Is a Backdoor Roth worth it in our situation?

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Topic Author
cbr shadow
Posts: 274
Joined: Wed Jul 10, 2013 2:12 pm

Is a Backdoor Roth worth it in our situation?

Post by cbr shadow » Tue Aug 13, 2019 6:18 pm

My wife and I are both 35 years old and haven't contributed to a Roth IRA in several years since our salaries are too high to do a standard Roth IRA contribution. We have the option of doing a "Backdoor Roth IRA Contribution" except we both have rollover IRA's from previous employer 401k's. Those rollover Roth IRA's are currently with Vanguard and invested in VTSAX.

Both of our employer's 401k plans allow for us to move our rollover IRA's into the 401k's, but the 401k's have about 1% expense total. Compare that to the VTSAX Admiral's expense ratio under 0.1%. Our rollover IRA accounts don't have a ton in them (mine is $75k, hers is $20k).

In our situation is it worth moving that money to our 401k's and then doing the backdoor process to contribute to our Roth IRA's?

In case it matters, here's some general info:
Age(s) : 35/35
HH income: ~$300k
Location: Northern California

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luminous
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Re: Is a Backdoor Roth worth it in our situation?

Post by luminous » Tue Aug 13, 2019 6:22 pm

Absolutely worth it. You’ll be paying $81/year to shelter $12k/year.
50/20/30 US stock/international stock/bonds. Hope to semi-retire in 2022.

Topic Author
cbr shadow
Posts: 274
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Re: Is a Backdoor Roth worth it in our situation?

Post by cbr shadow » Tue Aug 13, 2019 6:27 pm

luminous wrote:
Tue Aug 13, 2019 6:22 pm
Absolutely worth it. You’ll be paying $81/year to shelter $12k/year.
Can you share how you did that math?
1% of $70,000 = $700
1% of $20,000 = $200
--
Total = $900

Not being a jerk, but want to know if I'm not thinking of this correctly.

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TomatoTomahto
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Re: Is a Backdoor Roth worth it in our situation?

Post by TomatoTomahto » Tue Aug 13, 2019 6:36 pm

luminous wrote:
Tue Aug 13, 2019 6:22 pm
Absolutely worth it. You’ll be paying $81/year to shelter $12k/year.
The choice should be between Roth and taxable. I’m a big fan of backdoor Roth, but ...

Taxable has tax drag that Roth doesn’t. 1% expense to transfer existing tIRA is something I would do, personally, but it’s not a slam dunk. Much more information needed, and even then, it might be a close call.
Okay, I get it; I won't be political or controversial. The Earth is flat.

abyan
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Re: Is a Backdoor Roth worth it in our situation?

Post by abyan » Tue Aug 13, 2019 6:39 pm

cbr shadow wrote:
Tue Aug 13, 2019 6:18 pm
Both of our employer's 401k plans allow for us to move our rollover IRA's into the 401k's, but the 401k's have about 1% expense total. Compare that to the VTSAX Admiral's expense ratio under 0.1%. Our rollover IRA accounts don't have a ton in them (mine is $75k, hers is $20k).
This is a question for the brainier types on this forum, and perhaps your HR people, but can you rollover those 401ks OUT of your employers and to Vanguard or somewhere else with MUCH lower expense ratios? 1% expense ratios aren't nothing.

Also, with your IRA totals being that low, you got me wondering about just doing a Roth conversion on them, maybe a portion every year for the next 2 to 4 years, to get rid of them.

megabad
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Re: Is a Backdoor Roth worth it in our situation?

Post by megabad » Tue Aug 13, 2019 6:43 pm

cbr shadow wrote:
Tue Aug 13, 2019 6:27 pm
luminous wrote:
Tue Aug 13, 2019 6:22 pm
Absolutely worth it. You’ll be paying $81/year to shelter $12k/year.
Can you share how you did that math?
1% of $70,000 = $700
1% of $20,000 = $200
--
Total = $900

Not being a jerk, but want to know if I'm not thinking of this correctly.
I am with you on the math. What is your asset allocation? If you have muni bonds in taxable your tax drag would be minimal. If you have all equities maybe it is closer to 1%. How long are you staying with both of these companies?

I don't like paying so much in fees (% wise), but the problem is, you likely don't have much tax advantaged space relative to your income and you permanently lose it if you don't use it. I would likely do it (rollover to 401ks and then backdoor Roths) on the assumption that eventually you will have a 401k with lower expenses anyway.


