Just discovered we may not be eligible for Roth IRA anymore

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triton1987
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Joined: Thu Jul 11, 2019 8:02 am

Just discovered we may not be eligible for Roth IRA anymore

Post by triton1987 » Thu Jul 11, 2019 2:15 pm

Hello, and thanks in advance for any advice, this might be long winded since it's kind of a complicated situation. Got married a few weeks ago, just returned from the honeymoon and was working on some future planning for our finances. Doing some calculations and having to make some assumptions based off historicals, it's looking like we may not be eligible to contribute to our Roth IRAs anymore. Looking for some advice, insight, and/or critique if I'm missing something, but first a little background on our situation (with round numbers):

Me:
Age: 31
Income (gross): W2 $127k, tax-free disability $20k, LLC projecting $43k but not factored into MAGI as of now
MAGI: $92.5k -> $127k - $19k (401k) - $3.5k (HSA) - $12k(standard deduction)
401(k): $27k, max contributions + company match
IRRA: $90k
Inherited IRA: $100k - RMD based off my age
Roth IRA: $40k
HSA: $4k - max contribution (only became eligible with new company last year)
HYSA: $82k @ 2.25% (opportunity fund for real estate)
Brokerage: $70k
Checking/savings: $5k - only used for direct deposit then transferred to other accounts

Wife:
Age: 30
Income (gross): W2 ~$15k (starting job in Aug)
MAGI: ~$115k+ -> distributions from family LLC and trusts are received and taxed as income
401(k): $0 - starting job in Aug but is planning to max contribution
IRRA: $17k
Roth IRA: $12k
Brokerage: $450k

Combined MAGI: $207.5k

Debt:
Mortgage: 25 yr, $280k @ 3% but current plan payoff in 11 years
No student loans, no credit card debt, no vehicle loans

Up until now I've been under the cap for Roth IRA contributions being single and reducing my MAGI with 401(k) contributions and standard deduction or itemizing, depending on the year. Now that we're married, she really doesn't have any deductions to itemize so we're both stuck taking the standard deduction. The mortgage interest and medical expenses (almost none) don't add up to more than the standard deduction of $24k. For 2018 I had a bit more flexibility for itemizing since I run my LLC from my home, but I don't think that will outweigh the combined standard deduction for 2019 filing married. So with the current projections, not including my potential LLC income, we're already over the $193k phase out and $203k limit. Her distribution income will likely be over $115k since those returns are proportional to market performance (her family LLC does asset management and the trusts have securities). And to top things off, we already made max contributions to our Roths for 2019; fortunately (maybe) we kept those contributions in cash so it might be easier to withdraw those dollars and not get complicated with capital gains.

I have just started looking into doing backdoor Roth conversions, but what I'm seeing makes me think it may not be beneficial for me to do that. Since I have an inherited IRA and a rollover IRA (IRRA), I'd have to convert the entire IRA/IRRA to Roth, not just a portion of it. I would really hate to lose the tax deferred benefits of the IRA/IRRA, and since I change companies every couple years, it's hard to keep building a single 401(k). I could leave my 401(k) with the old firm, or transfer it to the new firm, but I usually end up saving money rolling it to the IRRA since my bank doesn't charge any management fees for self-directed accounts.

I've reached out to her family's tax firm to see if they can come up with some way for her distributions to go into some tax-deferred account, or trust, or some way that they wouldn't be counted as income...still waiting to hear back from them. We live far below our means and do not need the extra income right now, but I'm at a loss for other ways to reduce our taxable income to stay eligible for Roth contributions. Any advice or guidance on what we should be doing differently, or strategies we can try to reduce our taxable income? Thanks again.

lakpr
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Re: Just discovered we may not be eligible for Roth IRA anymore

Post by lakpr » Thu Jul 11, 2019 2:40 pm

If your wife would defer the max $19k into the 401k in the job she will start in August, there is really no issue here. $207.5k - $19k = $188.5k. The phase out for Roth begins only at $193k.

So one action plan would be to refer the max $4000 per month into 401k. I am assuming that is possible.

Topic Author
triton1987
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Joined: Thu Jul 11, 2019 8:02 am

Re: Just discovered we may not be eligible for Roth IRA anymore

Post by triton1987 » Thu Jul 11, 2019 2:54 pm

lakpr, thanks for the quick response.

Her family assets (LLC and trusts) generate $115k+ every year, independent from her upcoming job. So her 401(k) contribution cant be deducted from that figure, just from the estimated $15k W2 earnings this year. Unless there is a creative way to divert the distributions from the family assets into tax-deferred accounts, at a minimum we'll be at $207.5k (her $115k + my $92.5k) assuming she contributes all of her W2 earnings to her 401(k).

lakpr
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Re: Just discovered we may not be eligible for Roth IRA anymore

Post by lakpr » Thu Jul 11, 2019 3:22 pm

I see!

I did not see a traditional IRA or a Rollover IRA for your wife, so at least she will be able to do a backdoor Roth for her. She can go ahead and ask the custodian to recharacterize her already made Roth contributions to traditional IRA, then turn around and convert to Roth IRA.

