#2 12-08-2020, 05:46 AM For 2021, 2020 and 2019, the total contributions you make each year to all of your traditional IRAs and Roth IRAs can't be more than: $6,000 ($7,000 if you're age 50 or older), or If less, your taxable compensation for the year That's from the IRS website. I plan to Roth convert and QCD. True it is first world problems but it is a problem nonetheless and I would much rather keep my hard earned cash in my pockets rather than lining uncle Sams. Based on the last 19 years of inflation, that would actually be a smaller withdrawal than their first at age 70.5. My situation was a bit different from yours. Rich. As far as James Lange goes, he has been wrong for about 10 years that tax rates were going up as far back as the Bush tax cuts. Why or why not? Early retiree Go Curry Cracker has a good post on how he is timing his conversions (over a longer time) to get his taxes down to zero. The second is the possibility of reducing or eliminating social security to those with large enough 401k accounts. Then again, it could go the other way which is a reason for hedging your bets. Revolving credit cards loans make sense mathematically. By age 80, it's 5.3%, and if that account kept up with inflation despite the withdrawals, it could be $530K a year, well into the top tax bracket even for married folks not including other income. It wasnt my intention to be nosy, just informed. A larger Roth would be very useful in that type of situation. Once any of these events happens, ill re-evaluate our tax situation and likely start contributing the 17.5k to the Roth. Financial Wellness and Burnout Prevention for Medical Professionals, How the 199A Deduction Impacts 401k Decisions and Tax Rates. Funding the conversion with non Roth dollars effectively results in a contribution to the Roth account. This is interesting and complicated stuff. While social security optimization was not mentioned by the author, you can see from the chart that it allows a bit more money to be transferred to the Roth if Social Security is taken later. I hope the reason you cant save more is that youre making huge payments on your student loans rather than that youve mostly grown into your income already. I guess I was thinking more of having cash on hand for living expenses to keep my income as low as possible to keep the rate at which I do Roth conversions as low as possible. Great article. Thanks again for the visuals it really drove home the point. If thats the case Id say sure go Roth. Agreed. Planning for de-accumulation (or distribution), however, is difficult for super-savers. Same with a doc who plans to retire very early (with a smaller tax-deferred nest egg or at least many years with which to make withdrawals or do Roth conversions). Straighten out your financial life today! Our government is broke. If you cant max out both your wifes and your Roth IRA each year on your current salary, then you are only compounding the problem by using credit cards to do so (even at 0-2% interest). But in that case, you're really comparing a Roth account to a taxable account. Answer: Maybe. Assuming he's actually maxing the 401(k) out, in order to save the equivalent after-tax amount of money, an investor who preferentially used a pre-tax account would have to also make a taxable investment. We think of this money as our nest egg for retirement, but the IRS calls it IRD (income in respect to the decedent) and wants to crack that egg open to suck out taxes on the deferred income inside. Compare this to no conversions (the right) with a lower ending balance, and of course less Roth money. As an aside, QCDs also allow you to reduce the RMD problem if you plan on doing charitable contributions. I worry about this also. It seems like 12% and 24% tax brackets would be natural breaks. In the first example, starting retirement with $2 million in a tax deferred account does not at all mean that youll still have $2 million in that account by age 90. Why deplete Taxable account ? Perfect for those who wear the white coat! This window opens as soon as you stop earning income (and thus can access your lower tax brackets) and closes when you are forced to take RMDs. One reason in this case I prefer somewhat to not deplete the taxable account and use it as an inheritance. RMDs are actually a very conservative means of slowly depleting a portfolio, and unless your investments have very good returns, the inflation-adjusted dollars youll be withdrawing as RMDs unlikely to increase dramatically over time. My goal is to funnel most of my income into the i401(k). Also, next year I will be married to another physician. I hope to not retire (programmer, self employed, love my job), so Roth is