Backdoor Roth vs Taxable ?

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Topic Author
friluftsliv-roy
Posts: 51
Joined: Tue Jul 23, 2024 6:53 pm

Backdoor Roth vs Taxable ?

Post by friluftsliv-roy »

I am relatively new to this forum and I am learning a few things still.

I have been maxing out my pre-tax 401k contributions for several years now, but any additional savings I have currently go into my taxable account. (an additional 10-15k per year approx.).
I have not been doing traditional IRAs lately and not eligible to contribute to Roths directly, but I do have some old tIRAs from a decade back with a combined value of about $40k.
I understand that if I start "backdoor" Roth conversions going forward, the $40k in tIRA would trigger "Pro-rata" rules.
So I am considering rolling over the $40k IRA into my 401k first to avoid that undesirable situation.
Fidelity says it is possible to rollover - I just need to request the other brokerage (ETrade) to sell my tIRA positions and send me a check favoring "Fidelity 401k account.." (corrected - NOT Roth) . Since the check is not directly favoring me it will not be considered a distribution / taxable event with penalties.

Here are my questions -
1. Has anyone done such a rollover before (tIRA to t401K) - any tips, do's or don'ts would be greatly appreciated.
2. Assuming the rollover is successful and complete before Dec 31st of this year, does it allow me to start backdoor Roth conversions this year (2024) or starting next year (2025). Based on what I read it would be this year itself, but wanted to double check.
3. Is it really worth the hassle, or should I just keep investing the excess savings in my taxable account.
4. The reason the backdoor Roth sounds appealing to me is that I will be adding some "tax diversity" to my portfolio, and also the funds will grow tax free, no tax impact on rebalancing events, and no taxes on withdrawals. Anything I am missing ? Any disadvantages I am not aware of ? (I know I cannot withdraw the Roth IRA funds until after age 59.5 - that is 10 years away for me, and I am perfectly ok with that)
Last edited by friluftsliv-roy on Sat Oct 26, 2024 6:33 pm, edited 1 time in total.
sailaway
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Re: Backdoor Roth vs Taxable ?

Post by sailaway »

friluftsliv-roy wrote: Sat Oct 26, 2024 2:13 pm I am relatively new to this forum and I am learning a few things still.

I have been maxing out my pre-tax 401k contributions for several years now, but any additional savings I have currently go into my taxable account. (an additional 10-15k per year approx.).
I have not been doing traditional IRAs lately and not eligible to contribute to Roths directly, but I do have some old tIRAs from a decade back with a combined value of about $40k.
I understand that if I start "backdoor" Roth conversions going forward, the $40k in tIRA would trigger "Pro-rata" rules.
So I am considering rolling over the $40k IRA into my 401k first to avoid that undesirable situation.
Fidelity says it is possible to rollover - I just need to request the other brokerage (ETrade) to sell my tIRA positions and send me a check favoring "Fidelity Roth IRA account..". Since the check is not directly favoring me it will not be considered a distribution / taxable event with penalties.

Here are my questions -
1. Has anyone done such a rollover before (tIRA to t401K) - any tips, do's or don'ts would be greatly appreciated.
2. Assuming the rollover is successful and complete before Dec 31st of this year, does it allow me to start backdoor Roth conversions this year (2024) or starting next year (2025). Based on what I read it would be this year itself, but wanted to double check.
3. Is it really worth the hassle, or should I just keep investing the excess savings in my taxable account.
4. The reason the backdoor Roth sounds appealing to me is that I will be adding some "tax diversity" to my portfolio, and also the funds will grow tax free, no tax impact on rebalancing events, and no taxes on withdrawals. Anything I am missing ? Any disadvantages I am not aware of ? (I know I cannot withdraw the Roth IRA funds until after age 59.5 - that is 10 years away for me, and I am perfectly ok with that)
As you describe it, you would be converting $40k at one time. A reverse rollover to your 401k should not be sent to any Roth IRA. Call your 401k provider again and ask about a reverse rollover.

Do not ask about the backdoor Roth or otherwise mention Roth in any way. Too often, folks ask multiple questions at one time and end up confusing the issue..it sounds like that is what has happened here and you were given instructions to make a Roth conversion, rather than a reverse rollover.
Outer Marker
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Re: Backdoor Roth vs Taxable ?

Post by Outer Marker »

It's a minor paperwork hassle, but well worth it in the long run for tax free growth. As sailaway notes, the tIRA funds should be rolled into your t401K account, not a Roth. Hopefully you won't need to touch your Roth funds for many years - but just so you're aware, the contributions can be withdrawn at any time without penalty; only the earnings are subject to restrictions.
sailaway
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Re: Backdoor Roth vs Taxable ?

Post by sailaway »

Outer Marker wrote: Sat Oct 26, 2024 2:42 pm It's a minor paperwork hassle, but well worth it in the long run for tax free growth. As sailaway notes, the tIRA funds should be rolled into your t401K account, not a Roth. Hopefully you won't need to touch your Roth funds for many years - but just so you're aware, the contributions can be withdrawn at any time without penalty; only the earnings are subject to restrictions.
OP will be doing backdoor Roth; there will be no contributions. Each conversion will be judged separately for the first five years. Any earnings prior to the conversion will be taxable at the time of conversion and subject to 10% penalty if removed in less than five years. This is why many folks fund their backdoor in a lump sum and make the conversion as soon as possible. Done this way, any earnings are negligible or even non existent.
Outer Marker
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Re: Backdoor Roth vs Taxable ?

Post by Outer Marker »

sailaway wrote: Sat Oct 26, 2024 2:48 pm
Outer Marker wrote: Sat Oct 26, 2024 2:42 pm It's a minor paperwork hassle, but well worth it in the long run for tax free growth. As sailaway notes, the tIRA funds should be rolled into your t401K account, not a Roth. Hopefully you won't need to touch your Roth funds for many years - but just so you're aware, the contributions can be withdrawn at any time without penalty; only the earnings are subject to restrictions.
OP will be doing backdoor Roth; there will be no contributions. Each conversion will be judged separately for the first five years. Any earnings prior to the conversion will be taxable at the time of conversion and subject to 10% penalty if removed in less than five years. This is why many folks fund their backdoor in a lump sum and make the conversion as soon as possible. Done this way, any earnings are negligible or even non existent.
We're spitting hairs on the terminology, but the point is the same. OP, I think correctly, doesn't want to convert the pre-tax funds. The most he can do via the backdoor is $6,500 (or $7,500 over 50) which is limited by the amount he can contribute in after-tax funds to a tIRA.

And, to answer one of OP's initial questions, as long as the reverse rollover of the pre tax funds to 401K is completed before year end, he can start using the back door this year.
uslee2004
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Re: Backdoor Roth vs Taxable ?

