Backdoor Roth question

[Timeoutofmind]

I have read about backdoor Roth’s several times…but it does not seem they would be the right choice for me. Instead, it seems like I should stick with a conventional IRA. Consider the following.

1. I will retire in a lower tax bracket than I am currently in. Thus, I would rather avoid the taxes at the present point in time, rather than when I withdraw them in retirement.

2. I do not need additional tax protected retirement investment space. Between my wife and I maxing out our various accounts, we are generously funding/overfunding our retirement.

Could someone enlighten me? Am I missing something?

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[caveat87]

I have read about backdoor Roth’s several times…but it does not seem they would be the right choice for me. Instead, it seems like I should stick with a conventional IRA. Consider the following.

1. I will retire in a lower tax bracket than I am currently in. Thus, I would rather avoid the taxes at the present point in time, rather than when I withdraw them in retirement.

2. I do not need additional tax protected retirement investment space. Between my wife and I maxing out our various accounts, we are generously funding/overfunding our retirement.

Could someone enlighten me? Am I missing something?

I don't think you are missing anything. There are certainly pros and cons to roth versus non-Roth and if you expect to be in a lower income bracket in retirement than you are now a conventional IRA could be the better play.

However, depending on how much income you retire with and any potential changes in tax brackets it could be possible that a roth is the better move, especially if you find yourself having to take a big distribution to pay for expenses later in life. Also, I believe Roth IRAs don't require a minimum distribution so they can be an efficient vehicle for estate planning for your heirs/spouse.

 

[Mman]

I have read about backdoor Roth’s several times…but it does not seem they would be the right choice for me. Instead, it seems like I should stick with a conventional IRA. Consider the following.

1. I will retire in a lower tax bracket than I am currently in. Thus, I would rather avoid the taxes at the present point in time, rather than when I withdraw them in retirement.

2. I do not need additional tax protected retirement investment space. Between my wife and I maxing out our various accounts, we are generously funding/overfunding our retirement.

Could someone enlighten me? Am I missing something?

if you are in a high tax bracket (assuming you do not have other IRA assets subject to pro-rata rule), you can instantly convert your traditional IRA contribution or a Roth IRA contribution and then you will owe no further taxes when you withdraw it. If you leave it as a Traditional IRA and never convert it, you will owe taxes on the gains.

The avoidance of taxes in the current year for traditional IRA contributions does not apply above a certain income threshold. I'm too lazy to look it up, but once your income is high enough you should almost always convert to Roth. Costs nothing now and saves money later.

 

[anonperson]

I have read about backdoor Roth’s several times…but it does not seem they would be the right choice for me. Instead, it seems like I should stick with a conventional IRA. Consider the following.

1. I will retire in a lower tax bracket than I am currently in. Thus, I would rather avoid the taxes at the present point in time, rather than when I withdraw them in retirement.

2. I do not need additional tax protected retirement investment space. Between my wife and I maxing out our various accounts, we are generously funding/overfunding our retirement.

Could someone enlighten me? Am I missing something?

A traditional ira is taken out pre tax if you are under the income limits (~$125k). In your situation, I assume you are above the limits so you would make a non deductible contribution. It will grow and then you pay taxes at the end.

If you do a backdoor ira, that same money will grow and you won't pay any taxes on the growth.

$12k a year (you and spouse) over many years does add up.

It won't make or break you but why pay taxes if you don't need to?

 

[NICMAN]

Why not do both? Like anonymous above we max out our private practice 401k corporate and individual contributions and do $12K each year into a backdoor Roth. When the time comes to withdraw we can strategically draw off the accounts depending on our income brackets and mandatory distributions. I expect to live a long life and the ability to draw off income of which the growth will be sheltered from taxation will be useful.

 

[BLADEMDA]

 

[okayplayer]

Phoenix, Arkansas has always been known for its low income earners.

 

[abolt18]

What you're saying doesn't make sense to me. Are you a physician that makes enough money to NEED to go through the backdoor to do a Roth IRA contribution? If so, your "conventional IRA" will not be a tax-deductible contribution anyway. So you gain zero benefit from leaving it in the "conventional IRA."

Scenario 1) Do as you suggested. Contribute non-deductible $$$ to an IRA of whatever flavor you desire (non-Roth). Leave the money in there to grow. Pull it out in retirement. As this is now money you already paid taxes on prior to contribution, and will now grow in the IRA, and you will pay taxes AGAIN on its growth when you pull money from it. Ouch.

Scenario 2) Contribute a non-deductible contribution to your Traditional IRA, "investing" it in a money-market account. The following day, convert it to a Roth IRA. Money grows for many years to come. In retirement you pull money out and pay ZERO taxes.

Also, why would you NOT want additional tax-protected retirement space?

