Backdoor Roth IRA vs Taxable Account

[okayplayer]

My group has a corporate profit sharing 401(k) plan (53k/yr limit). My wife has a 403(b) and 457(b) with a match from her employer (50k or so total/yr). What do you guys do for excess posttax dollars you want to invest?

Was thinking Vanguard for Backdoor Roth IRAs for my wife and I ($5500 + $5500 annually) as a starting point this yar. I've read the White Coat Investor tutorial on how to do the conversion and how to do the subsequent taxes but it is still a little intimidating to me.

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[Arch Guillotti]

Was thinking Vanguard for Backdoor Roth IRAs for my wife and I ($5500 + $5500 annually) as a starting point this yar. I've read the White Coat Investor tutorial on how to do the conversion and how to do the subsequent taxes but it is still a little intimidating to me.

It really is pretty easy with Vanguard.

 

[okayplayer]

It really is pretty easy with Vanguard.

2 separate accounts for you and your spouse?

 

[k12balla]

Backdoor Roth, hsa if you have a HDHP, 529 for your kids, FU account, then taxable accounts through vanguard. WCI is $.

 

[okayplayer]

Backdoor Roth, hsa if you have a HDHP, 529 for your kids, FU account, then taxable accounts through vanguard. WCI is $.

No HSA plan for us. Doing 529 to the max of my state income tax deduction.

Do you do your Backdoor Roth through Vanguard as well as your taxable account or does that confuse things?

 

[OB1🤙]

Doesn't confuse things at all, but you can't leave any money in a traditional IRA. Taxable account is just fine.

 

[Nivens]

Apologies for the pseudo-hijack, but any recommendations on how to start to build a base of financial knowledge? My Dad handled the majority of this stuff until now (I know, spare me please), and I find all of this is a foreign language to me.

Edit: I'm an intern earning money for the first time.

 

[okayplayer]

Apologies for the pseudo-hijack, but any recommendations on how to start to build a base of financial knowledge? My Dad handled the majority of this stuff until now (I know, spare me please), and I find all of this is a foreign language to me.

Edit: I'm an intern earning money for the first time.

Many of us like http://whitecoatinvestor.com

He has book recommendations on there which I have used for even more in depth reading. The search function is outstanding on the site and he has written on seemingly every topic so dig around.

 

[OneFellSwoop]

www.whitecoatinvestor.com

It'll change your financial life, it did mine! Pay close attention to life insurance stuff as well as financial advisor stuff. Wished I found it before I bought whole life from a 'financial advisor'

 

[pgg]

https://www.bogleheads.org/wiki/Getting_started

 

[G-Man82]

Boglehead website is amazing, and the WCI book is great too, especially if starting to read his blog seems daunting. The book will give you a good intro. I also suggest the "Boglehead's Guide to Investing." It's good to form a foundation, and is definitely Vanguard skewed, and rightly so.

The finance and investment thread here on SDN is good, too, and the WCI participates in it.

Beware of financial advisors. I had one in residency and he had me open a Roth IRA, which is a good thing. 2 years later, I'd read the above books and decided to check out the Roth account. I then realized that it was invested in a John Hancock Growth Fund (JALGX) with an ER of 1.37% and a 5% front-load. ... I transferred that to Vanguard fast and actually just opened a traditional IRA at Vanguard to do a "Roth conversion" and transfer to my Vanguard Roth Account. It seems pretty easy ... Have the 2 Accounts. Transfer cash to the traditional, then click "Roth conversion." Haven't done it yet but plan to soon.

Does anyone know if it's possible to contribute post-tax dollars beyond the IRS limit, after employer contributions, to fill out the rest of the 403b? I feel there is potentially space there that isn't always utilized.

 

[Mman]

Apologies for the pseudo-hijack, but any recommendations on how to start to build a base of financial knowledge? My Dad handled the majority of this stuff until now (I know, spare me please), and I find all of this is a foreign language to me.

