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Old 01-20-2018, 02:26 AM   #21
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Originally Posted by PatrickA5 View Post
Wouldn't it be better to have both? Why not take $24,000 out of your Traditional IRA and $16,000 out of your Roth IRA and pay ZERO taxes. That's the power of having both tax deferred and tax free retirement accounts.
Because it depends on what taxes were paid on the Roth to build it. To get $16k from a Roth requires a $400k Roth, so much has to be from conversions if that is your only savings. If you put the max in, over 20 years & your Roth doubled in value, you paid the equal of half the tax rate paid, up front, but still be well short of $400k, so the rest would be conversions up to the top of 10% bracket. . That has to be compared to the rate paid on the tIRA. The OP example is fairly useless, of that I agree totally. No one interested in tax efficiency has $1M Roth in retirement as their only income, never having converted. As stated, the intelligent approach one would always fill deferred first, then Roth, possibly except when starting out ones young career when if married & paying low tax rates. Then convert when if/when it makes sense tax rate wise. Once the fixed income in retirement after RMDs is guaranteed to set the marginal rate, then conversion pre 70.5 can be assessed. Especially useful for younger DWs expecting to outlive older DHs and not remarry the last 10–15 plus years.
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Old 01-20-2018, 08:16 AM   #22
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Originally Posted by Jerry1 View Post
I wasn't able to do any ROTH contributions while working due to my income level and company 401K.
You still could have done backdoor Roths, for you and your spouse. (Just mentioning this for anyone who may still be in that situation). When doing a backdoor, you're using money that you've already HAD to pay tax on, so at that point the only question is "Do I want this to grow tax-free, or do I want it in a taxable account"? The math is pretty easy on that one. Wish I'd learned about backdoors earlier!
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Old 01-20-2018, 09:44 AM   #23
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Originally Posted by Animorph View Post
...there is also a benefit to Roth converting even if the tax rate of the conversion and the later withdrawal is the same. It's equivalent to being able to contribute some of your taxable account to your
Roth IRA. So, if you are paying taxes on a significant taxable account, like me, it's worth it to go ahead and hit the top of the 24%/28% bracket using Roth conversions. Especially with a long time between conversion and withdrawal...
Can you perhaps explain this further?
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Old 01-20-2018, 10:23 AM   #24
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Can you perhaps explain this further?
I think what Animorph means might be something like this:
Assume you have 10K in TIRA and 25% tax rate
1) If you convert TIRA and pay 25% tax from TIRA you end up w/ 7.5K in Roth.
After N yrs, it doubles to 15K vs
2) Leave TIRA alone. After N yrs it doubles to 20K. You pay 25% tax and end up after tax with 15K, the same as Roth conversion in 1) above.

However if you pay conversion tax from taxable account instead, it goes like this. Assume you have 10K in TIRA, 2.5K in taxable acct, and 25% tax rate.
3) You convert TIRA and pay 25% tax from taxable account. You end up with 10K in Roth. After N yrs, it doubles to 20K.
4) Leave TIRA and taxable account alone. After N yrs you end up w/ 20K TIRA and 5K taxable. The TIRA after tax is worth 15K. The taxable account has appreciated 2.5K . You pay 15%CG taxes of 0.37K and end up with 4.63K. You have after tax a total 19.63- K so the Roth is larger. The difference is even larger because the taxable account probably had dividends along the way which were taxed (tax drag). The longer the time period the greater the difference will be.

Basically by using the taxable account to pay the conversion taxes, you were able to stuff more into the Roth to gain the advantage.
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Old 01-20-2018, 10:30 AM   #25
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The other reason for a Roth is the title of this website. Early Retirement. If you need funds to carry you between retirement and the allowable withdrawal age for tax deferred accounts you can use any of the funds you put into the Roth that are over 5 years old. When matched with partial conversions, this makes what is referred to as a "Roth Ladder". Google it or search for it here. I also strongly second the prior comment about having diversity in the types of accounts you have. Just like having diversity in your investments, having diversity in your account types gives you flexibility in how you withdraw funds allowing you to minimize taxes.
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Old 01-20-2018, 11:14 AM   #26
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Originally Posted by Curmudgeon View Post
You still could have done backdoor Roths, for you and your spouse. (Just mentioning this for anyone who may still be in that situation). When doing a backdoor, you're using money that you've already HAD to pay tax on, so at that point the only question is "Do I want this to grow tax-free, or do I want it in a taxable account"? The math is pretty easy on that one. Wish I'd learned about backdoors earlier!

