Add individual IRA after 401k max?

[tmitchell]

Hi

I'm blessed (?) to be in a high tax bracket currently and am hoping to RE in 2-3 years. While still in the grind I'm maxing out my 401k to take advantage of the tax deferred savings.

Question is: should I also add an individual IRA to my savings plan while employed, or just direct that money into my taxable account? The idea behind the individual IRA would be to do a Roth conversation later on when I'm in a lower tax bracket.

What is the optimal strategy here?

 

[GrayHare]

Optimal for high earners is to contribute to the tIRA and quickly convert that to Roth. Optimal for high savers is to avoid the taxed-at-ordinary-income-rates tIRA trap altogether and instead invest via an ordinary account in somerhing like BRK.B that produces the more-favorably-taxed capital gains. This works only while the relevant tax laws remain the same, of course.

 

[Z3Dreamer]

Many 401k plans allow you to contribute non-deductible contributions after the maximum. The backdoor Roth is about $7,000 per year. The non-deductible 401k limit after maxing out is $37,000 minus employer contributions. So, lets say you put in the full $19,000 and with matching and profit sharing, the employer puts in another $6,000. This means you could put in another $31,000 for a total of $56,000. This is NOT a Roth but a non-deductible 401k.

How does this help you? You will not be paying taxes on the earnings of the $31,000 each year.

In addition you could do your backdoor Roth.

 

[bloom2708]

To take Z3Dreamer's post to the next level.

Many companies allow you to convert your "Post-Tax" contributions to Roth. In plan conversions. This is what gets you tax free earnings.

If the Post-Tax contributions are not Roth, the earnings are still taxable when withdrawn down the line.

Get to know your companies plan in detail. Our megacorp converts Post-Tax to Roth "daily" or with every paycheck. A nice benefit for more places to stash money.

Another place is the company ESPP. A rolling buy at 10% discount, sell immediately plan can be another place to harvest 10%.