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Old 04-10-2014, 03:02 AM   #41
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Wow, had a busy day at work, what a great surprise to find all this great advice. Wife and 2 kids live in Hawaii. Pretty modest living because food, housing and private school takes a big chunk of our earnings. We're not financially wise people, so I have lots to research now! I'm hoping to take the simplest path first and go from there. And yes, I realize this is a "good" problem to have. It just sort of snuck up on me and I didn't notice until I completed turbotax lol.
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Old 04-10-2014, 05:43 AM   #42
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Congratulations for having made it into the income bracket where you get to work hard and pay the bills for all the grasshoppers and deadbeats, yet don't make enough to get into the country club.

I have no tax advice beyond the wisdom already shared...

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Old 04-10-2014, 07:30 AM   #43
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Thanks Gauss…I was not aware of this. I just spoke with my company and they allow it. Can I convert that to roth IRA right away or will have to wait for some time? If it allows it right away then my tax implications will be just nil.
Be very careful with this. I don't think it will work the way you are picturing it. I'm not clear on what specific strategy you are considering but it sounds like you are thinking of converting Traditional 401(k) savings to Roth 401k savings, which is 100% taxable at your marginal tax rate (which could be pushed to as high as 40% depending on your income and amount of 401k savings).

Or are you simply talking about making future contributions to a Roth 401k in which case there's no conversion tax but your income taxes will increase immediately because you are no longer deferring the income. Might make sense for you depending on your situation but either way, there are tax implications.

The only thing that wouldn't involve a tax consequence is if you are suggesting rolling a Rollover IRA into your existing 401k to allow you to do backdoor Roth contributions going forward (outside of your work 401k). If this is what you meant, then I retract all of my concerns for you and your tax bill.
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Old 04-10-2014, 08:22 AM   #44
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Be very careful with this. I don't think it will work the way you are picturing it. I'm not clear on what specific strategy you are considering but it sounds like you are thinking of converting Traditional 401(k) savings to Roth 401k savings, which is 100% taxable at your marginal tax rate (which could be pushed to as high as 40% depending on your income and amount of 401k savings).

Or are you simply talking about making future contributions to a Roth 401k in which case there's no conversion tax but your income taxes will increase immediately because you are no longer deferring the income. Might make sense for you depending on your situation but either way, there are tax implications.

The only thing that wouldn't involve a tax consequence is if you are suggesting rolling a Rollover IRA into your existing 401k to allow you to do backdoor Roth contributions going forward (outside of your work 401k). If this is what you meant, then I retract all of my concerns for you and your tax bill.

No..I'm not converting traditional 401K to roth ira nor I'm taking about Roth 401K. I'm already contributing 23K(17.5K + 5.5 catch up) in my 401K which are pre-tax money. As Gauss mentioned...My company allows after tax 10% of my salary on top of pre-tax 23K into after tax 401K plan. Let's say that 10% is 10K. I'm planning to take that 10K and convert into Roth IRA. Since that 10K was after tax money, I'll not have to pay any tax on it. I spoke with my 401K admin and they said I can do it but wanted to hear from folks who have already done it and if there is any gottcha.

In any case…23K + Company Match + After Tax 401K contribution(capped at 10% of my salary) can not exceed 52K
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Old 04-10-2014, 10:30 AM   #45
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Yes retire2020 we are going to do the same thing. Contribute about $20,000 additional to our 401K in after tax money and then do what is called an in-plan conversion of that money into a Roth 401K. There is no tax except on the earnings from the $20,000 during the time between contribution and conversion.

Only very few plans allow this...it is essentially a $20,000 back door Roth
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Old 04-10-2014, 10:40 AM   #46
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Don't overthink the tax thing. Take what you can from the IRS, bite your tongue and right the check. Next year do the same thing. That's basically the way it works for high income folks.

Consider the alternative....you could be making $15k a year and paying nothing.
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Old 04-10-2014, 11:16 AM   #47
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Don't overthink the tax thing. Take what you can from the IRS, bite your tongue and right the check. Next year do the same thing. That's basically the way it works for high income folks.

Consider the alternative....you could be making $15k a year and paying nothing.
Or making $95K and paying nothing like some.
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Old 04-10-2014, 11:48 AM   #48
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Yes retire2020 we are going to do the same thing. Contribute about $20,000 additional to our 401K in after tax money and then do what is called an in-plan conversion of that money into a Roth 401K. There is no tax except on the earnings from the $20,000 during the time between contribution and conversion.

Only very few plans allow this...it is essentially a $20,000 back door Roth
Same here.

My 401k allows after-tax contributions *and* in-service withdrawals of after-tax contributions (and their earnings). Both are needed for this to efficiently work. So after I max out my before-tax and age 50 catchup contributions ($17.5K plus $5.5K in 2014), I max out my after-tax contributions to my 401k ($34.5K minus employee contributions to my defined benefit pension since these count against the limit) and then immediately roll the after-tax contributions into a Roth IRA. This is all defined by the IRS 415c limit.

I started building-up after-tax contributions in both an IRA and my 401k in 2007 when I learned the law would change in 2010 to allow Roth conversions at any income level. To date, I've made over $300K in backdoor Roth contributions. These are funds that would have otherwise gone into taxable accounts and now they are tax free.

It is a free lunch if your 401k plan allows it.
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Old 04-10-2014, 11:49 AM   #49
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Don't overthink the tax thing. Take what you can from the IRS, bite your tongue and right the check. Next year do the same thing. That's basically the way it works for high income folks.

Consider the alternative....you could be making $15k a year and paying nothing.
Really.