Post by uslee2004 »

Outer Marker wrote: Sat Oct 26, 2024 2:58 pm
sailaway wrote: Sat Oct 26, 2024 2:48 pm

OP will be doing backdoor Roth; there will be no contributions. Each conversion will be judged separately for the first five years. Any earnings prior to the conversion will be taxable at the time of conversion and subject to 10% penalty if removed in less than five years. This is why many folks fund their backdoor in a lump sum and make the conversion as soon as possible. Done this way, any earnings are negligible or even non existent.
We're spitting hairs on the terminology, but the point is the same. OP, I think correctly, doesn't want to convert the pre-tax funds. The most he can do via the backdoor is $6,500 (or $7,500 over 50) which is limited by the amount he can contribute in after-tax funds to a tIRA.

And, to answer one of OP's initial questions, as long as the reverse rollover of the pre tax funds to 401K is completed before year end, he can start using the back door this year.
$7000 and $8000, respectively above underlined for year 2024 :happy
uslee
cacophony
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Re: Backdoor Roth vs Taxable ?

Post by cacophony »

friluftsliv-roy wrote: Sat Oct 26, 2024 2:13 pm I am relatively new to this forum and I am learning a few things still.

I have been maxing out my pre-tax 401k contributions for several years now, but any additional savings I have currently go into my taxable account. (an additional 10-15k per year approx.).
I have not been doing traditional IRAs lately and not eligible to contribute to Roths directly, but I do have some old tIRAs from a decade back with a combined value of about $40k.
I understand that if I start "backdoor" Roth conversions going forward, the $40k in tIRA would trigger "Pro-rata" rules.
So I am considering rolling over the $40k IRA into my 401k first to avoid that undesirable situation.
...
Were the tIRA contributions entirely deducible? Only deductible contributions (pre-tax) and appreciation are allowed to be rolled over to a traditional 401(k). If you have non-deductible contributions they must be separated out and left in your IRA. That non-deductible basis can then be converted to Roth with no tax consequences.
Topic Author
friluftsliv-roy
Posts: 51
Joined: Tue Jul 23, 2024 6:53 pm

Re: Backdoor Roth vs Taxable ?

Post by friluftsliv-roy »

sailaway wrote: Sat Oct 26, 2024 2:33 pm
As you describe it, you would be converting $40k at one time. A reverse rollover to your 401k should not be sent to any Roth IRA. Call your 401k provider again and ask about a reverse rollover.

Do not ask about the backdoor Roth or otherwise mention Roth in any way. Too often, folks ask multiple questions at one time and end up confusing the issue..it sounds like that is what has happened here and you were given instructions to make a Roth conversion, rather than a reverse rollover.
sailaway wrote: Sat Oct 26, 2024 2:48 pm
Outer Marker wrote: Sat Oct 26, 2024 2:42 pm It's a minor paperwork hassle, but well worth it in the long run for tax free growth. As sailaway notes, the tIRA funds should be rolled into your t401K account, not a Roth. Hopefully you won't need to touch your Roth funds for many years - but just so you're aware, the contributions can be withdrawn at any time without penalty; only the earnings are subject to restrictions.
OP will be doing backdoor Roth; there will be no contributions. Each conversion will be judged separately for the first five years. Any earnings prior to the conversion will be taxable at the time of conversion and subject to 10% penalty if removed in less than five years. This is why many folks fund their backdoor in a lump sum and make the conversion as soon as possible. Done this way, any earnings are negligible or even non existent.
Just to clarify, I intend to convert the $40k from tIRA to t401k first. that money will never go to my Roth.

I am doing that as a way to clear the path for backdoor Roths in the future (new contributions) without running afoul of "Pro rata" rules during the Roth conversion process.
sailaway
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Re: Backdoor Roth vs Taxable ?

Post by sailaway »

friluftsliv-roy wrote: Sat Oct 26, 2024 6:13 pm
sailaway wrote: Sat Oct 26, 2024 2:33 pm
As you describe it, you would be converting $40k at one time. A reverse rollover to your 401k should not be sent to any Roth IRA. Call your 401k provider again and ask about a reverse rollover.

Do not ask about the backdoor Roth or otherwise mention Roth in any way. Too often, folks ask multiple questions at one time and end up confusing the issue..it sounds like that is what has happened here and you were given instructions to make a Roth conversion, rather than a reverse rollover.
sailaway wrote: Sat Oct 26, 2024 2:48 pm

OP will be doing backdoor Roth; there will be no contributions. Each conversion will be judged separately for the first five years. Any earnings prior to the conversion will be taxable at the time of conversion and subject to 10% penalty if removed in less than five years. This is why many folks fund their backdoor in a lump sum and make the conversion as soon as possible. Done this way, any earnings are negligible or even non existent.
Just to clarify, I intend to convert the $40k from tIRA to t401k first. that money will never go to my Roth.

I am doing that as a way to clear the path for backdoor Roths in the future (new contributions) without running afoul of "Pro rata" rules during the Roth conversion process.
My original post was pointing out that your OP mentioned having the check written out to your Roth IRA. Don't do that.

My point here was that you need to stay on top of the backdoor Roth process in order to not have any growth between the contribution and the conversion. Many bogleheads lump sum the first day of the year, then convert as soon as the funds are settled, often the next day. If you get distracted and don't do the conversion for a couple of months, you could end up with growth that will be taxed at conversion and incur a penalty if you want to withdrawal those funds. The amounts would generally be minimal, but can be avoided by being organized.
Topic Author
friluftsliv-roy
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Joined: Tue Jul 23, 2024 6:53 pm

Re: Backdoor Roth vs Taxable ?

Post by friluftsliv-roy »

Outer Marker wrote: Sat Oct 26, 2024 2:58 pm
sailaway wrote: Sat Oct 26, 2024 2:48 pm

OP will be doing backdoor Roth; there will be no contributions. Each conversion will be judged separately for the first five years. Any earnings prior to the conversion will be taxable at the time of conversion and subject to 10% penalty if removed in less than five years. This is why many folks fund their backdoor in a lump sum and make the conversion as soon as possible. Done this way, any earnings are negligible or even non existent.
We're spitting hairs on the terminology, but the point is the same. OP, I think correctly, doesn't want to convert the pre-tax funds. The most he can do via the backdoor is $6,500 (or $7,500 over 50) which is limited by the amount he can contribute in after-tax funds to a tIRA.

And, to answer one of OP's initial questions, as long as the reverse rollover of the pre tax funds to 401K is completed before year end, he can start using the back door this year.
Yes, you are correct - I do not want to convert any of the $40k pre tax tIRA funds, I want to roll them into t401k, so that in future I can start the backdoor roth process on new contributions every year - hopefully starting this year itself (thanks for confirming that !).

Interestingly, I'm also turning 50 next year, so my 401k catch-up contributions of $8k will need to go to a new Roth 401k (the new secure 2.0 rule) - so any "leftover" savings up to $8k can then be used for tIRA / backdoor Roth conversion.
Topic Author
friluftsliv-roy
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Re: Backdoor Roth vs Taxable ?

