Author Topic: Do we make too much money for an IRA to be worth it?  (Read 2373 times)

Izybat

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Do we make too much money for an IRA to be worth it?
« on: June 07, 2017, 07:28:23 PM »
I'm trying to work out if my husband and I should be contributing to an IRA at some point, but I'm starting to wonder if it's worth it in our case.

Currently we make a combined household income of approximately $225,000 (gross, not net). This seems to make us ineligible for a Roth IRA given the phase out based on income (modified AGIs of less than $194,000 with phase-out begining at $184,000). We can contribute to a traditional IRA, but since our AGI is higher than 119,000 and we have 401Ks at work, we wouldn't get to deduct it on our taxes.

If we can't get the tax break because our AGI is so high, does it even make sense to contribute to an IRA versus just doing regular after-tax investing? Am I missing some other benefit?

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extremedefense

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Re: Do we make too much money for an IRA to be worth it?
« Reply #2 on: June 07, 2017, 07:32:52 PM »
225k - 2*(18k maximum 401k contribution per person) = 189k

So why not max your 401k at the 18k each year, and then do the Roth 401k contributions to your 53k per person which you can rollover to Roth IRA when you leave your employer.

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MDM

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Re: Do we make too much money for an IRA to be worth it?
« Reply #3 on: June 07, 2017, 11:17:08 PM »
So why not max your 401k at the 18k each year, and then do the Roth 401k contributions to your 53k per person which you can rollover to Roth IRA when you leave your employer.
Note that once one has contributed $18K to a traditional 401k in a year, no money may go to a Roth 401k.

Some plans do allow "after tax non-Roth" contributions, which can form the basis of a Mega Backdoor Roth IRA.  From the last post in that thread:
Quote
This is dependent entirely on the 401k plan. Whether after-tax contributions are even allowed, whether those contributions must be made by payroll deduction, whether they can happen before the max employee deferral limit is reached, whether In-plan Roth Rollovers are allowed, whether in-service rollovers are allowed, how often rollovers are allowed and at what cost are all at the discretion of the plan.

Despite the name similarities, backdoor Roths are completely independent of mega backdoor Roths.  You may do one, the other, neither, or both.

SeattleCPA

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Re: Do we make too much money for an IRA to be worth it?
« Reply #4 on: June 08, 2017, 08:01:43 AM »
I'm trying to work out if my husband and I should be contributing to an IRA at some point, but I'm starting to wonder if it's worth it in our case.

Currently we make a combined household income of approximately $225,000 (gross, not net). This seems to make us ineligible for a Roth IRA given the phase out based on income (modified AGIs of less than $194,000 with phase-out begining at $184,000). We can contribute to a traditional IRA, but since our AGI is higher than 119,000 and we have 401Ks at work, we wouldn't get to deduct it on our taxes.

If we can't get the tax break because our AGI is so high, does it even make sense to contribute to an IRA versus just doing regular after-tax investing? Am I missing some other benefit?

You're probably thinking about this right way. Max your 401(k)s... then look at saving after-tax...
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Roland of Gilead

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Re: Do we make too much money for an IRA to be worth it?
« Reply #5 on: June 08, 2017, 08:38:30 AM »
The mega backdoor Roth is just so wrong you gotta do it if you can.

We were making the big bucks and socking away $60,000 in a Roth each year.

SeattleCPA

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Re: Do we make too much money for an IRA to be worth it?
« Reply #6 on: June 08, 2017, 09:47:08 AM »
Roland, I just think people (a) underestimate how tax efficient a taxable account can be. You can have millions in your portfolio and not pay income taxes on the income.

Further, if someone misses other tax benefits or incurs extra costs or risks due to the Roth, it's hard to make the numbers work.

All that said, agree that in some situations a Roth makes sense. And if one can simply move money into a Roth account (no tax or compliance cost including opportunity costs), sure, agree that makes sense.
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Roland of Gilead

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Re: Do we make too much money for an IRA to be worth it?
« Reply #7 on: June 08, 2017, 11:57:06 AM »
If you are a CPA in Redmond, you have to be advising Microsoft employees left and right to set up mega back door Roths because Fidelity allows the in plan conversion under the Microsoft 401K plan.   

