I am a 22 year old deciding on which index funds specifically to invest in my Roth IRA I have opened with Vanguard. Could I get a copy of the spreadsheet you used to create the graph? A) continue maxing out our 401k accounts AND make non-deductible contributions to a Traditional IRA? there are separate limits for each; total IRA and total 401K. So…..I have a question. Your strategy of funding a traditional 401(k) and slowly converting it to a Roth 401(k) when FIREd sounds appealing. And yes, this strategy can apply to anyone, whether you are pursuing early FI or not. Paying off debt would be a great way to use the extra money you save from investing in a pre-tax retirement account, especially if the interest rate on the loan is high. I have learned a lot from your site and jlcollins site. What about that 300 in above the line donations? At one point there was chatter about limiting pre-tax contributions to either 401k / 403b or 457 up to a combined limit (~$18.5k), but not being able to fully fund both types of accounts up to that limit. Larger contributions allow for more tax deductions; more tax deductions = lower tax bills and more retirement income down the road. We need to set up a few step by step rules such as how much/percentage you should have in an emergency fund, how much/percentage in taxable accounts and how much/percentage to throw in tax advantaged accounts. I’m 57 and plan to retire at 70 if my health holds out. I was happy and surprised to see most of the strategies survive intact. On the high side similar coverage as employed can cost upwards of $1000 a month with out ACA subsides that are scheduled to phase out. I have confidence that I will be able to optimize my withdrawal strategy to limit my tax burden later in life so that’s why I’m comfortable only funding tax-free contribution accounts during my working years. The last state you lived in stays as your tax address? How can the 9k be tax free – you said earlier it would be counted as ordinary income and that you were in the 15% tax bracket so why isn’t it and the other $25k taxed at 15%. The nice thing about the Roth is there aren’t any RMDs to worry about. Hi Will, email me your spreadsheet and I’ll take a look. Without a doubt one of your best articles! (and of course, pay taxes on the conversion). I’m only 37 so I have time to work with. The bigger question becomes how good is your 401k. My employee match is a measly $500/year, and the best fund I can contribute to is Ivestco Equally Weighted S&P 500, VADRX. We also have two rentals, one of which we are selling when it becomes vacant in July. This would make ER before 55 difficult. It will also be interesting to see if the new cap on state/local/property tax deductions causes people to focus more on domestic geographic arbitrage. Podcast Episode Summary The order of operations for how you should approach the different “buckets” available to you both for retirement accounts and for your taxable savings Four basic ways for […] I am totally lost on the best way to approach this (ie. However, a Backdoor Roth is an option that can be used. My hope is to roll about $7K-9K from the tax deferred accounts to the Roths each year. Same distribution of my wealth in these existing index funds, or different funds? love it. Ia percuma untuk mendaftar dan bida pada pekerjaan. Join Mindy Jensen and Scott Trench (from BiggerPockets.com) weekly for the BiggerPockets Money Podcast. I’m going to turn 65 in April. It has already been taxed. Redirecting to /topic/taxes/mega-backdoor-roth-%7C-mad-fientist/a-4bVBXc_OSq6yMpIxSjPIAA:a:1569947-988fce0cd0%2Fmadfientist.com Check out SCORE.org if you need free advice on business planning, etc. If you are still working, you would be paying your marginal tax rate on every dollar of the conversion. So if someone owned their own business and could set up an individual 401k via vanguard and funnel business and personal contributions to that (up to 18k limit for individual and 56k total max per year, according to the vanguard site : https://investor.vanguard.com/what-we-offer/small-business/individual-401k?Link=facet). I have almost enough to retire today, though, at age 38. Hi, Is there any difference during early retirement between (a) living on after-tax Roth contributions and converting the entire 0% bracket from 457 to Roth each year, and (b) living on taxable 457 distributions and converting the remainder of the 0% bracket to Roth? Thanks Drew for the answer. It’ll be interesting to see how the higher priced real estate markets and 2nd home markets are affected by the limits on interest and property tax deductions. I need some guidance from people older and wiser than me. I do agree taxable money should be used before withdrawing from Roths in most situations though. From the comment, it sounds like it’d be something I’d be interested in reading. Thanks for this easy to read summary! That may be a cool calculator to add to the FI Laboratory. And if you choose the right option, you could accumulate an extra $100,000 over the course of your lifetime! Lol. Can you just rent a place for say 6 months, change your drivers license, utilities, etc.? Please try again. The backdoor Roth IRA contribution is a strategy and not a product or a type of IRA contribution. Brandon walks us through advanced retirement account strategies you may have heard of, such as the Backdoor Roth, Roth Conversion Ladder, and the coveted Mega Backdoor Roth. When choosing between a Traditional IRA and a Roth IRA, you are effectively choosing when you want to pay tax on