As for you, if your current 401k does not allow your Rollover IRA to be rolled in, you are stuck. There is one thing you can do: have your current year Roth contributions characterized as non-deductible Traditional IRA contribution, then use those funds to invest in bond funds only. Consider this as part of your bond portfolio. Do not convert to Roth. If you have any bonds within your401k or taxable, shift them to stocks in equal amounts to compensate, and keep your desired asset allocation.

In the future if you are successful in getting your Rollover IRA rolled into a 401k, then you can convert remaining amount to Roth.

This is a way to preserve your IRA space and not lose it.

If you think about it, bond income, whether in taxable or in 401k, gets taxed the same way, as ordinary income. It is only the original contribution, the basis, which gets taxed front end at contribution in the n-d-tIRA, and gets taxed at the backend with 401k. Expected earnings are not expected to be a lot, so the tax bite is going to be minimal. Not zero, but not too shabby.

lakpr
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Re: Just discovered we may not be eligible for Roth IRA anymore

Post by lakpr » Thu Jul 11, 2019 3:24 pm

One last bit. Making a separate post so it does not get lost in the big post I just made.

Inherited IRA balances do NOT count for the pro-rata rule. The Rollover IRA does.

deltaneutral83
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Re: Just discovered we may not be eligible for Roth IRA anymore

Post by deltaneutral83 » Thu Jul 11, 2019 3:30 pm

triton1987 wrote:
Thu Jul 11, 2019 2:21 pm

Up until now I've been under the cap for Roth IRA contributions being single and reducing my MAGI with 401(k) contributions and standard deduction or itemizing, depending on the year.
Standard deduction reduces MAGI for Roth purposes?

nolesrule
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Re: Just discovered we may not be eligible for Roth IRA anymore

Post by nolesrule » Thu Jul 11, 2019 3:31 pm

deltaneutral83 wrote:
Thu Jul 11, 2019 3:30 pm
triton1987 wrote:
Thu Jul 11, 2019 2:21 pm

Up until now I've been under the cap for Roth IRA contributions being single and reducing my MAGI with 401(k) contributions and standard deduction or itemizing, depending on the year.
Standard deduction reduces MAGI for Roth purposes?
No.

nolesrule
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Re: Just discovered we may not be eligible for Roth IRA anymore

Post by nolesrule » Thu Jul 11, 2019 3:33 pm

lakpr wrote:
Thu Jul 11, 2019 3:22 pm
There is one thing you can do: have your current year Roth contributions characterized as non-deductible Traditional IRA contribution, then use those funds to invest in bond funds only. Consider this as part of your bond portfolio.
In the case of not being able to do the backdoor because of a traditional IRA getting in the way, instead of recharacterizing to a traditional IRA and having a non-deductible contribution and being married to tracking basis until you die, one could get a return of contributions and then invest the money tax efficiently in a taxable brokerage account.

mhalley
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Re: Just discovered we may not be eligible for Roth IRA anymore

Post by mhalley » Thu Jul 11, 2019 3:36 pm

Another thought on backdoor Roth: they are great, but the value is really not huge per year. If you do them for 30years, it adds up, but if you are only going to do them for a few, then they might not be worth the hassle. POF did some calculations comparing a backdoor Roth to investing in a taxable account here:
https://www.physicianonfire.com/value-of-backdoor-roth/
. By tucking away $6,000 in a Roth account rather than a taxable account, you can save about 0.5% of $6,000 annually, or about $30 per year in taxes. Depending on where you live, what you invest in, and how much you earn, the value to you could be $0, but will probably be in the range of $20 to $50 a year.

That’s what we’re fretting over. We jump hoops to get this $20 to $50 annual benefit. We fill out page after page of paperwork to open a solo 401(k). We contemplate starting a business (or something that could be called a business) to be able to do this...

While it’s true that the benefit recurs year after year and the tax savings can eventually grow by addition and compounding to a few thousand dollars over several decades. If you’re married and doing this with $11,000 per year, the savings could eventually reach five or even six figures — at an initial rate of $40 to $100 per year.
Last edited by mhalley on Thu Jul 11, 2019 3:38 pm, edited 1 time in total.

MotoTrojan
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Re: Just discovered we may not be eligible for Roth IRA anymore

Post by MotoTrojan » Thu Jul 11, 2019 3:37 pm

nolesrule wrote:
Thu Jul 11, 2019 3:33 pm
lakpr wrote:
Thu Jul 11, 2019 3:22 pm
There is one thing you can do: have your current year Roth contributions characterized as non-deductible Traditional IRA contribution, then use those funds to invest in bond funds only. Consider this as part of your bond portfolio.
In the case of not being able to do the backdoor because of a traditional IRA getting in the way, instead of recharacterizing to a traditional IRA and having a non-deductible contribution and being married to tracking basis until you die, one could get a return of contributions and then invest the money tax efficiently in a taxable brokerage account.
Agreed. I’d never carry a post tax tIRA personally.

lakpr
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Re: Just discovered we may not be eligible for Roth IRA anymore

Post by lakpr » Thu Jul 11, 2019 3:41 pm

nolesrule wrote:
Thu Jul 11, 2019 3:33 pm
In the case of not being able to do the backdoor because of a traditional IRA getting in the way, instead of recharacterizing to a traditional IRA and having a non-deductible contribution and being married to tracking basis until you die, one could get a return of contributions and then invest the money tax efficiently in a taxable brokerage account.
The OP stated only a preference to keep everything in an IRA, because he job hops every 2 to 3 years. One of those years/jobs he can roll the money from the Rollover IRA to 401k, then the n-d-tIRA to Roth.