BlueHouse

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Re: Do we make too much money for an IRA to be worth it?
« Reply #8 on: June 08, 2017, 02:00:37 PM »
Roland, I just think people (a) underestimate how tax efficient a taxable account can be. You can have millions in your portfolio and not pay income taxes on the income.

Further, if someone misses other tax benefits or incurs extra costs or risks due to the Roth, it's hard to make the numbers work.

All that said, agree that in some situations a Roth makes sense. And if one can simply move money into a Roth account (no tax or compliance cost including opportunity costs), sure, agree that makes sense.
SeattleCPA, I'm not sure I understand fully, so I'm going to hijack this thread for a minute and make it about me (which I think is similar to the OP). 
I max out my regular 401k and I also contribute to a traditional IRA (non-tax deductible due to income limit).  I then convert the tIRA to Roth because I've already paid taxes on that money anyway, so why not stick it into an account where the growth will be tax-free also? 

If my reasoning above is sound, then my answer to

If we can't get the tax break because our AGI is so high, does it even make sense to contribute to an IRA versus just doing regular after-tax investing? Am I missing some other benefit?
is YES, it does make sense. 
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SeattleCPA

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Re: Do we make too much money for an IRA to be worth it?
« Reply #9 on: June 08, 2017, 04:42:22 PM »
If you are a CPA in Redmond, you have to be advising Microsoft employees left and right to set up mega back door Roths because Fidelity allows the in plan conversion under the Microsoft 401K plan.

It's usually not relevant/available for our clients. They do BTW often use the Sec. 457 plan option that MSFT provides...
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SeattleCPA

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Re: Do we make too much money for an IRA to be worth it?
« Reply #10 on: June 08, 2017, 04:51:22 PM »
Roland, I just think people (a) underestimate how tax efficient a taxable account can be. You can have millions in your portfolio and not pay income taxes on the income.

Further, if someone misses other tax benefits or incurs extra costs or risks due to the Roth, it's hard to make the numbers work.

All that said, agree that in some situations a Roth makes sense. And if one can simply move money into a Roth account (no tax or compliance cost including opportunity costs), sure, agree that makes sense.
SeattleCPA, I'm not sure I understand fully, so I'm going to hijack this thread for a minute and make it about me (which I think is similar to the OP). 
I max out my regular 401k and I also contribute to a traditional IRA (non-tax deductible due to income limit).  I then convert the tIRA to Roth because I've already paid taxes on that money anyway, so why not stick it into an account where the growth will be tax-free also? 

If my reasoning above is sound, then my answer to

If we can't get the tax break because our AGI is so high, does it even make sense to contribute to an IRA versus just doing regular after-tax investing? Am I missing some other benefit?
is YES, it does make sense.

In your situation, I think it's fine to use the backdoor Roth. Or if it was available a megabackdoor Roth.

But I can create scenarios where you or the OP loses with the option or options where you or OP doesn't win very much.

E.g.,
You or the OP has big IRA balances which will impact your basis.
You are on the cusp of retiring and as soon as you're retired, you'll enjoy a 0% LT capital gains or 0% qualified dividends tax rate.
You have other better investment options such as (for example) some sweet, sweet private equity investment
You still have other tax advantaged savings options like (as an example) direct real estate investment.

I admit it... I have a prejudice concerning Roth style accounts... I am always suspect of them as reflexive answers because I know (when I sit down and talk with clients with their tax returns and financial statements on table in front of me) that people regularly reflexively choose to "Roth" and don't optimize.
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BlueHouse

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Re: Do we make too much money for an IRA to be worth it?
« Reply #11 on: June 08, 2017, 05:42:05 PM »

Quote
In your situation, I think it's fine to use the backdoor Roth. Or if it was available a megabackdoor Roth.

But I can create scenarios where you or the OP loses with the option or options where you or OP doesn't win very much.

E.g.,
You or the OP has big IRA balances which will impact your basis.
You are on the cusp of retiring and as soon as you're retired, you'll enjoy a 0% LT capital gains or 0% qualified dividends tax rate.
You have other better investment options such as (for example) some sweet, sweet private equity investment
You still have other tax advantaged savings options like (as an example) direct real estate investment.

