Roth IRA guidance

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Topic Author
Gritty1109
Posts: 2
Joined: Wed Nov 13, 2019 8:29 am

Roth IRA guidance

Post by Gritty1109 » Wed Nov 13, 2019 9:31 am

Greetings,

As part of a new employment, I have the opportunity to restructure my tax deferred investment strategy and wanted to ask for the forum’s wisdom in addressing this.

Emergency funds: 18 months cash reserve

Debt: 72,000 student loan debt, 1.7% interest rate

Tax Filing Status: MFJ

Tax Rate: 35% Federal, 4% State

Age:40

Desired Asset allocation: 70% stocks / 30% bonds
Desired International allocation: 20% of stocks

Current portfolio is about 1.8 mm

Current retirement assets

Taxable 1 mm

His (Roth) 401k 250,000

His pension plan 400,000

His Roth IRA 93,000

Her Roth IRA 78,000

New annual Contributions

$19,000 his 401k
$36,000 his pension plan
$6000 his Roth IRA (backdoor / recharacterization)
$6000 her Roth IRA (backdoor / recharacterization)
$60,000 taxable

Questions:

1. For years I have contributed to my 401k as a Roth contribution. Would I be better served to make these contributions pretax instead, given my tax bracket?

2. I have the opportunity to roll out my work 401k (Roth) to my personal Roth IRA due to a change in employment. If I roll this out, am I still able to execute a backdoor Roth IRA contribution for myself and my wife on an ongoing basis?

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FiveK
Posts: 7803
Joined: Sun Mar 16, 2014 2:43 pm

Re: Roth IRA guidance

Post by FiveK » Wed Nov 13, 2019 12:46 pm

Gritty1109, welcome to the forum.
Gritty1109 wrote:
Wed Nov 13, 2019 9:31 am
1. For years I have contributed to my 401k as a Roth contribution. Would I be better served to make these contributions pretax instead, given my tax bracket?

2. I have the opportunity to roll out my work 401k (Roth) to my personal Roth IRA due to a change in employment. If I roll this out, am I still able to execute a backdoor Roth IRA contribution for myself and my wife on an ongoing basis?
1. Probably. See Traditional versus Roth - Bogleheads for details.

2. Yes. Roth IRA balances have no effect whatsoever on the Backdoor Roth process.

Olemiss540
Posts: 1134
Joined: Fri Aug 18, 2017 8:46 pm

Re: Roth IRA guidance

Post by Olemiss540 » Wed Nov 13, 2019 2:46 pm

39% marginal rate would prompt me to taking advantage of ANY pretax opportunities available including 401k, HSA, etc.
I hold index funds because I do not overestimate my ability to pick stocks OR stock pickers.

Count of Notre Dame
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Joined: Fri Oct 11, 2013 1:08 pm

Re: Roth IRA guidance

Post by Count of Notre Dame » Wed Nov 13, 2019 6:38 pm

Why carry the student loans when you could sell off part of your taxable investments (hopefully not incurring a lot of taxes) to pay off that nuisance? I know the rate is low, but still!

MotoTrojan
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Re: Roth IRA guidance

Post by MotoTrojan » Wed Nov 13, 2019 6:52 pm

Count of Notre Dame wrote:
Wed Nov 13, 2019 6:38 pm
Why carry the student loans when you could sell off part of your taxable investments (hopefully not incurring a lot of taxes) to pay off that nuisance? I know the rate is low, but still!
I would not sell investments for gains to save 1.7% in interest personally. You could argue that with bonds yielding what they are that a 1.7% after-tax return is worth paying them off though with cash that would've gone to bonds/cash.

OP you should absolutely start getting some pre-tax investments going, especially with how much Roth space you have accrued. I would switch the 401k's to pre-tax. Note that this will be less out-of-pocket cost so you should bump up your taxable investing to compensate, or if applicable start contributing to HSAs.

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

Re: Roth IRA guidance

Post by FiveK » Wed Nov 13, 2019 6:54 pm

Count of Notre Dame wrote:
Wed Nov 13, 2019 6:38 pm
Why carry the student loans when you could sell off part of your taxable investments (hopefully not incurring a lot of taxes) to pay off that nuisance? I know the rate is low, but still!
Up to the OP, but if it is on auto-pay then the nuisance factor might be even lower than the interest rate.

HomeStretch
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Joined: Thu Dec 27, 2018 3:06 pm

Re: Roth IRA guidance

Post by HomeStretch » Wed Nov 13, 2019 7:06 pm

Welcome!

Does your 401k plan allow after-tax (non Roth) contributions and, if so, does it allow in-plan Roth rollovers or in-service rollovers to a Roth IRA (mega backdoor)?

If so, consider doing a mega backdoor up to the limit ($56k < age 50 for 2019) as earnings are tax-free before contributing to a Taxable account (earnings are generally taxed each year).

Link to BH wiki page on “After-Tax 401k”:
https://www.bogleheads.org/wiki/After-tax_401(k)

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Stinky
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Location: Sweet Home Alabama

Re: Roth IRA guidance

Post by Stinky » Wed Nov 13, 2019 7:59 pm

You’re 40 years old, have almost $2 million in assets, and still have student loans?

Pay them off. Put that debt behind you.
It's a GREAT day to be alive - Travis Tritt

bltn
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Joined: Mon Feb 20, 2017 9:32 pm

Re: Roth IRA guidance

Post by bltn » Wed Nov 13, 2019 10:13 pm

Welcome to the forums.

So , it looks like your putting 31,000 into Roths , 36,000 into pretax retirement funds, and 60,000 into taxable savings. Even though you might save a bit of tax money now by changing your 401k to tax deferred, you ll be happy to have all those Roth assets later. And you ll be happy to have a large portion of your accumulation in a taxable account. At your pace, your taxes are going to be pretty high when you are retired.
I would continue your savings as they are.
I don t have a problem with the student loan at 1.7%. Before I cleared that, I d put the additional money to prepay a mortgage.
Keep up the savings in these accounts and you ll do very well.

All the best.

Topic Author
Gritty1109
Posts: 2
Joined: Wed Nov 13, 2019 8:29 am

Re: Roth IRA guidance

Post by Gritty1109 » Fri Nov 15, 2019 2:57 pm

Thanks to all the posters who took time to consider my dilemma. I really appreciate it.

In order to pursue as much tax diversification as I can, I think I’ll keep funding both my Roth 401k as well as my pension as I have been in the past. In this way, I can fill my 3 tax baskets (Roth, tax deferred, and taxable) as much as possible.

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