First, our future tax rates are unknown so how certain are you that your rate will be the same or lower? Second, even given the same tax rate in retirement, it is wise to fund the Roth because it is not subject to RMDs. So you can control how much or little you disburse every year. If all of your money is in a pre-tax investment with RMD, you might get bumped into a higher tax bracket against your choice. However, if your tax rate will be lower in retirement then don't use the Roth.
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Personal Finance Advice and Education! (3 Viewers)
- Thread starter No. 16
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matuski
Footballguy
Tom Hagen
Footballguy
They wouldn't. @Slapdash is going to have to be careful that his combined contributions (excluding match) do not exceed $18,000. His new employer will most likely have no idea how much he contributed to his prior plan and are not responsible to account for them.
Rules for excess contributions.
Tom Hagen
Footballguy
SIMPLE and SEP IRA accounts would need to be included in the calculation to determine how much of a Roth conversion is taxable so they would most likely preclude you from doing a tax free backdoor Roth. See Lines 6 and 8 of Form 8606.
I don't believe an IRA inherited from someone other than a spouse is included in the calculation when converting to a Roth. Per IRS Pub 590-A
It's not your IRA if it is in the deceased's name with you as beneficiary. You probably want to verify that with someone other than an anonymous guy on a magic football website though.
Grahamburn
Footballguy
Assuming he rolled his old account into the new one the employer's 401k provider will likely catch that he over contributed during the year upon valuation of the plan. They'll issue him a check and a 1099 for the overage.
Steve Tasker
Footballguy
Sand
Footballguy
And then asks for Western Union?
(For anyone not knowing this the IRS never, ever calls. Always a scam, thus the joke.)
rick6668
Footballguy
FYI, the IRS has contracted out on overdue collections to four agencies. They can now call you about valid IRS debt. You will receive a letter in the mail regarding that they may contact you before any calls will begin.And then asks for Western Union?
(For anyone not knowing this the IRS never, ever calls. Always a scam, thus the joke.)
cincredfan
Footballguy
From what I read he didn't meet the limit but will meet the limit by year end
If similar to highly comped employee with contribution limit refund you get a check from your employer similar to normal pay.
Leeroy Jenkins
Footballguy
I have all of my accounts linked now but for my wife's personal checking and one credit card.Dentist said:
I guess now I let it do its job for a month and see what kind of budget it puts together and then tweak it?
One issue i notice: I do a transfer from my personal checking to another checking account for my mortgage monthly. Mint shows both as mortgage payments so it appears my mortgage is double. How do i make these offset?
Charlie Harper
Footballguy
Was just basing everything on current tax codes, since that's all we got. However, it's unlikely I'll jump into the 400k tax bracket. I'll probably stay in 28% bracket, but could go 1 up towards the end of my career if I choose to climb the ladder. Does that still make ROTH the best option?
ghostguy123
Footballguy
To me, it seems like it would make sense to have money in both traditional and roth.
That way you can withdraw enough from the traditional to be at the top of a lower tax bracket, then take any additional from the Roth.
That way you can withdraw enough from the traditional to be at the top of a lower tax bracket, then take any additional from the Roth.
I personally expect taxes to rise, just look at our massive debt. But anyway if you are within sniffing distance of making 400K per year, then you'd be wise to pony up for a pro advisor instead of listening to a poor schmuck like me.
Sand
Footballguy
Hedging here is a good thing. And The OP is just about out of Roth room anyway, so will have to either go taxable or tax deferred. TD has much higher earnings potential (even if you pay the 10% penalty on the way out!).
We can all guess, but I expect that within a band our tax burden will be relatively constant over the years. Just IMO.
Instinctive
Footballguy
Two more pieces of info about the traditional vs Roth questions:
1. You effectively save more dollars in tax advantaged space by using a Roth. In the 25% bracket, for example, you're saving $7333 in pre-tax dollars. In a traditional, you're only saving $5500 in pre-tax dollars (which, by the way, end up getting taxed on the other end). So if you can afford to pay the taxes up front, you're basically paying for a greater amount of tax advantage at a later time.
2. Regardless of what your tax burden is, Roth stuff isn't taxed. So, again, if you can afford the taxes up front, you gain a real benefit. Whereas you can try to predict brackets in the future, but you know the lowest one will be zero.
