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Roth limits
Old 09-14-2023, 10:58 PM   #1
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Roth limits

I am curious what people think of this of this scenario. I haven't sat down and done the math yet, but figured I would reach out and see if I'm missing something obvious.

I have made max contributions to my ROTH IRA since age 26. I am 37 now. I can't make IRA contributions in 2022 and 2023 because my MAGI is over $144,000 2022 and $153,000 2023. I have made 401K contributions both years.

Are there any obvious reasons someone should purposefully make less than $153,000 a years, strictly for the ROTH IRA tax benefits? I know the phase out period is quite wide, $138,000 to $153,000 for 2023. But if one was to make $160,000 in 2023, is it really worth it to make $7,000 more this year and disqualify yourself from making the ROTH IRA contributions? I know to make the max contribution you will have to make less than $138,000. You would have to decrease your income 160,000 - 138,000 by 22,000 to invest 6,500 in the ROTH and still be able to max your 401k contribution.

I guess I want to know, how much more than $138,000 a year would someone have to earn to justify giving up the ROTH IRA option? For someone who is 37 years old.
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Old 09-14-2023, 11:29 PM   #2
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You should research backdoor Roth contributions. If you currently have no money in a traditional IRA, you make a nondeductible IRA contribution and immediately convert it to a Roth.
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Old 09-14-2023, 11:39 PM   #3
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+1 on backdoor Roths. I did this before I got an IRA.

Also keep an eye out for employers that offer a Mega-Backdoor Roth. If you ever get access to one, itís a great way to build up a significant balance in a Roth.
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Old 09-15-2023, 12:11 AM   #4
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Originally Posted by N02L84ER View Post
You should research backdoor Roth contributions. If you currently have no money in a traditional IRA, you make a nondeductible IRA contribution and immediately convert it to a Roth.
I had to recharacterize my ROTH contribution in 2022 to a traditional nondeductible contribution, so I do have that option. I just don't think that is the best option right now since my income is much higher now compared to what it may be in 5 years from now. I am under the impression that my tax bill will be higher now, compared to if I wait a few years when work isn't as lucrative. I have to track my cost basis in my traditional IRA because of the nondeductible contribution, it's turning my taxes into quite a task.
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Old 09-15-2023, 07:54 AM   #5
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WADR, at OP income level they should probably sharpen their pencil to see if Roth is really the preferable way to go... I'm skeptical that is is the wise course. IOW, I think you probably should have shifted from Roth savings to tax deferred savings long ago, especially if you are single.

Also see
Originally Posted by pb4uski View Post

I think it is a fair article. Unlike others that I've seen, while it rambles about too much, it does focus on the difference between the tax savings/effective tax rate when retirement contributions are made vs the taxes paid/effective tax on withdrawals.

It wouldn't surprise me that 90% of people are in a lower tax rate in retirement than they were when working so therefore a Roth is indeed a bad idea for them. That even applies to most people here even though we like to complain the dreaded tax torpedo... the level of taxes on withdrawals is annoying while the taxes saved when that income was deferred is long forgotton.

I was a high income earner and was in the 28% and sometimes 33% marginal tax rate when I was working so saved 28% or 33% or a mix thereof on my tax-deferred contrbutions. On my Roth conversions over the past 10 years have paid an average of 10%. Even after I start SS and RMDs strike me, my effective rate on RMDs will "only" be 16-17%.

Another factor of savings is when I was working I lived in a state with an income tax and now that I'm retired I live in a state with no income tax so additional savings... and if I had gone with a Roth I would have paid a lot more state income tax while working.

So I have saved big time from tax-deferral.. 10% or more for federal income tax alone... meaning that I would have LOST big time if I had used Roth rather than tax-deferred because I would have paid 28% or 33% in advance while working vs 16-17% or less in retirement.
Also, I think of a modest income friend who recently retired and if he manages his tax deferred withdrawals correctly will pay 0% on them, meanwhile he was in the 12% tax bracket in recent years when he deferred that income, saving 12% easy peasy.
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