The situation, therefore, is temporary and only constrained by inertia and preferences. There is no “life long marriage” to Form 8606.

Also, the IRA space, once given up, cannot be reclaimed back. Making the contributions now reserves that space for you. Gives you time to choose an option and execute later.

Topic Author
triton1987
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Re: Just discovered we may not be eligible for Roth IRA anymore

Post by triton1987 » Thu Jul 11, 2019 4:09 pm

So I'll be doing a lot more research in backdoor Roth info, thanks for the suggestions.

One area I am really struggling to find additional info on is any way to have her distributions not count against her (M)AGI. It's extremely difficult talking to her family about this, they're stuck in the mindset of "this is how it's always been done, no need to change anything", but I am the first case in their family where the income now causes a limitation for me (i.e. she's the first grandchild/beneficiary to get married). The way I understand it, the Trusts and family LLC kick off earnings/distributions from the profits and securities, the taxes are withheld by the CPA firm and paid in quartly installaments to the treasury, then the remaining dollars get deposited into her brokerage account as cash = the $115k or so annually.

There has to be a way to have those dollars, or a portion of them, diverted into another account/living trust/entity that has less tax consequence. I'll admit that I'm not well-versed in the more complicated strategies of reducing taxes, but this sounds like the type of scenario Robert Kiosaki talks about with owning assets that generate lots of income, but not paying any (or minimal) taxes. Would there be some way of her starting a S-corp and doing book keeping for the trust and family LLC, then diverting her distributions to a solo-401(k)...or something along those lines? Sorry if this is a stupid question, it's just hard for me to accept that this money HAS to be taxed as wages.

Spirit Rider
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Re: Just discovered we may not be eligible for Roth IRA anymore

Post by Spirit Rider » Thu Jul 11, 2019 4:16 pm

My reading of your MAGI will be:
  • You: $127K salary - $19K 401k deferral - $3.5K HSA + LLC income ~$40K* ~= $145K. Note: Standard or itemized deductions are below the line and do not reduce your AGI/MAGI.
  • Spouse $15K - ~$14K** 401k deferral + ~$115K LLC/Trust income = ~$115K
  • Total ~= ~$145K + ~$115K = $260K.
Your best option is to rollover both you and your spouse's pre-tax balances in all traditional, SEP and SIMPLE IRA accounts into your respective 401k plans. It is more likely than not they both allow such rollovers.

You didn't indicate whether your LLC is passive income or self-employed earned income. If the latter, alternatively you can adopt a one participant 401k and roll your pre-tax IRA balances in to that plan, as long as it is not Vanguard.

Spirit Rider
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Re: Just discovered we may not be eligible for Roth IRA anymore

Post by Spirit Rider » Thu Jul 11, 2019 4:24 pm

triton1987 wrote:
Thu Jul 11, 2019 4:09 pm
There has to be a way to have those dollars, or a portion of them, diverted into another account/living trust/entity that has less tax consequence. I'll admit that I'm not well-versed in the more complicated strategies of reducing taxes, but this sounds like the type of scenario Robert Kiosaki talks about with owning assets that generate lots of income, but not paying any (or minimal) taxes. Would there be some way of her starting a S-corp and doing book keeping for the trust and family LLC, then diverting her distributions to a solo-401(k)...or something along those lines? Sorry if this is a stupid question, it's just hard for me to accept that this money HAS to be taxed as wages.
You are paying less taxes having the trust income passed to your wife. Trust tax rates are highly compressed and reach the 37% marginal tax bracket on ordinary income and the 20% marginal capital gains rate and NIIT for both at < $13K.

The income from this family LLC/Trust is most likely passive income and there is no way to claim it as earned income that could be contributed to an employer retirement plan.

It may be hard for you to accept, but this additional income is not wages, it likely HAS to be treated as ordinary income which IS taxed at the same ordinary income tax rates as wages.

You can certainly have professionals investigate possible options, but it sounds more like someone looking a $115K/year "gift horse in the mouth."

retiredjg
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Re: Just discovered we may not be eligible for Roth IRA anymore

Post by retiredjg » Thu Jul 11, 2019 4:31 pm

triton1987 wrote:
Thu Jul 11, 2019 2:21 pm
Income (gross): W2 $127k, tax-free disability $20k, LLC projecting $43k but not factored into MAGI as of now
MAGI: $92.5k -> $127k - $19k (401k) - $3.5k (HSA) - $12k(standard deduction)

MAGI: ~$115k+ -> distributions from family LLC and trusts are received and taxed as income

Up until now I've been under the cap for Roth IRA contributions being single and reducing my MAGI with 401(k) contributions and standard deduction or itemizing, depending on the year.