Post by friluftsliv-roy »

cacophony wrote: Sat Oct 26, 2024 3:31 pm
friluftsliv-roy wrote: Sat Oct 26, 2024 2:13 pm I am relatively new to this forum and I am learning a few things still.

I have been maxing out my pre-tax 401k contributions for several years now, but any additional savings I have currently go into my taxable account. (an additional 10-15k per year approx.).
I have not been doing traditional IRAs lately and not eligible to contribute to Roths directly, but I do have some old tIRAs from a decade back with a combined value of about $40k.
I understand that if I start "backdoor" Roth conversions going forward, the $40k in tIRA would trigger "Pro-rata" rules.
So I am considering rolling over the $40k IRA into my 401k first to avoid that undesirable situation.
...
Were the tIRA contributions entirely deducible? Only deductible contributions (pre-tax) and appreciation are allowed to be rolled over to a traditional 401(k). If you have non-deductible contributions they must be separated out and left in your IRA. That non-deductible basis can then be converted to Roth with no tax consequences.
I am pretty sure it was deductible and that was the reason I had opted for the tIRA back then - but I would probably have to dig up 10-15 year old tax returns to ascertain that.
Will that be a requirement a part of the "paperwork" required for the rollover process ? Or is that something the IRS will ask to see later during tax return to ensure the tIRA to t401k conversion was done properly ?
Topic Author
friluftsliv-roy
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Re: Backdoor Roth vs Taxable ?

Post by friluftsliv-roy »

sailaway wrote: Sat Oct 26, 2024 6:19 pm
friluftsliv-roy wrote: Sat Oct 26, 2024 6:13 pm



Just to clarify, I intend to convert the $40k from tIRA to t401k first. that money will never go to my Roth.

I am doing that as a way to clear the path for backdoor Roths in the future (new contributions) without running afoul of "Pro rata" rules during the Roth conversion process.
My original post was pointing out that your OP mentioned having the check written out to your Roth IRA. Don't do that.

My point here was that you need to stay on top of the backdoor Roth process in order to not have any growth between the contribution and the conversion. Many bogleheads lump sum the first day of the year, then convert as soon as the funds are settled, often the next day. If you get distracted and don't do the conversion for a couple of months, you could end up with growth that will be taxed at conversion and incur a penalty if you want to withdrawal those funds. The amounts would generally be minimal, but can be avoided by being organized.
sorry, my bad - I just noticed that was an error on my part - I meant the check will be in favor of 401k (traditional).

regarding avoiding growth during conversion, yes, I intend to do the conversion as soon as the money settles in the new tIRA- in fact I will just keep it as cash and try to convert it as soon as the money is available - that should be ok right ?.

Any tips on how else to expedite it ? Should I keep a Roth IRA account open and ready (not funded yet) before contributing to the tIRA account first ? That way as soon as the money settles it can be moved over to Roth.
cacophony
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Re: Backdoor Roth vs Taxable ?

Post by cacophony »

friluftsliv-roy wrote: Sat Oct 26, 2024 6:31 pm
cacophony wrote: Sat Oct 26, 2024 3:31 pm

Were the tIRA contributions entirely deducible? Only deductible contributions (pre-tax) and appreciation are allowed to be rolled over to a traditional 401(k). If you have non-deductible contributions they must be separated out and left in your IRA. That non-deductible basis can then be converted to Roth with no tax consequences.
I am pretty sure it was deductible and that was the reason I had opted for the tIRA back then - but I would probably have to dig up 10-15 year old tax returns to ascertain that.
Will that be a requirement a part of the "paperwork" required for the rollover process ? Or is that something the IRS will ask to see later during tax return to ensure the tIRA to t401k conversion was done properly ?
It's a requirement that that a rollover to a traditional 401k be entirely pre-tax contributions. Non-deductible (post-tax) contributions should have been tracked in IRS form 8606, which keeps a running total of the non-deductible portion of your IRAs. I think you're only required to file that form in years when you actually make non-deductible contributions.
HomeStretch
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Re: Backdoor Roth vs Taxable ?

Post by HomeStretch »

Yes, prioritize making retirement contributions to Roth (via a backdoor Roth after the $40k rollover) over Taxable. The Roth account will grow tax free. Besides the lower tax drag, in retirement having lower dividend/gains subject to tax may result in higher ACA subsidies, lower/no Medicare IRMAA, more room to do Roth conversions, etc.

If your 401k plan offers a “mega backdoor Roth” (see BH wiki page link below), consider fully utilizing the available Roth space. If your W2 net payroll check becomes too low to live on due to the higher 401k withholdings, use funds in the Taxable account. In this way you “move” retirement funds from Taxable to Roth.
https://www.bogleheads.org/wiki/Mega-backdoor_Roth

Start the E*TRADE distribution by check soon if you want the rollover completed by 12/31/24. E*TRADE can take a long time to process transactions such as a distribution by check with a special payee.
Outer Marker
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Re: Backdoor Roth vs Taxable ?

Post by Outer Marker »

friluftsliv-roy wrote: Sat Oct 26, 2024 6:27 pm Interestingly, I'm also turning 50 next year, so my 401k catch-up contributions of $8k will need to go to a new Roth 401k (the new secure 2.0 rule) - so any "leftover" savings up to $8k can then be used for tIRA / backdoor Roth conversion.
If you're in a tax bracket where a t401K is most advantageous (as it likely is) why do you want to split your catch-up contributions into a new Roth401K? I'd keep your workplace contributions all traditional, and if you have extra fund the backdoor Roth.
sailaway
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Re: Backdoor Roth vs Taxable ?

Post by sailaway »

Outer Marker wrote: Sun Oct 27, 2024 6:03 am
friluftsliv-roy wrote: Sat Oct 26, 2024 6:27 pm Interestingly, I'm also turning 50 next year, so my 401k catch-up contributions of $8k will need to go to a new Roth 401k (the new secure 2.0 rule) - so any "leftover" savings up to $8k can then be used for tIRA / backdoor Roth conversion.
If you're in a tax bracket where a t401K is most advantageous (as it likely is) why do you want to split your catch-up contributions into a new Roth401K? I'd keep your workplace contributions all traditional, and if you have extra fund the backdoor Roth.
OP was referring to changing rules for employees of a certain income level.
lakpr
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Re: Backdoor Roth vs Taxable ?

Post by lakpr »

Outer Marker wrote: Sun Oct 27, 2024 6:03 am
friluftsliv-roy wrote: Sat Oct 26, 2024 6:27 pm Interestingly, I'm also turning 50 next year, so my 401k catch-up contributions of $8k will need to go to a new Roth 401k (the new secure 2.0 rule) - so any "leftover" savings up to $8k can then be used for tIRA / backdoor Roth conversion.
If you're in a tax bracket where a t401K is most advantageous (as it likely is) why do you want to split your catch-up contributions into a new Roth401K? I'd keep your workplace contributions all traditional, and if you have extra fund the backdoor Roth.
SECURE Act 2.0 mandates that anyone who earned more than $140k in 2024, must make catch up contributions as Roth 401(k) in 2025. Actually that rule was also theoretically applicable for 2023 AGI / catchup in 2024, but the IRS delayed the implementation of the rule until 2025 to allow the 401(k) plans to adjust.
Outer Marker
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Re: Backdoor Roth vs Taxable ?

