Author Topic: Help me figure out how to allocate money to my stache.  (Read 2962 times)

BlueHouse

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Help me figure out how to allocate money to my stache.
« on: March 14, 2015, 04:23:08 PM »
I want to be sure I'm taking advantage of opportunities for savings/investments.  How should I allocate my money based on my circumstances?  I think a Roth is not a good solution to me at this point, but I keep hearing people tell me otherwise. 

I have a high income.  It is the highest I ever expect it to be.  My marginal tax rate is 34% for 2014.
I have a solo 401k and it is maxed out annually at 52K
I have a tIRA from old jobs.  I havenít rolled it into a Roth because I donít want to pay taxes on it at my current tax rate.  I think I can put another $5500/year into this account, but I could not claim a deduction on it due to income.  However, I donít do it because Iím not sure how to keep track of pre and post dollars.  Should I?
I contribute after tax dollars to a taxable brokerage account. 
I also contribute extra to paying down my mortgage early. 

When Iím closer to retirement, I MAY transfer all of my IRA holdings to my 401k, then begin Roth rollovers.  But by that time Iíll be in my mid to late 50s.  Iím not sure itís worth it at that point. 

What changes should I make to my current stash?  Should I change strategy? 

MDM

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Re: Help me figure out how to allocate money to my stache.
« Reply #1 on: March 14, 2015, 10:13:40 PM »
I think I can put another $5500/year into this account, but I could not claim a deduction on it due to income.  However, I donít do it because Iím not sure how to keep track of pre and post dollars.  Should I?
No.  If you tried a backdoor Roth you would have to pay tax on the proportional amount coming from your existing tIRA.  Probably not worthwhile at your current marginal rate.

Quote
What changes should I make to my current stash?  Should I change strategy?
High level strategy looks good.  No info on your current asset allocation so no way to comment.

BlueHouse

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Re: Help me figure out how to allocate money to my stache.
« Reply #2 on: March 15, 2015, 06:43:01 AM »
I think I can put another $5500/year into this account, but I could not claim a deduction on it due to income.  However, I donít do it because Iím not sure how to keep track of pre and post dollars.  Should I?
No.  If you tried a backdoor Roth you would have to pay tax on the proportional amount coming from your existing tIRA.  Probably not worthwhile at your current marginal rate.

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What changes should I make to my current stash?  Should I change strategy?
High level strategy looks good.  No info on your current asset allocation so no way to comment.
Thank you, MDM for your comments.  I'm comfortable again with the notion that a Roth is NOT a good choice for me at this stage. The one other thing I could do that I'm not doing is contribute to traditional IRA. Should I? 
I guess I don't really understand the benefits for me. I don't wualify for a tax deduction for it, so I would be limited to earning tax-free growth on only the interest of $5500/year for the next 10 years.  Do I understand that correctly?  And then when I withdraw it, I would pay taxes on all of it?  Or just on the growth? 
In my traditional IRA, the existing money came from rollovers of previous 401ks, so that money was all tax advantaged. Then one year I added 5k to I at tax time, but then found out that the 5k was not tax advantaged. So now I have a mix of money in that account and I'm worried about keeping track to that. Does it matter?  Has the taxable event already happened and will all withdrawals be treated exactly the same?  Or when I withdraw, do I need to specific that I've already paid tax on some portion of the money so I shouldn't pay again? 

kpd905

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Re: Help me figure out how to allocate money to my stache.
« Reply #3 on: March 15, 2015, 07:51:02 AM »
Do you qualify for Roth IRA contributions, or is your income too high?

If you can't deduct the tIRA, then don't do it.  But if you can still put money in a Roth IRA you should while you can.

zurich78

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Re: Help me figure out how to allocate money to my stache.
« Reply #4 on: March 15, 2015, 09:46:25 AM »
I think I can put another $5500/year into this account, but I could not claim a deduction on it due to income.  However, I donít do it because Iím not sure how to keep track of pre and post dollars.  Should I?
No.  If you tried a backdoor Roth you would have to pay tax on the proportional amount coming from your existing tIRA.  Probably not worthwhile at your current marginal rate.

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What changes should I make to my current stash?  Should I change strategy?

