In my case I get a 9% 100% match. Check out IRS Publication 590 for more info. Say I decide to retire at 65, and have little earned income. Starting next year, would you recommend me to start putting money into a traditional IRA and then convert them into a Roth IRA when I retire? I haven’t seen that question addressed. I am wondering which is the best choice for a “later” early retiree. and 5) would anyone be concerned if the bulk of their retirement savings is in Voya as opposed to, say, Vanguard or some such? Givens: 1) $1,000,000 in a tax-deferred 403b; 2) a separate, taxable account from which to live and pay conversion taxes during the conversion process; 3) A constant 7% interest rate within the tax-deferred account, in the Roth account, and to calculate the compounded “opportunity cost” of triggering conversion taxes earlier vs. later. But he won’t be able to do such large conversions in the future with ACA because to do so the conversions are counted as income and more income means LESS subsidy. I just bought a house with the intention of living in it for two years and then selling it to get the capital gains exclusion. My employer offers a matching Roth 401k contribution. So yes you can max out your 401K and still contribute $13K combined to you and your wife’s IRAs if financially able. The only time it makes sense to do the roll-over is if you make over $200k so that you aren’t allowed a direct Roth contribution. Today we’re joined by a friend of the BiggerPockets podcast network, Brandon “The Mad Fientist”. What basket should I fill after maxing out the tIRA? What do you need to do to establish legal residency for taxes? Brian Setzer, If you are out of the country most of the year you also get a substantial income tax exemption. Your second point highlights why I take a “get all the tax breaks I can now, worry about getting my money out later” approach. Your employer can’t cap your contributions to a 401k, that is set by the government. Sorry for the non-relevant question. To make tax-gain harvesting and tax-loss harvesting easier and more effective, you should set your taxable investment accounts to use Specific Identification of Shares so you can pick individiual shares to sell. As for becoming a C Corp, that depends on a variety of things. This would minimize taxes. Thanks a lot for answering my questions. It’s even clearer to me now, especially from this: “Since Investor B converts less than his standard deductions and exemptions each year, he avoids paying taxes on the conversion and ends up having exactly the same amount of money in his Roth IRA as Investor A does when they reach standard retirement age.”. Lol. Those contributions are both pre-tax. First Name. Do you still recommend a traditional IRA (even if it will be non-deductible) over a roth? The Roth IRA Horse Race is an advanced strategy that allows you juice your IRA conversions. My question is not around IRA’s, but 401(k)’s. I had heard about backdoor Roth contributions before but I never looked into the strategy because I’ve always been within the Roth income limits. I think you mean $11K + $2K, but the total is still $13K. We do have a relatively high sales tax to make up for it, though the cost of living is substantially cheaper than some of the other non-income tax states. The comments section on fientist's blog makes one very important point that sort of negates the benefit of this strategy: the Roth IRA pipeline only allows you withdraw the principal of your conversions before age 59.5, so most of us don't really care if the $10k rollover grows to $18k. Does this change the strategy? Nice quick summary – that’s what I gleaned from the new bill as well. I guess I need to either forget about new Roth IRA contributions (wait until early retirement to convert), or find out more about penalties for contributing when you are financially ineligible under the new law (they are pretty steep now). Today we’re joined by a friend of the BiggerPockets podcast network, Brandon “The Mad Fientist”. Now that it’s in there, I can see that it makes the post even clearer and more complete so I really appreciate the feedback! I can’t see any real difference. I found this article that discusses some of the ramnifications: https://thefinancebuff.com/case-against-roth-401k.html (its not particularly targeted at early retirees), The effective rate is irrelevant when determining whether this year’s contribution should be traditional or Roth. Could this strategy be correctly labeled as a graduated backdoor Roth IRA? I found out it wasn’t too late to open up a SEP IRA (I am self-employed) and got my income down another couple K, lowering the monthly payment from $72 to $30. I learned a lot from the information ! My humble recommendation, start a business that generates income and open a Solo 401(k). I really enjoy my work and don’t think I want to stop working in the near future… I do want to stop in 10 or so years, but possibly work or consult part time?? Our available tax advantaged space is almost 60% of our after tax income. If you have a retirement plan at work, your tax deduction for the IRA starts disappearing above a certain income level. Is there anything you’d do differently in my case? This argument holds less weight if I’m paying state tax right now, will retire in a tax free state, and/or retire in a state with untaxable military pension. Therefore I couldn’t convert any tax-free. Have you done one of those charts where you compare the net worth over time between these two options? It sounds like you are above the traditional IRA phaseout but not the Roth IRA phaseout for couples. The longer the period, the better chance a ROTH will outperform Traditional + taxable account. Thanks for doing the research. Interesting. If it is a smaller company perhaps she can rally her co-workers and talk to HR and slip in the word fiduciary. BUT: isn’t there a relatively large caveat in tIRA contributions? I’ve been out of commission for a few days, so sorry for the