Post by Outer Marker »

lakpr wrote: Sun Oct 27, 2024 7:56 pm
Outer Marker wrote: Sun Oct 27, 2024 6:03 am
If you're in a tax bracket where a t401K is most advantageous (as it likely is) why do you want to split your catch-up contributions into a new Roth401K? I'd keep your workplace contributions all traditional, and if you have extra fund the backdoor Roth.
SECURE Act 2.0 mandates that anyone who earned more than $140k in 2024, must make catch up contributions as Roth 401(k) in 2025. Actually that rule was also theoretically applicable for 2023 AGI / catchup in 2024, but the IRS delayed the implementation of the rule until 2025 to allow the 401(k) plans to adjust.
Interesting. Thanks. That's a new one to me and will definitely apply. I hope my 401K plan allows me to split off the Roth portion to equities. Everything else in that plan is in money market.
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celia
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Re: Backdoor Roth vs Taxable ?

Post by celia »

friluftsliv-roy wrote: Sat Oct 26, 2024 6:27 pm Yes, you are correct - I do not want to convert any of the $40k pre tax tIRA funds, I want to roll them into t401k, so that in future I can start the backdoor roth process on new contributions every year - hopefully starting this year itself (thanks for confirming that !).
Have you considered converting the $40K to a Roth IRA instead to get a good jump start on the Roth's growth? If you can afford the Roth conversion taxes (using money in taxable or current year income to pay the taxes), you could even split the conversion over two years. And you would be able to still do the Backdoor Roth both years. Although the pro rata rule will make you pay more in taxes this year, that is balanced against less taxes next year. (The total tax will be the same as if doing a $40k Roth conversion and nothing else.)

To see what it would look like on your taxes, print out two copies of Form 8606 (a double sided Form) for 2024 and 2025. (You'll have to print out the 2023 version and increment the year by 1 throughout the form and by 2 on the other.) Fill out the first two sections by hand. This will also be a good example of how the Backdoor Roth would work. Your case is like the second example (Ben) but you can do better than make the mistake this fictitious investor made.
:D

Even if you decide not to convert the $40K, filling out the form for 2 different years will help you see how things work.
Topic Author
friluftsliv-roy
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Re: Backdoor Roth vs Taxable ?

Post by friluftsliv-roy »

Outer Marker wrote: Sun Oct 27, 2024 8:00 pm
lakpr wrote: Sun Oct 27, 2024 7:56 pm
SECURE Act 2.0 mandates that anyone who earned more than $140k in 2024, must make catch up contributions as Roth 401(k) in 2025. Actually that rule was also theoretically applicable for 2023 AGI / catchup in 2024, but the IRS delayed the implementation of the rule until 2025 to allow the 401(k) plans to adjust.
Interesting. Thanks. That's a new one to me and will definitely apply. I hope my 401K plan allows me to split off the Roth portion to equities. Everything else in that plan is in money market.
Based on the info I got from https://www.schwab.com/learn/story/what ... text=here., all 401k plans are required to have the Roth option available for such catch-ups starting in 2025.

I believe the investment options would be the same (based on the plan) regardless of the type of account. I know plans vary - but most plans offer a variety of mutual funds that include equity funds, bond/fixed income funds and mixed (target date funds). Are you saying your current plan offers only one money market fund, or that is the default fund ?
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friluftsliv-roy
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Re: Backdoor Roth vs Taxable ?

Post by friluftsliv-roy »

celia wrote: Mon Oct 28, 2024 12:35 am
friluftsliv-roy wrote: Sat Oct 26, 2024 6:27 pm Yes, you are correct - I do not want to convert any of the $40k pre tax tIRA funds, I want to roll them into t401k, so that in future I can start the backdoor roth process on new contributions every year - hopefully starting this year itself (thanks for confirming that !).
Have you considered converting the $40K to a Roth IRA instead to get a good jump start on the Roth's growth? If you can afford the Roth conversion taxes (using money in taxable or current year income to pay the taxes), you could even split the conversion over two years. And you would be able to still do the Backdoor Roth both years. Although the pro rata rule will make you pay more in taxes this year, that is balanced against less taxes next year. (The total tax will be the same as if doing a $40k Roth conversion and nothing else.)

To see what it would look like on your taxes, print out two copies of Form 8606 (a double sided Form) for 2024 and 2025. (You'll have to print out the 2023 version and increment the year by 1 throughout the form and by 2 on the other.) Fill out the first two sections by hand. This will also be a good example of how the Backdoor Roth would work. Your case is like the second example (Ben) but you can do better than make the mistake this fictitious investor made.
:D

Even if you decide not to convert the $40K, filling out the form for 2 different years will help you see how things work.
Thank you for the article - it was a life saver for me ! I already went through it in great detail and realized my situation was similar to Ben.

In fact, prior to reading this article, I thought I was doomed forever for having the old IRAs - that I would never be able to have Roths without taking a significant tax hit at my highest earning / tax bracket years.

The only difference is, unlike Ben, I am not going to opt for any Roth conversions on the existing IRAs due to significant tax hit (24%). I expect to be in a much lower tax bracket in my RMD years (12% compared to 24% currently, that is assuming I even make it to age 75 in the first place !).

Having said that, going forward I do want to get into Roth build up through the 401k catch-up starting next year, as well as the backdoor Roths (hopefully starting this year itself). After retirement I will roll the Roth 401k back into my Roth IRA and the traditional 401k part to a traditional IRA and then keep doing annual Roth conversions to fill up the 12% tax bracket.
RetiredAL
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Re: Backdoor Roth vs Taxable ?

Post by RetiredAL »

friluftsliv-roy wrote: Mon Oct 28, 2024 3:08 pm .... I expect to be in a much lower tax bracket in my RMD years (12% compared to 24% currently, that is assuming I even make it to age 75 in the first place !).

Having said that, going forward I do want to get into Roth build up through the 401k catch-up starting next year, as well as the backdoor Roths (hopefully starting this year itself). After retirement I will roll the Roth 401k back into my Roth IRA and the traditional 401k part to a traditional IRA and then keep doing annual Roth conversions to fill up the 12% tax bracket.
Careful with that 12% thought. Taxation of SS may throw you a curve.

Today, for MFJ, income after approx 75K (SS + everything else) gets effectively taxed at 22% long before where most call the top of the 12% bracket. This is because taxation of SS is trying to catch back up $-wise to what the normal top of the 12% filer is paying in total $. Yes, you do get a slight saving, as only 85% of SS, under current law, will be taxed.

