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No. 16

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Ric Edelman says a back-door Roth rarely makes sense, just keep it in the traditional.

I'm heavily diversified and want to maximize the flexibility of penalty free withdrawals on my contributions as much as possible (to aid early retirement and/or mitigate being forced to move by my company) while I have the disposable income available to me.

Edited by Tiger Fan
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Just being uber careful here, since this is my first backdoor Roth. Got off of live chat with Fidelity b/c I had to run to a meeting and the customer service guy sent me the following message:

Roth conversions are generally taxed as ordinary income. You can choose to withhold taxes at the time of the conversion; however, tax withholding is considered a distribution and may be subject to the 10% early withdrawal penalty for those under age 59 1/2. If you have any further questions please feel free to contact us again.

He's just covering his ###, right? I'm only going to be taxed on the gains (losses) b/w the deposit and conversion (a few days)

He might mean that if you don't do the necessary reporting of the conversion to the irs when filing your taxes, the irs will just see the conversion as a withdrawal. They're not told by your plan holder that you're in fact doing a conversion. That's your responsibility. I have learned this the hard way. Luckily the IRS was cool about me reporting this later on and didn't penalize me in any way.

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Just being uber careful here, since this is my first backdoor Roth. Got off of live chat with Fidelity b/c I had to run to a meeting and the customer service guy sent me the following message:

Roth conversions are generally taxed as ordinary income. You can choose to withhold taxes at the time of the conversion; however, tax withholding is considered a distribution and may be subject to the 10% early withdrawal penalty for those under age 59 1/2. If you have any further questions please feel free to contact us again.

He's just covering his ###, right? I'm only going to be taxed on the gains (losses) b/w the deposit and conversion (a few days)

He might mean that if you don't do the necessary reporting of the conversion to the irs when filing your taxes, the irs will just see the conversion as a withdrawal. They're not told by your plan holder that you're in fact doing a conversion. That's your responsibility. I have learned this the hard way. Luckily the IRS was cool about me reporting this later on and didn't penalize me in any way.

Thx, this makes sense. Follow up - do they provide me the forms to do that, or I do it all on my own?

Edited by Tiger Fan
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Just being uber careful here, since this is my first backdoor Roth. Got off of live chat with Fidelity b/c I had to run to a meeting and the customer service guy sent me the following message:

Roth conversions are generally taxed as ordinary income. You can choose to withhold taxes at the time of the conversion; however, tax withholding is considered a distribution and may be subject to the 10% early withdrawal penalty for those under age 59 1/2. If you have any further questions please feel free to contact us again.

He's just covering his ###, right? I'm only going to be taxed on the gains (losses) b/w the deposit and conversion (a few days)

He might mean that if you don't do the necessary reporting of the conversion to the irs when filing your taxes, the irs will just see the conversion as a withdrawal. They're not told by your plan holder that you're in fact doing a conversion. That's your responsibility. I have learned this the hard way. Luckily the IRS was cool about me reporting this later on and didn't penalize me in any way.

Thx, this makes sense. Follow up - do they provide me the forms to do that, or I do it all on my own?

If you're doing paper, you download 8086. I do it through turbotax.

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Just being uber careful here, since this is my first backdoor Roth. Got off of live chat with Fidelity b/c I had to run to a meeting and the customer service guy sent me the following message:

Roth conversions are generally taxed as ordinary income. You can choose to withhold taxes at the time of the conversion; however, tax withholding is considered a distribution and may be subject to the 10% early withdrawal penalty for those under age 59 1/2. If you have any further questions please feel free to contact us again.

He's just covering his ###, right? I'm only going to be taxed on the gains (losses) b/w the deposit and conversion (a few days)

He might mean that if you don't do the necessary reporting of the conversion to the irs when filing your taxes, the irs will just see the conversion as a withdrawal. They're not told by your plan holder that you're in fact doing a conversion. That's your responsibility. I have learned this the hard way. Luckily the IRS was cool about me reporting this later on and didn't penalize me in any way.

Thx, this makes sense. Follow up - do they provide me the forms to do that, or I do it all on my own?