Combined MAGI: $207.5k
Your combined MAGI may be way over this number. As mentioned already, MAGI is before standard or itemized deductions are removed from the total (but not before whatever is contributed to traditional 401k).

This will not be a problem this year, but the question arises if you have made Roth IRA contributions in the past based on the idea that you could take deductions out of the total. If yes, you need to fix that as the penalty can be quite steep since it builds up every year.

Also, if you have been helping her with her taxes, she has probably not been eligible to contribute to Roth IRA either.

I have just started looking into doing backdoor Roth conversions, but what I'm seeing makes me think it may not be beneficial for me to do that. Since I have an inherited IRA and a rollover IRA (IRRA),
Your rollover IRA is in the way. The inherited IRA is not included in pro-rating unless it is now in YOUR name.

Apparently your wife also has a rollover IRA so it is in the way as well (although small enough you might just want to convert it all?).


It appears to me that neither you nor your wife should use the back door method to contribute to Roth IRA, at least not right now. Put the money into taxable instead. There is nothing that says you can't hold retirement money in a taxable account. Lots of people do that.

As for the Roth IRA contributions you have already made for 2019, they can be removed as if it never happened, but you cannot just take the money out yourself. You contact the Roth IRA custodian and specify exactly which contribution(s) you want to withdraw making sure they understand you want this to be like it never happened because it was an excess contribution.


One thing is confusing. IN parts of your post, you talk as if you are fining jointly but in other parts you talk as if you are filing separately. I don't think you ever tell us how you are filing and or what you expect your tax bracket to be.

WhiteMaxima
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Re: Just discovered we may not be eligible for Roth IRA anymore

Post by WhiteMaxima » Thu Jul 11, 2019 5:10 pm

Backdoor Roth. easy and simple.

Topic Author
triton1987
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Re: Just discovered we may not be eligible for Roth IRA anymore

Post by triton1987 » Thu Jul 11, 2019 5:41 pm

Understood, I misread the criteria for allowable deductions, thought the standard deduction was allowed so thanks for pointing that out! In prior years my income was lower, and I just confirmed that in those years I am still under the allowed cap.

I have NOT been helping her with her taxes, hers have been done by the accounting firm that handles the whole LLC and Trusts, her situation is way too complicated for my limited knowledge haha.

The Inherited IRA was originally part of a trust with my siblings, but I was somehow able to get out of the trust and have it transferred to my SSN. It is still titled with my grandmother's name FBO me, but I have complete control and all RMD's are applied to my SSN. I have had several trust attorneys look at this and they don't know how it was possible, but that's the way it is. My siblings' RMD's are all calculated off my grandmother's birthday, but mine is based off my birthday. Not sure what happened.

Sorry for the confusion about how I'm filing; as of 2018 all filings were single, but 2019 we will probably be married filing jointly but still TBD. The confusion may come from the comments about the rule that if one spouse takes the standard deduction, the other spouse must do the same, correct? We couldn't file with her taking the standard deduction while I itemize, right? I expect our tax bracket to be 24% since we'll fall between $165k-315k.

My LLC so far is passive, I believe. The only income generated so far has been from interest from short-term loans (hard money), but I will likely be selling a property at a $40k profit. No real expenses so far.

Thanks everyone.

mhalley
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Re: Just discovered we may not be eligible for Roth IRA anymore

Post by mhalley » Thu Jul 11, 2019 5:46 pm

[Duplicate post removed, remaining posts merged into here, see below. --admin LadyGeek]

This appears to be a duplicate post.

Topic Author
triton1987
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Re: Just discovered we may not be eligible for Roth IRA anymore

Post by triton1987 » Thu Jul 11, 2019 5:47 pm

Correct, browser glitched, sorry. How do I delete?

retiredjg
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Re: Just discovered we may not be eligible for Roth IRA anymore

Post by retiredjg » Thu Jul 11, 2019 5:48 pm

click on the ! and ask to have it deleted

retiredjg
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Re: Just discovered we may not be eligible for Roth IRA anymore

Post by retiredjg » Thu Jul 11, 2019 6:08 pm

triton1987 wrote:
Thu Jul 11, 2019 5:41 pm
The Inherited IRA was originally part of a trust with my siblings, but I was somehow able to get out of the trust and have it transferred to my SSN. It is still titled with my grandmother's name FBO me, but I have complete control and all RMD's are applied to my SSN. I have had several trust attorneys look at this and they don't know how it was possible, but that's the way it is. My siblings' RMD's are all calculated off my grandmother's birthday, but mine is based off my birthday. Not sure what happened.
My understanding is that as long as it is in your grandmother's name FBO you, it is not prorated if you do a Roth conversion.