Edit: I'm an intern earning money for the first time.

The biggest key to success in investing long term is developing the right attitude and the right habits. Learn to save consistently and invest it wisely in low cost options with the appropriate risk tolerance and you are assured to do well over the long haul. I'd read the White Coat Investor site, Bogleheads stuff, maybe the Millionaire Next Door, etc. as somewhere to start and get going down the path. Once you've mastered the basics you can expand your knowledge base.

1) Save more
2) Pick wise investments
3) Pay less for those investments in fees

That's really about it. The wise investments for you are mostly going to be low cost stock funds with maybe a little international and some bond exposure depending on your age.

 

[Nivens]

Thanks for the advice everyone! I woke up in July and realized I am completely illiterate finacially. It's kind of overwhelming.

 

[deltamed]

Backdoor Roth, hsa if you have a HDHP, 529 for your kids, FU account, then taxable accounts through vanguard. WCI is $.

Can anyone explain to me in plain english this backdoor roth? Everyone seems to be using it but when I asked my accountant (who is also a lawyer) about it seems that it offers no tax advantage if you already have a sizable retirement portfolio (some complex rule/formula that actually makes you have to pay taxes on the roth).

 

[IlDestriero]

It's never too late to get serious.
Good luck.

 

[Mman]

Can anyone explain to me in plain english this backdoor roth? Everyone seems to be using it but when I asked my accountant (who is also a lawyer) about it seems that it offers no tax advantage if you already have a sizable retirement portfolio (some complex rule/formula that actually makes you have to pay taxes on the roth).

Traditional IRAs are tax deductible (for some) and then you pay taxes on earnings on the back end when you take the money out. Roth IRAs are after tax contributions and grow tax free.

The issue is if you have a retirement plan via your place of work and earn too much money ($118,000 for married filing jointly 2015) then you cannot deduct your traditional IRA contribution from your taxes. So you are already paying tax on it. By transferring that traditional to a Roth (backdoor Roth) then you don't have to pay taxes in the future on your gains. Traditional IRAs also have Required Minimum Withdrawals where as Roth's don't.

I think that's the basics of it.

 

[deltamed]

Traditional IRAs are tax deductible (for some) and then you pay taxes on earnings on the back end when you take the money out. Roth IRAs are after tax contributions and grow tax free.

The issue is if you have a retirement plan via your place of work and earn too much money ($118,000 for married filing jointly 2015) then you cannot deduct your traditional IRA contribution from your taxes. So you are already paying tax on it. By transferring that traditional to a Roth (backdoor Roth) then you don't have to pay taxes in the future on your gains. Traditional IRAs also have Required Minimum Withdrawals where as Roth's don't.

I think that's the basics of it.

I get the basic idea. However, looking up the details of what my accountant said it seems this only works if you have zero IRA balances otherwise. So I dont get how so many physicians are doing it:

http://www.fpcwealth.com/blog/83-misconceptions-about-backdoor-roth-ira-conversions.html

 

[maxxor]

I get the basic idea. However, looking up the details of what my accountant said it seems this only works if you have zero IRA balances otherwise. So I dont get how so many physicians are doing it:

http://www.fpcwealth.com/blog/83-misconceptions-about-backdoor-roth-ira-conversions.html

Zero traditional IRA balances.

 

[pgg]

I get the basic idea. However, looking up the details of what my accountant said it seems this only works if you have zero IRA balances otherwise. So I dont get how so many physicians are doing it:

http://www.fpcwealth.com/blog/83-misconceptions-about-backdoor-roth-ira-conversions.html

Mostly, I think they have 401(k)s or defined benefit plans or other non-IRA pretax savings accounts through their employers. Or they were able to roll the IRAs into 401(k) employer plans prior to doing Roth conversions.