If you're doing paper, you download 8086. I do it through turbotax.

Gracias!

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He might mean that if you don't do the necessary reporting of the conversion to the irs when filing your taxes, the irs will just see the conversion as a withdrawal. They're not told by your plan holder that you're in fact doing a conversion. That's your responsibility. I have learned this the hard way. Luckily the IRS was cool about me reporting this later on and didn't penalize me in any way.

The IRS is generally very understanding of people making mistakes with qualified plans (401(k), 403(b), IRAs, etc.). I don't think I've ever seen an assessed penalty sustained on a taxpayer who made an inadvertent mistake. They really seem to realize that the average person can't make sense of all of the qualified plan tax rules and regulations. Hell, qualified plans are one of my specialties/niches and I learn something new seemingly every day. They're endlessly complicated from a tax standpoint.

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  • 3 weeks later...

Finally have enough money to start maxing my Roth IRAs for myself and my wife.

Trying to sift through information about what types of investments to make in Roth IRA vs, 401K. Is there a good reason to do different types of investments, for tax purposes?

? You use post-tax dollars to populate the Roth and then no taxes after that - so just make whatever investments you want to make. Hopefully something diversified like Vanguard Mkt Funds.

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Finally have enough money to start maxing my Roth IRAs for myself and my wife.

Trying to sift through information about what types of investments to make in Roth IRA vs, 401K. Is there a good reason to do different types of investments, for tax purposes?

Your first decision should be on cost of funds (expense ratio). If our 401k has a cheap stock fund (say 0.2%) but it's bond fund is 0.8%, you should use your Roth for bonds

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Finally have enough money to start maxing my Roth IRAs for myself and my wife.

Trying to sift through information about what types of investments to make in Roth IRA vs, 401K. Is there a good reason to do different types of investments, for tax purposes?

Your first decision should be on cost of funds (expense ratio). If our 401k has a cheap stock fund (say 0.2%) but it's bond fund is 0.8%, you should use your Roth for bonds

No doubt fees are critical. Shouldn't he focus on what would provide the most growth and therefore tax-free net?

Not really advocating, just asking the question.

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Finally have enough money to start maxing my Roth IRAs for myself and my wife.

Trying to sift through information about what types of investments to make in Roth IRA vs, 401K. Is there a good reason to do different types of investments, for tax purposes?

Your first decision should be on cost of funds (expense ratio). If our 401k has a cheap stock fund (say 0.2%) but it's bond fund is 0.8%, you should use your Roth for bonds

No doubt fees are critical. Shouldn't he focus on what would provide the most growth and therefore tax-free net?

Not really advocating, just asking the question.

The idea is that it's very difficult to predict future performance and past performance is a weak indicator of future success. In the long-term, fees add up significantly, and you can control them - to an extent - because funds are required to disclose them.

Sure, if you can find a fund that will throw off 10% growth every year, go for it. But good luck identifying it....

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Exactly. Unless investing in high-growth individual stocks (which I don't recommend) it won't make much difference. Fees on the other hand will have a definite effect on overal return.

If fees are equivalent, at that point put the higher growth items (equities) in Roth but highly likely not to matter much

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Finally have enough money to start maxing my Roth IRAs for myself and my wife.

Trying to sift through information about what types of investments to make in Roth IRA vs, 401K. Is there a good reason to do different types of investments, for tax purposes?

Your first decision should be on cost of funds (expense ratio). If our 401k has a cheap stock fund (say 0.2%) but it's bond fund is 0.8%, you should use your Roth for bonds

No doubt fees are critical. Shouldn't he focus on what would provide the most growth and therefore tax-free net?

Not really advocating, just asking the question.

Given a long enough horizon (and fees, as discussed) I would try to pack the equities in the Roth, absolutely.

I have made a conscious decision to put bonds and real estate in tax deferred and have equities in taxable - the tax bite can also make a huge difference in effective returns. All of these things can add up over time.

Edited by Sand
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Finally have enough money to start maxing my Roth IRAs for myself and my wife.