your money. There are other benefits to doing a Roth conversion as a traditional retiree, eg if the money is intended for heirs, but not really as an FI strategy at that point. If you have already maxed out your Roth IRA contributions of $5500, can you still back door Roth / transfer from the traditional IRA [from say, money that had been contributed previously] to the Roth IRA? What is a Mega Backdoor Roth IRA? So let me make sure I understand this. At least that’s what I’m reading. Today we’re joined by a friend of the BiggerPockets podcast network, Brandon “The Mad Fientist”. As I said, a newbie.) I have a post about the seminar, Taxes in Retirement, on my blog for those interested (BossManJax.com). Etsi töitä, jotka liittyvät hakusanaan Mad fientist backdoor roth tai palkkaa maailman suurimmalta makkinapaikalta, jossa on yli 19 miljoonaa työtä. Thanks for doing the research. This is legal and allowed as the article above explains helps in growing your investments tax free. For a while, I had been obsessing over the lack of enough taxable accumulations to fund ER. The money in your taxable accounts has already been taxed. Would you recommend maxing that out that before setting up an IRA? this is simply not a prob with proper planning. Conversely, if you earn too much to get the Traditional IRA tax deductions, you’d also be better off contributing to a Roth, a Mega Backdoor Roth, or simply a taxable account. So any additional investments might have to go in taxable accounts. Instant gain! I don’t think 1 is a concern because any tax savings or credits would end up in our 457’s, but 2 does seem like a real downside that I can’t quite quantify. Hi, I retired in 2017 at age 53 and transferred my lifetime 401(k) funds to my traditional IRA. When you are converting a IRA to a Roth IRA it is counted as additional income, and assuming you are retired and withraling say 30k per year, doesnt this increase your tax bill? I am currently living abroad and we are thinking of traveling for a year or so prior to returning to America and not making any income. Having money in a Roth would probably ensure to a slightly higher degree that future earnings are not taxed. I learned about GCC this past week and found this article through them. Love the content you have, and am currently trying to get my husband on board with reaching FI. You keep track of how much you deposit into the Traditional IRA. I’m single and, once retired, can live off $20,000 a year. It was interesting article though and it highlighted some downsides to backdoor Roth IRA contributions that I wasn’t aware of so thanks for sharing! Thanks for all the education. I am currently twenty years old and my father wants me to talk to his investment adviser on starting investing early and I was wondering if you would recommend a Roth or Traditional IRA or would you go a different route for someone so young? Wow, thanks for your response! Looking forward to take advantage of the others while saving a decent amount on taxes until we FIRE in a few years. Time period is totally irrelevant! Ideally, once I retire from full-time, I’d like to still work/consult part-time (if it doesn’t screw up my taxes). I’m curious what you’d do in my situation…. As I wrote previously, I believe that traditional accounts provide a better opportunity for tax avoidance. Nice! One challenge I have is the best way to accumulate a payoff amount for a rental property in 5 years or so as I will need that income for FI. Join over 100,000 others on the Mad Fientist … Check out this post and this post for more on the Roth conversion ladder strategy. Excellent questions, Amy! Great article! Since the ~$9K would be the only earned income, the transfer amount would be less than the standard deduction and exemption so no tax would be owed on the conversion. I just want to include all pertinent information. Absolutely James! 21-36 for a total of fifteen working years. Thanks as always! But now, a new consideration. Also, do you need to have itemized deductions greater than the standard deduction to take advantage of the traditional IRA? She has a terrible 401(k) plan at work, but since she has a 401(k) plan at all, the tax deduction for a traditional IRA gets phased out starting at $98,000 MAGI for us. It’s news to me, but my employer would allow me to double my contributions by using a 457. ... Those are the posts that brought topics like the Roth Conversion Ladder into the FI world and ultimately made my site popular. If AK is too cold, live in southern WA, and drive across to Oregon (no sales tax) for shopping. Haha, I sent you an email containing the spreadsheet at the same time you left this second comment. Thanks! I have tried researching to find an answer but have had no results. I heard Congress wants to base upon income instead of tax brackets like before. Thanks, GubMints! Am I missing something? If I have my own employee 401k plan and my MAGI is over $73,000 or close to it, then wouldn’t contributing to a Traditional IRA account be the same as contributing to a normal taxable account since I am not receiving any taxable deductions for the money I am contributing? Am I interpreting that right? Not only that, there seem to be some exciting new opportunities that early retirees can take advantage of so I look forward to exploring those soon (I’m looking at you, “20% deduction for pass-though entities”). I’d been devouring MMM’s blog for the last year and a half trying to whittle my expenses down to the optimum level, but had always avoided maxing out my 401k because I