Or they converted all of their traditional IRAs to Roth at some point, paying taxes on that balance in the process. This is generally inadvisable for doctors since the conversion is taxed at their marginal rate, but it might make sense in rare circumstances. E.g., if one took a sabbatical and didn't work for a year (and thus had no other income), or if one is a military doctor and spent most of a year deployed to a combat zone tax exclusion area (me in 2013).

But you're right, there's not much upside to backdoor Roths if one already has sizeable deductable IRA accounts.

 

[Arch Guillotti]

Mostly, I think they have 401(k)s or defined benefit plans or other non-IRA pretax savings accounts through their employers. Or they were able to roll the IRAs into 401(k) employer plans prior to doing Roth conversions.

Or they converted all of their traditional IRAs to Roth at some point, paying taxes on that balance in the process. This is generally inadvisable for doctors since the conversion is taxed at their marginal rate, but it might make sense in rare circumstances. E.g., if one took a sabbatical and didn't work for a year (and thus had no other income), or if one is a military doctor and spent most of a year deployed to a combat zone tax exclusion area (me in 2013).

I converted a few years ago when I was just starting out. I forget what the tax bill was but in hindsight I am glad I made the conversion.

 

[Arch Guillotti]

Zero traditional IRA balances.

Correct. I have a zero balance in traditional IRA and x balance in Roth, both with Vanguard.

 

[Arch Guillotti]

2 separate accounts for you and your spouse?

yes.

 

[aneftp]

Correct. I have a zero balance in traditional IRA and x balance in Roth, both with Vanguard.

And that is the key. Zero balance in traditional.

Way back in 2006/7 I put around $4000 each year x 2 years to non deductible Ira to plan for the big Roth conversion in 2010. Than I changed my mind.

So that non deductible ira just sits there. It's around $12k now but pointless for me to do a massive conversion in 2015 since my deductible IRA will be taxed so much if I were to convert.

I am not completely sold on Roths anyways. That's why I didn't do the conversion with the 2010 tax law to pay the taxes over 2 years.

The government can do whatever they want in the future.

They already have higher income people pay higher Medicare taxes if they make more than 175k a year even though Medicare was supposed to be the same rate for everyone.

Who knows in the future govt will limit withdrawals from Roths. Say if u with drawl more than $50k from Roth. Congress can always pass laws saying they can impose a "fee" of 10% to excess with drawl over $50k with a Roth.

Never trust what the govt can do when they are spending other people money.

Just look at the ridiculous prop 30 California bill that was passed in November 2012. Yet govt made the new tax retroactive to Jan 1 2012. So richer people ended up paying more taxes retroactively on a bill that didn't become law until the voters approved it.

To me that sort of BS should be outlaw. Imagine having to pay extra taxes retroactively on a bill had wasn't approved until the end of the year.

If govt is desperate they will attack "rich" Roth IRA owners as well by being creative to yank more money away. Remember the US constitution grants congress the power to tax. That's how Obamacare was saved in 2012. That's how the retroactive prop 30 tax was legal because of a 1994 Supreme Court ruling.

I wouldn't go blindly thinking your Roth IRA is fully free from taxes ever again.

 

[aneftp]

Correct. I have a zero balance in traditional IRA and x balance in Roth, both with Vanguard.

And that is the key. Zero balance in traditional.

Way back in 2006/7 I put around $4000 each year x 2 years to non deductible Ira to plan for the big Roth conversion in 2010. Than I changed my mind.

So that non deductible ira just sits there. It's around $12k now but pointless for me to do a massive conversion in 2015 since my deductible IRA will be taxed so much if I were to convert.

I am not completely sold on Roths anyways. That's why I didn't do the conversion with the 2010 tax law to pay the taxes over 2 years.

The government can do whatever they want in the future.

They already have higher income people pay higher Medicare taxes if they make more than 175k a year even though Medicare was supposed to be the same rate for everyone.

Who knows in the future govt will limit withdrawals from Roths. Say if u with drawl more than $50k from Roth. Congress can always pass laws saying they can impose a "fee" of 10% to excess with drawl over $50k with a Roth.