Trying to sift through information about what types of investments to make in Roth IRA vs, 401K. Is there a good reason to do different types of investments, for tax purposes?

Your first decision should be on cost of funds (expense ratio). If our 401k has a cheap stock fund (say 0.2%) but it's bond fund is 0.8%, you should use your Roth for bonds

No doubt fees are critical. Shouldn't he focus on what would provide the most growth and therefore tax-free net?

Not really advocating, just asking the question.

The idea is that it's very difficult to predict future performance and past performance is a weak indicator of future success. In the long-term, fees add up significantly, and you can control them - to an extent - because funds are required to disclose them.

Sure, if you can find a fund that will throw off 10% growth every year, go for it. But good luck identifying it....

My thought was that since the purpose of a Roth is to get the most growth so you can earn as much as possible and not pay taxes on it - he would want to go with a growth based approach. I don't know where you got the hurdle point of 10% - bond funds have been and are expected to be very low for the foreseeable future.

I was referring to buying general entire stock market funds. There isn't any doubt about stock funds outperforming bond funds over the long haul.

Historical Stock market vs. Bonds performance

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Binky, that is a common misconception. At the same tax bracket you will make the same whether in a 401K or Roth. Here's my simple proof for you:

25% tax bracket, and assume the investment doubles over the time period

401K: $100(pretax), become $200 at retirement. Less taxes ($50), you end up with $150

Roth: $100(pretax) - $25(tax), makes $75 into Roth. Investment doubles to $150

No difference

The only reason to lean Roth with high-growth is that it is not subject to RMDs and can give more flexibility. It is not due to superior return

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Binky, that is a common misconception. At the same tax bracket you will make the same whether in a 401K or Roth. Here's my simple proof for you:

25% tax bracket, and assume the investment doubles over the time period

401K: $100(pretax), become $200 at retirement. Less taxes ($50), you end up with $150

Roth: $100(pretax) - $25(tax), makes $75 into Roth. Investment doubles to $150

No difference

The only reason to lean Roth with high-growth is that it is not subject to RMDs and can give more flexibility. It is not due to superior return

this

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Binky, that is a common misconception. At the same tax bracket you will make the same whether in a 401K or Roth. Here's my simple proof for you:

25% tax bracket, and assume the investment doubles over the time period

401K: $100(pretax), become $200 at retirement. Less taxes ($50), you end up with $150

Roth: $100(pretax) - $25(tax), makes $75 into Roth. Investment doubles to $150

No difference

The only reason to lean Roth with high-growth is that it is not subject to RMDs and can give more flexibility. It is not due to superior return

Thanks - I follow you now.

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The government 401k equivalent called the Thrift Savings plan doesn't have a whole lot of current investing options (more are coming next year though) but they have the basic small cap, large cap, international, government, and bond funds.

So there are a lot of services out there that you can pay to get to balance your portfolio to time the market. Many of them are recommending that investors put all of their money in the government securities fund right now due to market volatility. If you're within five years of retirement and are seriously risk averse, ok...maybe. But I want volatile markets, down markets, bad weeks and months if I'm 10+ years out. I can buy more in these environments (especially as we enter correction territory).

People need to invest in their retirement based on their risk tolerance, I do understand that. But putting all your money into government securities in a seesaw market is a loss. All those people who jumped out in 2008 lost massive gains when the market rebounded, not just what they lost, but that plus a whole lot more. For me I might be a little more conservative at all-time market highs, but more aggressive when the market is tanking. I did nothing in 2008 or 2009 but as the market was coming back I moved more aggressively into stocks. #### having all my money on the sideline waiting on the suggestion of a robot, programmed by a human, who can't possibly predict the market at the wheel.

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I have about 20x monthly expenses just sitting in a savings and cash deposit. My current job has a pension plan and I'm maxing out my ROTH IRA.

I'm 30 single with no kids, no debt aside from a car that will be paid off in 2 years. The reason I'm stacking up cash is mainly for a home, but living here in the Bay Area prices are ridiculous. If I save at my current rate it'll be about 5 years before I have near 20% for a townhouse at today's prices.