It's all related to a 1980's formula that is not indexed to inflation. Back then, only the 'uber-rich' were caught up in this SS taxation. Today, after 40 years of inflation with no adjustment, many are caught by it.

Because of this, the 15% tax deferred monies I put into my 401K is being taxed at 22% to take it out.

If you are going to do conversions after retirement, it behooves you to not take SS until age 70. I took mine at 66 and got dinged.

For those reading this that expect to be in or above the 22% bracket in retirement, this is a mute point.
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friluftsliv-roy
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Re: Backdoor Roth vs Taxable ?

Post by friluftsliv-roy »

RetiredAL wrote: Mon Oct 28, 2024 3:31 pm
friluftsliv-roy wrote: Mon Oct 28, 2024 3:08 pm .... I expect to be in a much lower tax bracket in my RMD years (12% compared to 24% currently, that is assuming I even make it to age 75 in the first place !).

Having said that, going forward I do want to get into Roth build up through the 401k catch-up starting next year, as well as the backdoor Roths (hopefully starting this year itself). After retirement I will roll the Roth 401k back into my Roth IRA and the traditional 401k part to a traditional IRA and then keep doing annual Roth conversions to fill up the 12% tax bracket.
Careful with that 12% thought. Taxation of SS may throw you a curve.

Today, for MFJ, income after approx 75K (SS + everything else) gets effectively taxed at 22% long before where most call the top of the 12% bracket. This is because taxation of SS is trying to catch back up $-wise to what the normal top of the 12% filer is paying in total $. Yes, you do get a slight saving, as only 85% of SS, under current law, will be taxed.

It's all related to a 1980's formula that is not indexed to inflation. Back then, only the 'uber-rich' were caught up in this SS taxation. Today, after 40 years of inflation with no adjustment, many are caught by it.

Because of this, the 15% tax deferred monies I put into my 401K is being taxed at 22% to take it out.

If you are going to do conversions after retirement, it behooves you to not take SS until age 70. I took mine at 66 and got dinged.

For those reading this that expect to be in or above the 22% bracket in retirement, this is a mute point.
That's an interesting data point, and yes - that's one of the reasons I think I will end up delaying SS until 70 - that will give me about 8-10 years to get the most of my taxable capital gains harvested in 0% tax bracket and some Roth conversions as well. It's a long way from now though, 20 years from now SS as we know it may not exist, unless congress gets their act together to fix it. If SS is able to survive in it's current form, I may not even need to touch my leftover t401k funds until RMDs kick in at age 75. I am guessing that will be a (very) good problem to have !
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Re: Backdoor Roth vs Taxable ?

Post by Outer Marker »

friluftsliv-roy wrote: Mon Oct 28, 2024 2:16 pm
Outer Marker wrote: Sun Oct 27, 2024 8:00 pm
Interesting. Thanks. That's a new one to me and will definitely apply. I hope my 401K plan allows me to split off the Roth portion to equities. Everything else in that plan is in money market.
Based on the info I got from https://www.schwab.com/learn/story/what ... text=here., all 401k plans are required to have the Roth option available for such catch-ups starting in 2025.

I believe the investment options would be the same (based on the plan) regardless of the type of account. I know plans vary - but most plans offer a variety of mutual funds that include equity funds, bond/fixed income funds and mixed (target date funds). Are you saying your current plan offers only one money market fund, or that is the default fund ?
My prior employer plans treated all investments as one pool, regardless of source (pre-tax vs Roth). All of my 401k is currently fixed income- and I’d rather be able to designate the mandatory Roth money as equity- but I doubt that’s an option. We’ll see…
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Re: Backdoor Roth vs Taxable ?

Post by RyeBourbon »

celia wrote: Mon Oct 28, 2024 12:35 am
friluftsliv-roy wrote: Sat Oct 26, 2024 6:27 pm Yes, you are correct - I do not want to convert any of the $40k pre tax tIRA funds, I want to roll them into t401k, so that in future I can start the backdoor roth process on new contributions every year - hopefully starting this year itself (thanks for confirming that !).
Have you considered converting the $40K to a Roth IRA instead to get a good jump start on the Roth's growth?
There's no point in "getting a jump start" on Roth growth if your current marginal tax rate is higher than your anticipated marginal rate when withdrawing.
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Re: Backdoor Roth vs Taxable ?

Post by HomeStretch »

If this will be your initial Roth IRA, at a minimum considering doing a small Roth conversion (even $100) in 2024 to get the 5-year clock on initial Roth IRAs started.
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Re: Backdoor Roth vs Taxable ?

Post by celia »

RyeBourbon wrote: Mon Oct 28, 2024 5:55 pm
celia wrote: Mon Oct 28, 2024 12:35 am
Have you considered converting the $40K to a Roth IRA instead to get a good jump start on the Roth's growth?
There's no point in "getting a jump start" on Roth growth if your current marginal tax rate is higher than your anticipated marginal rate when withdrawing.
The benefit in doing it early is that the Roth account will have more time to compound. If you compound in tax-deferred instead, the balance can become so large that a Roth conversion can straddle more than one tax bracket. And there's also the NIIT and IRMAA surcharges and potential change of marital status to consider that may not apply earlier. There's more to consider than just the current and future tax brackets.
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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Re: Backdoor Roth vs Taxable ?

Post by RyeBourbon »

celia wrote: Tue Oct 29, 2024 3:47 pm
RyeBourbon wrote: Mon Oct 28, 2024 5:55 pm
There's no point in "getting a jump start" on Roth growth if your current marginal tax rate is higher than your anticipated marginal rate when withdrawing.
The benefit in doing it early is that the Roth account will have more time to compound. If you compound in tax-deferred instead, the balance can become so large that a Roth conversion can straddle more than one tax bracket. And there's also the NIIT and IRMAA surcharges and potential change of marital status to consider that may not apply earlier. There's more to consider than just the current and future tax brackets.
Yes, your example is also comparing tax brackets, so we agree.
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Re: Backdoor Roth vs Taxable ?

Post by ThankYouJack »

friluftsliv-roy wrote: Sat Oct 26, 2024 2:13 pm 3. Is it really worth the hassle, or should I just keep investing the excess savings in my taxable account.
I've done what you plan to do and it's not much hassle (assuming you don't make mistakes). But is it worth it, comes down to if you want to spend more time doing this sort of thing to save a small amount on taxes. The tax saving on ~$7k / annually in Roth vs taxable will be a drop in the bucket in the grand scheme.
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Re: Backdoor Roth vs Taxable ?

