Where are the tax breaks for people making 200k/year

[Alan]

Quote:

Originally Posted by spncity 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.

As long as one of you has earned income then both can contribute to an IRA up to the limits, and that contribution may or may not be tax deductible subject to your taxable income. See details below.

Retirement Topics - IRA Contribution Limits

[gauss]

Quote:

Originally Posted by panacea 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.

Thank you for the concern. Before I did this I researched it for about a year to convince myself that it would work. I then however only converted a few thousand dollars the first time and waited until the next year when I received all my 1099-R's and filed my tax return to validate that the approach works as intended.

I would suggest that everyone take this approach in only converting a few thousand dollars the first time and waiting until the taxes have been filed the next year to confirm that you are doing it properly. The pro-rata rules could cause unexpected problems if they have not been properly addressed ahead of time (search "isolating the basis" over at fairmark.com for further details).

-gauss

[someguy]

I have a solo 401(k) with Vanguard and it allows traditional (pre-tax) 401(k) contributions and/or Roth (after-tax) 401(k) contributions. Since it's a Roth 401(k), there are no income restrictions. As you said, the total combined limit is ~$52K/person/year.

Where I get confused is if you are making enough to contribute $50K/year (or $100K if married and spouse also participates in the business), why would you want to "waste" part of your $50K allotment as a post-tax contribution? Unless you think taxes in your retirement in the US will be double what they are now, wouldn't you want to defer as much income tax as possible now since your marginal rate will be lower (probably a ton lower) in retirement?

Quote:

Originally Posted by gauss 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

[gauss]

Someguy,

When I refer to after-tax contributions to a 401k I am not referring to Roth 401k contributions

The elective deferral limit of $17,500 for 401k, that everyone is familiar with, applies to the sum of pre-tax AND Roth contributions to a 401k. Anything above $17,500 and less than $52,000 must be after-tax -- if the plan allows it.

If you have contributions above $17,500 in year in the Roth and pre-tax categories I would expect trouble down the road. The exception to this would be if you made after-tax contributions and then converted
to a Roth 401k. You would essentially be doing a two step process.

I do not have personal experience with this scenario -- I always did the after-tax (non-Roth) 401k contributions and then rolled-over /converted to a Roth IRA.

The reason that I am doing after tax contributions is to allow for a Roth conversion each year in excess of the normal yearly contributions limits ($17,500 401k & $5,500);

Does this help to clarify?

-gauss

[ERhoosier]

Another take on Backdoor IRA. Even when possible, doesn't it loose much of its appeal for folks with large existing traditional IRA (whether single or multiple accounts)?

Backdoor Roth IRA conversion: Tax-free? - MarketWatch

[LOL!]

Quote:

Originally Posted by ERhoosier Another take on Backdoor IRA. Even when possible, doesn't it loose much of its appeal for folks with large existing traditional IRA (whether single or multiple accounts)?

If you mean Backdoor Roth IRA, then yes, it does lose its appeal.

Some folks will rollover traditional IRA into a 401(k) to get it out of the picture. If one's 401(k) does not allow this, then one can become self-employed and create a 401(k) that does allow this, do the rollover into the self-employed 401(k), then quit.

[dadoftwo]

Dumb question time, I have a small traditional Ira from a long time ago. I never converted to a Roth. It's okay to do the backdoor Roth with a separate organization and leave the other Ira alone (not convert) right?

[FIREd]

Quote:

Originally Posted by dadoftwo Dumb question time, I have a small traditional Ira from a long time ago. I never converted to a Roth. It's okay to do the backdoor Roth with a separate organization and leave the other Ira alone (not convert) right?

Yes, you don't have to convert all of your IRAs. But you have to be careful with this because the conversion could become partly taxable.

Say you have a total of $20K in the IRA you want to leave alone and that all the contributions to that IRA were deductible. You contribute $5,500 (non-deductible) to a new IRA and convert immediately that money to a Roth. In that case, 5500/(5500+20000) = 21.5% of the conversion will be tax free, the rest will be fully taxable. In other words, the IRS does not care which IRA you are converting. When calculation your tax liability on the conversion, they look at the amount you convert relative to the size of all your IRAs combined.

I was in similar situation and this is what I did to get around that complication:
http://www.early-retirement.org/foru...ira-70485.html