As a first time home buyer I know I don't need 20%, but it doesn't hurt. I guess I'm also saving cash in case of a wedding and all that jazz.

So really where is the best place for all the extra savings If I plan to access it within 5 years give or take depending on how life pans out?

Edited by No. 16
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You have a lot more control over your tax bracket in 30 years than you do now...

You will have a lot less control over your bracket than you think, is my guess. Very few retirees make their primary decisions over tax brackets. More to the point, who the hell knows what the tax rates will be in 30 years (forget brackets). The point is, we don't know, so estimating taxes to be roughly the same is a decent starting point. What I am doing is to try and have both pretax (401k) and post tax (Roth) savings to at least give myself options to manipulate the system in my favor as much as possible

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I have about 20x monthly expenses just sitting in a savings and cash deposit. My current job has a pension plan and I'm maxing out my ROTH IRA.

I'm 30 single with no kids, no debt aside from a car that will be paid off in 2 years. The reason I'm stacking up cash is mainly for a home, but living here in the Bay Area prices are ridiculous. If I save at my current rate it'll be about 5 years before I have near 20% for a townhouse at today's prices.

As a first time home buyer I know I don't need 20%, but it doesn't hurt. I guess I'm also saving cash in case of a wedding and all that jazz.

So really where is the best place for all the extra savings If I plan to access it within 5 years give or take depending on how life pans out?

I would do a CD ladder. You won't make much (maybe 2%) but more importantly the money is secure and there when you need it. Great work on the savings, you will be in great shape when it comes time to get that townhouse. Just don't do something stupid and spend it all on a wedding ;-)

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So the good news is my company's retirement plan now offers some index funds. The expense ratios aren't vanguard level, but at between .36% and .45%, its about a .5% savings over the lowest non-index fund which is nice.

My plan with the ADA is similar. I have index funds, but they sure are overcharging for them. I wish mine were as low as yours, mine are closer to .6%

Like you though, it's a full 0.5 to 0.7% over the alternatives.

Stupid variable annuity plans and their "risk and mortality" expense that adds to the layer... that's the dang problem.

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Finally have enough money to start maxing my Roth IRAs for myself and my wife.

Trying to sift through information about what types of investments to make in Roth IRA vs, 401K. Is there a good reason to do different types of investments, for tax purposes?

Your first decision should be on cost of funds (expense ratio). If our 401k has a cheap stock fund (say 0.2%) but it's bond fund is 0.8%, you should use your Roth for bonds

No doubt fees are critical. Shouldn't he focus on what would provide the most growth and therefore tax-free net?

Not really advocating, just asking the question.

The idea is that it's very difficult to predict future performance and past performance is a weak indicator of future success. In the long-term, fees add up significantly, and you can control them - to an extent - because funds are required to disclose them.

Sure, if you can find a fund that will throw off 10% growth every year, go for it. But good luck identifying it....

My thought was that since the purpose of a Roth is to get the most growth so you can earn as much as possible and not pay taxes on it - he would want to go with a growth based approach. I don't know where you got the hurdle point of 10% - bond funds have been and are expected to be very low for the foreseeable future.

I was referring to buying general entire stock market funds. There isn't any doubt about stock funds outperforming bond funds over the long haul.

Historical Stock market vs. Bonds performance

For the record, I was just picking a number out of thin air re: 10%. You can change that number to something lower and my point still stands.

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I have about 20x monthly expenses just sitting in a savings and cash deposit. My current job has a pension plan and I'm maxing out my ROTH IRA.

I'm 30 single with no kids, no debt aside from a car that will be paid off in 2 years. The reason I'm stacking up cash is mainly for a home, but living here in the Bay Area prices are ridiculous. If I save at my current rate it'll be about 5 years before I have near 20% for a townhouse at today's prices.

As a first time home buyer I know I don't need 20%, but it doesn't hurt. I guess I'm also saving cash in case of a wedding and all that jazz.

So really where is the best place for all the extra savings If I plan to access it within 5 years give or take depending on how life pans out?