thought I earned too little to save for both FI and my future post – 60ish retirement. I haven’t done enough research on it yet, but as something to think about: HSA (if available) I was explaining this idea to a friend and decided to share your article as the chart and article explains it very well. 3) Does the fact that my wife plans on working for some time, potentially to retirement age, defeat the effectiveness of the Roth conversion ladder? Should I max out rIRA, then traditional? Taxable account (currently contributing $4k/month). Plus my 457 & 401k double contribution option survived! This is due to personal exemptions being combined with the new larger standard deduction (they will no longer be separate from the Itemized or standard deduction). If your income is low enough that you don’t have to pay taxes anyway, additional tax deductions aren’t going to help you so you should just put your money into a Roth. For people like me in a “service industry” the deduction phases out at taxable income from $315,000 to $415,000, but at the sweet spot of $315,000, the deduction of $63,000 is worth over $15,000 per year. If you have a retirement plan at work, your tax deduction for the IRA starts disappearing above a certain income level. Now just check your email to confirm! That’s a great idea to switch over your contributions from a Roth 401(k) to a Traditional 401(k) in order to help pay off your wife’s student loans faster. Perhaps unsurprisingly, Brandon is a developer like Andrew. The reason is that most likely your new employer 401k will not offer options as great as the Vanguard or Fidelity Traditional IRA. joint or married filing separately. Let me know where you end up deciding to go. The Mad Fientist's powerful credit card search tool allows you to easily find the best credit cards for your specific travel needs! It’s up to you though so if you’d feel more comfortable getting everything converted to the Roth, the small amount of tax you’d have to pay likely won’t impact your long-term plans very much. Brandon – great post, thank you for early assessment on the new laws! I sadly wasn’t able to establish residency in Florida before moving abroad. You can do what is known as “back door IRA”. http://jlcollinsnh.com/stock-series/, Sam, my $.02. Sorry I didn’t get the spreadsheet out to you before you created your own. That is, the investor must wait 5 years before withrawing the originally converted amount. Mega Backdoor Roth article by the Mad Fientist; Post from Vishal from Everything about Education about Mega Backdoor Roth; The Wealthy Accountant; Books Mentioned in the Show: Hiking to Waterfalls in Virginia; Subscribe To The FI Weekly. I would like to move the money out of the Roth and into a taxable account but don’t want to pay the 10% penalty fee (that 10% will practically wipe out my gains). Does the ladder strategy go out the window if someone isn’t able to make it to early retirement and just retires at the more common retirement age? Thanks for the clarification of what seems obvious. However, since I plan on retiring at age 42, I most likely have ~50 years ahead of me where I will be drawing a pension, withdrawing investment funds, and having to stay in the 25% bracket. I’ve known a few people who have volunteered there and it’s been positive experiences for all of them. In time I hope to understand it all, or at least a lot more than I do right now as a self-confessed and slightly ashamed newbie! If you are single, none of your IRA contributions are deductible if your MAGI is over $71,000. Anyway, I’m hoping that someone smarter than I can see if the pros outweigh the cons, and look for any pitfalls in this plan. Also a minor point – you actually can contribute more than $5500 to a Roth IRA, via the so-called “mega backdoor Roth” process. Just want to make sure I’m not making a mistake by NOT funding a tIRA or rIRA in my current situation. Your question regarding dividends and capitals gains would be from taxable accounts. My wife and I are only able to contribute $5500 a year. However, I currently live in Japan and that money was excluded from U.S. Taxes (foreign earned income exclusion). If I paid myself a small salary of, say, $50,000, what happens to the other $143,000? Would you happen to still have the spreadsheet you used for the chart? Good points made in the article, but it seems worth emphasizing as others in the comments have mentioned that IRA deductions go away above certain income limits depending on filing status. I’m no longer able to make tax-deductible Traditional IRA contributions so I happily just fully fund my Roth IRA every year instead. Am thinking it will happen in the 2nd half of ’15. So I see, I am not the only one to have found your blog through MMM :-). You rock! I hadn’t heard of that organization before so I appreciate you letting me know about it! I would love to use Traditional, but my employer caps my tax-free contributions to 25% of my income. Thank you!! Depending on how long that money is growing in the Roth before she draws upon it, and her tax situation in the accumulation phase, adding to a Roth may be more advantageous than taxable accounts. The disadvantage of doing it during your working years is that you’d likely get taxed quite a bit on the conversion. Is it worth starting a 401K thru my business in order to increase my contributions going forward? So I’ve fully converted to maxing out all of our tax advantaged accounts with the plan of converting to a Roth down the road.
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