Your invested assets: taxable vs TIRA/401k vs Roths

[Gatordoc50]

70 tax/ 30 tax deferred/ 0 tax free. Next year, I am planning to evaluate Roth conversions.

 

[Lurking]

Thanks for this -- your question spurred some extra calculations and I'm better off than I expected! In my (overly conservative) spreadsheet, everything in the 401k is assumed to be taxable, so my knee-jerk response was that I would be 49% taxable/49% tax-deferred/~2% Roth IRA. Apparently the Roth 401k contributions I was making for several years made more of a dent than I expected (yay market growth!) because after actually looking up what the tax free portion of the 401k was, I'm closer to 50% taxable/37% tax deferred/13% tax free.

 

[FIREd]

Thanks for this -- your question spurred some extra calculations and I'm better off than I expected! In my (overly conservative) spreadsheet, everything in the 401k is assumed to be taxable, so my knee-jerk response was that I would be 49% taxable/49% tax-deferred/~2% Roth IRA. Apparently the Roth 401k contributions I was making for several years made more of a dent than I expected (yay market growth!) because after actually looking up what the tax free portion of the 401k was, I'm closer to 50% taxable/37% tax deferred/13% tax free.

I am thinking that DW should stop contributing to her 401K and start contributing to a Roth 401K instead. We are in a high tax bracket, so experts would probably weigh against it, yet I think it would give us more flexibility for managing our taxable income down the road.

 

[someguy]

High income types can run out of tax deductible contribution possibilities really quickly. They've paid the FIT already. The backdoor Roth contribution takes a little bit from the taxable account and puts it into the Roth with no other taxes due.

Yes, but doesn't that assume the person has no other tax-deferred IRAs? It seems most of the folks we're talking about are likely to have substantial IRAs (from 401k rollovers), which means the relatively small $5-$6K that could be converted is going to be largely subject to FIT at the marginal level. Even without, you're talking about a contribution of 1% of a $500K income.

 

[someguy]

I am thinking that DW should stop contributing to her 401K and start contributing to a Roth 401K instead. We are in a high tax bracket, so experts would probably weigh against it, yet I think it would give us more flexibility for managing our taxable income down the road.

Keep in mind some of the benefits of Roth IRAs don't apply to Roth 401(k)s. The biggie is that Roth IRAs don't have RMDs while Roth 401(k)s do.

 

[Animorph]

Thanks for this -- your question spurred some extra calculations and I'm better off than I expected! In my (overly conservative) spreadsheet, everything in the 401k is assumed to be taxable, so my knee-jerk response was that I would be 49% taxable/49% tax-deferred/~2% Roth IRA. Apparently the Roth 401k contributions I was making for several years made more of a dent than I expected (yay market growth!) because after actually looking up what the tax free portion of the 401k was, I'm closer to 50% taxable/37% tax deferred/13% tax free.

I had DW contribute to her Roth 401k for a short time. That account is not tracked separately on her 401k website. All I get is a total $ amount if I read the actual statement. I really have no idea what it's invested in. The 401k account as a whole is doing well, and I know all the investments add up to the correct total. However, the Roth value doesn't seem to grow much. Kind of suspicious that it's getting all the Stable Value shares and not mirroring the full 401k AA. I wish it would surprise me.

 

[FIREd]

Keep in mind some of the benefits of Roth IRAs don't apply to Roth 401(k)s. The biggie is that Roth IRAs don't have RMDs while Roth 401(k)s do.

Since you can rollover a Roth 401K into a roth IRA, is it really a problem?

 

[TallTim]

I may be mis-reading, but that's not always outcome determinative. Agree, many high earners have rollover IRA balances that are substantial - but they are still limited in making contributions to those accts by the same rules -- which was I think Animorph's point.

Similarly, conversions can in some cases be limited and in any case are taxed at marginal rates now ... so why would a high earner convert an existing IRA or Rollover IRA into a Roth while still earning $$ (say, for example person makes $500K and has a $500k IRA balance between Rollover and regular) ... In the year of conversion, FIT at 40% on the $500 PLUS FIT on the portion rolled over at marginal rates vs. doing the same when there is no earned $500k income -- isn't the rollover cheaper after retirement in absolute dollars?

 

[Animorph]

Yes, but doesn't that assume the person has no other tax-deferred IRAs? It seems most of the folks we're talking about are likely to have substantial IRAs (from 401k rollovers), which means the relatively small $5-$6K that could be converted is going to be largely subject to FIT at the marginal level. Even without, you're talking about a contribution of 1% of a $500K income.

We don't come close to $500k income, but we have been over the Roth contribution income limit for a long time. I have a deductible IRA from a 401k rollover, but DW is still all 401k, so the backdoor Roth contribution works for her with no tax impact. And yeah, it's not as much as we'd like to contribute, but it's still $5.5k that's no longer taxed.

 

[Brett_Cameron]

all is tax deferred or tax exempt.

