Taxes and IRAs. They're Making My Brain Hurt.

[Allie]

I'm doing our taxes and trying to think through retirement contributions knowing that I want to avoid taxes and have access to my money in a few years.  Ugh.  I like numbers and money but I am not schooled in spreadsheets or accounting or math.  I need someone with a clue to point me in the right direction. 

Our situation today:

2014 AGI - $182,000 (Yes, this close to the Roth limit.  ARGH!)

Everything we had through employers has been maxed out.

So, now we have to choose between each putting 5,500 into a traditional IRA post tax or 4,900 into a Roth IRA. 

Any reason at all to put the lesser amount into a Roth IRA right now?  If not, $5,500 post tax into a traditional IRA and backdoor to Roth immediately or $5,500 post tax to traditional IRA and wait until we do our Roth Ladder to move it over?  Are either of these options any better than just sticking it in a regular taxable account?

We also have a very small SEP IRA ($280).  If I use the backdoor right away, should I pay tax on the $280 in the SEP IRA and move it at the same time?  I read that having money in a traditional IRA elsewhere impacts a backdoor move, so this seems like a good idea, right?

Honestly, I have no idea how to figure out if we will even need to access this money between the ages of 40 ad 65 as we were completely uneducated about FIRE, Roth ladders, and tax advantaged accounts and put a bunch of money in taxable accounts before we knew better. 

Oh my god, this makes my head hurt.  I haven't taken a math course in over a decade.  Please help.

If I have made this way too complicated, please let me know.  Or steer me to a good resource. 

[Indexer]

At that income including an employer plan I don't think you are getting the deduction anyway with the trad so you might as well backdoor the Roth.  The math gets complicated but if you are 'maxing' out everything a Roth is normally better regardless.  It has to do with the fact that you can shelter more money in a Roth on a tax adjusted basis than a Trad.  If you aren't doing max contributions it doesn't matter, but if you are maxing it out then the Roth normally prevails in the long run.

Income doesn't matter for a backdoor Roth.  Thats the point.  ;)

I don't understand the 5500 or 4900.  Just do 5500 into a Roth. 

For the SEP.  You are correct that having other pre-tax IRAs can mess up a backdoor Roth.  So if it is only 280 you might as well convert it in the process and just pay the taxes.

For the Roth ladders.  This isn't even a concern until you are within 5 years of retirement.  You have plenty of time to research this further along with FIRE.  Its not time sensitive for this particular decision. 

[Allie]

Thank you for the reply!!

We are maxing everything we can (457, state retirements, etc.), the IRAs are my last piece for 2014 because we weren't sure exactly where our MAGI would fall.  We can only contribute 4,900 directly into a Roth due to the phase out, so to hit 5,500 it would have to go through the traditional first. 

We should be retiring sometime in the next 5-10 years.  Retiring being a loose term used to describe no longer working full time at a job.  My husband just likes his job.  We'll see how much longer he likes it after we have enough money in the bank that he doesn't need it.  :)  But, we have a bunch in taxable accounts too.  So, shouldn't need to ladder anything for a number of years.

So if you were in my situation, you would put 5,500 post tax into the traditional, then backdoor that and the small amount in the SEP to the Roth right away?

Thank you so much!

[garrettld]

First of all I'd advise that you take a chill pill. Even if you royally screw up the IRA stuff this year, it's not going to have a significant financial impact in the long term. You have plenty of time to learn about Roth ladders, etc.

So, now we have to choose between each putting 5,500 into a traditional IRA post tax or 4,900 into a Roth IRA.

You can put the maximum possible ($4900) into your Roth IRA, and then put the remainder of your 2014 IRA contribution ($600) into a post-tax Traditional IRA and do the backdoor on that portion immediately. You could also just put all $5500 into your post-tax Traditional IRA and then immediately backdoor all of it. At the end of the day you'll end up with $5500 in your Roth IRA either way, and it doesn't really matter which way you do it.

About your SEP IRA: yes, having that $280 will complicate things. If you put $600 into a post-tax Trad. IRA and do the backdoor with just that $600, then you'll only be able to deduct $409, which is 68% of $600, because $600/$880 = 68%. I hope that made sense.

You may also be able to roll your SEP IRA into an employer's retirement plan. This might not be worth it if your employer plan has poor investment options, and your employer may not accept this type of rollover, but I thought it was worth mentioning.

To answer another one of your questions, post-tax Traditional IRAs are generally worse than just using a taxable account because capital gains taxes are typically lower than income taxes. There's no reason you should use a post-tax Trad. IRA unless you're doing the backdoor Roth.

[Allie]

A chill pill and morning coffee have taken the edge off.  :-)

This is the last in a long line of frustrating end of the year planning, consolidating, and tax related things related to job changes and income changes in our household.  Nothing realted to financal planning was easy this year. 

Thank you for the clarification and advice.  I'll see if my old 403b will accept new contributions from the SEP.  The SEP is new and hopefully will be larger next year.