delayed reply, but I’m glad to see Justin stepped in with an excellent response (thanks a lot, Justin!). Just wanted to stop by and let you know this article in general really changed the way I think about the Roth/Traditional debate. If you’re married, filing jointly, you won’t pay any with exemptions. I know Roth contributions could be taken before but can your conversion (assuming you wait 5 years and it contains earnings) be taken before 59.5? Does this concept only apply to young investors? Good morning, For example, you can only shelter $5500 per year from taxes by maxing out an IRA so if you choose a Roth, you pay the government $1000 (or whatever) and you have $5500 sheltered from taxes in a Roth or you can shelter $5500 sheltered in a Traditional and you can use that $1000 you would have paid in tax to invest in your taxable account. As it is, I contribute both to the Roth/Traditional portions of my 401K equivalent (Thrift Savings Plan), but continue to contribute exclusively to Roth for my wife and I’s $5500 each outside of the TSP…so more like a 60%ROTH / 40%TRADITIONAL mix in total. Is the advice in this article current as of the passing of the 2017 tax legislation? Granted, it does take a very large balance to generate high marginal rates using a 4% withdrawal rate, so traditional still makes sense for most, but one should use marginal rates to determine when that changes. In my scenario would it just be better to place my surplus funds in a taxable account? I plan to get out in 3 years to work as an engineer, at which point, my wife will start her doctorate program. Hence the tax rates you are avoiding would be equally an “average” tax identical to the withdrawal case. Perhaps a bit higher if you still have children dependents at 50. Does that make sense or am I still misunderstanding what you’re saying (if so, I apologize). If you change “contribute to both Trad IRA/401(k)s AND Roth IRAs while working” to just “contribute to both 401(k)s AND Roth IRAs while working” (ie, tax deferred accounts without income limits) that’s certainly great. Great article – very clear. … Per your advice on this site, I’ll likely be re-characterizing my Roth IRA to a Traditional IRA and looking in to an HSA as well. On the other hand, someone living in a no income tax state, could lock in at 15% by contributing to Roth. Does the models in this article consider the lower administrative costs of contributing to a ROTH? Select Page. They can pass your request along to whatever management company they may be using for the 401k and they can add new fund options for you. Both as far as your earnings as well as where federal tax brackets might go (most seem to say taxes need to go up to cover deficits and entitlements) as well as whether you might relocate to a different state or country, what your social security payment will be, etc. I wanted to move some or all of these into a similar Vanguard account with only 1 or 2 funds. I currently have enough funds in my taxable account to fund my living expenses for 10 +/- years. P my $.02. I had the exact same question as Ron, curious if my annual “backdoor” Roth Conversion was the right move given my joint income is above the deductible IRA threshold…. Since that I don’t have an employer for 401K, I opened up a regular taxable brokerage account on the vanguard and have been putting $200 every two weeks into 10% VGSLX and 90% VTSAX. Hi MF! Today we’re joined by a friend of the BiggerPockets podcast network, Brandon “The Mad Fientist”. Incidentally, while they changed the tax brackets for 12%, 22% etc. I am now at a new employer that also offers a 401(k). So, please, do go ahead with the Roth 401 contributions. Preferably tax advisors in Northern California. So for the last 2 years, I have been transferring $5000 or $5500 (starting 2013) from my post-tax income to the Traditional IRA account and then immediately converting it to Roth IRA. We also cannot directly contribute to a ROTH IRA due to our high income. The limit to contribute to a 401K is $18,000. Is there any potential disadvantage to starting this conversion 5 years pre-ER, so that it is ready to go right away? Thank you very much – I see I should have dug through the other questions… Maybe you could add a note about this in step 2 since it looks like there have been several of these questions. You can’t touch your earnings until later without a fee, but you can always take out the money you put in. Thanks for the awesome article, enjoyed reading it and interesting results…. Can you stll transfer all 20k in this way or does the spouse have have a certain amount of it in their account. Appreciate your help! The Mad Fientist drops by to educate on tax optimization, travel rewards, and living his best life in the lastest Christopher Guest post! We don’t have any regular taxable investments. If you earn more than what’s allowable for a deduction on a traditional IRA, MAGI is higher than $62K in 2017, is there an advantage to funding a traditional IRA and then convert to a Roth or just contribute to a Roth? Wow, thanks for your response! The specific amounts change as tax policy changes and as we all know that changed for tax year 2018. Does that sound right? Next question is part of the reason I’m asking. You might be wondering what exactly is a Mega Backdoor Roth IRA? The post that you referenced (http://jlcollinsnh.wordpress.com/2012/05/30/stocks-part-viii-the-401k-403b-ira-roth-buckets/) is actually one of my favorites of yours because it not only describes the various types of retirement accounts but it also discusses which investments should go into each type (or “bucket”, as you say) to maximize tax efficiency. But doesn’t that also imply that I am sheltering less of my investment from capital gains taxes? I am now contributing to a Traditional IRA and 401k but every year I seem to go back and forth between which is better. I enjoy your excellent blog. I have aout 80K in traditional IRA that I would like to convert to a Roth. I