6 ms·

You can only contribute to roth IRA's if income is less than $125k right (single)? There is a back-door but not sure about the details on it.

prezjordan 5y ago
Starts to ramp down at 125k, and at >=140k you cannot contribute to it. Instead you contribute to a traditional IRA, then immediately convert it to Roth and file an 8606.
wikibob 5y ago
Correct there is an income limit for direct contributions to a Roth IRA. Absolutely absurdly, there is no income limit to do a post-tax contribution to a non-roth-IRA, and then do an IRA to Roth-IRA conversion. --- With no income limit you can: - $6,000 post-tax dollars contribution to IRA, then do a Roth Conversion and file a IRS8606. This is a Backdoor Roth Contribution - $19,500 pre-tax dollars contribution to 401k. - $xxxx company matching dollars to 401k. - ($56,000 - $19,500 - $xxxx company match) contribution to After Tax 401k, then 401k to Roth 401k conversion This is a Mega Backdoor Roth Contribution - HSA $3,600 --- Tax implications: - The money converted into the Roth IRA (the $6,000/year) you paid tax on the principle going in, and are not taxed on it nor on capital gains coming out. - The pre-tax 401k dollars (yours & matched) you did not pay tax on the principle going in, so you are taxed on the principle and capital gains coming out - The after tax 401k contribution, converted to Roth 401k, you paid tax on the principle going in, and are not taxed on it nor on capital gains coming out. - The HSA you did not pay tax on the principle going in, you are not taxed on capital gains or principle going out, as long as it is for qualified medical expenses. --- Extra Notes: - Do not get tricked into rolling over old employer 401k plans to a traditional (non-Roth) IRA. If you do this, there are very complex tax implications when doing backdoor Roth contributions. If you have an existing Traditional (non-Roth) IRA, do lots of reading or buy a couple hours of time from a "Fiduciary Financial Advisor". Do not ever trust a "Financial Advisor" under any circumstances. They do not have your best interest in mind, they have their commission in mind. Fiduciary Financial Advisors don't make a commission from your decisions. Make sure that if you go this route, you find someone who only does Fiduciary advising (and doesn't split time). - You should carefully evaluate timing on doing a 401k to Roth 401k conversion of your withheld earnings and company contributions. If you have a year that you have lower income (back to school, travel, year off), you should probably do the conversion then. The money will be taxed as ordinary income, but then treated as Roth dollars coming out. - Beware of employer provided retirement plans with high expense ratios. Anything over about 0.30% is a ripoff and you are wasting money. You have to dig deep into the fund information to find the expense ratio. - Shockingly, many default investments are target-date plans, and they charge outrageous expense ratios, I have seen as high as 0.90%. Compounded over 30 years this will cost you a literal fortune. --- If you are a high earner with no health issues, you should be saving $65,600 per year in the above tax advantaged strategies. Look up the BogleHeads wiki and guide for where to invest the money (Total Market LOW cost, unmanaged mutual funds). This is not financial advice, hire your own fiduciary financial advisor
- nodesocket 5y ago
  Thanks for the information. I actually didn't know about the individual 401k. Using the individual 401k would allow me to make a larger contribution ($58k) than my current SEP (income does not max out the 25% limit). However, the downside with the individual 401k is that I cannot expand and hire full-time employees. Do you have to know if I can convert my SEP into an individual 401k?
  - wikibob 5y ago
    See this amazing chart from the IRS on allowable source and destination's for rollovers: https://www.irs.gov/pub/irs-tege/rollover_chart.pdf https://www.irs.gov/pub/irs-tege/rollover_chart.pdf It does appear you can roll a SEP-IRA over to a "Qualified (pre-tax) Plan" which footnote 1 indicates includes 401K. How much do you have in the SEP currently? You could roll $6,000 of it per year over into a Roth IRA (held at Vanguard for example). Remember, make sure not to end up with money in a traditional IRA, or the tax situation for backdoor contributions becomes much more complex.
- devoutsalsa 5y ago
  This is not entirely correct. If you participate in an employer 401K and have an income greater than $76K (as a single person) in 2020, you can't contribute to your traditional IRA. Well, you can't deduct the contribution, so you're putting in after tax income. I learned this when Turbo Tax wouldn't let me deduct my IRA contribution. Oops! So now I have to go through the hassle of clawing the money out of my traditional IRA, or I'll have to pay tax on it again when I take it out. See this => https://www.investopedia.com/ask/answers/07/401(k)_ira.asp https://www.investopedia.com/ask/answers/07/401(k)_ira.asp You're looking for the section called "Deductibility of IRA Contributions If You Also Have an Employer Plan (2021)". #nottaxadvice
  - prezjordan 5y ago
    > $6,000 post-tax contribution to IRA, then Roth Conversion "post-tax" is the important bit!
deleted 5y ago
[deleted]
vmception 5y ago
Roth ira is not a roth 401k Ive never been able to figure out why personal finance sites and gurus conflate that, I can find no advantage of a roth ira it looks simply like an inferior product/provision
- wikibob 5y ago
  Overall I would agree that Roth dollars are preferable to traditional-IRA and traditional-401k dollars. However until very recently it was not possible to get money into Roth funds if you made over the income limit. It’s been a multi-decade accumulation of small changes culminating with the 2018 change that allows converting post-tax dollars from IRA or 401k dollars to Roth dollars, with no income limit.
  - vmception 5y ago
    Okay So a roth 401k is still not a roth ira, thats my only point and am hoping for a conversation why people act like there is only one roth product and that they are the same thing when one is clearly superior in most circumstances
- leetcrew 5y ago
  I agree, it's an important distinction that should be made more clear. one advantage to a roth (or traditional) IRA over a 401k is that you get to choose the funds yourself. my employer doesn't offer very good funds (the expense ratio on the s&p500 option is over 50 basis points!), so I max out my roth IRA before contributing to my 401k.
  - vmception 5y ago
    A self directed 401k allows that too just like a self directed ira. 401k is still superior then. Roth or otherwise you can “mega backdoor roth” into self directed 401ks