1. You effectively save more dollars in tax advantaged space by using a Roth. In the 25% bracket, for example, you're saving $7333 in pre-tax dollars. In a traditional, you're only saving $5500 in pre-tax dollars (which, by the way, end up getting taxed on the other end). So if you can afford to pay the taxes up front, you're basically paying for a greater amount of tax advantage at a later time.
2. Regardless of what your tax burden is, Roth stuff isn't taxed. So, again, if you can afford the taxes up front, you gain a real benefit. Whereas you can try to predict brackets in the future, but you know the lowest one will be zero.
Sand
Footballguy
The math just isn't that cut and dry. Nerdwallet has a good chart that shows the outcome between a Roth and Traditional. Given the same tax rates it's just about a wash (thought Roth has no RMDs, so that's a win there). Right now my kid is at 0% and I'm helping him shovel monies into a Roth - super no brainer. At my income it becomes a much harder problem.
Now, if you're planning to retire early, then there are some compelling strategies that point toward a traditional.
In general, though, I'm a big fan of hedging (heck, I hedged out the Mansion bet and took the guaranteed payout!). If you have a 401k, which usually is best converted to an IRA the instant you retire, then if you have some Roth space as well it gives you a lot of flexibility to manage taxable income and limit Uncle Sam's take. Taxes are such a huge part of this - tax avoidance is one of the biggest wealth building tools you have in retirement.
Doctor Detroit
Please remove your headgear
Roth contributions are generally better for the young, or those in lower tax brackets right now. If you are contributing to a Roth over a traditional and it's taking you into a higher tax bracket, then you are failing.
Another thing is that it's true you can't predict future tax rates you also can't predict future laws. The Roth can be pulled anytime going forward and some think it will. A Roth IRA is great for anyone who qualifies to contribute, a Roth vs Traditional 401k has many variables and is never as cut and dried as some may suggest.
If I'm reading that correctly...this is the theory:
1. Upon retirement, rollover 401k funds to traditional IRA (no tax consequences)
2. Convert traditional IRA to Roth IRA (capped at $5500/person/year currently) - would be taxed as ordinary income, which in theory would be lower due to not working
3. Withdraw from Roth (with no tax consequences) if you need the money, or continue to invest in Roth
Interesting and something I haven't considered before. Although you can really only maximize around $11k (today's $s), should be one part of your early retirement strategy
Thanks
Rick James
Footballguy
IMO counting on a pension 33 years from now is crazy
NutterButter
Footballguy
There's no limit on how much you can convert. The $5500 is the cap on how much you can invest in an ira in a year.If I'm reading that correctly...this is the theory:
1. Upon retirement, rollover 401k funds to traditional IRA (no tax consequences)
2. Convert traditional IRA to Roth IRA (capped at $5500/person/year currently) - would be taxed as ordinary income, which in theory would be lower due to not working
3. Withdraw from Roth (with no tax consequences) if you need the money, or continue to invest in Roth
Interesting and something I haven't considered before. Although you can really only maximize around $11k (today's $s), should be one part of your early retirement strategy
Thanks
rick6668
Footballguy
Yeah, This is interesting. If all your retirement is tied up in Traditional IRA's and/or 401K's then once you retire this could be very beneficial.
Hmm. Holding off on SS for a few years to convert some large amounts could really reduce the taxable amounts.
Chadstroma
Footballguy
Tom Hagen
Footballguy
Just be careful about this disclaimer if you retire early.If I'm reading that correctly...this is the theory:
1. Upon retirement, rollover 401k funds to traditional IRA (no tax consequences)
2. Convert traditional IRA to Roth IRA (capped at $5500/person/year currently) - would be taxed as ordinary income, which in theory would be lower due to not working
3. Withdraw from Roth (with no tax consequences) if you need the money, or continue to invest in Roth
Interesting and something I haven't considered before. Although you can really only maximize around $11k (today's $s), should be one part of your early retirement strategy
Thanks
Tom Hagen
Footballguy
Converting a 401(k) upon retirement makes a lot of sense in many cases, but may not if you retire before 59 1/2. Distributions can be taken from a 401(k) without penalty if you are 55 and separated from service. Taking an equivalent distribution from an IRA is subject to penalty unless you lock in to a 72(t) calculation or meet one of the other exceptions.
Which is why it makes sense to leave it as a 401k until you retire. A lot of people move companies and put it in IRA which limits future options and backdoors.