Edit: I like abyan's suggestions above better.

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luminous
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Re: Is a Backdoor Roth worth it in our situation?

Post by luminous » Tue Aug 13, 2019 6:46 pm

cbr shadow wrote:
Tue Aug 13, 2019 6:27 pm
luminous wrote:
Tue Aug 13, 2019 6:22 pm
Absolutely worth it. You’ll be paying $81/year to shelter $12k/year.
Can you share how you did that math?
1% of $70,000 = $700
1% of $20,000 = $200
--
Total = $900

Not being a jerk, but want to know if I'm not thinking of this correctly.
Woah sorry, I definitely slipped a decimal there. Apologies.
50/20/30 US stock/international stock/bonds. Hope to semi-retire in 2022.

lakpr
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Re: Is a Backdoor Roth worth it in our situation?

Post by lakpr » Tue Aug 13, 2019 7:59 pm

I had done some math on this topic in a different context. My conclusion is that, given an identical choice of investing $6k per year in a Roth account vs taxable account, the advantage of Backdoor Roth is about $14k over 20 years

In your case, it appears that it is perhaps break even for yourself, but definitely worth it for your wife. The additional expenses you would incur for rolling over YOUR Rollover IRA is $700 * 20 = $14k, hence break even. For your wife, though, it is only $200 * 20 = $4k, so worth an additional $10k.

Edited to add link to my previous post, containing the table:

viewtopic.php?f=1&t=286641&p=4664092#p4664092

Edited a second time to suggest simply Roth converting the $20k as a better option than rolling over to a 1%+ 401k plan.
Last edited by lakpr on Tue Aug 13, 2019 8:15 pm, edited 2 times in total.

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FiveK
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Re: Is a Backdoor Roth worth it in our situation?

Post by FiveK » Tue Aug 13, 2019 8:08 pm

abyan wrote:
Tue Aug 13, 2019 6:39 pm
...can you rollover those 401ks OUT of your employers and to Vanguard or somewhere else with MUCH lower expense ratios?
Not without penalty while still employed at that company and under age 59.5.

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FiveK
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Re: Is a Backdoor Roth worth it in our situation?

Post by FiveK » Tue Aug 13, 2019 8:16 pm

lakpr wrote:
Tue Aug 13, 2019 7:59 pm
...but definitely worth it for your wife.
Yes. Good way to look at it.

The fees make things a bit worse than $700/yr due to compounding. E.g., $70K earning 8%/yr is $326K after 20 years, while earning 7%/yr is only $271K.

Depending on current vs. expected future marginal rates, converting one or both tIRAs to Roth might be worthwhile.

usagi
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Re: Is a Backdoor Roth worth it in our situation?

Post by usagi » Tue Aug 13, 2019 9:45 pm

Your post is interesting. Given your high income I tend to think both of you are readily employable, so I really would consider looking for a new job with a company that doesn't have a 401K plan that sucks. I would also talk to my employer about getting a more competitive 401k plan. There is a high end skilled labor shortage, I would work that to my advantage. I think your real issue is your current employer's 401K plan.

Lee_WSP
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Location: Arizona

Re: Is a Backdoor Roth worth it in our situation?

Post by Lee_WSP » Tue Aug 13, 2019 9:49 pm

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Last edited by Lee_WSP on Wed Aug 14, 2019 12:08 pm, edited 1 time in total.

megabad
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Re: Is a Backdoor Roth worth it in our situation?

Post by megabad » Wed Aug 14, 2019 10:07 am

FiveK wrote:
Tue Aug 13, 2019 8:08 pm
abyan wrote:
Tue Aug 13, 2019 6:39 pm
...can you rollover those 401ks OUT of your employers and to Vanguard or somewhere else with MUCH lower expense ratios?
Not without penalty while still employed at that company and under age 59.5.
Well it depends on the situation...if you were say making after tax 401k contributions, then some plans allow in-service "rollovers" to an IRA of the associated portion of your 401k. This is one of the reasons that I think abyan's suggestions should be investigated. This would be a slam dunk for OP in my view if plan allows.

mervinj7
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Re: Is a Backdoor Roth worth it in our situation?