I admit it... I have a prejudice concerning Roth style accounts... I am always suspect of them as reflexive answers because I know (when I sit down and talk with clients with their tax returns and financial statements on table in front of me) that people regularly reflexively choose to "Roth" and don't optimize.

Thank you so much for the info.  I think I'm doing almost as much as I can at the moment.  The only other thing I could do is change my insurance to one with an HSA
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Beach_Stache

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Re: Do we make too much money for an IRA to be worth it?
« Reply #12 on: June 14, 2017, 04:54:37 AM »
As high income earners I would max out your 401k's, do catch up contributions as well if you're >= 50 years old.  If you can reduce your AGI by $36k/year and have other deductions like flex spending or HSA to bring your AGI down, you may be eligible for a ROTH IRA as well.  We both max out or 401k's and I max my Roth IRA and will have my wife do a Roth IRA this year as well.  As high income earners, I think the most important is to max your 401k to get your contributions up and taxes down a little bit.  If you are making $225k/year now, do you think you'll be making $225k/year post retirement?  If not then your taxes will be lower which makes maxing out your 401k that much more important since you'd be paying more in taxes now than you would be in retirement.
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Izybat

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Re: Do we make too much money for an IRA to be worth it?
« Reply #13 on: September 06, 2017, 04:36:04 PM »
I hate to admit it, but I'm still confused about IRAs. As mentioned previously, my husband and I make quite a bit of money ($225,000 total a year), which puts us over the MAGI limits for contributing to a Roth IRA and for tax deductions on a traditional IRA. I had assumed that meant that I couldn't contribute to either without doing some of the back door Roth conversion stuff that was mentioned (which is probably very useful, but may be a little bit beyond my abilities at this stage).

So, for clarity's sake, can I contribute to a traditional IRA with post-tax money, and then somehow not claim a tax deduction for it? If so, does it need to a special kind of IRA? That would allow the growth to be tax-deferred , right?

For example, I have a (very small, ~$4,000) IRA that's a roll-over IRA from a previous 401k plan. Can I use post-tax money to contribute to that account? Even if it's possible, would it be wise to do so given that it would mean mixing up post-tax and pre-tax contributions? Should I open a different IRA that's just for post-tax money?

jjandjab

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Re: Do we make too much money for an IRA to be worth it?
« Reply #14 on: September 07, 2017, 09:47:55 AM »
I hate to admit it, but I'm still confused about IRAs. As mentioned previously, my husband and I make quite a bit of money ($225,000 total a year), which puts us over the MAGI limits for contributing to a Roth IRA and for tax deductions on a traditional IRA. I had assumed that meant that I couldn't contribute to either without doing some of the back door Roth conversion stuff that was mentioned (which is probably very useful, but may be a little bit beyond my abilities at this stage).

So, for clarity's sake, can I contribute to a traditional IRA with post-tax money, and then somehow not claim a tax deduction for it? If so, does it need to a special kind of IRA? That would allow the growth to be tax-deferred , right?

For example, I have a (very small, ~$4,000) IRA that's a roll-over IRA from a previous 401k plan. Can I use post-tax money to contribute to that account? Even if it's possible, would it be wise to do so given that it would mean mixing up post-tax and pre-tax contributions? Should I open a different IRA that's just for post-tax money?

Hi there - to try and clarify and  directly answer your questions:

Yes, you can contribute to the "rollover" IRA with your post-tax traditional IRA contribution for 2017. That is considered a traditional IRA. You do not need to open another traditional IRA.

And yes, that money would grow tax deferred and so you don't have to worry about the capital gains, etc... as you would if you just put that money in a taxable account.

Either your tax software or accountant will know that there is no deduction associated with your contribution.

To follow up on the next part - As a fellow high earner, please do the research on the "backdoor Roth". My wife and I have been doing this for years and it is not complicated (or as complicated as it might seem).

The only even slightly complicated part is rolling over your current traditional IRA, which contains the 4k right now, into a new Roth IRA account, preferably at the same firm where you have your current account (we use Fidelity). You will pay taxes on that - perhaps $1k or so this year.