I would do a CD ladder. You won't make much (maybe 2%) but more importantly the money is secure and there when you need it. Great work on the savings, you will be in great shape when it comes time to get that townhouse. Just don't do something stupid and spend it all on a wedding ;-)

With a 20 month expenses stockpile, would it be worth it to pay off the car loan and just put what you are paying on the car back into this fund? Probably only saving the interest on a loan with a percent of 2.49 to 6 or 7?

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I have about 20x monthly expenses just sitting in a savings and cash deposit. My current job has a pension plan and I'm maxing out my ROTH IRA.

I'm 30 single with no kids, no debt aside from a car that will be paid off in 2 years. The reason I'm stacking up cash is mainly for a home, but living here in the Bay Area prices are ridiculous. If I save at my current rate it'll be about 5 years before I have near 20% for a townhouse at today's prices.

As a first time home buyer I know I don't need 20%, but it doesn't hurt. I guess I'm also saving cash in case of a wedding and all that jazz.

So really where is the best place for all the extra savings If I plan to access it within 5 years give or take depending on how life pans out?

I would do a CD ladder. You won't make much (maybe 2%) but more importantly the money is secure and there when you need it. Great work on the savings, you will be in great shape when it comes time to get that townhouse. Just don't do something stupid and spend it all on a wedding ;-)

With a 20 month expenses stockpile, would it be worth it to pay off the car loan and just put what you are paying on the car back into this fund? Probably only saving the interest on a loan with a percent of 2.49 to 6 or 7?

No interest loan. So I'll take my time with it.

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You have a lot more control over your tax bracket in 30 years than you do now...

You will have a lot less control over your bracket than you think, is my guess. Very few retirees make their primary decisions over tax brackets. More to the point, who the hell knows what the tax rates will be in 30 years (forget brackets). The point is, we don't know, so estimating taxes to be roughly the same is a decent starting point. What I am doing is to try and have both pretax (401k) and post tax (Roth) savings to at least give myself options to manipulate the system in my favor as much as possible

This is the type of control I was talking about, yes. Makes sense to maximize both options and see where things go as you get closer to retirement age. I was more speaking from the perspective of people that plan to retire early. A lot of people act like you cannot get cash out of a 401k easily until traditional retirement age, which is not true.

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I have about 20x monthly expenses just sitting in a savings and cash deposit. My current job has a pension plan and I'm maxing out my ROTH IRA.

I'm 30 single with no kids, no debt aside from a car that will be paid off in 2 years. The reason I'm stacking up cash is mainly for a home, but living here in the Bay Area prices are ridiculous. If I save at my current rate it'll be about 5 years before I have near 20% for a townhouse at today's prices.

As a first time home buyer I know I don't need 20%, but it doesn't hurt. I guess I'm also saving cash in case of a wedding and all that jazz.

So really where is the best place for all the extra savings If I plan to access it within 5 years give or take depending on how life pans out?

I would do a CD ladder. You won't make much (maybe 2%) but more importantly the money is secure and there when you need it. Great work on the savings, you will be in great shape when it comes time to get that townhouse. Just don't do something stupid and spend it all on a wedding ;-)

With a 20 month expenses stockpile, would it be worth it to pay off the car loan and just put what you are paying on the car back into this fund? Probably only saving the interest on a loan with a percent of 2.49 to 6 or 7?

No interest loan. So I'll take my time with it.

You have an auto loan with no interest rate on it? What stupid bank did that one?

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Binky, that is a common misconception. At the same tax bracket you will make the same whether in a 401K or Roth. Here's my simple proof for you:

25% tax bracket, and assume the investment doubles over the time period

401K: $100(pretax), become $200 at retirement. Less taxes ($50), you end up with $150

Roth: $100(pretax) - $25(tax), makes $75 into Roth. Investment doubles to $150

No difference

The only reason to lean Roth with high-growth is that it is not subject to RMDs and can give more flexibility. It is not due to superior return

this

It depends. Yes, if the choice is between putting $75 into a Roth or $100 into a traditional, it will be the same. Often times that isn't the case though.

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I have about 20x monthly expenses just sitting in a savings and cash deposit. My current job has a pension plan and I'm maxing out my ROTH IRA.