Post by lakpr »

ThankYouJack wrote: Wed Oct 30, 2024 7:39 am
friluftsliv-roy wrote: Sat Oct 26, 2024 2:13 pm 3. Is it really worth the hassle, or should I just keep investing the excess savings in my taxable account.
I've done what you plan to do and it's not much hassle (assuming you don't make mistakes). But is it worth it, comes down to if you want to spend more time doing this sort of thing to save a small amount on taxes. The tax saving on ~$7k / annually in Roth vs taxable will be a drop in the bucket in the grand scheme.
Disagree with the statement I colored in blue. According to my calculations, those savings would amount to nearly $1k per year -- BUT WITH THE CAVEAT that the time horizon must be 20 years or longer. Well, I suppose the disagreement stems from whether you consider $1k per year as "drop in the bucket" or "significant" ...

Here is a post I wrote couple of years ago, when the Roth IRA contribution limits were only $6k per person.
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Re: Backdoor Roth vs Taxable ?

Post by ThankYouJack »

lakpr wrote: Wed Oct 30, 2024 8:15 am
ThankYouJack wrote: Wed Oct 30, 2024 7:39 am

I've done what you plan to do and it's not much hassle (assuming you don't make mistakes). But is it worth it, comes down to if you want to spend more time doing this sort of thing to save a small amount on taxes. The tax saving on ~$7k / annually in Roth vs taxable will be a drop in the bucket in the grand scheme.
Disagree with the statement I colored in blue. According to my calculations, those savings would amount to nearly $1k per year -- BUT WITH THE CAVEAT that the time horizon must be 20 years or longer. Well, I suppose whether you consider $1k per year as "drop in the bucket" or "significant" ...

Here is a post I wrote couple of years ago, when the Roth IRA contribution limits were only $6k per person.
Your analysis includes capital gain taxes but the OP mentioned being in a low tax bracket (12%) in retirement so we shouldn't factor in capital gain taxes. It also assumes the OP will do BDRs for 20 years. At age 50, that might be a stretch.

And since the tax saving compounds, it's not really a $1k savings each year. Year 1 would be far less.


My main point is if one is making and saving so much that your doing backdoor Roths for 20+ years one is likely going to have a 7 to 8 figure portfolio. It's not like saving a bit extra on taxes will make or break retirement.

With that said, I still do BDR each year, but I do think they're a bit overblown on here.
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Re: Backdoor Roth vs Taxable ?

Post by lakpr »

ThankYouJack wrote: Wed Oct 30, 2024 8:48 am Your analysis includes capital gain taxes but the OP mentioned being in a low tax bracket (12%) in retirement so we shouldn't factor in capital gain taxes. It also assumes the OP will do BDRs for 20 years. At age 50, that might be a stretch.

And since the tax saving compounds, it's not really a $1k savings each year. Year 1 would be far less.


My main point is if one is making and saving so much that your doing backdoor Roths for 20+ years one is likely going to have a 7 to 8 figure portfolio. It's not like saving a bit extra on taxes will make or break retirement.

With that said, I still do BDR each year, but I do think they're a bit overblown on here.
The 12% tax bracket will be no more, 15% starting in 2026. Unless the tax laws change of course, but we are not supposed to speculate about tax law changes on this forum.

The OP also said maxing pre-tax 401(k) for years, and if that trend continues for the next 20 years, hard to see why the OP wouldn't be in 25% tax bracket in retirement even at 60. Given also that the 0% LTCG and the 15% tax bracket compete with each other in approximately the same domain (the limits between the two are only $250 different from each other), to the extent that someone realizes income in the 15% bracket, they are displacing the room available for the 0% LTCG.

All that said, it's a viewpoint question. Yes, $20k over 20 years on a 7 or 8 figure portfolio is tiny; but in absolute terms, $1k approximately per year (averaged over 20 years, and all in real terms) for what is pretty much 10 to 15 minutes of work per year ... is substantial in my opinion.

May be we aren't disagreeing with each other as much as nit-picking each other's arguments.
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Re: Backdoor Roth vs Taxable ?

Post by Admiral »

Yes, I have done what you want to do (though it was a SEP rolled into a workplace plan). Took ten minutes on the phone with Vanguard.

I did it in order to do what you want to accomplish: eliminate a T-IRA (in my case, a SEP IRA) in order to be able to do backdoor Roth contributions (not "conversions" as you stated) with no pro-rata tax implications,

I will recommend, however, that you explore simply contributing to your workplace Roth account directly, assuming your company has one. There are no income limitations as there are with Roth IRAs, and it's simpler than doing backdoor contributions. And, ofc, it allows you to keep your T-IRA account should you want to. The usual contributions limits still apply.
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Re: Backdoor Roth vs Taxable ?

Post by ThankYouJack »

lakpr wrote: Wed Oct 30, 2024 9:04 am
ThankYouJack wrote: Wed Oct 30, 2024 8:48 am Your analysis includes capital gain taxes but the OP mentioned being in a low tax bracket (12%) in retirement so we shouldn't factor in capital gain taxes. It also assumes the OP will do BDRs for 20 years. At age 50, that might be a stretch.

And since the tax saving compounds, it's not really a $1k savings each year. Year 1 would be far less.


My main point is if one is making and saving so much that your doing backdoor Roths for 20+ years one is likely going to have a 7 to 8 figure portfolio. It's not like saving a bit extra on taxes will make or break retirement.

With that said, I still do BDR each year, but I do think they're a bit overblown on here.
The 12% tax bracket will be no more, 15% starting in 2026. Unless the tax laws change of course, but we are not supposed to speculate about tax law changes on this forum.

The OP also said maxing pre-tax 401(k) for years, and if that trend continues for the next 20 years, hard to see why the OP wouldn't be in 25% tax bracket in retirement even at 60. Given also that the 0% LTCG and the 15% tax bracket compete with each other in approximately the same domain (the limits between the two are only $250 different from each other), to the extent that someone realizes income in the 15% bracket, they are displacing the room available for the 0% LTCG.

All that said, it's a viewpoint question. Yes, $20k over 20 years on a 7 or 8 figure portfolio is tiny; but in absolute terms, $1k approximately per year (averaged over 20 years, and all in real terms) for what is pretty much 10 to 15 minutes of work per year ... is substantial in my opinion.

May be we aren't disagreeing with each other as much as nit-picking each other's arguments.
I don't think it's a nitpick, but more of a deeper analysis / more feedback from the OP would be needed before assuming LTCG taxes will be paid. This is because the LTCG taxes play the main role in your numbers, getting to $1k/year.

I think most Bogleheaders avoid paying LTCG either through the timing of realizing gains, charitable donations or step-up basis.

Maybe short term view a $300 to $1k / year tax savings seems like a lot, but long term when one's portfolio has grown to millions, not so much.
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Re: Backdoor Roth vs Taxable ?

Post by friluftsliv-roy »

HomeStretch wrote: Mon Oct 28, 2024 6:33 pm If this will be your initial Roth IRA, at a minimum considering doing a small Roth conversion (even $100) in 2024 to get the 5-year clock on initial Roth IRAs started.
Yes, this will be my very first Roth IRA ever at age 49.5 ! Regarding the 5-year clock it does not apply to me for another 5 years or so, since I am 10 years away from 59.5 - right ? Regardless, I will definitely get started with the Roth this year and contribute the maximum allowed - I will sell some stuff from taxable if I have to.
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Re: Backdoor Roth vs Taxable ?

