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I can't tell if it is a good thing or bad thing that I don't make enough to worry about back door Roths. Sounds all confusing and stuff and such. :nerd: :nerd: :nerd:

I do get a raise this week though, so maybe I get lucky and a computer error adds a zero somewhere or something.

Its kind of annoying. You have to remember to report this as well when you file taxes or you'll get a nice letter from the irs a year later saying you owe a few grand in taxes b/c they think you withdrew 5.5k from your ira.

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Having cash on hand for the possibility of an investment seems silly for a couple reasons.

1- For a great investment opportunity, just take out a loan.

2- if you did find this opportunity and then used your emergency fund, that means you don't have an emergency fund anymore because you just used it for a non emergency.

My brother currently has his house paid off, no debt, two fairly new nice cars paid off. He also has over 100 grand sitting in his bank account, and has only been putting in like 6% into his 401 k for a long long time. I didn't realize those last two things were quite that drastic until recently, and have been having a hell of a time trying to explain to him that he is LOSING money in that savings account. He keeps telling me he isn't losing money, he is getting interest. In time......in time.

1 - sigh.... com'on man

2 - That's why I'm advocating more cash than just an emergency. I'm talking about having an emergency fund and then more cash.

And obviously you should only have this cash after maxing out your 401k, backdoor roth IRA, HSA, spousal IRA if applicable, and after all consumer debt is 100% paid for outside of a mortgage, provided you have a 15 year mortgage at a great rate.

But those should definitely be your goals.

All money should be deferred somewhere if possible so that it isn't spent on frivolous things and so you don't have lifestyle creep as you advance in your career.

What about paying for college for 4 kids?

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Having cash on hand for the possibility of an investment seems silly for a couple reasons.

1- For a great investment opportunity, just take out a loan.

2- if you did find this opportunity and then used your emergency fund, that means you don't have an emergency fund anymore because you just used it for a non emergency.

My brother currently has his house paid off, no debt, two fairly new nice cars paid off. He also has over 100 grand sitting in his bank account, and has only been putting in like 6% into his 401 k for a long long time. I didn't realize those last two things were quite that drastic until recently, and have been having a hell of a time trying to explain to him that he is LOSING money in that savings account. He keeps telling me he isn't losing money, he is getting interest. In time......in time.

1 - sigh.... com'on man

2 - That's why I'm advocating more cash than just an emergency. I'm talking about having an emergency fund and then more cash.

And obviously you should only have this cash after maxing out your 401k, backdoor roth IRA, HSA, spousal IRA if applicable, and after all consumer debt is 100% paid for outside of a mortgage, provided you have a 15 year mortgage at a great rate.

But those should definitely be your goals.

All money should be deferred somewhere if possible so that it isn't spent on frivolous things and so you don't have lifestyle creep as you advance in your career.

Is there a max on the backdoor roth?

No.

Did a little more reading...wouldn't it be $5500/year/person b/c that's what the traditional IRA contribution limits are?

THat's the amount you can contribute to your traditional or roth directly if you were below the income limit. That's not how much you can convert in a year. Two different things. So if you had 40k in a traditional, you can convert that all in one year if you wanted. Obviously tax implications if you were converting some deductible traditional.

That's a Roth conversion...the backdoor Roth is when you make an annual nondeductible contribution to a traditional IRA ($5,500 or $6,500 with catch up) because you are over the MAGI limits and then move it to a Roth. There are no tax issues here.

Its still a conversion either way regardless of how the money got into your traditional IRA in the first play. And yes there are tax issues if part of your traditional IRA includes deductible contributions. You need to be careful about that. If you have a traditional that contains 5k in deductible (say from a rollover) and 5k in non deductible you can't just move the non-deductible amount to the roth. If you tried to move 5k to the roth, the irs actually considers this as 2.5k coming from the deductible and 2.5k coming from the non deductible. The amount that irs coming from each is based on what percentage of the total amount in the ira each makes up.

Yeah, I think we're on the same page. I just took TIger Fan's question to mean the specific annual process of (legally) skirting the Roth MAGI limitations to make a Roth contribution.

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I can't tell if it is a good thing or bad thing that I don't make enough to worry about back door Roths. Sounds all confusing and stuff and such. :nerd: :nerd: :nerd:

I do get a raise this week though, so maybe I get lucky and a computer error adds a zero somewhere or something.

If you are making money and have even a little bit for savings, it makes a lot of sense for you to have a Roth IRA. I, too, am poor enough that I don't need to worry about the subtleties of back door Roths or conversions, but at the same time you shouldn't stick your head in the sand and assume that this stuff is beyond you. Do a little research and consider opening a Roth if you haven't already. Edited by pecorino
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I can't tell if it is a good thing or bad thing that I don't make enough to worry about back door Roths. Sounds all confusing and stuff and such. :nerd: :nerd: :nerd:

I do get a raise this week though, so maybe I get lucky and a computer error adds a zero somewhere or something.

If you are making money and have even a little bit for savings, it makes a lot of sense for you to have a Roth IRA. I, too, am poor enough that I don't need to worry about the subtleties of back door Roths or conversions, but at the same time you shouldn't stick your head in the sand and assume that this stuff is beyond you. Do a little research and consider opening a Roth if you haven't already.

Is there even a point to that if I am contributing to a 403b and am not maxed out on it?

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Having cash on hand for the possibility of an investment seems silly for a couple reasons.

1- For a great investment opportunity, just take out a loan.

2- if you did find this opportunity and then used your emergency fund, that means you don't have an emergency fund anymore because you just used it for a non emergency.