I'm 30 single with no kids, no debt aside from a car that will be paid off in 2 years. The reason I'm stacking up cash is mainly for a home, but living here in the Bay Area prices are ridiculous. If I save at my current rate it'll be about 5 years before I have near 20% for a townhouse at today's prices.

As a first time home buyer I know I don't need 20%, but it doesn't hurt. I guess I'm also saving cash in case of a wedding and all that jazz.

So really where is the best place for all the extra savings If I plan to access it within 5 years give or take depending on how life pans out?

I would do a CD ladder. You won't make much (maybe 2%) but more importantly the money is secure and there when you need it. Great work on the savings, you will be in great shape when it comes time to get that townhouse. Just don't do something stupid and spend it all on a wedding ;-)

With a 20 month expenses stockpile, would it be worth it to pay off the car loan and just put what you are paying on the car back into this fund? Probably only saving the interest on a loan with a percent of 2.49 to 6 or 7?

No interest loan. So I'll take my time with it.

You have an auto loan with no interest rate on it? What stupid bank did that one?

Assume it's the dealer/manufacturer? Subaru.

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Binky, that is a common misconception. At the same tax bracket you will make the same whether in a 401K or Roth. Here's my simple proof for you:

25% tax bracket, and assume the investment doubles over the time period

401K: $100(pretax), become $200 at retirement. Less taxes ($50), you end up with $150

Roth: $100(pretax) - $25(tax), makes $75 into Roth. Investment doubles to $150

No difference

The only reason to lean Roth with high-growth is that it is not subject to RMDs and can give more flexibility. It is not due to superior return

this

It depends. Yes, if the choice is between putting $75 into a Roth or $100 into a traditional, it will be the same. Often times that isn't the case though.

when would it not be the case? Are you referring to employee match?

Basically, before you max your 401K/Roth (and after employee match) you have a choice of that money skipping your paycheck and going to 401k (say $100) or letting it go through your paycheck (now $75) and putting it in the Roth. I am not aware of another option

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Binky, that is a common misconception. At the same tax bracket you will make the same whether in a 401K or Roth. Here's my simple proof for you:

25% tax bracket, and assume the investment doubles over the time period

401K: $100(pretax), become $200 at retirement. Less taxes ($50), you end up with $150

Roth: $100(pretax) - $25(tax), makes $75 into Roth. Investment doubles to $150

No difference

The only reason to lean Roth with high-growth is that it is not subject to RMDs and can give more flexibility. It is not due to superior return

this

It depends. Yes, if the choice is between putting $75 into a Roth or $100 into a traditional, it will be the same. Often times that isn't the case though.

when would it not be the case? Are you referring to employee match?

Basically, before you max your 401K/Roth (and after employee match) you have a choice of that money skipping your paycheck and going to 401k (say $100) or letting it go through your paycheck (now $75) and putting it in the Roth. I am not aware of another option

When people don't do the math and account for the differences. 401K deferral is generally a percentage, and I'd guess most don't figure out that they can put 5% into their traditional but only 3.75% into their Roth- most I know just put the same amount in either and live with the differences in their take-home.

It's probably more apparent when talking about IRA contributions. $5500 isn't a huge limit, and most people aren't going to put $5500 into their traditional but only $4125 into a Roth. They could also take the tax savings from the traditional and invest that on the side to make up the difference, but again, I doubt most do.

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I have a question about the income limits for contributing to a Roth IRA. I understand for couples in 2016 the limits kick in at 184,000 and you're completely cutoff from contributing if you reach 194,000 income.

QUESTION - You and your wife make 200k (ineligible for Roth IRA contributions) but you both max out a traditional 401k @ 18,000 each bringing your taxable income down to 164k (eligible). Are you eligible to contribute to a Roth IRA or not?

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I have a question about the income limits for contributing to a Roth IRA. I understand for couples in 2016 the limits kick in at 184,000 and you're completely cutoff from contributing if you reach 194,000 income.