superior for estate planning and general safety net. Wife does a traditional IRA and we dont have enough left over for a backdoor at this point. Between the TIRA RMD (which is a bit like a inflation adjusted annuity) SS and a dab of brokerage, my future is barely leveraged. I see no reason to split anything. But thats what Id do. In this example, we see the darker blue filling up to the 12% tax bracket. For now we are paying excessive rent, but I think its a lesser mistake than buying a $2M house. The third would be a conversion of 401k dollars into an essentially government guaranteed annuity check and the government essentially confiscates 401k dollars to pay debts it owes with a ever increasing debt burden with no or few cuts in spending. #1 2022 Backdoor Roth - accidentally directly contributed to Roth 01-16-2022, 01:06 PM Hi all - new to the forum here and I think I've found a new way to screw up the Backdoor Roth IRA process! Has made me max out any tax bracket Im in below our max expected [under current laws] future brackets, at least for now while our ROTH accounts are well under 50% of our retirement funds. Why get another wife when you can just get another job? Certainly something for me to ponder. Second, my household income was $40K, not $135K. Im a freelancer and intend to open an individual 401(k) this year. The i401(k) would be our post-tax option. Why not live like a resident and do them all? What do you think? He is 71. Hence, this backdoor Roth FAQ, updated by me for 2023. Or if the money you contribute necessarily needs to come from your side business itself which kinda defeats the purpose. Doc W- thanks for the comment and the great points. I didnt have a Roth until my last year when I quit early, just long enough to satisfy 1 more year of SS eligibility and established finally my Roths. Our plan is financial independence by our late 40s/ early 50s. Can he roll-in his other 401ks/IRAs into current 401k plan while/since he still continue to work? But any gains after your death are fully taxable, unlike a stretch Roth IRA. Qualified money is always the best money to give or leave to charity! Tax bracket arbitrage makes a lot of sense (defer income when we are in high brackets until later when hopefully we are in lower tax brackets) but there are some important considerations. My physician wife, 49, continues to work with high income and has no plans to retire anytime soon . How about ISIS sets off Iranian nuclear bombs in Washington, NYC, LA, and SF? If youre a supersaver, consider Roth contributions. The estate tax and asset protection arguments are a lot stronger. As I said in the other thread, that isnt true. We make about 125k but much is tax exempt housing and food allowance. Great article as always. So this is really interesting. Currently its Roth, mainly because the match is traditional, and my profit sharing contributing for my solo 401K is traditional; I do a backdoor Roth IRA too, or course. Many other ideas come up but what do you all think? This is commonly known as the still working exception. In a few years it may be worth readdressing. More than five years have passed, which means I can withdraw the entire $278,000 sum that I converted penalty-free and tax-free. Says bipartisan support this year will cause the death of the stretch for IRAs >400k. large cap, small cap, bonds) prior to recharacterization can offer a benefit. If I put my wife on the WCI payroll, itll be even more. The farther out the benefit and the larger the discount rate, the less appealing this would be. Say you have been a good accumulator and have $2 million the IRS wants to tax. In fact if your real goal is to get the IRA down under $2m $2.5m then I think you need to consider not spending any of the taxable at all and recalibrate your thinking to just spend down and live off the IRA between 60 -70, which is essentially what I have been doing. I did some analysis on this in my 50s and decided to quit contributing to my Pretax accounts and to contribute heavily to brokerage and aggressively tax loss harvest. My wife and I are both independent contractors in CA. In non-CP states, only half gets the step up. Precisely. -maxing out my 401K The fundamental math is straightforward, however: you just take the maximum dollar amount for the tax bracket you wish to fill and back out your adjusted taxable income and you get your conversion amount. My guess is it will be on the backs of the top 10% of earners and not those with Obama Phones. One of The Finance Buff's most famous posts was written shortly after this option came into being, showing that the Roth option was a poor choice for most people, although even he recently acknowledged there are some exceptions. Paying the tax from elsewhere does not get more money out of the IRA. With tax rates expiring at the end of 2025 or sooner, would I be prudent with my large IRA(4+) to convert up to a 20% federal tax rate and no state income tax At that point Ill likely start converting my wifes accounts into Roth accounts until we officially stop working. Very well done David. Finally, would you borrow money from a credit card at 0-2% to max out the Roth IRA? If I keep that up for 20 more years, I'm going to have a monstrously- sized tax-deferred account. 