-OZ-
Footballguy
For private firms that makes sense.
For government? Damn straight I'm counting on my pensions.
Chadstroma
Footballguy
All my decisions for retirement is with assuming Social Security will not exist come retirement. There is no down side here on this. My wife and I will be financially stable come retirement and if we draw on Social Security then it will be pure spending money to have fun with.
NutterButter
Footballguy
Well it does significantly affect when you'll be able to retire. By my calculations, disregarding SS adds 5 years to my retirement projections. If you're getting the max at 70, that's over 40k in today's dollars you're not considering.
Sand
Footballguy
Indeed. The nice thing is you can manage your income to convert up to the 15% (for example) line and no further. If you have a lot of taxable investments and can suckle from those you can convert a lot at 0%. This is why I like some of the articles at Mad Fientist and GoCurryCracker a lot - they do a great job explaining how these (very legal!) tax avoidance strategies can help you effectively make your money go a lot further. Between this and stuffing an HSA as full as I can I hope to shave a few years off the time I'm stuck at this damn desk.
My retirement plan is looking pretty inflection point-ish, and removing SS from that equation makes me a
.
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Sand
Footballguy
Very good point. If you need to be able to withdraw between 55 and 59.5 this is a big consideration. On the other hand my fees in my 401k are about an order of magnitude higher than in my IRA - enough money that I'd go to the effort to capture it if I could.
Chadstroma
Footballguy
As it stands now. I will on track to retire at 60. (Hopefully I can make some big changes in income in the next few years and cut that down). I would hold off on taking SS until 70. If SS is not there then we will be comfortable. If it is then we can do more traveling and entertainment stuff.
-OZ-
Footballguy
Almost exactly our situation.As it stands now. I will on track to retire at 60. (Hopefully I can make some big changes in income in the next few years and cut that down). I would hold off on taking SS until 70. If SS is not there then we will be comfortable. If it is then we can do more traveling and entertainment stuff.
I'll retire again at around 62. My kids will be over 24 then, presumably either out of college or otherwise should be self sufficient. I'm planning on two federal pensions but no SS. if we do get SS at 70, that's probably going to charity, travel, and grandkids college funds. Our retirement age is driven far less by money in hand than life situation and our contentment in working.
-OZ-
Footballguy
I haven't decided if it's a problem, but even though I'm reasonably sure our tax rate will be higher when I retire than now, currently 40% of our retirement investments are in the traditional TSP (due to the Roth TSP not being available for my first 13 years working). I fully expect that to decrease over time but maybe not that much if we make decent gains with the investments - we're 90% Roth TSP plus her Roth now. We max her Roth and come close to maxing my Roth TSP every year.
So two questions.
1 can we backdoor the TSP?
2 should we?
So two questions.
1 can we backdoor the TSP?
2 should we?
SFBayDuck
Footballguy
Long time reader, first time poster in the thread. Great stuff in here fellas, appreciate it.
It's possible I'll have a large commission check at the end of September that at my current contribution % would put me at the max for 401K contributions for the year (split between traditional and Roth). Company match only happens at the end of the year in one lump contribution (which I hate), so that's not a factor. Should I worry about trying to spread out my remaining contributions over 3 months by lowering my contribution % instead of it hitting all at once, or just get the funds in there and call it good? I understand the power of compounding, but also the advantages of dollar cost averaging. But with just a three month window, not sure what to do. I'm probably overthinking things, but I haven't been in position to max out my 401K before the last month of the year before.
And reading through the past couple pages of this thread I thought I saw something about eligibility to contribute to an IRA. I've never done so, but might be in a position to this year. Some quick research seems to indicate that I'll be over the income level that would allow a deduction, so would that mean there is no point in doing so? Might as well just put it in a regular brokerage account, correct?
It's possible I'll have a large commission check at the end of September that at my current contribution % would put me at the max for 401K contributions for the year (split between traditional and Roth). Company match only happens at the end of the year in one lump contribution (which I hate), so that's not a factor. Should I worry about trying to spread out my remaining contributions over 3 months by lowering my contribution % instead of it hitting all at once, or just get the funds in there and call it good? I understand the power of compounding, but also the advantages of dollar cost averaging. But with just a three month window, not sure what to do. I'm probably overthinking things, but I haven't been in position to max out my 401K before the last month of the year before.