 

[someguy]

ISimilarly, conversions can in some cases be limited and in any case are taxed at marginal rates now ... so why would a high earner convert an existing IRA or Rollover IRA into a Roth while still earning $$ (say, for example person makes $500K and has a $500k IRA balance between Rollover and regular) ... In the year of conversion, FIT at 40% on the $500 PLUS FIT on the portion rolled over at marginal rates vs. doing the same when there is no earned $500k income -- isn't the rollover cheaper after retirement in absolute dollars?

I think we're basically saying the same thing, which is that it doesn't generally make sense for a high earner who hopes to ER to mess with Roth in any form. The high-level exception would be if you expect your marginal rate in ER to be similar to or more than your marginal rate now. The two practical ways that seems possible are 1) you spend close to all that you make now or 2) you expect huge increases in tax brackets between now and ER. If you're under #1, then ER or even R seems unlikely

 

[GrayHare]

I don't think there is, but why would a high earned income person who LBTM want to do that?

It's a great option for those who otherwise have no tIRA balance (perhaps because they have converted all to Roth already) because they can make an after-tax tIRA contrib now and immediately convert it to Roth without any tax due, and then all its earnings are tax free.

 

[someguy]

We don't come close to $500k income, but we have been over the Roth contribution income limit for a long time. I have a deductible IRA from a 401k rollover, but DW is still all 401k, so the backdoor Roth contribution works for her with no tax impact. And yeah, it's not as much as we'd like to contribute, but it's still $5.5k that's no longer taxed.

I'm assuming you're doing this to avoid taxes on dividends/etc? I'm probably just being dense, but why not just invest in a purely after-tax account using tax-efficient index funds?

 

[MichaelB]

Our portfolio is 98% taxable, 1% each tIRA and HSA. Munis are an important allocation for us, as are MLPs.

 

[Animorph]

I'm assuming you're doing this to avoid taxes on dividends/etc? I'm probably just being dense, but why not just invest in a purely after-tax account using tax-efficient index funds?

Long term capital gains taxes at 15%, unless you can stay under the 15% tax bracket. Roth won't have that. Ideally, I'd love to have the entire portfolio in a Roth.

While we could only contribute to one Roth account without a tax impact, our income in 2014 will be a lot lower with DW half time for half a year. We'll be Roth converting quite a bit in the next few years. This will reduce our income after age 70, when SS and RMD's hit, and keep us mostly in the 15% tax bracket.

 

[mpeirce]

73% taxable
25% tax-deferred
2% Roth/HSA

We've started Roth conversions and hope to continue to do so for another 10 years or so. This year it was a balance between the Roth conversion and selling some very low basis stock we have and benefiting from a 0% federal capital gains tax rate.

I drop by the CPA in late October (once we know how the year is going) and run though a few different scenarios to see which is best.

We have also started gifting the very low basis stock to the charity of our choice rather than sending "cash".

 

[GalaxyBoy]

31% taxable
24% non-taxable (Roth)
45% tax-deferred (IRA, 401k, 457)
0% HSA

 

[RetireAge50]

Interesting to note that about $20,000 per year of the tax-deferred money is actually tax free. Never was taxed and never will be due to standard deductions and exemptions.

Should at least plan to have enough of this to last a lifetime.

 

[MuirWannabe]

49% taxable
51% tax deferred
0% tax free

 

[NgineER]

First post... Trying to figure out how to get out early, despite getting late start
20% taxable
45% tax deferred
35% tax free

15 years to go...

 

[haha]

Interesting to note that about $20,000 per year of the tax-deferred money is actually tax free. Never was taxed and never will be due to standard deductions and exemptions.

Should at least plan to have enough of this to last a lifetime.

You are making a lot of assumptions. One, that taxpayer is MFJ. Another is that he has no income in taxable accounts, creating taxable income every year. Looking over this thread, it is clear that this is rarely the case. And of course, almost all Americans have or will have SS, and many (at least here) have pensions.

Ha

 

[tmm99]

It's a great option for those who otherwise have no tIRA balance (perhaps because they have converted all to Roth already) because they can make an after-tax tIRA contrib now and immediately convert it to Roth without any tax due, and then all its earnings are tax free.

That's if you do not already own tax-defered tIRA.

 

[youbet]

I don't think there is, but why would a high earned income person who LBTM want to do that? You'd be paying FIT at your high marginal rate now in order to avoid paying FIT on a lower marginal rate* later.

* I realize no one has a crystal ball, but if you are making $500K now but live on $100K, it's hard to imagine that in 20/30/whatever years the tax rate on $100K will be more than 40% (current marginal rate on 500K+).

If your TIRA is funded with post tax dollars, the conversion is tax free. IF it is a mix, the conversion is taxed in the same proportion.

I assume at your high income level, your TIRA is all or mostly post tax.

 

[LOL!]

We are about …

50% taxable
45% tax-deferred
05% Roth

but in reality, lots of that taxable 50% would be tax-free return-of-capital and another bit of that taxable will be offset by carryover losses and if I play my cards right, the rest will fall into the 0% tax bracket, so it's like having a Roth.

 

[Bikerdude]

5% taxable
12% tax free
83% tax deferred