1) Invest in Roth IRA Many a high-income professional who earns too much to make a direct Roth IRA contribution will need to use the backdoor to make a Roth IRA contribution of $6,500 or $7,500 (if age 50 or over). This is a good example of how docs get swindled too. Even if I retire at 60, I can do convertions for a few years. Should You Make Roth or Traditional 401(k) Contributions? If you want to contribute to charity what better way/time to do that: doing an QCD to reduce the impact of RMDs thus reducing taxes on the QCD amounts, while hopefully enjoying lower tax bracketed (or close to zero in some cases) CapitalGains tax-rates on brokerage amounts ! Thanks. Agree. Consider the Required Minimum Distributions (RMD) on a $10 Million tax-deferred IRA ($106K a year for 35 years growing at 5% real) when you hit age 70 1/2. I know the buckets retirement strategy discusses this some, and although I wouldnt plan to that indefinitely, maybe doing it for a few years with some of a cash position while I do Roth conversions would be acceptable. I just like the idea of tax diversification. Its only $18k one way or the other in the end. Rich people dont play games like that because they dont need to. This results in a large addition to their tax-free (Roth) account balance and rapid depletion of their taxable account, which are both funding retirement and Roth conversions. They would offer us more flexibility and only minimal tax drag. #1 Mega Backdoor Roth 03-31-2022, 11:43 AM We currently max 401k + employer match for me HSA Backdoor Roth for my wife and myself 403b for my wife - no employer match. As a general rule, Roth accounts are for people who are not in their peak earnings years, and tax-deferred accounts are for those in their peak earnings years. The reason we decided to go with some Roth 401K is our country has a large debt that will need to be paid some day. Yes, when you separate from an employer (and sometimes even before in some 401(k)s you can roll Roth 401(k) to a Roth IRA or convert a traditioanl 401(k) to a Roth IRA. Each year conversions will need to be carefully planned as recharacterizations of Roth conversions are no longer allowed. This plan limited my end tax burden by not having a huge TIRA or 401K and allowed me to convert at the 250K level avoiding the extra surcharges and tax bumps associated with converting to the top of the 24%, again a tax optimization. Do you plan to at some point in your career or early in your retirement? Using that money to fund Roth conversions decreases the amount subject to creditor risk. The big picture is that doctors need to be maxing out all options. 2. This is particularly important for high income employees who may not have a lot of retirement account options. The reason we got Roth conversion was not for us but so the government could gain access to out taxes sooner. I probably should have mentioned that I do not share my colleagues pessimistic view but that his point is tax diversification in different kinds of tax advantaged accounts may be wise even if its a decision between maxing a 401k vs some 401k and then some back door Roth. Will deal with it if and when it comes. Assume she is 55 years old, married, earns $400,000 a year, and wants to retire at 60. No need to hold cash for decades until you need it. 3) I dont think we could actually afford to do it with our current lifestyle. Easy one for now. Remember, while it is true that Roth dollars are more valuable than non-Roth dollars, as an inheritance they are essentially equal to your heirs on the day they receive them and the following tax can be either zero to a small amount depending on their tax bracket and how they manage them. I find the $2M in assets at retirement to be too conservative. Those have to be opened by the end of the calendar year as I told you in the last thread you posted these questions in 5 minutes ago. Also, note the expected tax payments during the working years and then again when RMDs kick in. But what to do with the $18K of your $28K that you can put into Roth each year, much harder decision. I cant say I never borrowed money off a credit card at 0% to