I have read about backdoor Roth’s several times…but it does not seem they would be the right choice for me. Instead, it seems like I should stick with a conventional IRA. Consider the following.

1. I will retire in a lower tax bracket than I am currently in. Thus, I would rather avoid the taxes at the present point in time, rather than when I withdraw them in retirement.

2. I do not need additional tax protected retirement investment space. Between my wife and I maxing out our various accounts, we are generously funding/overfunding our retirement.

Could someone enlighten me? Am I missing something?

 

[Timeoutofmind]

I am very sorry I was not more clear in the original post.

I can contribute 19.5K to my retirement account through my employer through a traditional pre-tax option. Or a Roth Post tax option.

Which is to say if I contribute through the traditional pretax option, the money is not taxed. So the income limit is not relevant here.

So I guess I am wondering given the two points in my OP…

wouldn’t I be better contributing to the traditional pretax option, and not moving it over into a back door Roth IRA?

 

[Arch Guillotti]

I am very sorry I was not more clear in the original post.

I can contribute 19.5K to my retirement account through my employer through a traditional pre-tax option. Or a Roth Post tax option.

Which is to say if I contribute through the traditional pretax option, the money is not taxed. So the income limit is not relevant here.

So I guess I am wondering given the two points in my OP…

wouldn’t I be better contributing to the traditional pretax option, and not moving it over into a back door Roth IRA?

Sounds like you are mixing up Roth 401K and Roth IRA.

 

[abolt18]

I am very sorry I was not more clear in the original post.

I can contribute 19.5K to my retirement account through my employer through a traditional pre-tax option. Or a Roth Post tax option.

Which is to say if I contribute through the traditional pretax option, the money is not taxed. So the income limit is not relevant here.

So I guess I am wondering given the two points in my OP…

wouldn’t I be better contributing to the traditional pretax option, and not moving it over into a back door Roth IRA?

You should be maxing out your employer retirement account with the $19.5K with pre-tax dollars. (401k or 403b)

In addition to this, you have an IRA (traditional vs Roth) that you can put in $6K for yourself and $6K for your spouse. You should DEFINITELY do the backdoor Roth.

 

[Medisaint]

I think all the pieces of the question you asked have been answered by various users. To collate them:
1) You are mixing up Tradition vs Roth 401K (19.5K limit) and traditional vs Roth IRA (6K limit)
2) If you are in a high earning bracket now you probably want to opt for a traditional 401K. This is your decision because employer 401Ks do not have income restrictions for Roth.
3) IRAs (Traditional or Roth) are great ways to tax-shelter additional money (6K/y) for retirement and should be maxed out annually if possible.
4) Traditional and Roth IRAs each have separate income limitations with Roth being higher than Traditional (you can find them on the IRS website). Once you exceed these income thresholds you can no longer DIRECTLY contribute to a Roth IRA and money put in a traditional IRA (6K) cannot be deducted from taxes meaning it will be taxed when you put it in and it will be taxed when it comes out. This is the worst option.
5) The advantage of the backdoor Roth is you can take that 6K you put in your traditional IRA (that you'll already have to pay taxes on because of your high income) and convert it to Roth IRA money that won't be taxed again when it comes out.
6) This is easy to screw up but there are tutorials on websites like 'white coat investor' that make it simple.

 

[Timeoutofmind]

I think all the pieces of the question you asked have been answered by various users. To collate them:
1) You are mixing up Tradition vs Roth 401K (19.5K limit) and traditional vs Roth IRA (6K limit)
2) If you are in a high earning bracket now you probably want to opt for a traditional 401K. This is your decision because employer 401Ks do not have income restrictions for Roth.
3) IRAs (Traditional or Roth) are great ways to tax-shelter additional money (6K/y) for retirement and should be maxed out annually if possible.
4) Traditional and Roth IRAs each have separate income limitations with Roth being higher than Traditional (you can find them on the IRS website). Once you exceed these income thresholds you can no longer DIRECTLY contribute to a Roth IRA and money put in a traditional IRA (6K) cannot be deducted from taxes meaning it will be taxed when you put it in and it will be taxed when it comes out. This is the worst option.
5) The advantage of the backdoor Roth is you can take that 6K you put in your traditional IRA (that you'll already have to pay taxes on because of your high income) and convert it to Roth IRA money that won't be taxed again when it comes out.
6) This is easy to screw up but there are tutorials on websites like 'white coat investor' that make it simple.

Thanks so much

Uber helpful!

 

[ChiDO]

New tax law may eliminate backdoor Roth ira

 

[aneftp]

I think if you live in a non income tax state like Washington state or florida. It’s a no brainer to do Roth IRA if your retirement outlook is more than 10 years.

The math becomes very cloudy if you live in a high state income tax rate like California. You are paying 9-11% state income taxes on that Roth plus federal. That 9-11% is a lot to give up immediately.