My brother currently has his house paid off, no debt, two fairly new nice cars paid off. He also has over 100 grand sitting in his bank account, and has only been putting in like 6% into his 401 k for a long long time. I didn't realize those last two things were quite that drastic until recently, and have been having a hell of a time trying to explain to him that he is LOSING money in that savings account. He keeps telling me he isn't losing money, he is getting interest. In time......in time.

1 - sigh.... com'on man

2 - That's why I'm advocating more cash than just an emergency. I'm talking about having an emergency fund and then more cash.

And obviously you should only have this cash after maxing out your 401k, backdoor roth IRA, HSA, spousal IRA if applicable, and after all consumer debt is 100% paid for outside of a mortgage, provided you have a 15 year mortgage at a great rate.

But those should definitely be your goals.

All money should be deferred somewhere if possible so that it isn't spent on frivolous things and so you don't have lifestyle creep as you advance in your career.

Is there a max on the backdoor roth?

No.

Did a little more reading...wouldn't it be $5500/year/person b/c that's what the traditional IRA contribution limits are?

THat's the amount you can contribute to your traditional or roth directly if you were below the income limit. That's not how much you can convert in a year. Two different things. So if you had 40k in a traditional, you can convert that all in one year if you wanted. Obviously tax implications if you were converting some deductible traditional.

That's a Roth conversion...the backdoor Roth is when you make an annual nondeductible contribution to a traditional IRA ($5,500 or $6,500 with catch up) because you are over the MAGI limits and then move it to a Roth. There are no tax issues here.

Its still a conversion either way regardless of how the money got into your traditional IRA in the first play. And yes there are tax issues if part of your traditional IRA includes deductible contributions. You need to be careful about that. If you have a traditional that contains 5k in deductible (say from a rollover) and 5k in non deductible you can't just move the non-deductible amount to the roth. If you tried to move 5k to the roth, the irs actually considers this as 2.5k coming from the deductible and 2.5k coming from the non deductible. The amount that irs coming from each is based on what percentage of the total amount in the ira each makes up.

Yeah, I think we're on the same page. I just took TIger Fan's question to mean the specific annual process of (legally) skirting the Roth MAGI limitations to make a Roth contribution.

yeah, sorry...should've restated it better.

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I can't tell if it is a good thing or bad thing that I don't make enough to worry about back door Roths. Sounds all confusing and stuff and such. :nerd: :nerd: :nerd:

I do get a raise this week though, so maybe I get lucky and a computer error adds a zero somewhere or something.

If you are making money and have even a little bit for savings, it makes a lot of sense for you to have a Roth IRA. I, too, am poor enough that I don't need to worry about the subtleties of back door Roths or conversions, but at the same time you shouldn't stick your head in the sand and assume that this stuff is beyond you. Do a little research and consider opening a Roth if you haven't already.

Is there even a point to that if I am contributing to a 403b and am not maxed out on it?

yes, odds are any roth IRA you could set up will have better and less costly investments to you.

The generally accepted order of retirement investing philosophy is:

Contribute to your 401k/403b up to the 100% employer match

Then Roth IRA until max

Then HSA if eligible until the max

Then back to the 401k/403b until the max

Then 529 if you have children and wish to contribute towards their college fund

Then Cash Management account

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yes, odds are any roth IRA you could set up will have better and less costly investments to you.

The generally accepted order of retirement investing philosophy is:

Contribute to your 401k/403b up to the 100% employer match

Then Roth IRA until max

Then HSA if eligible until the max

Then back to the 401k/403b until the max

Then 529 if you have children and wish to contribute towards their college fund

Then Cash Management account

What kind of rate are you getting in an HSA?

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I can't tell if it is a good thing or bad thing that I don't make enough to worry about back door Roths. Sounds all confusing and stuff and such. :nerd: :nerd: :nerd:

I do get a raise this week though, so maybe I get lucky and a computer error adds a zero somewhere or something.

If you are making money and have even a little bit for savings, it makes a lot of sense for you to have a Roth IRA. I, too, am poor enough that I don't need to worry about the subtleties of back door Roths or conversions, but at the same time you shouldn't stick your head in the sand and assume that this stuff is beyond you. Do a little research and consider opening a Roth if you haven't already.

Is there even a point to that if I am contributing to a 403b and am not maxed out on it?

yes, odds are any roth IRA you could set up will have better and less costly investments to you.

The generally accepted order of retirement investing philosophy is:

Contribute to your 401k/403b up to the 100% employer match

Then Roth IRA until max

Then HSA if eligible until the max

Then back to the 401k/403b until the max

Then 529 if you have children and wish to contribute towards their college fund

Then Cash Management account

assume those of us who have virtually 100% of our medical paid for can skip this step?

I mean, we pay a decent copay for braces and a max of $1,000 for the family on the year, but I don't know that a HSA makes sense in our situation.

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yes, odds are any roth IRA you could set up will have better and less costly investments to you.

The generally accepted order of retirement investing philosophy is:

Contribute to your 401k/403b up to the 100% employer match

Then Roth IRA until max

Then HSA if eligible until the max

Then back to the 401k/403b until the max

Then 529 if you have children and wish to contribute towards their college fund

Then Cash Management account

What kind of rate are you getting in an HSA?

You can choose to invest as you see fit in your HSA or just keep it in cash, that's your choice.

You can invest it in the market through someone like hsabank or bank of america hsa

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I can't tell if it is a good thing or bad thing that I don't make enough to worry about back door Roths. Sounds all confusing and stuff and such. :nerd: :nerd: :nerd:

I do get a raise this week though, so maybe I get lucky and a computer error adds a zero somewhere or something.

If you are making money and have even a little bit for savings, it makes a lot of sense for you to have a Roth IRA. I, too, am poor enough that I don't need to worry about the subtleties of back door Roths or conversions, but at the same time you shouldn't stick your head in the sand and assume that this stuff is beyond you. Do a little research and consider opening a Roth if you haven't already.

