Not enough Roth

[Out-to-Lunch]

but I don't need to break into a Roth to get money for BTD or emergencies, etc.

Few people would see that as a disadvantage, but YMMV.

 

[cb2008]

I wonder how many people start out with plans to do big Roth conversions then cave when they see how big that tax check is going to be? I also wonder how many people have created a spreadsheet of RMDs and taxes paid per year to see how bad the RMD tax bill is really going to be. It might not be as bad as you think but the only way to know is to build a spreadsheet or use a tool like eMoney.[/QUOTE]

 

[freedomatlast]

Here's my question in all of this - How did so many of the high earners here manage to put so much into Roth accounts during their earning years?

As I understand it, even for tax year 2022, Roth IRA contribution tax benefits are completely eliminated once household income reaches $144,000 as a single filer or just $214,000 as a married couple filing jointly.

And, again for tax year 2022, you can only contribute $7,000 per year, and that's only if you're 50 years of age or older. Under 50, it's only $6,000 per year.

 

[Love This Community]

Replying to subscribe to this thread

 

[jazz4cash]

Here's my question in all of this - How did so many of the high earners here manage to put so much into Roth accounts during their earning years?

As I understand it, even for tax year 2022, Roth IRA contribution tax benefits are completely eliminated once household income reaches $144,000 as a single filer or just $214,000 as a married couple filing jointly.

And, again for tax year 2022, you can only contribute $7,000 per year, and that's only if you're over 50 years of age. Under 50, it's only $6,000 per year.

I assumed the large balances were due to conversions rather than contributions. I think Roth option has only been around ~20 years. We don’t have a huge balance because i think the advantages are overblown in our case but 95% of our Roth accounts are due to conversions.

 

[braumeister]

Replying to subscribe to this thread

Just so you know, that's not really necessary. You can use "Thread Tools" at the top to subscribe to a thread.

 

[SecondCor521]

I wonder how many people start out with plans to do big Roth conversions then cave when they see how big that tax check is going to be? I also wonder how many people have created a spreadsheet of RMDs and taxes paid per year to see how bad the RMD tax bill is really going to be. It might not be as bad as you think but the only way to know is to build a spreadsheet or use a tool like eMoney.

I'd like to think I'm rational enough that I will be able to write a big tax check in 2025. I'm sure it will make me reevaluate my decision carefully, and I understand the temptation to defer.

But as you suggest, I also have a spreadsheet of RMDs and IRMAA to see how bad the RMD tax bill will be. In my case, the over/under seems to be about 33% tax burden all in, so if I can pay taxes today at a lower rate than that, I'll pay now.

I also understand that it's hard to make predictions, especially about the future, so I understand that things could change and my guesses today could be less than optimal.

I do think that it's after tax spendable dollars (adjusted for NPV and lifecycle stuff if you want) that matter.

Here's my question in all of this - How did so many of the high earners here manage to put so much into Roth accounts during their earning years?

As I understand it, even for tax year 2022, Roth IRA contribution tax benefits are completely eliminated once household income reaches $144,000 as a single filer or just $214,000 as a married couple filing jointly.

And, again for tax year 2022, you can only contribute $7,000 per year, and that's only if you're 50 years of age or older. Under 50, it's only $6,000 per year.

And Roth contribution limits were lower way back when - $2,000 per year I think a long time ago.

Roth conversions, as the other poster above said, are a big part of the answer. But also market returns compounding on a tax-deferred basis contribute a lot as well. If you build a spreadsheet with the maximum Roth contribution for two decades and include market growth, it can be a considerable influence.

It's pretty common for people here to max out their IRAs and their 401(k)s. The 401(k) can then end up in a traditional, and be the source for pretty sizeable Roth conversions. And for MFJ couples they typically max out both individual's plans.

The most common recipe I've seen here and in general financial circles is for people to have careers making solid good professional incomes but not super high, LBYM, and just maxing out the retirement plans and maybe a taxable, and doing that for two or three decades. Yes, there are a number of people here who had really high incomes or came into wealth, but the vast majority really are MND types (I think, anyway - maybe I'm projecting).