Then at that point you will have an open, but empty traditional IRA and a Roth IRA with a 4k balance. From then on you will deposit your post-tax traditional IRA money into the open, empty traditional IRA - I do this as soon as possible in January. As soon as that posts to the account (a few days or so), you go online and transfer the money from the traditional IRA to the Roth IRA. There is no tax consequence since you already are putting in post-tax money. It is really easy.

Now that money not only grows tax-deferred, but is also completely income tax free at the time of withdrawal in the future, amongst other estate planning benefits in the future.

I hope this helps! The small amount of extra time to do this is totally worth it, in my opinion, for a high earner who is young (I am assuming you are young?) and already maxing out other 401k accounts.



MDM

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Re: Do we make too much money for an IRA to be worth it?
« Reply #15 on: September 07, 2017, 10:05:59 AM »
...please do the research on the "backdoor Roth".
+1

E.g., OP see Backdoor Roth IRA - Bogleheads.

The non-deductible tIRA itself isn't a great deal.  Yes, you don't pay tax annually on dividends, etc., but when you withdraw earnings they are taxed at ordinary income rates, not as qualified dividends or long term capital gains.

Using the non-deductible tIRA as part of the backdoor Roth, however, is a fine deal.

lisa_mustache

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Re: Do we make too much money for an IRA to be worth it?
« Reply #16 on: September 08, 2017, 02:10:00 PM »
I hate to admit it, but I'm still confused about IRAs. As mentioned previously, my husband and I make quite a bit of money ($225,000 total a year), which puts us over the MAGI limits for contributing to a Roth IRA and for tax deductions on a traditional IRA. I had assumed that meant that I couldn't contribute to either without doing some of the back door Roth conversion stuff that was mentioned (which is probably very useful, but may be a little bit beyond my abilities at this stage).

So, for clarity's sake, can I contribute to a traditional IRA with post-tax money, and then somehow not claim a tax deduction for it? If so, does it need to a special kind of IRA? That would allow the growth to be tax-deferred , right?

For example, I have a (very small, ~$4,000) IRA that's a roll-over IRA from a previous 401k plan. Can I use post-tax money to contribute to that account? Even if it's possible, would it be wise to do so given that it would mean mixing up post-tax and pre-tax contributions? Should I open a different IRA that's just for post-tax money?

Hi there - to try and clarify and  directly answer your questions:

Yes, you can contribute to the "rollover" IRA with your post-tax traditional IRA contribution for 2017. That is considered a traditional IRA. You do not need to open another traditional IRA.

And yes, that money would grow tax deferred and so you don't have to worry about the capital gains, etc... as you would if you just put that money in a taxable account.

Either your tax software or accountant will know that there is no deduction associated with your contribution.

To follow up on the next part - As a fellow high earner, please do the research on the "backdoor Roth". My wife and I have been doing this for years and it is not complicated (or as complicated as it might seem).

The only even slightly complicated part is rolling over your current traditional IRA, which contains the 4k right now, into a new Roth IRA account, preferably at the same firm where you have your current account (we use Fidelity). You will pay taxes on that - perhaps $1k or so this year.

Then at that point you will have an open, but empty traditional IRA and a Roth IRA with a 4k balance. From then on you will deposit your post-tax traditional IRA money into the open, empty traditional IRA - I do this as soon as possible in January. As soon as that posts to the account (a few days or so), you go online and transfer the money from the traditional IRA to the Roth IRA. There is no tax consequence since you already are putting in post-tax money. It is really easy.

Now that money not only grows tax-deferred, but is also completely income tax free at the time of withdrawal in the future, amongst other estate planning benefits in the future.

I hope this helps! The small amount of extra time to do this is totally worth it, in my opinion, for a high earner who is young (I am assuming you are young?) and already maxing out other 401k accounts.

This is the clearest instruction on how to do this that I've seen!  Thank you!

Izybat

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Re: Do we make too much money for an IRA to be worth it?
« Reply #17 on: September 08, 2017, 04:26:31 PM »
Totally agree with @lisa_mustache. I've tried to look into backdoor Roths in the past, and it seemed too confusing. This doesn't seem that bad at all.