Is there even a point to that if I am contributing to a 403b and am not maxed out on it?

yes, odds are any roth IRA you could set up will have better and less costly investments to you.

The generally accepted order of retirement investing philosophy is:

Contribute to your 401k/403b up to the 100% employer match

Then Roth IRA until max

Then HSA if eligible until the max

Then back to the 401k/403b until the max

Then 529 if you have children and wish to contribute towards their college fund

Then Cash Management account

assume those of us who have virtually 100% of our medical paid for can skip this step?

I mean, we pay a decent copay for braces and a max of $1,000 for the family on the year, but I don't know that a HSA makes sense in our situation.

HSA, if you have an eligible high deductible health insurance plan is the only triple tax protected account on the market. Tax free going in, coming out, and no tax on gains.

You need to be thinking about the future... regardless of how much you have covered now, if you build up a good amount in that account you'll have the money in there for some experimental medicines or cancer drugs that won't be covered by medicare when you are older.

Current estimates are that people spend upwards of 200K on medical care in their retired years.

I'd rather have as much of that paid for in advance now with triple tax protected money than have to take it out of my retirement nest egg later on.

I consider the HSA part of my retirement savings... although since I have a $5000 deductible, wear contacts, and have had 2 children recently, I've ended up spending a lot more of the money recently than I would have liked to... but oh well.

The HSA of course is better if you are a higher earned because the tax savings is more significant.. like if you're in the 28% tax bracket... it's like getting your health care 28% off.

If you are in a lower tax bracket, the savings are less.

If you are eligible for an HSA, it frankly is probably even a better account than the Roth IRA for saving money... it's just that the use of that money is very specific... but with high certainty something you will likely use.

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yes, odds are any roth IRA you could set up will have better and less costly investments to you.

The generally accepted order of retirement investing philosophy is:

Contribute to your 401k/403b up to the 100% employer match

Then Roth IRA until max

Then HSA if eligible until the max

Then back to the 401k/403b until the max

Then 529 if you have children and wish to contribute towards their college fund

Then Cash Management account

What kind of rate are you getting in an HSA?

You can choose to invest as you see fit in your HSA or just keep it in cash, that's your choice.

You can invest it in the market through someone like hsabank or bank of america hsa

Sorry for the noob questions, but how are you eligible for an HSA? HSA's aren't tied to a job right?

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I can't tell if it is a good thing or bad thing that I don't make enough to worry about back door Roths. Sounds all confusing and stuff and such. :nerd: :nerd: :nerd:

I do get a raise this week though, so maybe I get lucky and a computer error adds a zero somewhere or something.

If you are making money and have even a little bit for savings, it makes a lot of sense for you to have a Roth IRA. I, too, am poor enough that I don't need to worry about the subtleties of back door Roths or conversions, but at the same time you shouldn't stick your head in the sand and assume that this stuff is beyond you. Do a little research and consider opening a Roth if you haven't already.

Is there even a point to that if I am contributing to a 403b and am not maxed out on it?

yes, odds are any roth IRA you could set up will have better and less costly investments to you.

The generally accepted order of retirement investing philosophy is:

Contribute to your 401k/403b up to the 100% employer match

Then Roth IRA until max

Then HSA if eligible until the max

Then back to the 401k/403b until the max

Then 529 if you have children and wish to contribute towards their college fund

Then Cash Management account

assume those of us who have virtually 100% of our medical paid for can skip this step?

I mean, we pay a decent copay for braces and a max of $1,000 for the family on the year, but I don't know that a HSA makes sense in our situation.

HSA, if you have an eligible high deductible health insurance plan is the only triple tax protected account on the market. Tax free going in, coming out, and no tax on gains.

You need to be thinking about the future... regardless of how much you have covered now, if you build up a good amount in that account you'll have the money in there for some experimental medicines or cancer drugs that won't be covered by medicare when you are older.

Current estimates are that people spend upwards of 200K on medical care in their retired years.

I'd rather have as much of that paid for in advance now with triple tax protected money than have to take it out of my retirement nest egg later on.

I consider the HSA part of my retirement savings... although since I have a $5000 deductible, wear contacts, and have had 2 children recently, I've ended up spending a lot more of the money recently than I would have liked to... but oh well.

The HSA of course is better if you are a higher earned because the tax savings is more significant.. like if you're in the 28% tax bracket... it's like getting your health care 28% off.

If you are in a lower tax bracket, the savings are less.

If you are eligible for an HSA, it frankly is probably even a better account than the Roth IRA for saving money... it's just that the use of that money is very specific... but with high certainty something you will likely use.

Good info, but it doesn't look like we're eligible.

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I can't tell if it is a good thing or bad thing that I don't make enough to worry about back door Roths. Sounds all confusing and stuff and such. :nerd: :nerd: :nerd:

I do get a raise this week though, so maybe I get lucky and a computer error adds a zero somewhere or something.

If you are making money and have even a little bit for savings, it makes a lot of sense for you to have a Roth IRA. I, too, am poor enough that I don't need to worry about the subtleties of back door Roths or conversions, but at the same time you shouldn't stick your head in the sand and assume that this stuff is beyond you. Do a little research and consider opening a Roth if you haven't already.

Is there even a point to that if I am contributing to a 403b and am not maxed out on it?

yes, odds are any roth IRA you could set up will have better and less costly investments to you.

The generally accepted order of retirement investing philosophy is:

Contribute to your 401k/403b up to the 100% employer match

Then Roth IRA until max

Then HSA if eligible until the max

Then back to the 401k/403b until the max

Then 529 if you have children and wish to contribute towards their college fund

Then Cash Management account

My 403b has several vanguard options that are talked about a lot here, with seemingly very low fees. I am mostly in VINIX.