 

[pb4uski]

I assumed the large balances were due to conversions rather than contributions. I think Roth option has only been around ~20 years. We don’t have a huge balance because i think the advantages are overblown in our case but 95% of our Roth accounts are due to conversions.

Yes, that was true in my case... while it is true that I would have been limited in Roth contributions, the more important reason was that when Roths first became available in 1998 I already had a six-figure income and was in a high tax bracket (28%+ as I recall), so tax-deferred was the better choice even if Roth had been available to me.

Roths were only 3% of our total nestegg when I retired, today it is 27% due to conversions and growth.

 

[oldtimer]

Here's my question in all of this - How did so many of the high earners here manage to put so much into Roth accounts during their earning years?

As I understand it, even for tax year 2022, Roth IRA contribution tax benefits are completely eliminated once household income reaches $144,000 as a single filer or just $214,000 as a married couple filing jointly.

And, again for tax year 2022, you can only contribute $7,000 per year, and that's only if you're 50 years of age or older. Under 50, it's only $6,000 per year.

Roth conversion, mega-backdoor Roth, and great market returns. The last item helped Peter Thiel turn <$2k into $5 Billion in his Roth IRA.

 

[steelyman]

I started maxing out Roth as soon as they were available (1998). When my employer finally offered a Roth 403(b) in 2008 I stopped all traditional contributions in favor of that.

I currently have a 50/50 split tax-deferred/Roth.

 

[corn18]

Here's how we got $312k into Roth in 8 years (2014 to 2021) with an income well north of the limit:

1. Backdoor Roth: $99k contributions. $11k-$14k / year. $5k-$7k each to non-deductible tIRA and converted to Roth each year
2. Mega backdoor Roth: $94k. Approx $20k / year. My 401k allowed after tax contributions (we did not have a Roth 401k) and subsequent rollover to Roth. So I would contribute up to the max limit for deductible 401k and then keep contributing after tax dollars up to the max total limit for 401k contributions.
3. Gains: $119k. Since this was Roth and gains should never be taxed, the Roth accounts were invested 100% in Fidelity Total US Stock fund.

I am retired now and might start conversions from my after tax 401k to reduce RMDs @ 70 when SS kicks in and pushes us into the 22%/25% marginal tax bracket. 100% of my 401k is in a stable value fund to minimize growth. So I should be able to convert all of it by age 70. I should also be able withdraw all of my taxable money @ 0% LTCG by then. So @ age 70, all of my savings will be in Roth accounts. My heirs will love that unless they change the tax laws WRT Roth withdrawals.

 

[Dash man]

Here's my question in all of this - How did so many of the high earners here manage to put so much into Roth accounts during their earning years?

My company had a Roth 401k option that I rolled into my Roth IRA after retirement.
I was also allowed to save additional after tax money in my regular 401k, that I was allowed to roll into my Roth IRA. But the earnings on those funds had to go into a traditional IRA.

 

[oldtimer]

I am retired now and might start conversions from my after tax 401k to reduce RMDs @ 70 when SS kicks in and pushes us into the 22%/25% marginal tax bracket. 100% of my 401k is in a stable value fund to minimize growth. So I should be able to convert all of it by age 70. I should also be able withdraw all of my taxable money @ 0% LTCG by then. So @ age 70, all of my savings will be in Roth accounts. My heirs will love that unless they change the tax laws WRT Roth withdrawals.

If your are charitable minded, you should leave some $ in tax-deferred so you can satisfy your potential RMDs by giving QCDs to the charities of your choice.

 

[SecondCor521]

Here's how we got $312k into Roth in 8 years (2014 to 2021) with an income well north of the limit:

1. Backdoor Roth: $99k contributions. $11k-$14k / year. $5k-$7k each to non-deductible tIRA and converted to Roth each year
2. Mega backdoor Roth: $94k. Approx $20k / year. My 401k allowed after tax contributions (we did not have a Roth 401k) and subsequent rollover to Roth. So I would contribute up to the max limit for deductible 401k and then keep contributing after tax dollars up to the max total limit for 401k contributions.
3. Gains: $119k. Since this was Roth and gains should never be taxed, the Roth accounts were invested 100% in Fidelity Total US Stock fund.