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Re: Just discovered we may not be eligible for Roth IRA anymore

Post by LadyGeek » Thu Jul 11, 2019 6:18 pm

triton1987, Welcome! As noted by retiredjg, clicking on the ! works. I removed your duplicate post and merged the remaining posts into this thread. This isn't a big deal, don't worry about it.
Wiki To some, the glass is half full. To others, the glass is half empty. To an engineer, it's twice the size it needs to be.

Topic Author
triton1987
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Re: Just discovered we may not be eligible for Roth IRA anymore

Post by triton1987 » Fri Jul 12, 2019 9:56 am

So I had another thought that might help with my Roth IRA dilema. My employer offers a Roth 401(k) option. Up until now I have chosen to max the 401(k) to reduce taxable income and meet the criteria for the Roth IRA, but if I'm not going to meet the Roth IRA income cap regardless, what are the thoughts on doing maybe 50/50 split into regular 401(k) and Roth 401(k)? When I leave this employer, would I roll the 401(k) into my IRRA, and roll the Roth 401(k) into my Roth IRA? I know this means I'll have a slightly larger tax bill, but I'm thinking the long term benefits might outweigh the slight increase in taxes. I'd still like to do some tax-deferred savings, and the ability of having the tax-free income from a Roth during retirement is too good to not take advantage of.

Thanks.

lakpr
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Re: Just discovered we may not be eligible for Roth IRA anymore

Post by lakpr » Fri Jul 12, 2019 10:12 am

Bad idea. Because you are in a 24% Federal tax bracket, and not sure which state you are in — you need to add State and city/county tax rates on the amount you contributed to Roth 401k. Effectively, assuming a modest 5% state tax rate and even zero local tax rate, you are going to pay 29% tax rate on the Roth contribution.

Once this tax is paid, you cannot undo that. So to be sure that this tax rate is acceptable,’you need to be sure that your income at the time of retirement is at least going to be in the ballpark of 29%. Else you would have lost money in unnecessary taxes.

Based on some back of the envelope calculations, you will need to have at least $1.6 million in today’s dollars, and assuming an unsustainable 5% withdrawal rate (trying to skew as much as possible towards Roth) before the lower brackets (12% or even 15%) are filled out. So you will have lost out at least 10%, possibly as much as 14%, by choosing Roth 401k now. That is not “slightly higher” tax bill, it is almost double the tax bill you will have incurred if you choose tax deferred. Not to mention you are in the NIIT range which would hit you at $250k of AGI.

[ Most states that tax working stiffs provide generous tax incentives for retirees; in NJ for example, the first $100k retirement income is exempt from state taxes, defined as withdrawals from 401k or 403b or pension after age 65 ... part of the reason why I assumed state tax is zero when withdrawing up to $80k per year ]

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triton1987
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Re: Just discovered we may not be eligible for Roth IRA anymore

Post by triton1987 » Fri Jul 12, 2019 10:33 am

I see. I'm in Colorado right now, but I have no way of predicting where we will actually retire. As for predicting income in retirement, my first thought plan was to withdraw from both tax-deferred and Roth accounts to stay within a reasonable/beneficial tax bracket. I wasn't counting on only drawing from a Roth, or only drawing from tIRA, but a mix of both. Another factor that I need to account for is that part of her inheritance will be received over the next 10 years from the liquidation of trusts, life incurance, and LLC assets to the sum of around $4m after taxes. If we did something simple like invest in a balanced mutual fund or VTSAX & bond funds, the dividends generated will continue to keep us in the higher tax brackets.

We will defintely be consulting tax/etate planning professionals in the near future to help us plan for the increase in income. I think some previous comments may have come accross like I'm not thankful for the income we have, and I may be looking at it like a problem. I'm very grateful for what we have, I'm just trying to learn about the different options available that would allow us to best utilize the funds we have.

Thanks again for the guidance.

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Re: Just discovered we may not be eligible for Roth IRA anymore

Post by Spirit Rider » Fri Jul 12, 2019 10:38 am

Not to mention the advantage of the Roth IRA is it is additional tax-advantaged contribution space.

Why are you resistant to the suggestions by many previous replies in this thread. Determine if you and your spouse's 401k plans accept IRA rollovers. If so, you can rollover all pre-tax IRA assets to those plans. Then you can follow the example of many, many Bogleheads before you and use the Backdoor Roth in a tax efficient manner.

lakpr
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Re: Just discovered we may not be eligible for Roth IRA anymore

Post by lakpr » Fri Jul 12, 2019 10:48 am

You can at least keep contributing to traditional account until you actually have $1.6 million? Yes you might be withdrawing from Roth accounts in retirement to keep your income low, but as I said, I assumed all withdrawal to be from the tax deferred to incur the highest tax possible.