Post by mervinj7 » Wed Aug 14, 2019 10:44 am

usagi wrote:
Tue Aug 13, 2019 9:45 pm
Your post is interesting. Given your high income I tend to think both of you are readily employable, so I really would consider looking for a new job with a company that doesn't have a 401K plan that sucks. I would also talk to my employer about getting a more competitive 401k plan. There is a high end skilled labor shortage, I would work that to my advantage. I think your real issue is your current employer's 401K plan.
+1 Have you spoken to HR about your 401k? Also, when you mention total fees are 1%, is that still true for each incremental investment? For example, my 401k charges a flat $54/year recordkeeping fee. After that, most of the institutional index funds are available for 0.01% to 0.03% ERs. Thus, the effective ER goes down with more assets. For us, it was a no-brainer to rollover several IRAs into the 401k in order to enable the backdoor Roth IRA.

bradpevans
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Re: Is a Backdoor Roth worth it in our situation?

Post by bradpevans » Wed Aug 14, 2019 11:10 am

cbr shadow wrote:
Tue Aug 13, 2019 6:18 pm
My wife and I are both 35 years old and haven't contributed to a Roth IRA in several years since our salaries are too high to do a standard Roth IRA contribution. We have the option of doing a "Backdoor Roth IRA Contribution" except we both have rollover IRA's from previous employer 401k's. Those rollover Roth IRA's are currently with Vanguard and invested in VTSAX.

Both of our employer's 401k plans allow for us to move our rollover IRA's into the 401k's, but the 401k's have about 1% expense total. Compare that to the VTSAX Admiral's expense ratio under 0.1%. Our rollover IRA accounts don't have a ton in them (mine is $75k, hers is $20k).

In our situation is it worth moving that money to our 401k's and then doing the backdoor process to contribute to our Roth IRA's?

In case it matters, here's some general info:
Age(s) : 35/35
HH income: ~$300k
Location: Northern California
maybe this is too simplistic but it seems you would want to compare:
A) do nothing, invest 6000 after tax dollars in a brokerage account, pay LTCG at some point, keep option to TLH/TGH

B) do the rollover, pay the increased expense ratios, invest 6000 after tax dollars, NEVER pay tax again, no option to TLH/TGH, five year /59.5 restrictions

Here i am under the assumption that 401k/pre-tax is being maxed, and you wish to save beyond that
.

I suppose if the would be current rollover amount swamps the incremental back door amount,
then it wouldn't be wise.

But if the options are Roth v. brokerage then it seems Roth would be preferred.

Topic Author
cbr shadow
Posts: 274
Joined: Wed Jul 10, 2013 2:12 pm

Re: Is a Backdoor Roth worth it in our situation?

Post by cbr shadow » Wed Aug 14, 2019 11:11 am

abyan wrote:
Tue Aug 13, 2019 6:39 pm
cbr shadow wrote:
Tue Aug 13, 2019 6:18 pm
Both of our employer's 401k plans allow for us to move our rollover IRA's into the 401k's, but the 401k's have about 1% expense total. Compare that to the VTSAX Admiral's expense ratio under 0.1%. Our rollover IRA accounts don't have a ton in them (mine is $75k, hers is $20k).
This is a question for the brainier types on this forum, and perhaps your HR people, but can you rollover those 401ks OUT of your employers and to Vanguard or somewhere else with MUCH lower expense ratios? 1% expense ratios aren't nothing.
Unfortunately my company is tiny and we don't have an HR department. Our one HR person would definitely not fall into the "Brainier types" and isn't helpful.

I've spoken to the company owner about 401k fees, but he's been using this 401k provider for years and considers it an excellent value since they send (1) person 1x per year to our office for a few hours to discuss the plan. Even the person they send couldn't be clear with me about fees. Anyways, I'm getting a little off topic with this rant haha

My salary is above market and I'm treated very well at my current company, so I'd like to stay.

It sounds like one option mentioned above is to "convert" our Rollover IRA's to the Roth IRA account. Is this difficult? Does it complicate taxes? I'm nervous about this stuff but willing to jump into it if it's saving us money.

I didn't mention in my initial post that we currently do max our 401k's and any leftover money (usually ~$100k / yr) goes into our taxable account with Vanguard. Our taxable account is 100% VTSAX

Topic Author
cbr shadow
Posts: 274
Joined: Wed Jul 10, 2013 2:12 pm

Re: Is a Backdoor Roth worth it in our situation?