We had several years in which we paid >40K in federal income taxes (no, I am not counting SS or property taxes). It felt really really good. Be thankful that you have the income.

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Old 04-10-2014, 11:59 AM   #50
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Or making $95K and paying nothing like some.
I have always liked the Millionaire Next Door and successor books, but as time goes on I get the wisdom from them even more. One of the groups mentioned are the low profile millionaires, who had a median realized income of $113K. Many are self employed, so they are probably not paying huge amounts or maybe even zero in income taxes, yet building up wealth in a business that won't be taxed for years, if ever.
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Old 04-10-2014, 12:02 PM   #51
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Same here.

My 401k allows after-tax contributions *and* in-service withdrawals of after-tax contributions (and their earnings). Both are needed for this to efficiently work. So after I max out my before-tax and age 50 catchup contributions ($17.5K plus $5.5K in 2014), I max out my after-tax contributions to my 401k ($34.5K minus employee contributions to my defined benefit pension since these count against the limit) and then immediately roll the after-tax contributions into a Roth IRA. This is all defined by the IRS 415c limit.

I started building-up after-tax contributions in both an IRA and my 401k in 2007 when I learned the law would change in 2010 to allow Roth conversions at any income level. To date, I've made over $300K in backdoor Roth contributions. These are funds that would have otherwise gone into taxable accounts and now they are tax free.

It is a free lunch if your 401k plan allows it.
I wish I had known this all these years. I've been with same Megacorp for last five years and missed out on this big time. I'm also in the process of moving my rollover IRA account to my megacorp 401K account which'll allow me to backdoor convert another 6500. All together, I'll be converting about 23K per year into Roth IRA..sweet.

BIG thank you to 'Gauss' to point this great feature out and 'Panecea' to point out to look into IRA-->MegarCopr 401K and then use backdoor Roth IRA conversion.
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Old 04-10-2014, 12:19 PM   #52
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I just finished doing my taxes. The Medicare surtax and the new personal exemption phaseout took a big bite. As did the AMT. Since I moved to California, I have have been paying a lot more in state income tax which triggers the AMT. So because I pay more taxes in California, the Feds jack up my tax liability. Really logical, isn't it.
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Old 04-10-2014, 12:38 PM   #53
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So because I pay more taxes in California, the Feds jack up my tax liability.
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Old 04-10-2014, 01:00 PM   #54
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From a financial perspective, Alabama is undoubtedly attractive.
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Old 04-10-2014, 05:44 PM   #55
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With high W-2 income there are certainly limits on what you can do, and it sucks. Using the after-tax IRA then convert to Roth is about the only way you can do anything, although it does not help your taxes.

I had a rental and had to carry over the passive activity losses for several years until I sold the house, so I feel your pain there.
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Old 04-10-2014, 11:13 PM   #56
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With high W-2 income there are certainly limits on what you can do, and it sucks. Using the after-tax IRA then convert to Roth is about the only way you can do anything, although it does not help your taxes.

I had a rental and had to carry over the passive activity losses for several years until I sold the house, so I feel your pain there.

Yeah that's another decision point I need to make. It's only a small loss we take on the rental, was good before for tax write off but now it seems we either need to rent for break even or small profit or sell ASAP.
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Old 04-11-2014, 07:24 AM   #57
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I just finished my taxes and the personal exemption phaseout really hurt. Bottom line we're paying 31% effective tax rate just got Federal Income Tax. State and local add a little more that 4% to that. We didn't plan too well this year so we get to add a penalty to the big payment due. It hurts, but I still count my blessings.
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Old 04-11-2014, 07:47 AM   #58
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Please check my understanding....

So, if we have contributed the max to pre-tax retirement accounts (through work for one of us and through Solo 401-K for the other) - can we contribute more (after tax) money to our own non-work traditional IRAs ? Is there an annual limit to this contribution per person?

Is that the money one then uses to convert to a Roth?

Thank you for any comments.
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Old 04-11-2014, 08:20 AM   #59
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I wish I had known this all these years. I've been with same Megacorp for last five years and missed out on this big time. I'm also in the process of moving my rollover IRA account to my megacorp 401K account which'll allow me to backdoor convert another 6500. All together, I'll be converting about 23K per year into Roth IRA..sweet.

BIG thank you to 'Gauss' to point this great feature out and 'Panecea' to point out to look into IRA-->MegarCopr 401K and then use backdoor Roth IRA conversion.
I think it is a huge benefit if you have access to it. Not everyone has access (often older large legacy companies do however). As such it is not discussed in the popular media too much.

I tend to post it here occasionally when someone speaks of a case where they (or others who are reading the thread) might be able to benefit from it. Helped me to ER at 46. Life changing....

-gauss
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Old 04-11-2014, 08:29 AM   #60
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Please check my understanding....

So, if we have contributed the max to pre-tax retirement accounts (through work for one of us and through Solo 401-K for the other) - can we contribute more (after tax) money to our own non-work traditional IRAs ? Is there an annual limit to this contribution per person?

Is that the money one then uses to convert to a Roth?

Thank you for any comments.
The ability to contribute after-tax contributions to a 401k plan is determined by each employers plan. They either support it or they don't. I have not found a Solo 401k plan that allows it yet, but I would sure like to know if one exists (Had brief business idea of becoming a Solo 401k provider to actually provide this much needed service).

The after tax money that we are referring to is within the 401k. We aren't contributing extra to the IRAs, but rather using a standard rollover/conversion to the Roth once the after-tax money is available in the 401k.

The annual limit for total "defined contrubtions" to a 401k plan is ~$52,000 per person per year. The employer is responsible for enforcing this limit.

-gauss
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