prezjordan 5y ago

Starts to ramp down at 125k, and at >=140k you cannot contribute to it. Instead you contribute to a traditional IRA, then immediately convert it to Roth and file an 8606.

wikibob 5y ago

Correct there is an income limit for direct contributions to a Roth IRA. Absolutely absurdly, there is no income limit to do a post-tax contribution to a non-roth-IRA, and then do an IRA to Roth-IRA conversion. --- With no income limit you can: - $6,000 post-tax dollars contribution to IRA, then do a Roth Conversion and file a IRS8606. This is a Backdoor Roth Contribution - $19,500 pre-tax dollars contribution to 401k. - $xxxx company matching dollars to 401k. - ($56,000 - $19,500 - $xxxx company match) contribution to After Tax 401k, then 401k to Roth 401k conversion This is a Mega Backdoor Roth Contribution - HSA $3,600 --- Tax implications: - The money converted into the Roth IRA (the $6,000/year) you paid tax on the principle going in, and are not taxed on it nor on capital gains coming out. - The pre-tax 401k dollars (yours & matched) you did not pay tax on the principle going in, so you are taxed on the principle and capital gains coming out - The after tax 401k contribution, converted to Roth 401k, you paid tax on the principle going in, and are not taxed on it nor on capital gains coming out. - The HSA you did not pay tax on the principle going in, you are not taxed on capital gains or principle going out, as long as it is for qualified medical expenses. --- Extra Notes: - Do not get tricked into rolling over old employer 401k plans to a traditional (non-Roth) IRA. If you do this, there are very complex tax implications when doing backdoor Roth contributions. If you have an existing Traditional (non-Roth) IRA, do lots of reading or buy a couple hours of time from a "Fiduciary Financial Advisor". Do not ever trust a "Financial Advisor" under any circumstances. They do not have your best interest in mind, they have their commission in mind. Fiduciary Financial Advisors don't make a commission from your decisions. Make sure that if you go this route, you find someone who only does Fiduciary advising (and doesn't split time). - You should carefully evaluate timing on doing a 401k to Roth 401k conversion of your withheld earnings and company contributions. If you have a year that you have lower income (back to school, travel, year off), you should probably do the conversion then. The money will be taxed as ordinary income, but then treated as Roth dollars coming out. - Beware of employer provided retirement plans with high expense ratios. Anything over about 0.30% is a ripoff and you are wasting money. You have to dig deep into the fund information to find the expense ratio. - Shockingly, many default investments are target-date plans, and they charge outrageous expense ratios, I have seen as high as 0.90%. Compounded over 30 years this will cost you a literal fortune. --- If you are a high earner with no health issues, you should be saving $65,600 per year in the above tax advantaged strategies. Look up the BogleHeads wiki and guide for where to invest the money (Total Market LOW cost, unmanaged mutual funds). This is not financial advice, hire your own fiduciary financial advisor