Would a Rother IRA have better options than these?

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yes, odds are any roth IRA you could set up will have better and less costly investments to you.

The generally accepted order of retirement investing philosophy is:

Contribute to your 401k/403b up to the 100% employer match

Then Roth IRA until max

Then HSA if eligible until the max

Then back to the 401k/403b until the max

Then 529 if you have children and wish to contribute towards their college fund

Then Cash Management account

What kind of rate are you getting in an HSA?

You can choose to invest as you see fit in your HSA or just keep it in cash, that's your choice.

You can invest it in the market through someone like hsabank or bank of america hsa

Sorry for the noob questions, but how are you eligible for an HSA? HSA's aren't tied to a job right?

You are eligible for an HSA if you and your spouse (if applicable) have high deductible health insurance policies. A quick google search on HSA's would give you a lot more info than I can fast.

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I can't tell if it is a good thing or bad thing that I don't make enough to worry about back door Roths. Sounds all confusing and stuff and such. :nerd: :nerd: :nerd:

I do get a raise this week though, so maybe I get lucky and a computer error adds a zero somewhere or something.

If you are making money and have even a little bit for savings, it makes a lot of sense for you to have a Roth IRA. I, too, am poor enough that I don't need to worry about the subtleties of back door Roths or conversions, but at the same time you shouldn't stick your head in the sand and assume that this stuff is beyond you. Do a little research and consider opening a Roth if you haven't already.

Is there even a point to that if I am contributing to a 403b and am not maxed out on it?

yes, odds are any roth IRA you could set up will have better and less costly investments to you.

The generally accepted order of retirement investing philosophy is:

Contribute to your 401k/403b up to the 100% employer match

Then Roth IRA until max

Then HSA if eligible until the max

Then back to the 401k/403b until the max

Then 529 if you have children and wish to contribute towards their college fund

Then Cash Management account

My 403b has several vanguard options that are talked about a lot here, with seemingly very low fees. I am mostly in VINIX.

Would a Rother IRA have better options than these?

Probably slightly better, but not statistically significant.

Then it becomes about tax diversification. Roth IRA is pay now not later. 403b is defer now, pay later.

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Probably slightly better, but not statistically significant.

Then it becomes about tax diversification. Roth IRA is pay now not later. 403b is defer now, pay later.

It seems like "defer now, pay later" is a better option to me. What circumstances would make one better than the other?

The main things to consider are your current tax bracket, your expectations for your future tax rates, and the length of time the money will grow. Obviously future tax rates are unknown, which makes an accurate comparison difficult.

Hypothetical oversimplification- you put $10K into a plan now and it grows to $50K at retirement. With a traditional plan, you get to deduct that $10K from income now but will pay taxes on the $50K later when you withdraw it. With a roth you pay taxes (via no deduction) on the $10K now but you'll pay nothing on the $50K at retirement.

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Probably slightly better, but not statistically significant.

Then it becomes about tax diversification. Roth IRA is pay now not later. 403b is defer now, pay later.

It seems like "defer now, pay later" is a better option to me. What circumstances would make one better than the other?

The main things to consider are your current tax bracket, your expectations for your future tax rates, and the length of time the money will grow. Obviously future tax rates are unknown, which makes an accurate comparison difficult.

Hypothetical oversimplification- you put $10K into a plan now and it grows to $50K at retirement. With a traditional plan, you get to deduct that $10K from income now but will pay taxes on the $50K later when you withdraw it. With a roth you pay taxes (via no deduction) on the $10K now but you'll pay nothing on the $50K at retirement.

Well with my 403b I am putting more into it than if I had to pay taxes on it now, so the end number will be a lot higher than whatever it would end up being if I use a Roth.

I suppose anything that gets you out of the higher tax brackets is a winner.

Whenever it is time for be to withdraw from it, I am guessing I won't be in the higher tax bracket, so deferring now seems like the better option. Correct me if I am wrong.

edit..............clarifying. When I am retirement, I am guessing I won't be in the same tax bracket as I am now. I would expect to bring in LESS annually than I do now (factoring in inflation of course).

Edited by ghostguy123
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Probably slightly better, but not statistically significant.

Then it becomes about tax diversification. Roth IRA is pay now not later. 403b is defer now, pay later.

It seems like "defer now, pay later" is a better option to me. What circumstances would make one better than the other?

The main things to consider are your current tax bracket, your expectations for your future tax rates, and the length of time the money will grow. Obviously future tax rates are unknown, which makes an accurate comparison difficult.

Hypothetical oversimplification- you put $10K into a plan now and it grows to $50K at retirement. With a traditional plan, you get to deduct that $10K from income now but will pay taxes on the $50K later when you withdraw it. With a roth you pay taxes (via no deduction) on the $10K now but you'll pay nothing on the $50K at retirement.

Well with my 403b I am putting more into it than if I had to pay taxes on it now, so the end number will be a lot higher than whatever it would end up being if I use a Roth.

I suppose anything that gets you out of the higher tax brackets is a winner.

Whenever it is time for be to withdraw from it, I am guessing I won't be in the higher tax bracket, so deferring now seems like the better option. Correct me if I am wrong.

edit..............clarifying. When I am retirement, I am guessing I won't be in the same tax bracket as I am now. I would expect to bring in LESS annually than I do now (factoring in inflation of course).

You also need to consider all the other deductions you are currently taking which you may not (should not) have when you're retired (mortgage, likely paying higher property taxes if you downsize, etc.).

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The accountant in me says you should be diversifying between traditional and roth style accounts (IRA/401k/whatever) so that you have options when you're retired. You don't want to go all in on traditional and then have to pull like 200k one year and pay taxes on all of it. I'd have to do a refresher, but my instinct is that you can pull up to $x from your traditional within a low bracket and then supplement that with your roth withdrawals to maximize your post-tax income.