Also, as long as you stay with VTSAX in taxable accounts, your dividends are going to be only 2% of the balance; it has only distributed dividends and no capital gains over the past 15 years. Bloomberg magazine ran a recent article that Vanguard managed to avoid distributing capital gains when Bayer acquired Monsanto, even when other mutual funds following the same 500 index did distribute them. It was a proprietary and patented solution by Vanguard. It is only the bond funds that you may end up with in taxable accounts that should be of higher concern since their dividends will be taxed as ordinary income.

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Tamarind
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Re: Just discovered we may not be eligible for Roth IRA anymore

Post by Tamarind » Fri Jul 12, 2019 11:21 am

More money is more money, OP, no way around it. Your spouse doesn't have a problem as she can do a backdoor Roth. Your rollover IRA is in the way of you doing one (the inherited one is not counted).

I would recommend you get your rollover IRA into a 401k. Two ways to do that:

1) If your employer plan will accept it, rolling in there is probably easy. I have also changed jobs a lot recently, and I don't find the 401ks to be a problem. If the new 401k is better, I roll old 401ks into new 401ks. If the old one is better I leave it. Right now I have two because my old one is sightly better. This is not a hassle because the old one is on auto-pilot.

2) If your LLC is single-member, you should be able to open a solo 401k set up to allow incoming rollovers from an IRA. Fidelity and E*Trade will do this for you. You then have control of your investments, a good place to put old 401ks, AND the ability to make employer contributions based on your LLC profit which will reduce your taxable income further. This is what I'd recommend you do. There's more effort to set it up, but it handles several issues at once and is the only way for you to get more tax-advantaged space.

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Re: Just discovered we may not be eligible for Roth IRA anymore

Post by gmc4h232 » Fri Jul 12, 2019 11:29 am

Tamarind wrote:
Fri Jul 12, 2019 11:21 am
More money is more money, OP, no way around it. Your spouse doesn't have a problem as she can do a backdoor Roth. Your rollover IRA is in the way of you doing one (the inherited one is not counted).

I would recommend you get your rollover IRA into a 401k. Two ways to do that:

1) If your employer plan will accept it, rolling in there is probably easy. I have also changed jobs a lot recently, and I don't find the 401ks to be a problem. If the new 401k is better, I roll old 401ks into new 401ks. If the old one is better I leave it. Right now I have two because my old one is sightly better. This is not a hassle because the old one is on auto-pilot.

2) If your LLC is single-member, you should be able to open a solo 401k set up to allow incoming rollovers from an IRA. Fidelity and E*Trade will do this for you. You then have control of your investments, a good place to put old 401ks, AND the ability to make employer contributions based on your LLC profit which will reduce your taxable income further. This is what I'd recommend you do. There's more effort to set it up, but it handles several issues at once and is the only way for you to get more tax-advantaged space.
Would it be easier to establish a solo 401k by setting up a qualified joint venture consisting of you and your wife assuming you are not in a community property state? Spirit Rider seems to have a lot of info on this based on previous posts

Topic Author
triton1987
Posts: 9
Joined: Thu Jul 11, 2019 8:02 am

Re: Just discovered we may not be eligible for Roth IRA anymore

Post by triton1987 » Fri Jul 12, 2019 1:14 pm

Tamarind wrote:
Fri Jul 12, 2019 11:21 am
1) If your employer plan will accept it, rolling in there is probably easy. I have also changed jobs a lot recently, and I don't find the 401ks to be a problem. If the new 401k is better, I roll old 401ks into new 401ks. If the old one is better I leave it. Right now I have two because my old one is sightly better. This is not a hassle because the old one is on auto-pilot.

2) If your LLC is single-member, you should be able to open a solo 401k set up to allow incoming rollovers from an IRA. Fidelity and E*Trade will do this for you. You then have control of your investments, a good place to put old 401ks, AND the ability to make employer contributions based on your LLC profit which will reduce your taxable income further. This is what I'd recommend you do. There's more effort to set it up, but it handles several issues at once and is the only way for you to get more tax-advantaged space.
The 401(k) plan my employer has established for us has horrible investment options; there are only 2 funds with less than 0.40% ER, one is an S&P 500 index, the other is a mid-cap index. All other options are either target date funds that range from 0.9-1.5% ER, ex-US funds that range 0.6-1.2% ER, or bond funds that average 0.75% ER, and they charge 0.35% management fee on the balance of the account. Whereas my primary bank has 0% fees for self-directed accounts, 100 free trades per month, and I can buy virtually anything.

The LLC is single-member so I will look into this as well.

Might be a long shot, but is possible to transfer my IRRA to my 401(k), eat the fees for a month, do a backdoor Roth, then transfer those funds back out of the 401(k) into an IRRA? I doubt it, I would think that once the funds are in the 401(k), the only way to get them out would be change employer.

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Tamarind
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Re: Just discovered we may not be eligible for Roth IRA anymore

Post by Tamarind » Fri Jul 12, 2019 1:19 pm

triton1987 wrote:
Fri Jul 12, 2019 1:14 pm
Tamarind wrote:
Fri Jul 12, 2019 11:21 am
1) If your employer plan will accept it, rolling in there is probably easy. I have also changed jobs a lot recently, and I don't find the 401ks to be a problem. If the new 401k is better, I roll old 401ks into new 401ks. If the old one is better I leave it. Right now I have two because my old one is sightly better. This is not a hassle because the old one is on auto-pilot.

