Help me plan my 2021 IRA strategy

[Lucky Recardito]

We are a 2-income household; married couple; late-30s; 1 toddler with a new baby on the way. For the past few years, we've been rolling along with an AGI in the $150K range, give or take, dutifully maxing out two 401(k)s, a family HSA, a DCFSA, and two Roth IRAs annually. But we're starting to get closer and closer to the Roth income limit, which means it's time for me to evolve our strategy.

For 2021, I'm estimating we'll have an AGI of about $187K (that's after accounting for filling up our 401ks, HSA, and DCFSA). Phase-out for Roth IRA eligibility will start at $198K for 2021. So we've got about $11K of safe space for unplanned income expansion if my current expectations hold.

I can't think of anything likely that will bump us up by $11K, but I can think of a few very unlikely but not impossible scenarios: (1) my estimate for 2021 includes 2 months of unpaid paternity leave for DH; his company could have a change of heart and decide to pay him, which could have an impact of up to $16K; (2) my assumed 2% raise for DH in early 2021 could be off -- he could get a mega-raise and bork the numbers; (3) I could get a promotion or change employers in mid/late 2021, either of which would likely be a $10K+ impact. Again, these are all quite unlikely -- but they are plausible.

Starting in 2022, we're likely to be comfortably over the limit (DH won't have unpaid paternity leave in 2022; I plan to aggressively pursue a job change in early 2022; etc.) -- so we're headed to new territory no matter what, with this interstitial year coming our way first.

So my question is: if you were me, would you go ahead and fill the Roths in 2021 and cross our fingers that we don't have meaningful unplanned income (Mustachian People Problem for sure), or would you proactively start a backdoor strategy? Or something else?

Other notes:

1) An obvious option would be to wait until Jan/Feb 2022 to fill our 2021 IRA space, when we know for sure what our income was. The problem here is that we're having kid #2 this spring, which means that in the fall we become a 2-daycare-bill family. And we're in a big city, meaning that when this starts, we'll be paying over $4K/month for full-time care for an infant and a toddler. In other words, we're going to take a big hit to our ability to invest aggressively for ~2 years until the older kid ages into public school. Current cashflow available to invest out of our take-home pay is ~3K/month, so it takes us about 4 months to fill two IRAs (which we typically do early in the year); once double-daycare hits, we'll only have ~1K/month for such investing, meaning it'll take us all dang year to fill up those IRAs. We won't have the cashflow to fill two IRAs in the first few months of 2022 (but meanwhile, we'll have plenty of cashflow in the first half of 2021).

2) Both DH and I have existing Traditional IRAs from previous rollovers. I've confirmed that I can roll mine into my 401k and will get that process started in any case; we will check on DH's next week, as I don't know what his plan does or does not allow.

3) We are ~10 years from FI based on my current estimates -- making steady progress but nowhere near the finish line.

[terran]

I'd get the traditional IRA rollover to 401(k) sorted before doing anything with IRAs given that you're close to the limit.

I think the question is whether you'd rather the guarantee of slightly more work (filling our form 8606 for backdoor Roth) or the possibility of even a bit more work (calling your custodian to recharacterize, attaching a recharacterization statement to your taxes, and filling out form 8606)?

[charis]

I'm curious about why you are contributing to a roth at that level of income.

[terran]

I'm curious about why you are contributing to a roth at that level of income.

If you're covered by a workplace retirement plan and have high income traditional IRA contributions aren't deductible so direct Roth contributions or non-deductible traditional IRA contributions followed by conversion to Roth (backdoor Roth) are your only good IRA options.

[charis]

I'm curious about why you are contributing to a roth at that level of income.

If you're covered by a workplace retirement plan and have high income traditional IRA contributions aren't deductible so direct Roth contributions or non-deductible traditional IRA contributions followed by conversion to Roth (backdoor Roth) are your only good IRA options.

Sorry my mistake - I misread AGI for gross income.

[Lucky Recardito]

I'd get the traditional IRA rollover to 401(k) sorted before doing anything with IRAs given that you're close to the limit.

Fair point... will prioritize this. (Got the info in hand re. account numbers and such; just need to sit down and take action.)

I think the question is whether you'd rather the guarantee of slightly more work (filling our form 8606 for backdoor Roth) or the possibility of even a bit more work (calling your custodian to recharacterize, attaching a recharacterization statement to your taxes, and filling out form 8606)?

When you put it this way, probably the former. (Especially since this isn't likely to be a one-year problem -- we're almost certain to be over the Roth limit in future years.) Though the easy way out is to just ignore the IRAs entirely and invest in our brokerage account -- that just feels like we're wasting tax-advantaged space, though, which is so precious....

[terran]

I definitely wouldn't skip the Roth or backdoor Roth entirely, but waiting a year until you know your total income wouldn't be a terrible idea. I've decided to start doing that to avoid having to recharacterize despite it being slightly suboptimal.

[ysette9]

I vote for doing the backdoor Roth IRA just in case. No big deal paperwork-wise and it would be a lot easier than accidentally going over the limit and having to fix that mess.

[the_fixer]

You should have until April ~15th to fund the Roth for the prior year.

We are always near the cutoff limit and I just put the money into the bank and wait till we do our taxes and know our final numbers then I can fund it normally or do a back door Roth.


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[Malum Prohibitum]

Is there anything preventing a backdoor Roth IRA when you are under the income limits?  I am no expert, but I don't think so.  To be on the safe side, maybe just do a backdoor Roth.

[Malum Prohibitum]

https://www.whitecoatinvestor.com/backdoor-roth-ira-tutorial/

[Lucky Recardito]

Nope, nothing preventing me from proactively doing a backdoor Roth other than laziness. Looking for permission to be lazy, I think, and not getting it here... which is probably good, and why I raised the question. :-)

[405programmer]

You mention having plenty of cashflow in the first half of 2021. So just throw that money in a savings account or brokerage account but mentally earmark it for either a non-deductible IRA or Roth IRA in early 2022 when you know your exact AGI number for 2021. Sure you might have to pay taxes on any money you make in that account over the next 12 months but that just means the market went up and you managed to capture the gainz. A small psychological benefit of not immediately putting the money into an IRA is now if something comes up with Kid #2 and you need some extra cash, you have roughly 12K that you don't have to file a bunch of paperwork to withdraw.

[Lucky Recardito]

My update here: I'm gearing up to do my first backdoor Roth contribution for myself, probably next week. Got my existing Traditional IRA money rolled into my 401k in January. Was worried about the timing aspect (from this article's heavy caution against the step transaction doctrine: https://www.kitces.com/blog/how-to-do-a-backdoor-roth-ira-contribution-while-avoiding-the-ira-aggregation-rule-and-the-step-transaction-doctrine/) -- worried enough that I was talking myself out of it -- but I see that later write-ups agree that the IRS has clarified language to the point that this is all now fine and I don't need to wait (https://www.physicianonfire.com/backdoor/ and https://www.whitecoatinvestor.com/backdoor-roth-ira-tutorial/ both explicitly mention it). Still may wind up being unnecessary if our 2021 AGI doesn't creep upward, but it'll be nice to be safe and I'll almost certainly need to do this in 2022, so it's worth learning. Feels like a personal-finance merit badge (especially for someone who once thought that aspiring to earn $50K a year was a stretch goal).

TBD on DH's IRA for the year -- blocker right now is that his company is moving to a new 401k provider (very slooooowwwwly), so we can't cross the bridge of transferring existing Traditional IRA money for him until May at the earliest. So we'll probably divert money to our brokerage account for April at least, until we get the lay of the land and can think more about how to handle filling up his IRA cap. One step at a time!