Couldn't he roll all of his tIRA balances in to his 401K?  Then, he would make a non-deductible contribution in to his now zero balance tIRA account and then convert that to Roth.  That's how I avoid pro rata taxation if that's what you were referring to.

MDM

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Re: Help me figure out how to allocate money to my stache.
« Reply #5 on: March 15, 2015, 11:14:04 AM »
Couldn't he roll all of his tIRA balances in to his 401K?  Then, he would make a non-deductible contribution in to his now zero balance tIRA account and then convert that to Roth.  That's how I avoid pro rata taxation if that's what you were referring to.
Yes, that would be an option if the 401k plan allows it.
See http://www.ehow.com/how_2075555_transfer-ira-401k.html and http://www.kiplinger.com/article/retirement/T047-C000-S004-moving-ira-assets-into-a-401k.html for some relevant info.

The one other thing I could do that I'm not doing is contribute to traditional IRA. Should I? 
I guess I don't really understand the benefits for me. I don't qualify for a tax deduction for it, so I would be limited to earning tax-free growth on only the interest of $5500/year for the next 10 years.  Do I understand that correctly?  And then when I withdraw it, I would pay taxes on all of it?  Or just on the growth?
Most likely not worth it.  You would not pay any tax on the withdrawal of your non-deductible contribution, but you would pay tax at ordinary income rates on the withdrawal of the investment returns.  In a taxable account you would have to pay tax every year on any dividends, etc. that your investment delivers, but when you withdraw from the taxable account you would pay tax at the lower long term capital gain rates.

Quote
In my traditional IRA, the existing money came from rollovers of previous 401ks, so that money was all tax advantaged. Then one year I added 5k to I at tax time, but then found out that the 5k was not tax advantaged. So now I have a mix of money in that account and I'm worried about keeping track to that. Does it matter?  Has the taxable event already happened and will all withdrawals be treated exactly the same?  Or when I withdraw, do I need to specify that I've already paid tax on some portion of the money so I shouldn't pay again?
Yes to the bolded part.  E.g. see http://wiki.fool.com/Tax_Consequences_of_a_Nondeductible_IRA_Distribution.

BCBiker

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Re: Help me figure out how to allocate money to my stache.
« Reply #6 on: March 15, 2015, 08:26:05 PM »
Here is the best post on IRA maximums. WCI writes for a doc audience but it applies to all.

http://whitecoatinvestor.com/multiple-401k-rules/

You can have more than one IRA.

If you own one or more businesses (including are a partner of some form of professional practice) you can contribute up to $53k ($18k plus 18% profits of business is the calculation for limits) per unrelated employer via a SEP-IRA or similarly configured retirement account.  Here is just one of many posts on the subject.

http://whitecoatinvestor.com/beating-the-51k-limit-friday-qa-series/

Note this is from a few years ago so the limit has increased.  If you are over 50 yo you can contribute more!

On top of this you can do $5500 per person (2 if married) to Roth IRA.  You could contribute  this amount to a traditional IRA as you suggest.  However, I believe that you cannot deduct a traditional IRA from your income thus making it useless because you are paying taxes on it anyway, so you might as well get the Roth advantage. Using a Roth is advantageous over putting into a fully taxed brokerage.  (check your tax returns to see if you are effectively deducting this amount. If not, it is a waste of time to have it in traditional IRA)

A married person with 2 profitable enough businesses could contribute $106k per year if one person is employed by each business plus $11k contributions to Roths (likely by backdoor).  If you could reasonably say that both spouses are employed at both businesses you could do $212K total SEP IRA plus 11K Roth!


You could roll all of your old 401(k)/IRAs into on rollover IRA (not Roth) just for simplicity.  You can also roll over to Roth if so desired by paying your current marginal tax rate on the amount converted.  I don't know why one would roll into a 401(k) because you generally have much less control of a 401(k) and much higher fees than say a Vanguard or Fidelity rollover IRA account.

You should not roll over to Roth unless you can lower your marginal rate to lower than what it will be in retirement (taking a year off for example). You can also roll over to Roth if you need the money without getting hit by the 10% penalty because the rollover becomes you basis in the Roth account (basis can be withdrawn penalty free - there is a 5 year limit from when you opened the account for withdrawing the basis).

This info is all factual to the best of my knowledge.  I hope it helps and correct me if I am wrong.