pension and low expenses, I feel like we will have enough. I would prefer to plan ahead with potential RMD issue, just by not adding to deferred at this point. By converting I can effectively do this.

Your points are well taken, There is a point where you can have too much in deferred though?
KlangFool
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Re: Increasing Roth contributions

Post by KlangFool »

ball241 wrote: Thu Nov 25, 2021 12:02 pm
There is a point where you can have too much in deferred though?
Only when you know you have enough to retire immediately. Then, you should retire.

KlangFool
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Topic Author
ball241
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Re: Increasing Roth contributions

Post by ball241 »

KlangFool wrote: Thu Nov 25, 2021 12:32 pm
ball241 wrote: Thu Nov 25, 2021 12:02 pm
There is a point where you can have too much in deferred though?
Only when you know you have enough to retire immediately. Then, you should retire.

KlangFool
There has to be a balance of Roth and tax deferred that makes sense based on individual circumstances.

I do get your point though, taxes paid can’t be unpaid. But ultimately you will pay it with tax deferred accounts, so the marginal rate now vs your rate in future is what’s relevant.
retiredjg
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Re: Increasing Roth contributions

Post by retiredjg »

ball241 wrote: Thu Nov 25, 2021 12:02 pm There is a point where you can have too much in deferred though?
Some people think so. Some people do not. :happy
cas
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Re: Increasing Roth contributions

Post by cas »

ball241 wrote: Wed Nov 24, 2021 8:54 pm I could simply set taxes aside from paycheck that will be owed on conversion and it will be exactly as if the contribution was made directly.
By the way, planning ahead for how to meet safe harbor on estimated taxes is something you'll want to think about before 4/15 of the year you will be doing the conversion. (4/15 (or the equivalent Tax Day date) is the deadline for the 1st estimated tax payment.)

4 equal (or front-loaded) timely estimated tax payments is one way to meet safe harbor if you will be paying by setting aside funds from paycheck. Paying via increased withholding from paycheck is probably the easiest way (because the quarterly estimated tax deadlines become irrelevant.). Other ways exist, but your options decrease as you start missing the quarterly deadlines.)
Topic Author
ball241
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Re: Increasing Roth contributions

Post by ball241 »

cas wrote: Thu Nov 25, 2021 12:52 pm
ball241 wrote: Wed Nov 24, 2021 8:54 pm I could simply set taxes aside from paycheck that will be owed on conversion and it will be exactly as if the contribution was made directly.
By the way, planning ahead for how to meet safe harbor on estimated taxes is something you'll want to think about before 4/15 of the year you will be doing the conversion. (4/15 is the deadline for the 1st estimated tax payment.)

4 timely estimated tax payments is one way to meet safe harbor if you will be paying by setting aside funds from paycheck. Paying via increased withholding from paycheck is probably the easiest way (because the quarterly estimated tax deadlines become irrelevant.). Other ways exist, but your options decrease as you start missing the quarterly deadlines.)
Thanks, yes I’m familiar with estimated payments.

Do you know if it matters when during year you do conversion in terms of when estimated payments need be made?
KlangFool
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Re: Increasing Roth contributions

Post by KlangFool »

ball241 wrote: Thu Nov 25, 2021 12:42 pm
KlangFool wrote: Thu Nov 25, 2021 12:32 pm
ball241 wrote: Thu Nov 25, 2021 12:02 pm
There is a point where you can have too much in deferred though?
Only when you know you have enough to retire immediately. Then, you should retire.

KlangFool
There has to be a balance of Roth and tax deferred that makes sense based on individual circumstances.

I do get your point though, taxes paid can’t be unpaid. But ultimately you will pay it with tax deferred accounts, so the marginal rate now vs your rate in future is what’s relevant.
Can you predict your own future? It is safer to assume that not everything will go according to your plan.

