Author Topic: Back door Roth IRA/ Traditional IRA Question  (Read 2569 times)

Mt Tahoe

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Back door Roth IRA/ Traditional IRA Question
« on: February 20, 2015, 01:01:30 PM »
Ok, I am 43. 5 years back, my Investor guy suggested that i put money in a roth ira, as well as max out my work 401k. So I have been doing so since. I have about $50k in a traditional roth IRA roll over from an old job's 401k. We were hoping to reach FI by 50.

I have since discovered the ways of the Mustache, and been reading up on FI and am attempting to set some goals and strategies.

It seems like I should have been contributing to a traditional IRA instead of a roth, and then looking at converting over to the roth once we declare FI and stop working, as described by the MadFIentist.

Was investing in a Roth IRA a mistake? Should I continue to put money away in my traditional IRA from now forward?

Mississippi Mudstache

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Re: Back door Roth IRA/ Traditional IRA Question
« Reply #1 on: February 20, 2015, 01:31:30 PM »
No, blowing the money on hookers and coke would be a mistake. Putting the money into a Roth IRA is a great decision - but maybe not the optimal decision. It makes sense to minimize your taxable income in order to save as much as possible now, then convert the traditional IRAs when you have less earned income and your effective tax rate will be much, much lower.

But since you mention a "Back door Roth IRA", I have to ask: Are you above the income limits for a deductible traditional IRA?

gluskap

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Re: Back door Roth IRA/ Traditional IRA Question
« Reply #2 on: February 20, 2015, 01:32:56 PM »
I think Madfientist showed that it's better to contribute to tIRA.  So yes moving forward I would contribute to tIRA as long as you can deduct the contribution.  If you make too much to deduct the tIRA contribution then I would contribute to Roth IRA.  If you make too much to contribute to Roth IRA then make a non-deductible contribution to tIRA and then convert to Roth IRA (otherwise known as back door Roth).

What's your AGI for 2014?  That will determine which you should do.

Gone Fishing

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Re: Back door Roth IRA/ Traditional IRA Question
« Reply #3 on: February 20, 2015, 01:45:53 PM »
Is the rollover IRA traditional or ROTH?  It can only be one or the other. If I had to guess, it is probably traditional, unless you had a ROTH 401(k) or paid a big slug of taxes on it when you rolled it over.


Any ROTH contributions you made in 2014 tax year can still be recharacterized, turned into tIRA contributions and deducted IF you qualify based on AGI.  If you have already filed 2014 taxes, you can file an amended return.

Mt Tahoe

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Re: Back door Roth IRA/ Traditional IRA Question
« Reply #4 on: February 20, 2015, 01:46:02 PM »
Let me get back to you on AGI. Don't have that with me. But pretty sure it is under the max allowed.

I put "back door" in title, then did some research about that and realized it was aimed at those making above a certain income.

Can you deduct expenses spent on hookers and coke with IRS?

Gone Fishing

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Re: Back door Roth IRA/ Traditional IRA Question
« Reply #5 on: February 20, 2015, 01:49:36 PM »

Can you deduct expenses spent on hookers and coke with IRS?

Only 50% and if it meets the following tests:

http://www.irs.gov/taxtopics/tc512.html

Mt Tahoe

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Re: Back door Roth IRA/ Traditional IRA Question
« Reply #6 on: February 20, 2015, 01:49:46 PM »
@ So Close, my IRA is traditional i believe (it simply says IRA on statements, whereas my roth say 'roth ira'). Both are held at same location.


Mt Tahoe

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Re: Back door Roth IRA/ Traditional IRA Question
« Reply #7 on: February 20, 2015, 01:53:17 PM »
Wow, I have so much to learn. Like in that movie 'wolf of wallstreet'. I bet they were deducting all that good stuff :)

Gone Fishing

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Re: Back door Roth IRA/ Traditional IRA Question
« Reply #8 on: February 20, 2015, 02:06:04 PM »
@ So Close, my IRA is traditional i believe (it simply says IRA on statements, whereas my roth say 'roth ira'). Both are held at same location.

Awesome, that is $50k you didn't pay taxes on.