And reading through the past couple pages of this thread I thought I saw something about eligibility to contribute to an IRA. I've never done so, but might be in a position to this year. Some quick research seems to indicate that I'll be over the income level that would allow a deduction, so would that mean there is no point in doing so? Might as well just put it in a regular brokerage account, correct?
Don't Noonan
Footballguy
Are you married? If so, and your wife doesn't work you may be qualified to do a spousal contribution. There is an income limit but it is higher than if you were trying to contribute to your own IRA. I generally don't advise making non deductible IRA contributions in an IRA that already includes deductible contributions. It can be difficult to keep track. It would be worth opening a new IRA to keep seperate.
SFBayDuck
Footballguy
Not married, divorced filing HoH and co-habitating for 5 years now. I suppose I could just put it in an IRA in her name, that was an option I hadn't thought of. Obviously a little potential risk there as I would have no legal claim to the funds if things went sideways.
Doctor Detroit
Please remove your headgear
If I don't get my pension (federal govt) I figure we are all screwed anyway.Rick James said:
Congress is trying to make us pay more into the fund by 1% each year for the next six years, even though the pension fund has $800 billion in it and is funded through 2085. It is not tied to the federal budget or the debt, it's a separate fund.
So those in the know believe congress is going to skim all the savings basically stealing the money to pay for pet projects. I see lawsuits coming.
Now military retirements are a completely different story, and so are those who retired under the president-Reagan federal system.
Doctor Detroit
Please remove your headgear
No you can't backdoor the TSP unless you completely move the money out. Since you are pretty sure your tax rate in retirement will be higher than it is now, you're on the right path now and I don't think a back door is necessary given your contribution rates anyway.-OZ- said:
Doctor Detroit
Please remove your headgear
Also those with the TSP are going to have more investment options, and they are supposed to make withdrawals much easier than they are now. TSP has the lowest fee structure out there but it is limited in scope and really makes it tough on retirees with their Stone Age withdrawal rules. They have 11 years, 7 months, and 19 days to fix this for my purposes. ?
Instinctive
Footballguy
I feel like the article you linked says exactly what I said, in more detail, with full tables of math instead of one example, and a little more nuance.
I don't really have anything to add, except that I agree. It is true that if you're super high tax now and will be super low in retirement, AND you invest all the extra tax savings, you might come out ahead on the traditional. But that's a lot of ifs, the biggest being trusting people to actually invest those tax savings now. Look at the 2nd table - that's pretty clear.
I'm with you on the hedging thought too. Helping you kid, by the way, is AWESOME. I started my Roth IRA at 16 with my first job, and my dad incentivized me by matching my contributions. So if I earned $4k my junior year of high school, I saved 2, he added 2, and I got to keep the other 2 (and we stayed within the legal limits of contributions).
ghostguy123
Footballguy
At 37, I am starting to get a clearer picture of what my realistic/attainable goals will be for the future/retirement.
My goal for age 50 will be as follows:
- Primary residence paid off
- 500k in my 403b (been maxing this for a few years now and should be able to keep doing so from here on out)
- own three rental properties free and clear (i own one free and clear now, and am about to take a loan for my 2nd rental property)
- My house and the rentals are not any sort of high priced luxury places, so I am going to have a goal for a net worth of 900k (living in Northeast Ohio).
- Convert from working full time to part time
If I am able to attain these goals by age 50, where would that put me in the hierarchy of the wealth ladder? More importantly, would it get me out of the bottom 5% of all FBGs??
My goal for age 50 will be as follows:
- Primary residence paid off
- 500k in my 403b (been maxing this for a few years now and should be able to keep doing so from here on out)
- own three rental properties free and clear (i own one free and clear now, and am about to take a loan for my 2nd rental property)
- My house and the rentals are not any sort of high priced luxury places, so I am going to have a goal for a net worth of 900k (living in Northeast Ohio).
- Convert from working full time to part time
If I am able to attain these goals by age 50, where would that put me in the hierarchy of the wealth ladder? More importantly, would it get me out of the bottom 5% of all FBGs??
Chadstroma
Footballguy
Absolutely. It will get you to the bottom 6%.If I am able to attain these goals by age 50, where would that put me in the hierarchy of the wealth ladder? More importantly, would it get me out of the bottom 5% of all FBGs??