Never trust what the govt can do when they are spending other people money.

Just look at the ridiculous prop 30 California bill that was passed in November 2012. Yet govt made the new tax retroactive to Jan 1 2012. So richer people ended up paying more taxes retroactively on a bill that didn't become law until the voters approved it.

To me that sort of BS should be outlaw. Imagine having to pay extra taxes retroactively on a bill had wasn't approved until the end of the year.

If govt is desperate they will attack "rich" Roth IRA owners as well by being creative to yank more money away. Remember the US constitution grants congress the power to tax. That's how Obamacare was saved in 2012. That's how the retroactive prop 30 tax was legal because of a 1994 Supreme Court ruling.

I wouldn't go blindly thinking your Roth IRA is fully free from taxes ever again.

 

[OB1🤙]

You can often roll the traditional IRA into your current 401k.

That zeros out the IRA balance, letting you do the backdoor Roth, and you don't pay tax on the conversion since it's pretax to pretax.

A little tax diversification is probably a good thing.

 

[deltamed]

And that is the key. Zero balance in traditional.

Way back in 2006/7 I put around $4000 each year x 2 years to non deductible Ira to plan for the big Roth conversion in 2010. Than I changed my mind.

So that non deductible ira just sits there. It's around $12k now but pointless for me to do a massive conversion in 2015 since my deductible IRA will be taxed so much if I were to convert.

I am not completely sold on Roths anyways. That's why I didn't do the conversion with the 2010 tax law to pay the taxes over 2 years.

The government can do whatever they want in the future.

They already have higher income people pay higher Medicare taxes if they make more than 175k a year even though Medicare was supposed to be the same rate for everyone.

Who knows in the future govt will limit withdrawals from Roths. Say if u with drawl more than $50k from Roth. Congress can always pass laws saying they can impose a "fee" of 10% to excess with drawl over $50k with a Roth.

Never trust what the govt can do when they are spending other people money.

Just look at the ridiculous prop 30 California bill that was passed in November 2012. Yet govt made the new tax retroactive to Jan 1 2012. So richer people ended up paying more taxes retroactively on a bill that didn't become law until the voters approved it.

To me that sort of BS should be outlaw. Imagine having to pay extra taxes retroactively on a bill had wasn't approved until the end of the year.

If govt is desperate they will attack "rich" Roth IRA owners as well by being creative to yank more money away. Remember the US constitution grants congress the power to tax. That's how Obamacare was saved in 2012. That's how the retroactive prop 30 tax was legal because of a 1994 Supreme Court ruling.

I wouldn't go blindly thinking your Roth IRA is fully free from taxes ever again.

That makes sense. As I understand, rollover IRAs are also a subset of traditional. Since I worked before medical school I had sizable 401ks from several jobs which I converted to rollover IRAs. These count against me so I cant do the backdoor Roth.

 

[IlDestriero]

That makes sense. As I understand, rollover IRAs are also a subset of traditional. Since I worked before medical school I had sizable 401ks from several jobs which I converted to rollover IRAs. These count against me so I cant do the backdoor Roth.

Sure you can, but you have to pay tax on all of your gains when you switch it. You have to crunch your own numbers and see if you think that's a good idea.

 

[Arch Guillotti]

Sure you can, but you have to pay tax on all of your gains when you switch it. You have to crunch your own numbers and see if you think that's a good idea.

Exactly. You can do it, but it's a taxable event.

 

[fakin' the funk]

Apologies for the pseudo-hijack, but any recommendations on how to start to build a base of financial knowledge? My Dad handled the majority of this stuff until now (I know, spare me please), and I find all of this is a foreign language to me.

Edit: I'm an intern earning money for the first time.

Personal Finance for Dummies
Amazon product

By far the best single book especially for someone starting out young

 

[cincincyreds]

Do any of you peeps have a nonqualified plan?