Post by cbr shadow » Wed Aug 14, 2019 11:13 am

bradpevans wrote:
Wed Aug 14, 2019 11:10 am
cbr shadow wrote:
Tue Aug 13, 2019 6:18 pm
My wife and I are both 35 years old and haven't contributed to a Roth IRA in several years since our salaries are too high to do a standard Roth IRA contribution. We have the option of doing a "Backdoor Roth IRA Contribution" except we both have rollover IRA's from previous employer 401k's. Those rollover Roth IRA's are currently with Vanguard and invested in VTSAX.

Both of our employer's 401k plans allow for us to move our rollover IRA's into the 401k's, but the 401k's have about 1% expense total. Compare that to the VTSAX Admiral's expense ratio under 0.1%. Our rollover IRA accounts don't have a ton in them (mine is $75k, hers is $20k).

In our situation is it worth moving that money to our 401k's and then doing the backdoor process to contribute to our Roth IRA's?

In case it matters, here's some general info:
Age(s) : 35/35
HH income: ~$300k
Location: Northern California
maybe this is too simplistic but it seems you would want to compare:
A) do nothing, invest 6000 after tax dollars in a brokerage account, pay LTCG at some point, keep option to TLH/TGH

B) do the rollover, pay the increased expense ratios, invest 6000 after tax dollars, NEVER pay tax again, no option to TLH/TGH, five year /59.5 restrictions

Here i am under the assumption that 401k/pre-tax is being maxed, and you wish to save beyond that
.

I suppose if the would be current rollover amount swamps the incremental back door amount,
then it wouldn't be wise.

But if the options are Roth v. brokerage then it seems Roth would be preferred.
Thanks, you stated the issue very concisely. That's exactly what I'm trying to figure out.

miamivice
Posts: 2066
Joined: Tue Jun 11, 2013 11:46 am

Re: Is a Backdoor Roth worth it in our situation?

Post by miamivice » Wed Aug 14, 2019 11:14 am

lakpr wrote:
Tue Aug 13, 2019 7:59 pm
I had done some math on this topic in a different context. My conclusion is that, given an identical choice of investing $6k per year in a Roth account vs taxable account, the advantage of Backdoor Roth is about $14k over 20 years
I agree with the numbers, but a few more might help context.

Investing $6000 a year for 20 years will result in a balance of $220,000, with $120,000 from contributions and $100,000 from growth. 15% long term capital gains tax will result in a tax hit of about $15,000, or reduce your ending balance from $220,000 to $205,000.

By putting it in a Roth, the $120,000 principle can be withdrawn at any time, howeer, the $100,000 growth can only be used penalty/tax free when one reaches age 59.5.

It is a personal decision as to whether one wants to lock up $100,000 growth in an account where it can only be used after age 59.5 to avoid penalties/taxes.

miamivice
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Joined: Tue Jun 11, 2013 11:46 am

Re: Is a Backdoor Roth worth it in our situation?

Post by miamivice » Wed Aug 14, 2019 11:17 am

usagi wrote:
Tue Aug 13, 2019 9:45 pm
Your post is interesting. Given your high income I tend to think both of you are readily employable, so I really would consider looking for a new job with a company that doesn't have a 401K plan that sucks. .... I think your real issue is your current employer's 401K plan.
There are a lot of factors in choosing where one works. Both spouse and I are fortuante to work for employers with incredibly low 401k plans, however, the fees of the 401k plan are way down on the list of important things about choosing where to work.

Topic Author
cbr shadow
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Re: Is a Backdoor Roth worth it in our situation?

Post by cbr shadow » Wed Aug 14, 2019 11:20 am

miamivice wrote:
Wed Aug 14, 2019 11:17 am
usagi wrote:
Tue Aug 13, 2019 9:45 pm
Your post is interesting. Given your high income I tend to think both of you are readily employable, so I really would consider looking for a new job with a company that doesn't have a 401K plan that sucks. .... I think your real issue is your current employer's 401K plan.
There are a lot of factors in choosing where one works. Both spouse and I are fortuante to work for employers with incredibly low 401k plans, however, the fees of the 401k plan are way down on the list of important things about choosing where to work.
Yeah I feel the same way. The 401k plan is a definite downside, but I've gotten significant salary increases often, they treat me well overall, and I actually work offsite at a major tech company (contracted to them) and am provided transportation, all meals, and other pretty unique benefits.