You'll have to show me the easy math. If I'm in a high tax bracket while working, and expect to be in a lower bracket in retirement, how does the math work out to be better to pay taxes on the conversion at the higher rate?

Never mind, I was mistaken, see the next 3 posts.
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Old 01-20-2018, 11:41 AM   #27
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You'll have to show me the easy math. If I'm in a high tax bracket while working, and expect to be in a lower bracket in retirement, how does the math work out to be better to pay taxes on the conversion at the higher rate?
I'm talking about a backdoor contribution.
Say you have a 401K that you're already contributing to, and/or your income is too high to contribute to a tIRA. After paying taxes, you have $5500 left over (actually $5500 per person, or $6500 per person for those over 50 yrs old). If you put that into a taxable account, then every year when it sheds dividends, or interest, or cap gains, you're going to pay taxes on that. If you backdoor that $$ into a Roth, then all of your future earnings (and withdrawals) are tax free.
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Old 01-20-2018, 11:45 AM   #28
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You'll have to show me the easy math. If I'm in a high tax bracket while working, and expect to be in a lower bracket in retirement, how does the math work out to be better to pay taxes on the conversion at the higher rate?
I think Curmudgeon was responding to a different situation.....Jerry1 commented that high income prevented him from contributing directly to Roth so Curmudgeon suggested backdoor Roth.....which, if done properly, doesn't cost anything in taxes since basis only is involved. You might be thinking of converting deductible contributions/earnings.
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Old 01-20-2018, 12:09 PM   #29
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I was mistakenly thinking that a backdoor Roth was always a deductible IRA which is then converted to a Roth (and taxed on the conversion). You are talking about making a non-deductible IRA contribution, and then converting to the Roth. No tax on the conversion since it was non-deductible. Carry on.
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Old 01-20-2018, 12:25 PM   #30
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You are talking about making a non-deductible IRA contribution, and then converting to the Roth. No tax on the conversion since it was non-deductible. Carry on.
Yep. Towards the end of my w*rking years, I was stashing away $13K per year in a Roth this way. Wish I'd known about this, or seen the advantage, earlier!
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Old 01-20-2018, 12:38 PM   #31
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How long has the backdoor Roth been around?
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Old 01-20-2018, 12:44 PM   #32
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Originally Posted by kaneohe View Post
I think what Animorph means might be something like this:
Assume you have 10K in TIRA and 25% tax rate
1) If you convert TIRA and pay 25% tax from TIRA you end up w/ 7.5K in Roth.
After N yrs, it doubles to 15K vs
2) Leave TIRA alone. After N yrs it doubles to 20K. You pay 25% tax and end up after tax with 15K, the same as Roth conversion in 1) above.

However if you pay conversion tax from taxable account instead, it goes like this. Assume you have 10K in TIRA, 2.5K in taxable acct, and 25% tax rate.
3) You convert TIRA and pay 25% tax from taxable account. You end up with 10K in Roth. After N yrs, it doubles to 20K.
4) Leave TIRA and taxable account alone. After N yrs you end up w/ 20K TIRA and 5K taxable. The TIRA after tax is worth 15K. The taxable account has appreciated 2.5K . You pay 15%CG taxes of 0.37K and end up with 4.63K. You have after tax a total 19.63- K so the Roth is larger. The difference is even larger because the taxable account probably had dividends along the way which were taxed (tax drag). The longer the time period the greater the difference will be.

Basically by using the taxable account to pay the conversion taxes, you were able to stuff more into the Roth to gain the advantage.
Thanks. This topic is very important to me as I'm evaluating possible conversions into the 22% bracket where I don't expect much, if any, benefit from tax rate differentials.

Conceptually, I get it. I've seen people describe Roth conversions as a kind of "transfer" from the taxable account into the Roth. In your example, the $10K tIRA is really only worth $7.5K after tax. So by moving all $10K into the Roth and paying tax from the taxable account, in effect, you have transferred $2.5K from your taxable account into the Roth, where it will live a happy, tax-free life from that point on.

The benefit is equal to the tax that would have eventually been paid on the taxable account were it not "transferred" to the Roth. I set up a simple spreadsheet that also shows the benefit is quite small for conversions up to the top of the 12% bracket and for short periods between conversion and RMD, but then increases to a meaningful amount as you convert into higher brackets with longer periods.