Your goal is to maximize post-tax income at all times. A lot of people confuse this with minimizing tax liability - those two things are not the same.

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The accountant in me says you should be diversifying between traditional and roth style accounts (IRA/401k/whatever) so that you have options when you're retired. You don't want to go all in on traditional and then have to pull like 200k one year and pay taxes on all of it. I'd have to do a refresher, but my instinct is that you can pull up to $x from your traditional within a low bracket and then supplement that with your roth withdrawals to maximize your post-tax income.

Your goal is to maximize post-tax income at all times. A lot of people confuse this with minimizing tax liability - those two things are not the same.

Each situation can differ but in general- I agree. I think the vast majority of people are best served with a mix of retirement from traditional and roth. The exact mix is what will differ the most among people and not so much whether you should have a mix.

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If you are on the poor side, say in a 15% tax bracket, then paying taxes now may be better than paying taxes later. At the very least, as some have suggested, a mix of pre- and post-tax investments is smart. Who do you think is going to pay our nearly $20 trillion debt? Your taxes in retirement may be higher than you think.

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Probably slightly better, but not statistically significant.

Then it becomes about tax diversification. Roth IRA is pay now not later. 403b is defer now, pay later.

It seems like "defer now, pay later" is a better option to me. What circumstances would make one better than the other?

The main things to consider are your current tax bracket, your expectations for your future tax rates, and the length of time the money will grow. Obviously future tax rates are unknown, which makes an accurate comparison difficult.

Hypothetical oversimplification- you put $10K into a plan now and it grows to $50K at retirement. With a traditional plan, you get to deduct that $10K from income now but will pay taxes on the $50K later when you withdraw it. With a roth you pay taxes (via no deduction) on the $10K now but you'll pay nothing on the $50K at retirement.

Well with my 403b I am putting more into it than if I had to pay taxes on it now, so the end number will be a lot higher than whatever it would end up being if I use a Roth.

I suppose anything that gets you out of the higher tax brackets is a winner.

Whenever it is time for be to withdraw from it, I am guessing I won't be in the higher tax bracket, so deferring now seems like the better option. Correct me if I am wrong.

edit..............clarifying. When I am retirement, I am guessing I won't be in the same tax bracket as I am now. I would expect to bring in LESS annually than I do now (factoring in inflation of course).

Every situation is unique to your particular circumstances- there are plenty of online calculators that you can use to give you an idea (and can account for putting more into a traditional vs. a roth), but again, you're going to have to make a lot of guesses about the future.

As far as tax brackets, most people assume that they'll be in a lower tax bracket when they retire. What many fail to consider, however, is that the lower bracket could have higher rates in the future. Of course, it could have lower rates as well, although that seems much less likely.

In general, splitting money into both roth and traditional type accounts is prudent for most people- it gives you another hedge/form of diversification.

Edited by humpback
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Ok. So i have alot of work to do in theae areas. I'm 41, she's 38. We have an 11 year old and a 6 year old. We only have 401K savings and have only been doing the minimum 4% which gets the company match. No IRAs, Roth or regular. No 529s.

I know i need to ramp up my retirement savings as well as get a late start on savings for college. At this point is it best to just start dumping in what i can into a Roth IRA and pull out principle for college when the time comes?

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I've got a very straightforward question that has been bugging me a bit recently. I'm told that a Roth IRA is so much better than a regular IRA.

Let's assume my tax bracket will be identical when I retire to what it is now.

Given this assumption, is a Roth IRA in any way better than a regular IRA? The before/after tax aspect doesn't seem to matter at all unless your tax bracket changes between now and when you get paid out at retirement.

Am I missing some additional benefit of a Roth IRA?

Rough example:

$100k contributed to both, which has earned 30% tax bracket currently and 30% tax bracket when I retire (hypothetical). Let's say the investment earns a 100% return over the amount of time that I have it invested.

Roth: $100k contributed, $30k removed up front from taxes = $70k. 100% return and I pull out $140k at retirement.

Traditional: $100k contributed, no taxes up front. 100% return gives me $200k total. At retirement, I'm taxed 30% which leaves me with $140k. The same amount.

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I need to better understand the back door Roth IRA. Been putting off doing but really need to start this year.

Im going to look but if anyone has a link to a nice step by step process in doing so.

Do you have a traditional IRA? If so, is there any money in there that is pre-tax? If so, you will have to pay tax on all of that when you convert it. You can't segregate what money in your IRA to transfer to a Roth.

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I've got a very straightforward question that has been bugging me a bit recently. I'm told that a Roth IRA is so much better than a regular IRA.

Let's assume my tax bracket will be identical when I retire to what it is now.

Given this assumption, is a Roth IRA in any way better than a regular IRA? The before/after tax aspect doesn't seem to matter at all unless your tax bracket changes between now and when you get paid out at retirement.

Am I missing some additional benefit of a Roth IRA?

There are a few more subtle benefits of the Roth that may or may not make a difference.

1. Many things in the tax code are based on adjusted gross income which includes traditional IRA distributions but not Roth distributions. For example, if your only sources of retirement income are social security and $50,000 of IRA distributions, 85% of your SS would be subject to tax if it was a traditional IRA but none of the SS would be taxed if it was a Roth. (Full disclosure, this works in reverse also. Contributing to a traditional could qualify you for deductions or credits you would not be eligible to receive with a Roth contribution.)

2. Traditional IRA's are subject to required minimum distributions but Roth IRA's are not (for now). If you don't have a need to draw on your IRA accounts in retirement and would prefer to leave them to your heirs, this makes a Roth much more attractive.

3. If you need the money prior to age 59 1/2 you can withdraw your original investment out of a Roth tax and penalty free.