KCitons
Footballguy
At 37, I am starting to get a clearer picture of what my realistic/attainable goals will be for the future/retirement.
My goal for age 50 will be as follows:
- Primary residence paid off. This depends on remaining balance, but should be attainable.
- 500k in my 403b (been maxing this for a few years now and should be able to keep doing so from here on out) Keeping the max contribution is attainable, but 13 years at $18k per year will not get you to $500k, this depends on your current balance. It will also rely on the stock market's continued growth.
- own three rental properties free and clear (i own one free and clear now, and am about to take a loan for my 2nd rental property)
- My house and the rentals are not any sort of high priced luxury places, so I am going to have a goal for a net worth of 900k (living in Northeast Ohio).
- Convert from working full time to part time
If I am able to attain these goals by age 50, where would that put me in the hierarchy of the wealth ladder? More importantly, would it get me out of the bottom 5% of all FBGs??
ghostguy123
Footballguy
I did a 15 year mortgage on my house almost 2 and a half years ago, and have paid a little extra. The house will definitely be paid off.
As for the 403b, I mentioned I have been maxing it out for a few years. I was also contributing smaller amounts for about 10 years before I realized I was being an idiot not putting in more. 500k should be very attainable with small annual gains. According to a 403b calculator I looked at, a 2% annual gain for the next 13 years would get me there.
I think all the goals I laid out are very attainable for me as long as nothing terrible happens along the way, and also without being a Dentist style penny pincher.
As for the 403b, I mentioned I have been maxing it out for a few years. I was also contributing smaller amounts for about 10 years before I realized I was being an idiot not putting in more. 500k should be very attainable with small annual gains. According to a 403b calculator I looked at, a 2% annual gain for the next 13 years would get me there.
I think all the goals I laid out are very attainable for me as long as nothing terrible happens along the way, and also without being a Dentist style penny pincher.
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KCitons
Footballguy
Will you stop contributing when you go to part time? What is your long term retirement plan?
ghostguy123
Footballguy
I dont have a long term retirement plan as of yet, just the plan of what I wanted to accomplish at 50.
If I go part time, yes I will still contribute to the 403b, and probably still contribute the max under the assumption that my house is paid off and I have the rental income on properties I have no mortgage on.
The three rentals with no mortgage is going to probably be the hardest thing to accomplish (especially if I decide I want more than three), but is certainly doable. The property I am going after right now is under 70k, and I do not plan to buy anything more expensive than that.
I suppose if I am able to meet my goals for age 50, the long term retirement thing will sort of take care of itself, hopefully.
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Sand
Footballguy
Probably pretty damn good - that rental income puts you in a super sweet spot.If I am able to attain these goals by age 50, where would that put me in the hierarchy of the wealth ladder? More importantly, would it get me out of the bottom 5% of all FBGs??
Charlie Harper
Footballguy
How much collusion and comprehensive deductible are you guys carrying?
I just finished paying off my 2013 Outback. It has a KBB of about 16k. I have enough of an emergency fund (down payment for home) right now to pay for a new vehicle if needed. My parents have a spare car, so I could even take my time finding a great deal on a replacement car (used this time) if needed.
I just raised my deductible to 2.5k, but the more I'm thinking about it..... I would be very comfortable with something like 5k. If I'm fine paying that much I even thinking about dropping it altogether.
The main factor is my current insurance is 1k/6 months with a 2.5k deductible due to previous error in my judgement while driving (lesson learne). Dropping the C&C would save about 400/6 months. That's $800 a year in my situation. Will be keeping liability coverage for sure at 100k/300k (don't own a home or anything).
I just finished paying off my 2013 Outback. It has a KBB of about 16k. I have enough of an emergency fund (down payment for home) right now to pay for a new vehicle if needed. My parents have a spare car, so I could even take my time finding a great deal on a replacement car (used this time) if needed.
I just raised my deductible to 2.5k, but the more I'm thinking about it..... I would be very comfortable with something like 5k. If I'm fine paying that much I even thinking about dropping it altogether.
The main factor is my current insurance is 1k/6 months with a 2.5k deductible due to previous error in my judgement while driving (lesson learne). Dropping the C&C would save about 400/6 months. That's $800 a year in my situation. Will be keeping liability coverage for sure at 100k/300k (don't own a home or anything).
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