KlangFool
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Topic Author
ball241
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Re: Increasing Roth contributions

Post by ball241 »

KlangFool wrote: Thu Nov 25, 2021 1:00 pm
ball241 wrote: Thu Nov 25, 2021 12:42 pm
KlangFool wrote: Thu Nov 25, 2021 12:32 pm
ball241 wrote: Thu Nov 25, 2021 12:02 pm
There is a point where you can have too much in deferred though?
Only when you know you have enough to retire immediately. Then, you should retire.

KlangFool
There has to be a balance of Roth and tax deferred that makes sense based on individual circumstances.

I do get your point though, taxes paid can’t be unpaid. But ultimately you will pay it with tax deferred accounts, so the marginal rate now vs your rate in future is what’s relevant.
Can you predict your own future? It is safer to assume that not everything will go according to your plan.

KlangFool
It probably is, which is why I will only hedge a little by not adding to tax deferred, just add Roth for now.

You make great points

I will leave what’s there and only convert yearly New contributions
cas
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Re: Increasing Roth contributions

Post by cas »

ball241 wrote: Thu Nov 25, 2021 12:56 pm Do you know if it matters when during year you do conversion in terms of when estimated payments need be made?
If you don't mind filling in Schedule AI (Annualized Income) of Form 2210, you can pay the estimated tax by the deadline of the quarter when you actually do the conversion. (Depending on how complicated your income is, Schedule AI can be time consuming, however.)

Personally, I prefer avoiding Schedule AI and either increasing withholding from paycheck or making 4 equal (or front-loaded) estimated tax payments by the 4 quarterly deadlines.

If you use the withholding-from-paycheck method, it is treated as being paid equally across the 4 quarters, even if you bump up the withholding later in the year. That means you have fewer deadlines to pay attention to.
Topic Author
ball241
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Re: Increasing Roth contributions

Post by ball241 »

cas wrote: Thu Nov 25, 2021 1:12 pm
ball241 wrote: Thu Nov 25, 2021 12:56 pm Do you know if it matters when during year you do conversion in terms of when estimated payments need be made?
If you don't mind filling in Schedule AI (Annualized Income) of Form 2210, you can pay the estimated tax by the deadline of the quarter when you actually do the conversion. (Depending on how complicated your income is, Schedule AI can be time consuming, however.)

Personally, I prefer avoiding Schedule AI and either increasing withholding from paycheck or making 4 equal (or front-loaded) estimated tax payments by the 4 quarterly deadlines.

If you use the withholding-from-paycheck method, it is treated as being paid equally across the 4 quarters, even if you bump up the withholding later in the year. That means you have fewer deadlines to pay attention to.
Thanks , ok withholding or adding to estimates equally seems easier.
DIYtrixie
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Re: Increasing Roth contributions

Post by DIYtrixie »

retiredjg wrote: Thu Nov 25, 2021 9:09 am If you have both traditional 457 and Roth 457, your plan may have some inflexible rules about which you can withdraw. I think you have already looked into this.

For the part you withdraw from Roth 457...you must take a pro-rated distribution of Roth contributions and pre-tax earnings from those Roth contributions until you are 59.5. This is not optimal because you have to pay tax and I think a 10% penalty on the earnings portion.

~~snip~~

By the way, the same thing will be true of the 403b if you decide to use the rule of 55 to take distributions from the 403b.
Hi retiredjg -- To be clear, does the pro-rated distribution of Roth contributions and pre-tax earnings above apply only because the OP plans to retire <59.5? Meaning, once >59.5, one can pick which shares (purchased with contributions or earnings) are withdrawn? Or is always pro-rated (regardless of age), with the only difference being that >59.5 the 10% penalty on earnings goes away?
retiredjg
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Re: Increasing Roth contributions

Post by retiredjg »

DIYtrixie wrote: Thu Nov 25, 2021 4:45 pm
retiredjg wrote: Thu Nov 25, 2021 9:09 am If you have both traditional 457 and Roth 457, your plan may have some inflexible rules about which you can withdraw. I think you have already looked into this.

