Gatordoc50
Full time employment: Posting here.
70 tax/ 30 tax deferred/ 0 tax free. Next year, I am planning to evaluate Roth conversions.
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.
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.
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.
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.
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.
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.
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 don't think there is, but why would a high earned income person who LBTM want to do that?
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?
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.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.
That's if you do not already own tax-defered tIRA.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.
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+).