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I've got a very straightforward question that has been bugging me a bit recently. I'm told that a Roth IRA is so much better than a regular IRA.

Let's assume my tax bracket will be identical when I retire to what it is now.

Given this assumption, is a Roth IRA in any way better than a regular IRA? The before/after tax aspect doesn't seem to matter at all unless your tax bracket changes between now and when you get paid out at retirement.

Am I missing some additional benefit of a Roth IRA?

There are a few more subtle benefits of the Roth that may or may not make a difference.

1. Many things in the tax code are based on adjusted gross income which includes traditional IRA distributions but not Roth distributions. For example, if your only sources of retirement income are social security and $50,000 of IRA distributions, 85% of your SS would be subject to tax if it was a traditional IRA but none of the SS would be taxed if it was a Roth. (Full disclosure, this works in reverse also. Contributing to a traditional could qualify you for deductions or credits you would not be eligible to receive with a Roth contribution.)

2. Traditional IRA's are subject to required minimum distributions but Roth IRA's are not (for now). If you don't have a need to draw on your IRA accounts in retirement and would prefer to leave them to your heirs, this makes a Roth much more attractive.

3. If you need the money prior to age 59 1/2 you can withdraw your original investment out of a Roth tax and penalty free.

Awesome, thank you!

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Ok. So i have alot of work to do in theae areas. I'm 41, she's 38. We have an 11 year old and a 6 year old. We only have 401K savings and have only been doing the minimum 4% which gets the company match. No IRAs, Roth or regular. No 529s.

I know i need to ramp up my retirement savings as well as get a late start on savings for college. At this point is it best to just start dumping in what i can into a Roth IRA and pull out principle for college when the time comes?

I favor retirement over education funds. It is great and all to have money to pay for or help pay for college but there are plenty of options for the kids to get an education (if they do) and pay for it. While, when you retire whatever you have in retirement is it. If you fall short then guess who has to pick up the slack? Your kids.

Put some money away for the kids but priority is you and that is not being selfish.

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Ok. So i have alot of work to do in theae areas. I'm 41, she's 38. We have an 11 year old and a 6 year old. We only have 401K savings and have only been doing the minimum 4% which gets the company match. No IRAs, Roth or regular. No 529s.

I know i need to ramp up my retirement savings as well as get a late start on savings for college. At this point is it best to just start dumping in what i can into a Roth IRA and pull out principle for college when the time comes?

I'm not sure how to tell you this without coming off like a pompous jerk, but I"m going to go ahead and say it anyway:

You can't afford to assist your children's post high-school education.

Your child can get loans for school. You can't get loans for retiring.

As crappy as student loans are, it would be worse for your child to see you unable to retire, have a unfulfilling retirement, or be so poor in retirement that you need support from them.

Get your retirement accounts beefed up.

Until you are maxing your Roth's and 401k's, you can't afford to be putting money in a 529 given how little savings you have at this point in your life.

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I need to better understand the back door Roth IRA. Been putting off doing but really need to start this year.

Im going to look but if anyone has a link to a nice step by step process in doing so.

goto the website white coat investor - look up backdoor roth IRA. he has a very specific outline.

It feels a little weird to do it... and it definitely takes some effort.. but it's worth it to get 11K into that plan (or more if you're over 50)

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Also, i can do a Roth 401K through work. OK to do that instead or IRA?

Not all employers offer Roth 401k. If they do great. Roth 401k and Roth IRA are same thing- it is just that the 401k is administered by your employer and the IRA is on you.

I'll have to double check, but I don't believe you can withdraw ROTH 401K contributions penalty free like you can ROTH IRA contributions.

Also be aware that whether you do a ROTH or traditional 401K, employer matches go into traditional (pre-Tax). I personally have started having my contributions go to the ROTH 401K which helps add a little extra tax diversification.

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Also, i can do a Roth 401K through work. OK to do that instead or IRA?

Not all employers offer Roth 401k. If they do great. Roth 401k and Roth IRA are same thing- it is just that the 401k is administered by your employer and the IRA is on you.

I'd do some searching and reading about Roth 401ks over at Bogleheads. They, if memory serves, don't like them much. Not sure why - I don't have that option so didn't delve into it.

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Also, i can do a Roth 401K through work. OK to do that instead or IRA?

Not all employers offer Roth 401k. If they do great. Roth 401k and Roth IRA are same thing- it is just that the 401k is administered by your employer and the IRA is on you.

I'd do some searching and reading about Roth 401ks over at Bogleheads. They, if memory serves, don't like them much. Not sure why - I don't have that option so didn't delve into it.

Cost. Same as regular 401k's. With a 401k you are at the mercy of your employer. With an IRA, you are the customer and you can get the best deal possible as you wish.

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Also, i can do a Roth 401K through work. OK to do that instead or IRA?

Not all employers offer Roth 401k. If they do great. Roth 401k and Roth IRA are same thing- it is just that the 401k is administered by your employer and the IRA is on you.

I'd do some searching and reading about Roth 401ks over at Bogleheads. They, if memory serves, don't like them much. Not sure why - I don't have that option so didn't delve into it.

Cost. Same as regular 401k's. With a 401k you are at the mercy of your employer. With an IRA, you are the customer and you can get the best deal possible as you wish.

This. Generally, the more options the better, At least in theory (in reality, listen to the ted talks on the subject).

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The accountant in me says you should be diversifying between traditional and roth style accounts (IRA/401k/whatever) so that you have options when you're retired. You don't want to go all in on traditional and then have to pull like 200k one year and pay taxes on all of it. I'd have to do a refresher, but my instinct is that you can pull up to $x from your traditional within a low bracket and then supplement that with your roth withdrawals to maximize your post-tax income.