Post by friluftsliv-roy »

celia wrote: Tue Oct 29, 2024 3:47 pm
RyeBourbon wrote: Mon Oct 28, 2024 5:55 pm
There's no point in "getting a jump start" on Roth growth if your current marginal tax rate is higher than your anticipated marginal rate when withdrawing.
The benefit in doing it early is that the Roth account will have more time to compound. If you compound in tax-deferred instead, the balance can become so large that a Roth conversion can straddle more than one tax bracket. And there's also the NIIT and IRMAA surcharges and potential change of marital status to consider that may not apply earlier. There's more to consider than just the current and future tax brackets.
I hear your perspective, but I think the "compounding" issue is more applicable to younger folks who have several decades left until they retire or have significant tax deferred balances. If I could turn back time I would start backdoor Roth 10 years back.

For me it is only about 10-12 years away, in a best case scenario the money could possibly double, or it could just gain 3% (based on some recent Goldman Sachs research some people on this site has been citing). Currently I only have about $500k in tax deferred (sum of all 401k and tIRA balances). In a best case scenario, it could turn into $1 million at retirement. At that point, using a conservative 3% SWR, I would need to convert about $30k per year only. Based on some rough calculations, the 12% bracket should go up to $80k by that point (adding standard deduction). That will give me some room to accommodate capital gains harvesting at 0% from taxable, even SS after 67/70 (yet to figure out the math on what age is optimal for me).
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Re: Backdoor Roth vs Taxable ?

Post by friluftsliv-roy »

ThankYouJack wrote: Wed Oct 30, 2024 7:39 am
friluftsliv-roy wrote: Sat Oct 26, 2024 2:13 pm 3. Is it really worth the hassle, or should I just keep investing the excess savings in my taxable account.
I've done what you plan to do and it's not much hassle (assuming you don't make mistakes). But is it worth it, comes down to if you want to spend more time doing this sort of thing to save a small amount on taxes. The tax saving on ~$7k / annually in Roth vs taxable will be a drop in the bucket in the grand scheme.
The tax saving on the dividend income portion of it is a negligible drop in the bucket, yes.
But I am not planning to touch the Roth for at least 20+ years, so compared to taxable I would have the benefit of no capital gains tax on the Roth funds - that's the main benefit I am looking at for BDRs.
(I am already sitting on almost $400k of unrealized gains on my taxable right now - which I mostly plan to realize/harvest during early retirement years at 0% LTCG tax, but if that grows too much then the 0% tax harvesting plan will not pan out)

Another benefit of being in Roth would be easy rebalancing without tax implications.

The only downside I can think of is no opportunities for tax loss harvesting during down years.
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Re: Backdoor Roth vs Taxable ?

Post by friluftsliv-roy »

lakpr wrote: Wed Oct 30, 2024 8:15 am
ThankYouJack wrote: Wed Oct 30, 2024 7:39 am

I've done what you plan to do and it's not much hassle (assuming you don't make mistakes). But is it worth it, comes down to if you want to spend more time doing this sort of thing to save a small amount on taxes. The tax saving on ~$7k / annually in Roth vs taxable will be a drop in the bucket in the grand scheme.
Disagree with the statement I colored in blue. According to my calculations, those savings would amount to nearly $1k per year -- BUT WITH THE CAVEAT that the time horizon must be 20 years or longer. Well, I suppose the disagreement stems from whether you consider $1k per year as "drop in the bucket" or "significant" ...

Here is a post I wrote couple of years ago, when the Roth IRA contribution limits were only $6k per person.
Thanks for the link to your old post - that is what I was thinking - but the numbers make it more clear !
I do not consider $1k per year a drop in the bucket, it covers 60% of my current housing expenses for one month :)
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Re: Backdoor Roth vs Taxable ?

Post by lakpr »

friluftsliv-roy wrote: Wed Oct 30, 2024 2:51 pm Thanks for the link to your old post - that is what I was thinking - but the numbers make it more clear !
I do not consider $1k per year a drop in the bucket, it covers 60% of my current housing expenses for one month :)
Glad you found my post useful!
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friluftsliv-roy
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Re: Backdoor Roth vs Taxable ?

Post by friluftsliv-roy »

lakpr wrote: Wed Oct 30, 2024 9:04 am
ThankYouJack wrote: Wed Oct 30, 2024 8:48 am Your analysis includes capital gain taxes but the OP mentioned being in a low tax bracket (12%) in retirement so we shouldn't factor in capital gain taxes. It also assumes the OP will do BDRs for 20 years. At age 50, that might be a stretch.

And since the tax saving compounds, it's not really a $1k savings each year. Year 1 would be far less.


My main point is if one is making and saving so much that your doing backdoor Roths for 20+ years one is likely going to have a 7 to 8 figure portfolio. It's not like saving a bit extra on taxes will make or break retirement.

With that said, I still do BDR each year, but I do think they're a bit overblown on here.
The 12% tax bracket will be no more, 15% starting in 2026. Unless the tax laws change of course, but we are not supposed to speculate about tax law changes on this forum.

The OP also said maxing pre-tax 401(k) for years, and if that trend continues for the next 20 years, hard to see why the OP wouldn't be in 25% tax bracket in retirement even at 60. Given also that the 0% LTCG and the 15% tax bracket compete with each other in approximately the same domain (the limits between the two are only $250 different from each other), to the extent that someone realizes income in the 15% bracket, they are displacing the room available for the 0% LTCG.

All that said, it's a viewpoint question. Yes, $20k over 20 years on a 7 or 8 figure portfolio is tiny; but in absolute terms, $1k approximately per year (averaged over 20 years, and all in real terms) for what is pretty much 10 to 15 minutes of work per year ... is substantial in my opinion.

May be we aren't disagreeing with each other as much as nit-picking each other's arguments.
I have been maxing 401k for only the past 8-10 years and the tIRA is from earlier years. My current tax deferred total balance is about $500k, including the tIRAs I am about to convert to 401k. Since I only have about 10-12 more years left until retirement (my ideal target is 62 - but it is too early to make the call - but I am definitely NOT working until age 70).

If all goes well, I should have about $1mil on my tax deferred portfolio at retirement. A conservative 3% SWR on that amounts to $30k per year. Based on some rough calculations assuming a low inflation rate of 2%, the second tax bracket (12/15%) upper limit would be about $60k with a standard deduction of about $20k. That would leave me about $50k of room for taxable capital gains harvesting at 0%, Roth conversions etc. I am planning on living of off taxable account for the first 7-10 years of retirement until SS kicks in and then RMDs at 75.

Since I already have a lot of unrealized capital gains (about $400k currently) on my taxable, I see the value in keeping all new extra investments (up to allowable limits) in the Roth space instead.

