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Old 02-05-2015, 11:41 PM
 
Location: Portal to the Pacific
8,736 posts, read 8,612,435 times
Reputation: 13006

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We are married, file jointly. Husband's income is about $185k+ I stated a small business last December. My annual income will be around $5.5k

We max out (with company match) a 401k. We contribute to a couple 529's and a tax-managed, non-retirement account. In another thread I mentioned how my financial advisor suggested not having an IRA and I didn't remember why. I realized last night why... we are very frugal and big savers.. her concern is that if we put $22-23k in the 401k for 25 years AND also max out an IRA, it's possible that we'll get to age 71 and the federal government will force us to take out way more money then we need. Also she was worried about locking up those funds until we're at least 59.5. She wanted us to have accessibility and growth... use our tax-managed account to pay for vacations, cars, renovations...

After reading the boglehead forum I can assuredly say that I'm a value-added girl: I want my tax-sheltered accounts. We're not the kind of people that will take vacations, buy cars or do much renovating anyway. We'd like to assure the kids that they're going to come into some inheritance one day.. Also I've learned that if you can get into an IRA for life's more serious stuff... education, dealth, disability, first home (no longer applicable), etc. I like that.

So it's my understanding that we may or may not be able to contribute to a Roth IRA, but that there are no limits on contributing to a traditional IRA. It's my understanding we can contribute $11k ($5.5k for each of us). I've read that about three days after opening a traditional IRA that we can convert (rollover?) it into a Roth IRA.

Our credit union offers these products and I can apply online... but I like to do this stuff in person... can I just go in and tell them that I want to do a backdoor Roth IRA? I realize that this is a loophole and thus, I'm not sure if these things are done discretely or if I can just be all loud-mouthed about it.

Does this sound like I kinda, sorta know what I'm doing?
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Old 02-06-2015, 01:00 AM
 
Location: Omaha, Nebraska
10,297 posts, read 7,882,664 times
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It's not a loophole at all, it's totally legal (for now, at least). So there's no need to be all hush-hush. And yes, that's how you do it. Just make sure when you put the money into the Traditional IRA that you put it into something like a money market fund, because you want the amount to stay rock stable during the time between when you deposit it and when you roll it over into the Roth IRA. You don't want any gains or losses during that period, as there would be tax implications.
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Old 02-06-2015, 01:15 AM
 
1,784 posts, read 3,446,713 times
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You sure you even need to do back door?

185 + 5.5 - 17.5 = 173

173 < 181 which is where the income limits start kicking in.


Or do you have a lot of interest/dividends/realized gains?
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Old 02-06-2015, 01:16 AM
 
2,064 posts, read 4,417,242 times
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A few things:

1) You are talking about RMD (required minimum distributions) at age 70 and you should put money into a Roth IRA to avoid that if you don't think you need the money when you're older. You can just keep it in your roth and eventually your kids will get it.

2) A backdoor roth isn't hush hush secret. It's well known and every financial advisor and investment bank will be familiar with it. You just contribute after tax money ($11k) into a traditional after tax 401k and then convert that to a roth IRA as soon as the money is fully deposited. You will pay a little bit of taxes on the gains during those few days but it's miniscule.

3) If your credit union person is not aware of how to do it, I'd probably just find another credit union but it also wouldn't surprise me. This stuff is pretty basic but lots of people don't even know about after-tax 401ks so I wouldn't be surprised if they didn't know about backdoor roths.

4) If you really want to avoid RMDs, you can start contributing to a roth 401k instead of pre-tax 401k. A roth 401k is like a roth IRA but one of the minor differences is that unfortunately roth 401ks are subject to RMD but you can convert a roth 401k to a roth IRA and from a tax perspective you won't be hit with a big tax bill when you convert (if you convert a pre-tax 401k to a roth IRA, you will be hit with a big tax bill since the converted amount will be taxed as your income tax rate (sounds like 28% or so in your case)).

RVD.
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Old 02-06-2015, 01:34 AM
 
Location: Portal to the Pacific
8,736 posts, read 8,612,435 times
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Quote:
Originally Posted by snowdenscold View Post
You sure you even need to do back door?

185 + 5.5 - 17.5 = 173

173 < 181 which is where the income limits start kicking in.