EnjoyIt
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Re: Is a Backdoor Roth worth it in our situation?

Post by EnjoyIt » Wed Aug 14, 2019 11:37 am

cbr shadow wrote:
Wed Aug 14, 2019 11:13 am
bradpevans wrote:
Wed Aug 14, 2019 11:10 am
cbr shadow wrote:
Tue Aug 13, 2019 6:18 pm
My wife and I are both 35 years old and haven't contributed to a Roth IRA in several years since our salaries are too high to do a standard Roth IRA contribution. We have the option of doing a "Backdoor Roth IRA Contribution" except we both have rollover IRA's from previous employer 401k's. Those rollover Roth IRA's are currently with Vanguard and invested in VTSAX.

Both of our employer's 401k plans allow for us to move our rollover IRA's into the 401k's, but the 401k's have about 1% expense total. Compare that to the VTSAX Admiral's expense ratio under 0.1%. Our rollover IRA accounts don't have a ton in them (mine is $75k, hers is $20k).

In our situation is it worth moving that money to our 401k's and then doing the backdoor process to contribute to our Roth IRA's?

In case it matters, here's some general info:
Age(s) : 35/35
HH income: ~$300k
Location: Northern California
maybe this is too simplistic but it seems you would want to compare:
A) do nothing, invest 6000 after tax dollars in a brokerage account, pay LTCG at some point, keep option to TLH/TGH

B) do the rollover, pay the increased expense ratios, invest 6000 after tax dollars, NEVER pay tax again, no option to TLH/TGH, five year /59.5 restrictions

Here i am under the assumption that 401k/pre-tax is being maxed, and you wish to save beyond that
.

I suppose if the would be current rollover amount swamps the incremental back door amount,
then it wouldn't be wise.

But if the options are Roth v. brokerage then it seems Roth would be preferred.
Thanks, you stated the issue very concisely. That's exactly what I'm trying to figure out.
I did the math above over a 20 year period without aum fees on a $6k/yr Roth contribution vs taxable.
Considering 2% dividends and a 15% tax drag on said dividends, the difference becomes about $8k
I also did the math on 5% total returns and over 20 years you would have $80k in capital gains that may or may not pay 15% in taxes worth another $12k. The way I figure it a Roth saves you some money on tax drag as well as offers increased options in retirement to minimize taxes, so I do the backdoor Roth every year once all our other pre-tax accounts are maxed out for said year.

Lee_WSP
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Location: Arizona

Re: Is a Backdoor Roth worth it in our situation?

Post by Lee_WSP » Wed Aug 14, 2019 11:40 am

bradpevans wrote:
Wed Aug 14, 2019 11:10 am
cbr shadow wrote:
Tue Aug 13, 2019 6:18 pm
My wife and I are both 35 years old and haven't contributed to a Roth IRA in several years since our salaries are too high to do a standard Roth IRA contribution. We have the option of doing a "Backdoor Roth IRA Contribution" except we both have rollover IRA's from previous employer 401k's. Those rollover Roth IRA's are currently with Vanguard and invested in VTSAX.

Both of our employer's 401k plans allow for us to move our rollover IRA's into the 401k's, but the 401k's have about 1% expense total. Compare that to the VTSAX Admiral's expense ratio under 0.1%. Our rollover IRA accounts don't have a ton in them (mine is $75k, hers is $20k).

In our situation is it worth moving that money to our 401k's and then doing the backdoor process to contribute to our Roth IRA's?

In case it matters, here's some general info:
Age(s) : 35/35
HH income: ~$300k
Location: Northern California
maybe this is too simplistic but it seems you would want to compare:
A) do nothing, invest 6000 after tax dollars in a brokerage account, pay LTCG at some point, keep option to TLH/TGH

B) do the rollover, pay the increased expense ratios, invest 6000 after tax dollars, NEVER pay tax again, no option to TLH/TGH, five year /59.5 restrictions

Here i am under the assumption that 401k/pre-tax is being maxed, and you wish to save beyond that
.

I suppose if the would be current rollover amount swamps the incremental back door amount,
then it wouldn't be wise.