I am retired now and might start conversions from my after tax 401k to reduce RMDs @ 70 when SS kicks in and pushes us into the 22%/25% marginal tax bracket. 100% of my 401k is in a stable value fund to minimize growth. So I should be able to convert all of it by age 70. I should also be able withdraw all of my taxable money @ 0% LTCG by then. So @ age 70, all of my savings will be in Roth accounts. My heirs will love that unless they change the tax laws WRT Roth withdrawals.

RMDs start at age 72 now.

Also, I'm not 100% sure but I think you'd end up with more after tax dollars to spend if you had your 401k in something that you expected to grow. Yes, you'd have more dollars to convert and your tax bill would be higher, but you'd still be left with more spendable dollars at the end of the day.

If you want to be in a stable value fund for asset allocation reasons, then that would make sense. But to avoid growth just to avoid taxes is, I think, cutting off your nose to spite your face.

 

[freedomatlast]

Here's how we got $312k into Roth in 8 years (2014 to 2021) with an income well north of the limit:

1. Backdoor Roth: $99k contributions. $11k-$14k / year. $5k-$7k each to non-deductible tIRA and converted to Roth each year
2. Mega backdoor Roth: $94k. Approx $20k / year. My 401k allowed after tax contributions (we did not have a Roth 401k) and subsequent rollover to Roth. So I would contribute up to the max limit for deductible 401k and then keep contributing after tax dollars up to the max total limit for 401k contributions.
3. Gains: $119k. Since this was Roth and gains should never be taxed, the Roth accounts were invested 100% in Fidelity Total US Stock fund.

I am retired now and might start conversions from my after tax 401k to reduce RMDs @ 70 when SS kicks in and pushes us into the 22%/25% marginal tax bracket. 100% of my 401k is in a stable value fund to minimize growth. So I should be able to convert all of it by age 70. I should also be able withdraw all of my taxable money @ 0% LTCG by then. So @ age 70, all of my savings will be in Roth accounts. My heirs will love that unless they change the tax laws WRT Roth withdrawals.

Thanks for the reply but I'm still trying to understand - If you were doing Roth conversions in years your income was well north of the limit and you were paying tax on those conversions at an income level well north of the limit, what was the tax advantage of doing so?

 

[corn18]

Thanks for the reply but I'm still trying to understand - If you were doing Roth conversions in years your income was well north of the limit and you were paying tax on those conversions at an income level well north of the limit, what was the tax advantage of doing so?

I didn't do any Roth conversions while earning high income. I converted income that I had to pay high taxes on anyway to Roth via the backdoor method. Two very different things.

 

[corn18]

RMDs start at age 72 now.

Also, I'm not 100% sure but I think you'd end up with more after tax dollars to spend if you had your 401k in something that you expected to grow. Yes, you'd have more dollars to convert and your tax bill would be higher, but you'd still be left with more spendable dollars at the end of the day.

If you want to be in a stable value fund for asset allocation reasons, then that would make sense. But to avoid growth just to avoid taxes is, I think, cutting off your nose to spite your face.

My 401k is the 40 part of my 60/40 AA.

 

[SecondCor521]

My 401k is the 40 part of my 60/40 AA.

Gotcha, thanks.

 

[2017ish]

Here's my question in all of this - How did so many of the high earners here manage to put so much into Roth accounts during their earning years?

....

We put next to nothing into Roths during our high earning years. Had a couple of low years that we did Roth 401k--as well as nominal conversions 6 years before we retired, just to start the clocks.

At retirement, we had only 230K in Roths--at our marginal rates, didn't make sense to aggressively fund them. After 4.5 years in retirement, however, we have 2.3 million in Roths. Now it makes sense to aggressively convert, even into the top of the 32% bracket. Still way more in TIRA than we'd like, but the ratio is slowly getting better, and our Roths are 100% equities....