QUESTION - You and your wife make 200k (ineligible for Roth IRA contributions) but you both max out a traditional 401k @ 18,000 each bringing your taxable income down to 164k (eligible). Are you eligible to contribute to a Roth IRA or not?

I don't think this will work.

ROTH IRA uses Modified Adjusted Gross Income (MAGI) as the income limit.

Modified Adjusted Gross Income is used to determine IRA eligibility. The calculation starts with adjusted gross income and then adds back in a number of items such as IRA deductions, self-employment tax, rental losses, student loan interest and other items. The calculation is explained in detail at IRS.gov.

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I have a question about the income limits for contributing to a Roth IRA. I understand for couples in 2016 the limits kick in at 184,000 and you're completely cutoff from contributing if you reach 194,000 income.

QUESTION - You and your wife make 200k (ineligible for Roth IRA contributions) but you both max out a traditional 401k @ 18,000 each bringing your taxable income down to 164k (eligible). Are you eligible to contribute to a Roth IRA or not?

Pretty sure it's based on modified AGI.

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I have a question about the income limits for contributing to a Roth IRA. I understand for couples in 2016 the limits kick in at 184,000 and you're completely cutoff from contributing if you reach 194,000 income.

QUESTION - You and your wife make 200k (ineligible for Roth IRA contributions) but you both max out a traditional 401k @ 18,000 each bringing your taxable income down to 164k (eligible). Are you eligible to contribute to a Roth IRA or not?

I don't think this will work.

ROTH IRA uses Modified Adjusted Gross Income (MAGI) as the income limit.

Modified Adjusted Gross Income is used to determine IRA eligibility. The calculation starts with adjusted gross income and then adds back in a number of items such as IRA deductions, self-employment tax, rental losses, student loan interest and other items. The calculation is explained in detail at IRS.gov.

I believe MAGI allows 401(k) contributions to be subtracted.

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Binky, that is a common misconception. At the same tax bracket you will make the same whether in a 401K or Roth. Here's my simple proof for you:

25% tax bracket, and assume the investment doubles over the time period

401K: $100(pretax), become $200 at retirement. Less taxes ($50), you end up with $150

Roth: $100(pretax) - $25(tax), makes $75 into Roth. Investment doubles to $150

No difference

The only reason to lean Roth with high-growth is that it is not subject to RMDs and can give more flexibility. It is not due to superior return

this
It depends. Yes, if the choice is between putting $75 into a Roth or $100 into a traditional, it will be the same. Often times that isn't the case though.
when would it not be the case? Are you referring to employee match?

Basically, before you max your 401K/Roth (and after employee match) you have a choice of that money skipping your paycheck and going to 401k (say $100) or letting it go through your paycheck (now $75) and putting it in the Roth. I am not aware of another option

When people don't do the math and account for the differences. 401K deferral is generally a percentage, and I'd guess most don't figure out that they can put 5% into their traditional but only 3.75% into their Roth- most I know just put the same amount in either and live with the differences in their take-home.

It's probably more apparent when talking about IRA contributions. $5500 isn't a huge limit, and most people aren't going to put $5500 into their traditional but only $4125 into a Roth. They could also take the tax savings from the traditional and invest that on the side to make up the difference, but again, I doubt most do.

My company gives you the option of either doing a regular 401k or a Roth 401k. Regardless of which I choose, I can defer $18,000 max (since I'm under 50.) So my balance will grow to be the same in 10, 15, 20 years no matter which one I pick. The difference, of course, is that my take home pay will be higher now if I choose the regular 401k, as it is taken out pretax. Same with individual yearly ROTH IRA. As mentioned above, I would put in $5500 (not $4125.)

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I suppose it's a moot point if you can just do a backdoor roth anyway

But, if you have contributions in a tax deductible ira, now they'll be tax consequences of the back door. If you straight up fund a roth, it doesn't matter what you have in a tax deductible.

My wife has a decent chunk (50k) in a Roth 401(k). Her employer is switching providers. I think what we're going to do is just roll-over that Roth 401k into an existing Roth IRA. That way the 50k can grow tax-free for 30-35 years. Then she'll sign up for the traditional 401k with her employer to get the tax deductions.

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