But if the options are Roth v. brokerage then it seems Roth would be preferred.
Why does everyone keep saying put it in taxable? How does taxable beat tax deferred growth in a trad account with the option to convert in the future?

Am I wrong in my understanding of the tax code on this issue? AFAIK the conversions do not have to be done by a certain time point and form 8606 keeps a record of non deducted trad contributions.

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FiveK
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Joined: Sun Mar 16, 2014 2:43 pm

Re: Is a Backdoor Roth worth it in our situation?

Post by FiveK » Wed Aug 14, 2019 12:01 pm

Lee_WSP wrote:
Wed Aug 14, 2019 11:40 am
Why does everyone keep saying put it in taxable? How does taxable beat tax deferred growth in a trad account with the option to convert in the future?
See Non-deductible traditional IRA - Bogleheads.

As noted there, "Whether a tax efficient fund comes out ahead in a non-deductible IRA or in a taxable account depends..." on various things. Also, "A spreadsheet that [allows one to consider those various things] is on the 'Non-ded. IRA' tab of the Case Study Spreadsheet.

miamivice
Posts: 2066
Joined: Tue Jun 11, 2013 11:46 am

Re: Is a Backdoor Roth worth it in our situation?

Post by miamivice » Wed Aug 14, 2019 12:20 pm

Lee_WSP wrote:
Wed Aug 14, 2019 11:40 am
bradpevans wrote:
Wed Aug 14, 2019 11:10 am
cbr shadow wrote:
Tue Aug 13, 2019 6:18 pm
My wife and I are both 35 years old and haven't contributed to a Roth IRA in several years since our salaries are too high to do a standard Roth IRA contribution. We have the option of doing a "Backdoor Roth IRA Contribution" except we both have rollover IRA's from previous employer 401k's. Those rollover Roth IRA's are currently with Vanguard and invested in VTSAX.

Both of our employer's 401k plans allow for us to move our rollover IRA's into the 401k's, but the 401k's have about 1% expense total. Compare that to the VTSAX Admiral's expense ratio under 0.1%. Our rollover IRA accounts don't have a ton in them (mine is $75k, hers is $20k).

In our situation is it worth moving that money to our 401k's and then doing the backdoor process to contribute to our Roth IRA's?

In case it matters, here's some general info:
Age(s) : 35/35
HH income: ~$300k
Location: Northern California
maybe this is too simplistic but it seems you would want to compare:
A) do nothing, invest 6000 after tax dollars in a brokerage account, pay LTCG at some point, keep option to TLH/TGH

B) do the rollover, pay the increased expense ratios, invest 6000 after tax dollars, NEVER pay tax again, no option to TLH/TGH, five year /59.5 restrictions

Here i am under the assumption that 401k/pre-tax is being maxed, and you wish to save beyond that
.

I suppose if the would be current rollover amount swamps the incremental back door amount,
then it wouldn't be wise.

But if the options are Roth v. brokerage then it seems Roth would be preferred.
Why does everyone keep saying put it in taxable? How does taxable beat tax deferred growth in a trad account with the option to convert in the future?

Am I wrong in my understanding of the tax code on this issue? AFAIK the conversions do not have to be done by a certain time point and form 8606 keeps a record of non deducted trad contributions.
I don't think everyone said to keep it in taxable, but several presented the options for the OP to consider. It comes down to flexibility and taxes. My view is that the tax tail shouldn't wag the dog. If the money would be enjoyed and appreciated before retirement, and his retirement accounts are well stuffed, a taxable account would provide a lot of flexibility.

On the other hand, if he is behind the 8 ball with retirement, or has no need for the money prior to 59.5, then backdoor Roth IRA makes sense.

Lee_WSP
Posts: 789
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Location: Arizona

Re: Is a Backdoor Roth worth it in our situation?

Post by Lee_WSP » Wed Aug 14, 2019 12:29 pm

I was reading into form 8606 too much. Rollovers also face the pro rata rule.

Another option for those with sub par 401ks is to get some 1099 income and open a solo k. But that's probably more effort than it's worth.

bradpevans
Posts: 557
Joined: Sun Apr 08, 2018 1:09 pm

Re: Is a Backdoor Roth worth it in our situation?

