Looking to get a second set of eyes on our personal situation, and thoughts on whether we would be good candidates to backdoor into Roth.
Married couple filing jointly, both age 35, 1 child. Gross income ~$300k. Expected net worth in retirement (for effective tax rate assumptions) - at least low 8 figures (owing to personal savings and expected family wealth).
Current traditional IRA balances (all contributions were pre-tax) - husband: $112k, wife: $12k.
We both max out our 401ks (Roth style), as well as 529 for child. Can't make Roth or deductible tIRA contributions due to income levels. So we invest the rest of our savings through taxable accounts. I'm trying to determine if we would instead benefit from putting the tIRA max of $11k ($5.5k x 2) into a backdoor Roth, and then what's left into taxable.
Let's assume we can't rollover our tIRA balances into our 401Ks. If we were to contribute $11k into our traditional IRA for tax year 2017, and then backdoor it into Roth, given the current tIRA balances there would be a tax bill based on a rate determined by our income + taxable portion of conversion amount.
Window of opportunity? - In the next year or two, we may have a second child and the unpaid maternity leave + wife possibly working reduced hours for a few years following second child's birth may drop our gross income temporarily from $300k to some slightly lower amount.
If we choose to make the 2017 $11k tIRA contribution for Backdoor Roth purposes, our options are,
- Convert all tIRA balances to Roth right away, pay the tax, and be done with it.
- Convert all tIRA balances to Roth next year or the year after when we have one more child and income (possibly) is a bit lower than 2017, thus tax rates are lower.
- Convert just the $11k to Roth right away, but pay a tax bill due to the pro-ration rules owing to current pre-tax tIRA balances.
- Convert just the $11k to Roth next year or the year after when we have one more child and income (possibly) is a bit lower than 2017, thus tax rates are lower.
- Any other options I didn't think of?
All of this assumes we will have a higher effective tax rate in retirement (higher net worth and also spend (thus distributions) than currently). I realize portfolio mix at the time will determine whether the higher distributions also mean higher effective tax rate. I'm going with the assumption that it will be higher, but interested in counter arguments if any.
Curious how you would plan in this situation.
Many thanks for everyone's time.