Regarding saving $1k for 10-15 minutes of work - it's a no brainer for me. I would definitely do it. ( I am that kind of a person who would stand in the customer service line at Costco to make sure they issue me a $5 credit for a price drop on an item I purchased just before the price drop )
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Re: Backdoor Roth vs Taxable ?

Post by friluftsliv-roy »

Admiral wrote: Wed Oct 30, 2024 10:37 am Yes, I have done what you want to do (though it was a SEP rolled into a workplace plan). Took ten minutes on the phone with Vanguard.

I did it in order to do what you want to accomplish: eliminate a T-IRA (in my case, a SEP IRA) in order to be able to do backdoor Roth contributions (not "conversions" as you stated) with no pro-rata tax implications,

I will recommend, however, that you explore simply contributing to your workplace Roth account directly, assuming your company has one. There are no income limitations as there are with Roth IRAs, and it's simpler than doing backdoor contributions. And, ofc, it allows you to keep your T-IRA account should you want to. The usual contributions limits still apply.
Thank you for the reply - I am looking to do exactly what you did.
I do have a Roth 401k option at work, but currently I put all my 401k money ($23k this year) into traditional 401k to maximize my tax savings. ($5.5k saved at 24% marginal bracket).

However, for the last decade or so I have also been putting an extra $10-15k in my taxable brokerage account every year, which I feel would be better off in a Roth IRA going forward - thinking about long term perspectives. I will also be forced to contribute the catch-up $8k to Roth 401k due to the new secure 2.0 rules. So overall, I will end up contributing $16 per year in the Roth space starting next year when I turn 50. I might actually draw some funds from my taxable if necessary to make it happen.
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Re: Backdoor Roth vs Taxable ?

Post by friluftsliv-roy »

ThankYouJack wrote: Wed Oct 30, 2024 10:43 am
lakpr wrote: Wed Oct 30, 2024 9:04 am

The 12% tax bracket will be no more, 15% starting in 2026. Unless the tax laws change of course, but we are not supposed to speculate about tax law changes on this forum.

The OP also said maxing pre-tax 401(k) for years, and if that trend continues for the next 20 years, hard to see why the OP wouldn't be in 25% tax bracket in retirement even at 60. Given also that the 0% LTCG and the 15% tax bracket compete with each other in approximately the same domain (the limits between the two are only $250 different from each other), to the extent that someone realizes income in the 15% bracket, they are displacing the room available for the 0% LTCG.

All that said, it's a viewpoint question. Yes, $20k over 20 years on a 7 or 8 figure portfolio is tiny; but in absolute terms, $1k approximately per year (averaged over 20 years, and all in real terms) for what is pretty much 10 to 15 minutes of work per year ... is substantial in my opinion.

May be we aren't disagreeing with each other as much as nit-picking each other's arguments.
I don't think it's a nitpick, but more of a deeper analysis / more feedback from the OP would be needed before assuming LTCG taxes will be paid. This is because the LTCG taxes play the main role in your numbers, getting to $1k/year.

I think most Bogleheaders avoid paying LTCG either through the timing of realizing gains, charitable donations or step-up basis.

Maybe short term view a $300 to $1k / year tax savings seems like a lot, but long term when one's portfolio has grown to millions, not so much.
Sorry I might have caused some confusion by not providing all the data points here, but I do have LTCG tax concerns. I am already sitting on $400k of unrealized gain on taxable, which will likely grow more by the time I retire.

I am hoping to harvest most of these gains at 0% LTCG bracket in the early years of retirement before SS kicks in around 67/70 and then RMDs at 75. I would then fill the 12/15% tax bracket with additional Roth conversions before RMDs kick in (assuming there is room left).

And when it comes to savings I would take any amount, as long as it does not have other indirect costs associated, such as having to hire a tax consultant to file complicated tax returns. From what I am reading, most regular tax software is able to handle the backdoor Roth process with some minor tweaks to the data entry process.
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Re: Backdoor Roth vs Taxable ?

Post by ThankYouJack »

friluftsliv-roy wrote: Wed Oct 30, 2024 3:21 pm
lakpr wrote: Wed Oct 30, 2024 9:04 am

The 12% tax bracket will be no more, 15% starting in 2026. Unless the tax laws change of course, but we are not supposed to speculate about tax law changes on this forum.

The OP also said maxing pre-tax 401(k) for years, and if that trend continues for the next 20 years, hard to see why the OP wouldn't be in 25% tax bracket in retirement even at 60. Given also that the 0% LTCG and the 15% tax bracket compete with each other in approximately the same domain (the limits between the two are only $250 different from each other), to the extent that someone realizes income in the 15% bracket, they are displacing the room available for the 0% LTCG.

All that said, it's a viewpoint question. Yes, $20k over 20 years on a 7 or 8 figure portfolio is tiny; but in absolute terms, $1k approximately per year (averaged over 20 years, and all in real terms) for what is pretty much 10 to 15 minutes of work per year ... is substantial in my opinion.

May be we aren't disagreeing with each other as much as nit-picking each other's arguments.
I have been maxing 401k for only the past 8-10 years and the tIRA is from earlier years. My current tax deferred total balance is about $500k, including the tIRAs I am about to convert to 401k. Since I only have about 10-12 more years left until retirement (my ideal target is 62 - but it is too early to make the call - but I am definitely NOT working until age 70).

If all goes well, I should have about $1mil on my tax deferred portfolio at retirement. A conservative 3% SWR on that amounts to $30k per year. Based on some rough calculations assuming a low inflation rate of 2%, the second tax bracket (12/15%) upper limit would be about $60k with a standard deduction of about $20k. That would leave me about $50k of room for taxable capital gains harvesting at 0%, Roth conversions etc. I am planning on living of off taxable account for the first 7-10 years of retirement until SS kicks in and then RMDs at 75.

Since I already have a lot of unrealized capital gains (about $400k currently) on my taxable, I see the value in keeping all new extra investments (up to allowable limits) in the Roth space instead.

Regarding saving $1k for 10-15 minutes of work - it's a no brainer for me. I would definitely do it. ( I am that kind of a person who would stand in the customer service line at Costco to make sure they issue me a $5 credit for a price drop on an item I purchased just before the price drop )
Sounds like you're already a millionaire or multimillionaire. Not saying there's anything wrong with waiting to save $5, but I'd also call that a drop in the bucket ;)

Anyway the BDR makes sense since it'll save you more than ~ 0.00025% of your net worth and should take less time than standing in Costco lines :thumbsup
Outer Marker
Posts: 5032
Joined: Sun Mar 08, 2009 8:01 am

Re: Backdoor Roth vs Taxable ?

Post by Outer Marker »

I still stop to pick up a quarter on the street. BDR is worth a lot more for not a lot of effort. Somehow my Roth has grown to about $250k, most of the contributions, I think, were backdoor.

Another important benefit of having a stash of Roth money is that you can have a spending reserve to stay below ACA subsidy limits.
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