Your goal is to maximize post-tax income at all times. A lot of people confuse this with minimizing tax liability - those two things are not the same.

Like Chad said it is dependent on a lot of variables, one isn't necessarily better than the other for most IMO, but there are circumstances where one is definitely better than the other.

The Roth is for young people because they are furthest away from needing the money. In your 20s and early 30s piling money into a Roth 401k gives you a distinct advantage over time. By your 30s you can probably reasonably guess your income path. Are you going to make so much that when you retire you're going to be in a tax bracket 28% or higher? If so continuing to use the Roth 401k is probably best because you'll want the tax advantage when you retire and you are producing a very good amount of income now.

On the flip side if you are going to have a steady progression and maybe never leave the 15, or 25 percent tax bracket then the traditional 401k is probably better. You get that tax break now, and you are going to build more principle for less money invested. If you are in the 25% tax bracket and you think when you'll retire you'll be in the 15%, then this is a no-brainer IMO.

I think once people get into their 40s there is a lot more known and the decision is much easier. The younger you the more unknown things are, and putting money into a Roth 401k if you don't need the tax break and won't miss the money is probably best. Then you can change your allocation in your 30s, 40s, and 50s to meet your retirement needs based on income and tax variables.

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Ok. So i have alot of work to do in theae areas. I'm 41, she's 38. We have an 11 year old and a 6 year old. We only have 401K savings and have only been doing the minimum 4% which gets the company match. No IRAs, Roth or regular. No 529s.

I know i need to ramp up my retirement savings as well as get a late start on savings for college. At this point is it best to just start dumping in what i can into a Roth IRA and pull out principle for college when the time comes?

I'm not sure how to tell you this without coming off like a pompous jerk, but I"m going to go ahead and say it anyway:

You can't afford to assist your children's post high-school education.

Your child can get loans for school. You can't get loans for retiring.

As crappy as student loans are, it would be worse for your child to see you unable to retire, have a unfulfilling retirement, or be so poor in retirement that you need support from them.

Get your retirement accounts beefed up.

Until you are maxing your Roth's and 401k's, you can't afford to be putting money in a 529 given how little savings you have at this point in your life.

Agree with Dentist and will add that if you save money for college in a 529, then the colleges will gladly take it. Gone. If the kiddo decides against going to college then I believe there is a penalty involved when getting the funds out, not sure. My guess is that it would not be pleasant for you.

But if you save money for retirement, you could potentially use some of it for college expenses if need be (for instance, if you decide that some portion of your Roth IRA could be used to pay for college expenses). Now the kiddo can apply for loans, maybe even get financial aid because he essentially has no money to pay for college, yet you may be sitting on a pile of cash in your Roth that you can tap into if you've already earmarked some of it for this purpose. And if kiddo decides to forgo college, or if he is just a jag off, then the money is yours, not his, to do what you want with. All courtesy of a Roth if that's how you decide to use it (which is a bit unorthodox, I believe, but my wife and I allocate 50% of our Roth money for the college fund).

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The accountant in me says you should be diversifying between traditional and roth style accounts (IRA/401k/whatever) so that you have options when you're retired. You don't want to go all in on traditional and then have to pull like 200k one year and pay taxes on all of it. I'd have to do a refresher, but my instinct is that you can pull up to $x from your traditional within a low bracket and then supplement that with your roth withdrawals to maximize your post-tax income.

Your goal is to maximize post-tax income at all times. A lot of people confuse this with minimizing tax liability - those two things are not the same.

Like Chad said it is dependent on a lot of variables, one isn't necessarily better than the other for most IMO, but there are circumstances where one is definitely better than the other.

The Roth is for young people because they are furthest away from needing the money. In your 20s and early 30s piling money into a Roth 401k gives you a distinct advantage over time. By your 30s you can probably reasonably guess your income path. Are you going to make so much that when you retire you're going to be in a tax bracket 28% or higher? If so continuing to use the Roth 401k is probably best because you'll want the tax advantage when you retire and you are producing a very good amount of income now.

On the flip side if you are going to have a steady progression and maybe never leave the 15, or 25 percent tax bracket then the traditional 401k is probably better. You get that tax break now, and you are going to build more principle for less money invested. If you are in the 25% tax bracket and you think when you'll retire you'll be in the 15%, then this is a no-brainer IMO.

I think once people get into their 40s there is a lot more known and the decision is much easier. The younger you the more unknown things are, and putting money into a Roth 401k if you don't need the tax break and won't miss the money is probably best. Then you can change your allocation in your 30s, 40s, and 50s to meet your retirement needs based on income and tax variables.

If you think you can predict your tax rate at retirement, you've either got a Delorian I want to borrow, you're very close to retirement already, or you're delusional.

You should have a mix. Diversify your options. Regardless of what you think your income path will be.

I totally agree with your young people point - Roth IRA though. I basically never have meaningful taxes owed, and I've been putting my maximum (usually capped at earned income) into my Roth IRA since I was 16 and got my first job. Those of you with kids - offer to match your kids' Roth IRA contributions if you want to incentivize them to save from an early-ish age. Because mine were generous, I was able to keep half my earnings for typical HS/college age stuff and put half into an IRA. Without that incentive, I likely would have just spent all of it rather than try to save half myself with no incentive other than, "We promise this is a good idea."

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Ok. So i have alot of work to do in theae areas. I'm 41, she's 38. We have an 11 year old and a 6 year old. We only have 401K savings and have only been doing the minimum 4% which gets the company match. No IRAs, Roth or regular. No 529s.

I know i need to ramp up my retirement savings as well as get a late start on savings for college. At this point is it best to just start dumping in what i can into a Roth IRA and pull out principle for college when the time comes?