I'm not quite ready to use this yet, but I wanted to make sure I understood it before it was time. Thanks for your advice!

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Re: Do we make too much money for an IRA to be worth it?
« Reply #18 on: September 09, 2017, 06:41:53 AM »
DW and I are in about the same financial situation, combined we make around $225k/year before tax but both max out our 401k's, so that brings us down to $189k, then we have flex spending for daycare at $5k, flex spending for health care at around $2.5k, mortgage insurance, 3 kids and lots of deductions.  I believe once we have our modified adjusted gross income we are down to like $150k.  I have been maxing out both 401k and Roth IRA since I was 23, and this year is also the first year DW will be maxing out her Roth IRA as well.  I think doing what you can to reduce your taxable income so you can retire early is a good bet, and there is plenty you can do.  Look at your MAGI from last year's taxes to see what situation you are in and what it would look like if you maxed out your 401k's, then you can probably also max out Roth's w/o an issue.  We still have plenty of room before we hit the cap b/c of all of our deductions.
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MDM

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Re: Do we make too much money for an IRA to be worth it?
« Reply #19 on: September 09, 2017, 07:15:42 AM »
DW and I are in about the same financial situation, combined we make around $225k/year before tax but both max out our 401k's, so that brings us down to $189k, then we have flex spending for daycare at $5k, flex spending for health care at around $2.5k, mortgage insurance, 3 kids and lots of deductions.  I believe once we have our modified adjusted gross income we are down to like $150k.
Note that "mortgage insurance, 3 kids and lots of deductions" have no effect on one's Modified Adjusted Gross Income for Roth IRA Purposes.

Izybat

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Re: Do we make too much money for an IRA to be worth it?
« Reply #20 on: September 09, 2017, 08:58:45 AM »
We're actually very close to maxing out our 401ks already. DH's is already maxed, and mine is about $3,000 away. (I'm slowly increasing mine by 1% every few months until we get there.) Since the 401k was easier to do than this IRA trick, I focused on that one first. I'm also doing a lot of things at once, like still paying off our last debt (a car loan, as I don't count the house), and building up our 3-6 month emergency fund. I'm hoping to have all of that taken care of within a year, and then I'll be looking for the best alternatives, hence looking at the IRAs and then after-tax investments.

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Re: Do we make too much money for an IRA to be worth it?
« Reply #21 on: September 09, 2017, 03:23:43 PM »
PTF because of jjandjabs easy explanation. So far I've ignored the backdoor Roth because I have traditional Ira balances (in my and my husbands accounts), and I didn't know how to get rid of them. We're also not completely above the income limits (some of our income is non taxable), so we still get a partial deduction when contributing to those. This year I contributed $5500 to the Roth, but planned to recategorize part of it to traditional after running the numbers on taxes and seeing how much we could deduct. Is this still a good idea, or no?

MDM

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Re: Do we make too much money for an IRA to be worth it?
« Reply #22 on: September 09, 2017, 03:39:10 PM »
PTF because of jjandjabs easy explanation. So far I've ignored the backdoor Roth because I have traditional Ira balances (in my and my husbands accounts), and I didn't know how to get rid of them. We're also not completely above the income limits (some of our income is non taxable), so we still get a partial deduction when contributing to those. This year I contributed $5500 to the Roth, but planned to recategorize part of it to traditional after running the numbers on taxes and seeing how much we could deduct. Is this still a good idea, or no?
If you can deduct traditional contributions then you probably aren't anywhere near needing to do a backdoor Roth - just do a normal Roth if that is your desire.

Whether traditional or Roth is better for you depends on your marginal rate now vs. when you would be withdrawing from traditional accounts.  See https://www.bogleheads.org/wiki/Traditional_versus_Roth.

DavidAnnArbor

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Re: Do we make too much money for an IRA to be worth it?
« Reply #23 on: September 09, 2017, 08:37:45 PM »
I wouldn't want to pay income taxes on rolling over the traditional ira into the roth ira. Isn't there a better way (non-taxable rollover event ) to empty out that traditional ira ?  what about starting a side hustle, like professional dog walker. Then make a bit of money, start a solo 401k with that sideline, and then roll the traditional ira into the solo 401k >?