Post by bradpevans » Wed Aug 14, 2019 2:26 pm

Lee_WSP wrote:
Wed Aug 14, 2019 11:40 am
bradpevans wrote:
Wed Aug 14, 2019 11:10 am
cbr shadow wrote:
Tue Aug 13, 2019 6:18 pm
My wife and I are both 35 years old and haven't contributed to a Roth IRA in several years since our salaries are too high to do a standard Roth IRA contribution. We have the option of doing a "Backdoor Roth IRA Contribution" except we both have rollover IRA's from previous employer 401k's. Those rollover Roth IRA's are currently with Vanguard and invested in VTSAX.

Both of our employer's 401k plans allow for us to move our rollover IRA's into the 401k's, but the 401k's have about 1% expense total. Compare that to the VTSAX Admiral's expense ratio under 0.1%. Our rollover IRA accounts don't have a ton in them (mine is $75k, hers is $20k).

In our situation is it worth moving that money to our 401k's and then doing the backdoor process to contribute to our Roth IRA's?

In case it matters, here's some general info:
Age(s) : 35/35
HH income: ~$300k
Location: Northern California
maybe this is too simplistic but it seems you would want to compare:
A) do nothing, invest 6000 after tax dollars in a brokerage account, pay LTCG at some point, keep option to TLH/TGH

B) do the rollover, pay the increased expense ratios, invest 6000 after tax dollars, NEVER pay tax again, no option to TLH/TGH, five year /59.5 restrictions

Here i am under the assumption that 401k/pre-tax is being maxed, and you wish to save beyond that
.

I suppose if the would be current rollover amount swamps the incremental back door amount,
then it wouldn't be wise.

But if the options are Roth v. brokerage then it seems Roth would be preferred.
Why does everyone keep saying put it in taxable? How does taxable beat tax deferred growth in a trad account with the option to convert in the future?

Am I wrong in my understanding of the tax code on this issue? AFAIK the conversions do not have to be done by a certain time point and form 8606 keeps a record of non deducted trad contributions.
See the bolded blue above....

Lee_WSP
Posts: 789
Joined: Fri Apr 19, 2019 5:15 pm
Location: Arizona

Re: Is a Backdoor Roth worth it in our situation?

Post by Lee_WSP » Wed Aug 14, 2019 3:01 pm

bradpevans wrote:
Wed Aug 14, 2019 2:26 pm
Lee_WSP wrote:
Wed Aug 14, 2019 11:40 am
bradpevans wrote:
Wed Aug 14, 2019 11:10 am
cbr shadow wrote:
Tue Aug 13, 2019 6:18 pm
My wife and I are both 35 years old and haven't contributed to a Roth IRA in several years since our salaries are too high to do a standard Roth IRA contribution. We have the option of doing a "Backdoor Roth IRA Contribution" except we both have rollover IRA's from previous employer 401k's. Those rollover Roth IRA's are currently with Vanguard and invested in VTSAX.

Both of our employer's 401k plans allow for us to move our rollover IRA's into the 401k's, but the 401k's have about 1% expense total. Compare that to the VTSAX Admiral's expense ratio under 0.1%. Our rollover IRA accounts don't have a ton in them (mine is $75k, hers is $20k).

In our situation is it worth moving that money to our 401k's and then doing the backdoor process to contribute to our Roth IRA's?

In case it matters, here's some general info:
Age(s) : 35/35
HH income: ~$300k
Location: Northern California
maybe this is too simplistic but it seems you would want to compare:
A) do nothing, invest 6000 after tax dollars in a brokerage account, pay LTCG at some point, keep option to TLH/TGH

B) do the rollover, pay the increased expense ratios, invest 6000 after tax dollars, NEVER pay tax again, no option to TLH/TGH, five year /59.5 restrictions

Here i am under the assumption that 401k/pre-tax is being maxed, and you wish to save beyond that
.

I suppose if the would be current rollover amount swamps the incremental back door amount,
then it wouldn't be wise.

But if the options are Roth v. brokerage then it seems Roth would be preferred.
Why does everyone keep saying put it in taxable? How does taxable beat tax deferred growth in a trad account with the option to convert in the future?

Am I wrong in my understanding of the tax code on this issue? AFAIK the conversions do not have to be done by a certain time point and form 8606 keeps a record of non deducted trad contributions.
See the bolded blue above....
No, I was missing some key information that I used to know, but then I kept reading the form 8606 and then I got confused, now I've got it sorted again.

Which is why I don't want to be a tax attorney.

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