For the part you withdraw from Roth 457...you must take a pro-rated distribution of Roth contributions and pre-tax earnings from those Roth contributions until you are 59.5. This is not optimal because you have to pay tax and I think a 10% penalty on the earnings portion.

~~snip~~

By the way, the same thing will be true of the 403b if you decide to use the rule of 55 to take distributions from the 403b.
Hi retiredjg -- To be clear, does the pro-rated distribution of Roth contributions and pre-tax earnings above apply only because the OP plans to retire <59.5? Meaning, once >59.5, one can pick which shares (purchased with contributions or earnings) are withdrawn? Or is always pro-rated (regardless of age), with the only difference being that >59.5 the 10% penalty on earnings goes away?
It happens when the withdrawal is from a designated Roth account in a 457 (or 403b or 401k) is prior to age 59.5. The earnings are not tax free yet.

After age 59.5, all the dollars in the designated Roth account are tax free, not just the contributions. There are no "shares" purchased with contributions vs shares purchased with earnings.

This is different from the withdrawal order of a Roth IRA where the earnings that occurred inside the Roth IRA are ALWAYS the last thing to come out and contributions are always available without penalty.
RetiredAL
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Re: Increasing Roth contributions

Post by RetiredAL »

ball241 wrote: Thu Nov 25, 2021 1:13 pm
Since you expect your tax rates to be similar after retirement, to you it's a wash. However, where will you your money go when you (and DW) are gone? A Roth is much more valuable to inherit than a tIRA.

The plan for DW and me is that our Roth's will be our last money spent, and most likely will never be needed, hence our kids will get it.
Topic Author
ball241
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Re: Increasing Roth contributions

Post by ball241 »

RetiredAL wrote: Thu Nov 25, 2021 5:22 pm
ball241 wrote: Thu Nov 25, 2021 1:13 pm
Since you expect your tax rates to be similar after retirement, to you it's a wash. However, where will you your money go when you (and DW) are gone? A Roth is much more valuable to inherit than a tIRA.

The plan for DW and me is that our Roth's will be our last money spent, and most likely will never be needed, hence our kids will get it.
Right, I just want hedge some in case it’s higher and have more flexibility. This thread has been very helpful
DIYtrixie
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Re: Increasing Roth contributions

Post by DIYtrixie »

retiredjg wrote: Thu Nov 25, 2021 5:16 pm
DIYtrixie wrote: Thu Nov 25, 2021 4:45 pm
retiredjg wrote: Thu Nov 25, 2021 9:09 am If you have both traditional 457 and Roth 457, your plan may have some inflexible rules about which you can withdraw. I think you have already looked into this.

For the part you withdraw from Roth 457...you must take a pro-rated distribution of Roth contributions and pre-tax earnings from those Roth contributions until you are 59.5. This is not optimal because you have to pay tax and I think a 10% penalty on the earnings portion.

~~snip~~

By the way, the same thing will be true of the 403b if you decide to use the rule of 55 to take distributions from the 403b.
Hi retiredjg -- To be clear, does the pro-rated distribution of Roth contributions and pre-tax earnings above apply only because the OP plans to retire <59.5? Meaning, once >59.5, one can pick which shares (purchased with contributions or earnings) are withdrawn? Or is always pro-rated (regardless of age), with the only difference being that >59.5 the 10% penalty on earnings goes away?
It happens when the withdrawal is from a designated Roth account in a 457 (or 403b or 401k) is prior to age 59.5. The earnings are not tax free yet.

After age 59.5, all the dollars in the designated Roth account are tax free, not just the contributions. There are no "shares" purchased with contributions vs shares purchased with earnings.

This is different from the withdrawal order of a Roth IRA where the earnings that occurred inside the Roth IRA are ALWAYS the last thing to come out and contributions are always available without penalty.
Perfect; thanks.
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