Is an IRA worth it without the tax deduction?

[Megs193]

I’m having a hard time figuring out the advantage of an IRA in my situation and want to see if there is something I am missing. My husband and I have a combined income of about $450,000 annually. We don’t qualify for any tax deduction for an IRA and are in a high tax bracket so I can’t figure out how to tell if a backdoor Roth is worth it.  If not, is there any advantage of a traditional Roth.  We will probably spend a decent amount of money in retirement because my husband has no interest in retiring so when he finally does I anticipate having at least 5 million saved. We have about $8,000 a month to invest once we pay off our mortgage in 8 months.

[FIREstache]

With that income, it looks like your MAGI would be too high to qualify for a direct Roth contribution, so you can do the backdoor Roth.

[Megs193]

With that income, it looks like your MAGI would be too high to qualify for a direct Roth contribution, so you can do the backdoor Roth.

Is there a benefit to doing this vs. a taxable account?

[terran]

The benefit to a backdoor roth is the same as a direct roth: once it's in the account you don't pay tax on the dividends or the gains. Note that a backdoor roth only works if you don't have previously deducted traditional IRA balances from contributing to a traditional IRA or from rolling over a workplace plan to an IRA.

[Megs193]

The benefit to a backdoor roth is the same as a direct roth: once it's in the account you don't pay tax on the dividends or the gains. Note that a backdoor roth only works if you don't have previously deducted traditional IRA balances from contributing to a traditional IRA or from rolling over a workplace plan to an IRA.

Thanks. Just to make sure I understand - we would contribute the yearly max to an IRA and immediately convert it to a Roth. We would then pay taxes only on any capital gains and wouldn’t have to pay any taxes when we go to withdrawal money?

[FIREstache]

The benefit to a backdoor roth is the same as a direct roth: once it's in the account you don't pay tax on the dividends or the gains. Note that a backdoor roth only works if you don't have previously deducted traditional IRA balances from contributing to a traditional IRA or from rolling over a workplace plan to an IRA.

Thanks. Just to make sure I understand - we would contribute the yearly max to an IRA and immediately convert it to a Roth. We would then pay taxes only on any capital gains and wouldn’t have to pay any taxes when we go to withdrawal money?

No.  In your Roth, you don't have to pay taxes or penalties on the capital gains or dividends at any time nor when you withdraw if they are all qualified distributions.

[jlcnuke]

With that income, it looks like your MAGI would be too high to qualify for a direct Roth contribution, so you can do the backdoor Roth.

Is there a benefit to doing this vs. a taxable account?

Yes, your gains in the taxable account will be taxed when you withdraw them, and dividends etc will be taxed always. In the Roth, none of that will be taxed.

[Enigma]

Depending on your situation other options might be available.

1) If you qualify for a 401k with your career or your husband's then max out the 401k - $19k (or $38k if both have plans)
2 ) If you qualify for a HSA - Health Savings Account then max out the HSA - $7k family
3) Then max out a Traditional IRA - $6k yours & $6k his

After that SOME 401k plans allow you to make 'After Tax Contributions'. If your 401k allows additional contributions the maximum you can contribute including your pretax contributions, your after tax contributions and your employers match is $56,000 (again a 2018 level).  Have a ROTH IRA ready if you do the 'After Tax Contributions'.  As soon as they hit/clear the 401k plan transfer that directly to a ROTH.

I agree that you make too much to put directly into a ROTH IRA.  No one will stop you but you WILL be penalized.

[Fire2028]

We have an income similar to yours and so we also can't deduct the IRA deduction.  Be careful of the backdoor method because when you convert, that withdrawal will be taxed.  There is a tax free component but the tax free portion is a percentage of that withdrawal divided by all your IRA holdings.  The IRS doesn't allow you to pick and choose which IRA dollars you are converting so hence the percentage.  I have over $500k in IRAs so we would have to pay tax on most of the conversion.  I did the math and figured it wasn't worth it to pursue the backdoor method at this time.  It might make sense if you want to contribute now and then start the backdoor when you are in a lower tax bracket, ie, already retired and you can use other funds to cover the 5 year holding period.  The conversion could work if you have most of your money in other funds like 401ks - just not IRAs. That is my understanding - YMMV!