2) If your LLC is single-member, you should be able to open a solo 401k set up to allow incoming rollovers from an IRA. Fidelity and E*Trade will do this for you. You then have control of your investments, a good place to put old 401ks, AND the ability to make employer contributions based on your LLC profit which will reduce your taxable income further. This is what I'd recommend you do. There's more effort to set it up, but it handles several issues at once and is the only way for you to get more tax-advantaged space.
The 401(k) plan my employer has established for us has horrible investment options; there are only 2 funds with less than 0.40% ER, one is an S&P 500 index, the other is a mid-cap index. All other options are either target date funds that range from 0.9-1.5% ER, ex-US funds that range 0.6-1.2% ER, or bond funds that average 0.75% ER, and they charge 0.35% management fee on the balance of the account. Whereas my primary bank has 0% fees for self-directed accounts, 100 free trades per month, and I can buy virtually anything.

The LLC is single-member so I will look into this as well.

Might be a long shot, but is possible to transfer my IRRA to my 401(k), eat the fees for a month, do a backdoor Roth, then transfer those funds back out of the 401(k) into an IRRA? I doubt it, I would think that once the funds are in the 401(k), the only way to get them out would be change employer.
Nope, you won't be able to get the money out of the 401k again unless the employer allows in-service withdrawals, which seems unlikely if it's a bad plan.

Given what you've added here, I think you seriously should look into opening a solo 401k. It will allow you to make additional pre-tax contributions as an employer of 20% of your adjusted profit (net of self-employment taxes).

Katietsu
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Re: Just discovered we may not be eligible for Roth IRA anymore

Post by Katietsu » Fri Jul 12, 2019 2:38 pm

triton1987 wrote:
Fri Jul 12, 2019 1:14 pm
Tamarind wrote:
Fri Jul 12, 2019 11:21 am
1) If your employer plan will accept it, rolling in there is probably easy. I have also changed jobs a lot recently, and I don't find the 401ks to be a problem. If the new 401k is better, I roll old 401ks into new 401ks. If the old one is better I leave it. Right now I have two because my old one is sightly better. This is not a hassle because the old one is on auto-pilot.

2) If your LLC is single-member, you should be able to open a solo 401k set up to allow incoming rollovers from an IRA. Fidelity and E*Trade will do this for you. You then have control of your investments, a good place to put old 401ks, AND the ability to make employer contributions based on your LLC profit which will reduce your taxable income further. This is what I'd recommend you do. There's more effort to set it up, but it handles several issues at once and is the only way for you to get more tax-advantaged space.
The 401(k) plan my employer has established for us has horrible investment options; there are only 2 funds with less than 0.40% ER, one is an S&P 500 index, the other is a mid-cap index. All other options are either target date funds that range from 0.9-1.5% ER, ex-US funds that range 0.6-1.2% ER, or bond funds that average 0.75% ER, and they charge 0.35% management fee on the balance of the account. Whereas my primary bank has 0% fees for self-directed accounts, 100 free trades per month, and I can buy virtually anything.

The LLC is single-member so I will look into this as well.

Might be a long shot, but is possible to transfer my IRRA to my 401(k), eat the fees for a month, do a backdoor Roth, then transfer those funds back out of the 401(k) into an IRRA? I doubt it, I would think that once the funds are in the 401(k), the only way to get them out would be change employer.
And even if you could, you need to have the traditional IRA balance at $0 on Dec. 31. So you would need the right timing. And the benefit is not worth the effort of doing this back and forth repeatedly, IMO.

With your newly more complex finances, have you thought about sitting down with a tax professional to talk this all over? I know finding one who is good at planning and educating is not always easy. Since your wife has a more complex situation, maybe someone who is familiar with the family money could spend a couple of hours with you and your wife. Just remember that if you get an extra dollar and pay 30 or 40 cents in taxes, you still have more than you started with. It can be shocking though when your taxes start to exceed what used to be your annual income.

Topic Author
triton1987
Posts: 9
Joined: Thu Jul 11, 2019 8:02 am

Re: Just discovered we may not be eligible for Roth IRA anymore

Post by triton1987 » Fri Jul 12, 2019 4:18 pm

Yes, we will be sitting down with professionals to get this sorted out and make sure we do everything legally with out penalty. I really appreciate everyone's input, and I will continue to remind myself that 50% of a watermelon is still more than 100% of a grape.

Cheers!

retiredjg
Posts: 36788
Joined: Thu Jan 10, 2008 12:56 pm

Re: Just discovered we may not be eligible for Roth IRA anymore

Post by retiredjg » Fri Jul 12, 2019 5:12 pm

I suggest that you and your wife both contribute to 1 tax-deferred account each -the full $19k. I would not contribute any more than that because you may end up in retirement with tax-deferred IRAs that are too large - causing RMD issues.