The more difficult problem is calculating the real-world tax drag from the taxable account. If I continue managing income and limiting conversions to the top of the 12% bracket over the next 13-14 years, then I owe nothing on QDs and LTCGs until 70 when RMDs and SS start. But my plan is to nearly exhaust the taxable account by then (the result of deferring SS and tax-deferred withdrawals). So I'm struggling to find the benefit if I never actually pay tax on the taxable account.

What's more, if I convert into the 22% bracket, I immediately pay the 27% incremental rate on QDs and LTCGs. So the net cost on conversion is higher than 22%. And I potentially deplete the taxable account even earlier.
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Old 01-20-2018, 12:48 PM   #33
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How long has the backdoor Roth been around?
Since I think 2010. That was the year the $100,000 income limit on conversions to Roths was done away with. That's when I started doing backdoor Roth conversions.
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Old 01-20-2018, 12:50 PM   #34
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Ah, guess I only missed a few years then.
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Old 01-20-2018, 12:51 PM   #35
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How long has the backdoor Roth been around?
The income limit for conversions was repealed for the 2010 tax year. We were able to convert DH's IRA at that time, because it had all after-tax contributions and had not yet recovered from the 2008 recession, so the gains and tax owed were relatively small. We continued to do back door conversions for him as long as one of us was working.

I had rolled over some prior 401Ks, so I have a mix of pre-tax and after-tax money in my IRA and it never did make sense to convert it. Back door conversions aren't really an option in that situation.
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Roth IRA doesn’t seem good
Old 01-20-2018, 03:26 PM   #36
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Roth IRA doesn’t seem good

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Originally Posted by cusetownusa View Post
Who is saying the Roth is so much better? Not sure I have heard that before.

Generally the advice is to max out tax deferred space and then max out the Roth space before contributing to a regular tax account.

The general advice might change for lower income households.


My spouse and I have been maxing our tax deferred accounts and not maxing our Roth accounts. It seems that a lot of main stream financial gurus seem to be recommending to get your match on tax deferred and next max out Roth before maxing the tax deferred. To me it seems better to max out tax deferred assuming fees are reasonable before maxing our Roth.
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Old 01-20-2018, 03:57 PM   #37
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Why are people saying the Roth is so much better? What am I missing?
That isn't the common advice I see for new contributions. What I've seen is advice that for most people, a deductible contribution is preferable and the first destination for new money up to contribution limits. Exceptions to that rule are people who have lower income and expect their tax rate to go up in retirement.

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Originally Posted by Curmudgeon View Post
You still could have done backdoor Roths, for you and your spouse. (Just mentioning this for anyone who may still be in that situation). When doing a backdoor, you're using money that you've already HAD to pay tax on, so at that point the only question is "Do I want this to grow tax-free, or do I want it in a taxable account"? The math is pretty easy on that one. Wish I'd learned about backdoors earlier!
+1
I have seen it described as using your potential "Roth space". There are several ways to get money into Roth space that don't involve any additional taxes. The backdoor and mega-backdoor Roth are two excellent tools to get more money into Roth space that have no additional costs over the alternative of taxable accounts. If you are an average or above earner and have money for long term savings beyond max'ing tax deferred accounts, the backdoor and mega-backdoor Roth are fantastic. If only they had been available all along.
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Old 01-20-2018, 04:23 PM   #38
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Since I think 2010. That was the year the $100,000 income limit on conversions to Roths was done away with. That's when I started doing backdoor Roth conversions.
Thanks, I feel better. I was part time by then so I could (and did) make Roth contributions thru the front door by then.
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Old 01-20-2018, 05:18 PM   #39
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As I likely posted in another thread there can be an advantage to converting some $ in a tIRA to a Roth. My DH will be 80 this year, MRDs are fast accelerating. I can manage our taxable income so that our taxable income is slightly below $77,400 - the 12% marginal tax rate for the next couple years. We don't anticipate needing the Roth investments but if we do it will be when our RMDs would be well over 7%/yr and in the 22% marginal rate bracket.
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Old 01-20-2018, 05:38 PM   #40
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In the end, everyone's financial situation and goals vary; and Roths, TIRAs, and taxable accounts are just 3 different tools that can be used. Cases where Roths may be a useful tool include:
1) When you can't make a deductible contribution but want to shelter future earnings, making backdoor contributions will enable this,
2) When the possibility of future RMDs and/or other income streams in retirement will put you into a higher marginal tax bracket than you're in now, converting or contributing to a Roth will net you tax savings.

But to say that 'Roth is better than TIRA', or vice versa, just doesn't make sense. Use the right tool for the right job.
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