fund a Roth IRA, because I did. ), helping to boost my overall Roth amount. This is not a simple question to answer. Since I already maxed out the traditional 401k with my previous employer, can I still open a Roth 401k and contribute to it from my new part time 1099 job? As for the stretch, we will see. Your question implies that youre looking for something other than a taxable account, and I assume that where your extra savings goes now. Financial Planning Software can pinpoint the sweet spot of Roth conversions the next figure demonstrates. -maxing out the backdoor Roth IRA for myself He Monte Carloed it and looked at many permutations, etc. It is hard to predict where any of us will be 30 years from now from an Estate tax standpoint.. John / WCI, Think a nice size ROTH can be a substitute for a LTC ins plan, where premiums are quite high. Second reason is that if I switch jobs, then I can toss the Roth 401k money into my Roth IRA account at Vanguard (right? Using that money to fund Roth conversions decreases the amount subject to creditor risk. No one can predict future tax laws. We can see these numbers below. Im guessing I should hold some money in cash to use for expenses and to keep my income low so that I can do Roth conversions. Our savings so far: Mine: Roth IRA $27k I contend if you hang on to too-much IRA ($3,$4,$5m) thats going to be much worse than a taxable account that you have no requirement to spend at all and even if you do spend it, most of the tax has already been paid or at least will be paid in a lower tax bracket. Use this tax free money after such life event., instead of depleting earlier this Brokerage amount then automatically adds these amounts to your Tax-Free bucket with zero taxes paid on these. Appreciate the simple answer . document.getElementById( "ak_js_1" ).setAttribute( "value", ( new Date() ).getTime() ); The book summarizes the most important information on the blog and contains material not found on the site at all. Question: If I am still working past age 70 , can I delay RMDs for my 401(k)? Thats it. Vanguards financial planners recommend putting your bond allocation into your tax deferred space. https://www.whitecoatinvestor.com/qualified-charitable-distributions/, Schwab has a roth ira conversion calaculator I LOVE this blog and it has been such a huge help to me!! Income, capital gain, and death (estate) taxes are definitely hitting high income slaves like us harder than anyone else. This is also a major benefit for those who want to retire early (which I do) as the window for these partial conversions is longer and thus you can have more money in the lower income tax brackets taken out. If you only get a few thousand dollars as a match, then you need more pre-tax dollars. Finally, you may be saying I really think I need more Roth. Thats more than I made my first 4 years as an attending. There is one item that you did not discuss. Youll have your mortgage paid off by residency graduation? Military? From a pure tax differential (working tax paid (taxable) vs spending tax (IRA) the seemingly large differential after the working years and before RMDs seems to favor spending down the IRA. Maybe. Today, I'm going to talk about some other exceptions and give you a few things to think about if you have a Roth option in your 401(k). I debate back and forth if I should roth 401k or 401k. I may take advantage of the DBP in the future if our income/lifestyle allows us. Once they retire their RMD, SS and taxable investment income may still have them in lower brackets than while working. 35 years old, married and filing jointly, made $480k income this year (3rd year out of residency, just made partner so definitely in my peak earning years): We go to the doctor too much, fortunately for minor stuff. One thing I would do, however, is roll that rollover IRA into your individual 401(k) and then do a backdoor Roth IRA for each of you each year. Still not clear that this works for that many people. In my case, using the taxable account to live on during the tax window serves a double purpose 1) allowing more money from the 401K to be transferred to the Roth (taxes paid by taxable account rather than from the 401K withdrawals this can be viewed as an accounting method of moving some money from the taxable account into the Roth), and 2) it allows me the option of delaying social security up to age 70 (if desired). That would probably have a rather significant effect on my 401(k) as well and seems at least as likely as all that happening. When doing my taxes this year it was suggested that I can put money into a traditional IRA. They spend a modest $150,000 a year and plan to continue spending that amount in retirement.