Better yet, don't use the tax-deferred 401k plans now while your income is "relatively low", but do use them later when your income and your tax bracket is higher. You would definitely want to use them in the 32% bracket.

The benefit in the 24% bracket is less clear to me because you may never be in a lower bracket than that. If there is never an opportunity to be in a bracket lower than 24%, there is some but not a lot of benefit to doing tax deferral when you are at 24%.


About rolling your rollover IRA out of the 401k if you roll it in there. The law allows it to be rolled back out if you want. You would have to see if your plan allows it. Your plan is allowed to be more restrictive than what the law allows.

But it would be fruitless anyway.... You would have to leave it there at least until after December 31, roll it out, roll it back in, do your back door, leave it until after December 31, roll it out, roll it back in....ad infinitum. Don't go there. It's not worth it.

During the times you have a poor 401k, best to just put His Roth IRA money into taxable. When you have a good 401k, you can use the back door.

Apparently some people are missing the fact that your wife has a Rollover IRA as well. But maybe her 401k is a good one and you can roll it there so that she can use the back door if she wants.

As I said earlier, I think you should forget about the back door for this year. You've got much more important things to work on right now. Maybe later it will work out better and you can use it then.

retiredjg
Posts: 36788
Joined: Thu Jan 10, 2008 12:56 pm

Re: Just discovered we may not be eligible for Roth IRA anymore

Post by retiredjg » Fri Jul 12, 2019 5:16 pm

Did you check to be sure your earlier contributions to Roth were actually allowed since were not calculating the MAGI correctly? If not, that should move to a very high place on your list of things that need to be fixed/done.

Lee_WSP
Posts: 391
Joined: Fri Apr 19, 2019 5:15 pm
Location: Arizona

Re: Just discovered we may not be eligible for Roth IRA anymore

Post by Lee_WSP » Fri Jul 12, 2019 5:41 pm

triton1987 wrote:
Fri Jul 12, 2019 1:14 pm
Tamarind wrote:
Fri Jul 12, 2019 11:21 am
1) If your employer plan will accept it, rolling in there is probably easy. I have also changed jobs a lot recently, and I don't find the 401ks to be a problem. If the new 401k is better, I roll old 401ks into new 401ks. If the old one is better I leave it. Right now I have two because my old one is sightly better. This is not a hassle because the old one is on auto-pilot.

2) If your LLC is single-member, you should be able to open a solo 401k set up to allow incoming rollovers from an IRA. Fidelity and E*Trade will do this for you. You then have control of your investments, a good place to put old 401ks, AND the ability to make employer contributions based on your LLC profit which will reduce your taxable income further. This is what I'd recommend you do. There's more effort to set it up, but it handles several issues at once and is the only way for you to get more tax-advantaged space.
The 401(k) plan my employer has established for us has horrible investment options; there are only 2 funds with less than 0.40% ER, one is an S&P 500 index, the other is a mid-cap index. All other options are either target date funds that range from 0.9-1.5% ER, ex-US funds that range 0.6-1.2% ER, or bond funds that average 0.75% ER, and they charge 0.35% management fee on the balance of the account. Whereas my primary bank has 0% fees for self-directed accounts, 100 free trades per month, and I can buy virtually anything.

The LLC is single-member so I will look into this as well.

Might be a long shot, but is possible to transfer my IRRA to my 401(k), eat the fees for a month, do a backdoor Roth, then transfer those funds back out of the 401(k) into an IRRA? I doubt it, I would think that once the funds are in the 401(k), the only way to get them out would be change employer.
If you did that, you wouldn't be able to continue contributing to a Roth. Unless you think you are able to do that each year, in which case, I must disavow you of that idea. The pro rata rule applies to the entire year, so you'd actually miss out on the first year of the conversion and then cannot re-convert until you stop making Roth contributions.

But honestly, Roth contributions are not the be all end all. $6,000 isn't a huge amount of money when you're making more than the income limit. The value (savings) are only 15% of the capital gains. And the closer you are to retirement the less valuable.

The mega backdoor Roth is much more valuable if your'e able to fill it up early in life.

retiredjg
Posts: 36788
Joined: Thu Jan 10, 2008 12:56 pm

Re: Just discovered we may not be eligible for Roth IRA anymore

Post by retiredjg » Fri Jul 12, 2019 5:52 pm

Lee_WSP wrote:
Fri Jul 12, 2019 5:41 pm
The pro rata rule applies to the entire year...
A clarification for others (and probably what you meant). It does not matter what is in IRA before you convert or on the day you convert or even after you convert....until that very last day in December.

What is in IRA on the last day in December must be pro-rated with any Roth conversion you did that year.

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LilyFleur
Posts: 278
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Re: Just discovered we may not be eligible for Roth IRA anymore

Post by LilyFleur » Sat Jul 13, 2019 12:01 am

Unfortunately, a non-spouse beneficiary cannot roll money out of an inherited IRA and into a Roth.
https://www.schwab.com/resource-center/ ... a-now-what

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