Or do you have a lot of interest/dividends/realized gains?
So the 401k amount ($17.5k) is deducted from the income?

If that's the case, then you are right....
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Old 02-06-2015, 01:49 AM
 
2,064 posts, read 4,417,242 times
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be sure to add in any bonuses, RSUs that vest, etc.
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Old 02-06-2015, 01:55 AM
 
Location: Portal to the Pacific
8,736 posts, read 8,612,435 times
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Quote:
Originally Posted by RVD90277 View Post
A few things:

1) You are talking about RMD (required minimum distributions) at age 70 and you should put money into a Roth IRA to avoid that if you don't think you need the money when you're older. You can just keep it in your roth and eventually your kids will get it.

2) A backdoor roth isn't hush hush secret. It's well known and every financial advisor and investment bank will be familiar with it. You just contribute after tax money ($11k) into a traditional after tax 401k and then convert that to a roth IRA as soon as the money is fully deposited. You will pay a little bit of taxes on the gains during those few days but it's miniscule.

3) If your credit union person is not aware of how to do it, I'd probably just find another credit union but it also wouldn't surprise me. This stuff is pretty basic but lots of people don't even know about after-tax 401ks so I wouldn't be surprised if they didn't know about backdoor roths.

4) If you really want to avoid RMDs, you can start contributing to a roth 401k instead of pre-tax 401k. A roth 401k is like a roth IRA but one of the minor differences is that unfortunately roth 401ks are subject to RMD but you can convert a roth 401k to a roth IRA and from a tax perspective you won't be hit with a big tax bill when you convert (if you convert a pre-tax 401k to a roth IRA, you will be hit with a big tax bill since the converted amount will be taxed as your income tax rate (sounds like 28% or so in your case)).

RVD.
In response:

1) So a Roth IRA doesn't have have RMD? This would be ideal.

2) I haven't even looked up what a after tax 401k is, but I will shortly... I assume you prefer this conversion over a non-deductible traditional IRA because you can contribute (a lot) more???

3) I haven't mentioned it to my advisor, mostly because she hasn't mentioned it to me. I'm considering the boglehead route and learning to do this on my own with Fidelty or Vanguard... my issue with even bringing it up with her is that during our meetings I get lost very easily. Sometimes she starts bringing up options and frankly, I'm not educated enough to make decisions. It takes me a long time to digest this stuff and sometimes I need to sit for a long time before taking any action. I'll email her about this though.

4) We started contributing to a roth 401k last year. My concern about converting our roth 401k to a roth IRA is similar to someone with a bunch of ira trying to convert just one of the non-deductible ira to a roth ira.. I read that the IRS bundles ALL ira money together... it can raise red flags and you run a higher risk of auditing. We have both traditional 401k and a roth... it could be the same problem... If we open an non-deductible ira we will have form 8606 forever in our files and thus the assurance that we contributed after-tax money. It just seems easier...
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Old 02-06-2015, 10:46 AM
 
Location: California side of the Sierras
11,162 posts, read 7,587,909 times
Reputation: 12523
Quote:

We started contributing to a roth 401k last year. My concern about
converting our roth 401k to a roth IRA is similar to someone with a bunch of ira
trying to convert just one of the non-deductible ira to a roth ira.. I read that
the IRS bundles ALL ira money together... it can raise red flags and you run a
higher risk of auditing.
Converting some (not all) of your traditional IRA money does not raise any red flags. You simply are required to convert a pro-rata share of deferred and after-tax monies. That's all.

Personally, I would not open IRAs at the credit union, unless they offer a brokerage account and free trades. (Do they?) Any mutual funds they will sell you are by definition far too expensive. Just go to Vanguard or Fidelity in the first place and keep more of your money for you.
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Old 02-06-2015, 10:49 AM
 
Location: California side of the Sierras
11,162 posts, read 7,587,909 times
Reputation: 12523
And yes, Roths have no RMDs during your lifetime. Your heirs will have RMDs. This does not apply to a spouse, who may treat their deceased spouse's IRA as their own.
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Old 02-06-2015, 10:49 AM
 
26,146 posts, read 21,368,471 times
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My wife and I gross over 200k and we don't come close to having to back door. The income limit is not applied to gross income but rather MAGI which for most people is the same as AGI
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