nodesocket 5y ago
Thanks for the information. I actually didn't know about the individual 401k. Using the individual 401k would allow me to make a larger contribution ($58k) than my current SEP (income does not max out the 25% limit). However, the downside with the individual 401k is that I cannot expand and hire full-time employees. Do you have to know if I can convert my SEP into an individual 401k?
- wikibob 5y ago
  See this amazing chart from the IRS on allowable source and destination's for rollovers: https://www.irs.gov/pub/irs-tege/rollover_chart.pdf https://www.irs.gov/pub/irs-tege/rollover_chart.pdf It does appear you can roll a SEP-IRA over to a "Qualified (pre-tax) Plan" which footnote 1 indicates includes 401K. How much do you have in the SEP currently? You could roll $6,000 of it per year over into a Roth IRA (held at Vanguard for example). Remember, make sure not to end up with money in a traditional IRA, or the tax situation for backdoor contributions becomes much more complex.
devoutsalsa 5y ago
This is not entirely correct. If you participate in an employer 401K and have an income greater than $76K (as a single person) in 2020, you can't contribute to your traditional IRA. Well, you can't deduct the contribution, so you're putting in after tax income. I learned this when Turbo Tax wouldn't let me deduct my IRA contribution. Oops! So now I have to go through the hassle of clawing the money out of my traditional IRA, or I'll have to pay tax on it again when I take it out. See this => https://www.investopedia.com/ask/answers/07/401(k)_ira.asp https://www.investopedia.com/ask/answers/07/401(k)_ira.asp You're looking for the section called "Deductibility of IRA Contributions If You Also Have an Employer Plan (2021)". #nottaxadvice
- prezjordan 5y ago
  > $6,000 post-tax contribution to IRA, then Roth Conversion "post-tax" is the important bit!

deleted 5y ago

[deleted]

vmception 5y ago

Roth ira is not a roth 401k Ive never been able to figure out why personal finance sites and gurus conflate that, I can find no advantage of a roth ira it looks simply like an inferior product/provision

wikibob 5y ago
Overall I would agree that Roth dollars are preferable to traditional-IRA and traditional-401k dollars. However until very recently it was not possible to get money into Roth funds if you made over the income limit. It’s been a multi-decade accumulation of small changes culminating with the 2018 change that allows converting post-tax dollars from IRA or 401k dollars to Roth dollars, with no income limit.
- vmception 5y ago
  Okay So a roth 401k is still not a roth ira, thats my only point and am hoping for a conversation why people act like there is only one roth product and that they are the same thing when one is clearly superior in most circumstances
leetcrew 5y ago
I agree, it's an important distinction that should be made more clear. one advantage to a roth (or traditional) IRA over a 401k is that you get to choose the funds yourself. my employer doesn't offer very good funds (the expense ratio on the s&p500 option is over 50 basis points!), so I max out my roth IRA before contributing to my 401k.
- vmception 5y ago
  A self directed 401k allows that too just like a self directed ira. 401k is still superior then. Roth or otherwise you can “mega backdoor roth” into self directed 401ks