am still maxing out my 401(k), even though I have more than enough saved for post standard retirement age, because I plan on using the method described in this article to convert most of that 401(k) money into a Roth IRA, tax free. Glad you’ve been enjoying it around here! I’m looking at adopting this strategy. Is the traditional IRA still a good deal? Are you talking about money in the 401ks, or money you want to save for retirement beyond the 401ks? The Mega backdoor Roth IRA sounds amazing and it is. 5) 2014 married/joint brackets throughout all years and no state taxes. I’m using my HSA as a retirement account, so I do not use my HSA account to pay my medical bills. But even with a traditional IRA it takes care of all of your issues. Transferring at $9,500/year (10,150 exemption and standard deduction for 2014 minus some for non qualified dividends and bank interest) only requires a 7.5% return to hold steady from the 125,000. First Name. Contributing to a Traditional IRA reduced his taxes when he was working so he had more money to invest in the taxable account during his 30s. Good at making money, bad at tax strategy and actually running a business. (I also just listened to your guest appearance on ListenMoneyMatters.Excellent!). Read this, http://danielamerman.com/va/BenefitAge.html, We’re still working on our capital gain harvesting for 2017. Brandon walks us through advanced retirement account strategies you may have heard of, … 2) if I don’t have to take the Voya money out all at once, how much will some or other tax law force me to take out every year? The details: Retirement is still 12 years out by my latest projection (will be age 47). Thanks a lot for taking the time to let me know, BGM. ‎Join the Mad Fientist as he interviews personal-finance icons like Mr. Money Mustache and Vicki Robin to discover the strategies they used to achieve financial independence and retire early! Am I correct to say that: If your income is in the higher tax bracket then the traditional IRA is the way to go. I know the rates won’t stay the same, interest, tax, or otherwise–but that is why I’m trying to build a calculator so that as time goes on I can adjust the variables to tweak it. HSAs have been OK to me (return ~4% per year)- but I am still not using them (I have a cash flow sufficient right now & for next five years to take care of expenses) so I am 90% invested in equities. I do max out on MY 401k & MY Roth IRA and for my wife a 5500$ for Traditional IRA. If you're eligible to contribute or you want more information about a Mega Backdoor Roth, make sure you swing by the Mad Fientist's article. Would it make sense to convert some of all of my current retirement savings to Roth accounts while I am volunteering for Americorps? Thanks for the help! Success! However, once I retire and start drawing my pension, my income will be great enough that it will be difficult to stay below the 25% bracket. Is there an equivalent exclusion for State taxes? The standard path is usually from MMM to JLCollinsNH to here, which is why I feel Mad Fientist readers are some of the best around. Phil, did you ever get an answer? My strategy throughout my 20’s was to plow as much money into my Roth 401k and Roth IRA as possible due to the obvious benefits of no taxation in retirement; however, since the early retirement bug bit me in the past year when I found ERE and MMM (and now your blog today), I’m not so sure . I am assuming zero, but a different answer would affect my strategy. This may not alter strategies for many, but would likely for those not able to deduct contributions to a traditional IRA. Also thanks for your travel cards posts. Help me see what I’m missing here! The Mad Fientist's powerful credit card search tool allows you to easily find the best credit cards for your specific travel needs! Hi, The Mad Fientist is a good source for how this works in case anyone’s interested. http://bit.ly/2I7JcTa Specifically, I can see value in funding the Roth IRA with any income that falls into the 15% tax bracket or lower. Hence, one is paying a “tax” on the conversion in the form of lower health subsidies. https://paulmerriman.com/how-to-invest-series-complimentary-download/ a 55K/yr pension and 12K/yr. My understanding is that 457 F accounts were significantly impacted, and nongovernmental 457 b accounts may have been. Here’s what a taxable account looks like: Not only is your money taxed before it enters the taxable account, your investment growth is also taxed along the way. Clear, concise and a cool strategy. 2. If you retire early, how are you able to pull from the IRA, TSP, etc without penalty before age 59 1/2? Hi, I’m confused on why withdrawals from a traditional IRA are not taxed at your marginal tax rate at time of withdrawal but instead at “average” instead: “the tax savings during contributions are at marginal rates, while the withdrawals are at average rates.”, To ease the discussion, below are some of the tax brackets for 2014 for someone who is single. As you said, the worst-case scenario is I’d have to pay early withdrawal penalties but since my tax bracket will most likely be much lower after I reach FI, I could still end up being better off even after the penalty. Thank you for your excellent summary of the new tax law strategies. Hi mb, I’ve not personally done that but I don’t see anything in the rules that says you couldn’t. In other words, with tax due (before credits) of $2,000, but then using various non-refundable credits totaling $700 (child care, saver’s, foreign tax, etc.) I have used this tip in the past…thanks to your knowledge sharing. There’s always ways to pick up some more money so I’d utilized the tax-advantaged space now and then figure out how to fund those first five years of early retirement later. Yes, the conversion can be taken without penalty after 5 years but not the earnings. I was happy and surprised to see most of the strategies survive intact. 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