I'm not sure how to tell you this without coming off like a pompous jerk, but I"m going to go ahead and say it anyway:

You can't afford to assist your children's post high-school education.

Your child can get loans for school. You can't get loans for retiring.

As crappy as student loans are, it would be worse for your child to see you unable to retire, have a unfulfilling retirement, or be so poor in retirement that you need support from them.

Get your retirement accounts beefed up.

Until you are maxing your Roth's and 401k's, you can't afford to be putting money in a 529 given how little savings you have at this point in your life.

Agree with Dentist and will add that if you save money for college in a 529, then the colleges will gladly take it. Gone. If the kiddo decides against going to college then I believe there is a penalty involved when getting the funds out, not sure. My guess is that it would not be pleasant for you.

But if you save money for retirement, you could potentially use some of it for college expenses if need be (for instance, if you decide that some portion of your Roth IRA could be used to pay for college expenses). Now the kiddo can apply for loans, maybe even get financial aid because he essentially has no money to pay for college, yet you may be sitting on a pile of cash in your Roth that you can tap into if you've already earmarked some of it for this purpose. And if kiddo decides to forgo college, or if he is just a jag off, then the money is yours, not his, to do what you want with. All courtesy of a Roth if that's how you decide to use it (which is a bit unorthodox, I believe, but my wife and I allocate 50% of our Roth money for the college fund).

Also, having filled out the FAFSA every year for a few years now, there are a number of protections on funds in designated retirement accounts. So while colleges count your income and your wealth to a large extent, you can "hide" money from them in some ways still.

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If you think you can predict your tax rate at retirement, you've either got a Delorian I want to borrow, you're very close to retirement already, or you're delusional.

If you are saying personal tax rates may change over time, sure (but any drastic change is not on the horizon). But anyone over 40 can get a pretty good idea what current tax bracket they will be in when they retire IMO.
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I need to better understand the back door Roth IRA. Been putting off doing but really need to start this year.

Im going to look but if anyone has a link to a nice step by step process in doing so.

Do you have a traditional IRA? If so, is there any money in there that is pre-tax? If so, you will have to pay tax on all of that when you convert it. You can't segregate what money in your IRA to transfer to a Roth.
I believe you can roll your deductible IRA contributions into your 401(k) plan, if the plan allows such. That is a way to clean up the IRA to do the backdoor Roth without the tax issue.
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In fact, if you've got kids, I'm going to give you a 23 year-old's perspective on some things that my parents did that seem to have worked, as I'm a pretty conscientious saver and budget-er - compared not only to the average American but especially to my age cohort. Both of my parents are CPAs, and I got my accounting degree before moving on to grad school.

1. Save half. Of everything: From the very earliest time I can remember receiving birthday or Christmas gifts that were simply cash or a check (or some other form of money that wasn't just an actual gift), my parents would take half of it and put it in a savings account for me. I got to keep the other half. Event today, my instinct is to take half of any money I receive and put it in a savings account, rather than a checking account. In fact, whenever I receive actual paychecks rather than direct deposit, I do just that - cash it, put half in savings and put half in checking.

2. Vacation Allowances: Whenever we went on vacation (typically an 8-16 day road trip making stops at various National Parks for camping 1-4 nights), my younger brother and I were each given an allowance. We were given simply instructions with it as well - you can spend it on whatever you want, but you don't get any more and you get to keep what you don't spend. If we all decide to get ice cream, or we go to dinner somewhere, that's a family thing, but if you want a poster or a post card or a hat pin or a hat or a candy bar or (you get the point), then that's your choice to make.

To this day, I have a poster from at least half the national parks, and while a number are in storage while I'm in this tiny-### apartment, I'll one day have a whole room in my home where the walls are covered in these framed posters of places I've been. I still try to collect them when I travel, though I do so far less often on a grad student budget.

3. Be the employer: My parents offered to match any Roth IRA contribution I made until I finished college. From the time I was 16 and got my first job at a mall cookie shop, to the time I was a pizza cook, officiated basketball, TA'd in college, summer internships, etc, I have always saved up half of my earned income up to $2,750 and set it aside for a Roth IRA contribution. At the end of the year, my father would match any contribution just like his company matched 401(k) contributions. When I work full-time for employers with matching plans, the first thing I'll do is fill out the paperwork to push, at a minimum, an amount which will get the full company match into my account.

I'm sure there are other things (an obvious one is simply setting a good example) and you can obviously teach just by teaching with words and having open financial discussions, but those three things in combination with a good example and lots of discussion surrounding financial decisions of the family have set me up very well. For that I am grateful and owe them a lot. And I do mean a lot of awareness of financial situations we were in. I was part of discussions with the financial advisor when it was time to pay for college, I was always informed as to what we were doing when we refinanced a mortgage or something...part of that was me being interested, but I think part of why I was interested was because of how my parents treated those things. It led to me being far more informed about all those topics upon arrival at college.

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If you think you can predict your tax rate at retirement, you've either got a Delorian I want to borrow, you're very close to retirement already, or you're delusional.

If you are saying personal tax rates may change over time, sure (but any drastic change is not on the horizon). But anyone over 40 can get a pretty good idea what current tax bracket they will be in when they retire IMO.

Bracket, sure. Rate, less sure. Say you're in the 35% bracket now, and you think you'll be in the 28% or 33% bracket when you retire. You may be absolutely right, but what if those brackets are 32% and 39% 20 years from now? Then you may be paying higher taxes even though you did in fact move to a lower bracket.

In the last 25 years, we have experienced at least two fairly significant changes in the tax brackets and the rates. In 1990, for instance, there were only 3 brackets and they topped out at a lower rate than the top two or three brackets we have now.

There's also the question of whether you may have a reason to want to draw significantly more money in a given year when you're retired.

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