Author Topic: Non-deductible investment options  (Read 2741 times)

mynewchoice

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Non-deductible investment options
« on: August 26, 2017, 01:06:42 PM »
After having just finished reading The Simple Path to Wealth, I decided to sit down and take stock of my accounts and see if I am doing the right things and where I can improve.  One area that I have noted to improve is with regard to non-deductible, or after-tax investments.  I am maxing my 401(k) but am unable to make deductible tIRA contributions or Roth contributions due to our MAGI, therefore per my understanding that leaves me only with non-deductible options (oh, I am also maximizing my HSA so that is the only other tax deferred option I believe I have).

I have read about the back door Roth conversions in the past, but always skipped by considering them because I have an old tIRA with Vanguard.  It has a balance of about $45,000.  In another post here on the forums, I saw someone mention it might be possible to roll that into a 401(k) and then the back door Roth conversion is more attractive as there is no balance impacting the tax aspect.  Well, unfortunately my 401(k) does not seem to allow that but I also have an old Simple IRA with Vanguard and it dawned on me that I might be able to roll into that and then pursue the back door Roth.

However, in looking closer I see there is a drawback there as well--the Simple IRA is limited to Investor shares and I am at an ER of 0.15% with a balance of about $100,000.  The tIRA on the other hand is invested in Admiral shares and an ER of 0.04%.

So, with all of that considered, even if the tIRA > Simple IRA rollover is possible, I am left wondering if:
  • Should I roll the tIRA into the Simple and pay a higher ER on that account to take advantage of the back door Roth?
  • Or should I roll the Simple over to the tIRA to get Admiral shares, and then just invest in a standard taxable account?

I am leaning towards the 2nd option, as the way I am thinking about it right now, this after-tax money is for long term savings so I don't plan on selling but will have dividends reinvested.  With the taxable account, when I do sell the taxes will be at long-term capital gains tax rates.  If I go with the first option to take advantage of the Roth, I believe that I would have to leave that account alone until after age 59.5 else face being taxed as normal income.  I might be confusing the tax aspects here because as I type this out it doesn't seem quite right, so I think I need to do some more reading.

Thanks for any feedback; I am likely over-thinking this and should just do either one as both are better than doing nothing.

dandarc

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Re: Non-deductible investment options
« Reply #1 on: August 26, 2017, 01:12:24 PM »
The SIMPLE IRA is a traditional IRA for "messing up backdoor Roth" purposes, so even rolling into that is no help, so rolling the SIMPLE to tIRA is the play, assuming you can't roll both of them into your 401K.  SEP-IRA is the same deal, if you have any of those out there.

So, if your 401K simply does not allow incoming rollovers, you're stuck on the backdoor Roth.

Do you know about the MEGAbackdoor Roth though?  Requires your 401K to allow after-tax (not Roth) contributions, and ideally in-service rollovers.  If the plan doesn't allow incoming rollovers, seems somewhat unlikely that it has both of these features, but worth checking.

http://www.madfientist.com/after-tax-contributions/

Paul der Krake

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Re: Non-deductible investment options
« Reply #2 on: August 26, 2017, 01:21:21 PM »
Do you have or can you come up with some self-employment income? If so, open up a solo 401(k), rollover the traditional IRA into it. Voila, no more pesky IRA monies messing up the backdoor Roth.

DavidAnnArbor

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Re: Non-deductible investment options
« Reply #3 on: August 26, 2017, 03:16:13 PM »
Yes just post on Craigslist that you have a dog-walking service.

mynewchoice

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Re: Non-deductible investment options
« Reply #4 on: August 26, 2017, 04:46:19 PM »
The SIMPLE IRA is a traditional IRA for "messing up backdoor Roth" purposes, so even rolling into that is no help, so rolling the SIMPLE to tIRA is the play, assuming you can't roll both of them into your 401K.  SEP-IRA is the same deal, if you have any of those out there.

So, if your 401K simply does not allow incoming rollovers, you're stuck on the backdoor Roth.

Do you know about the MEGAbackdoor Roth though?  Requires your 401K to allow after-tax (not Roth) contributions, and ideally in-service rollovers.  If the plan doesn't allow incoming rollovers, seems somewhat unlikely that it has both of these features, but worth checking.

http://www.madfientist.com/after-tax-contributions/

Thanks for the feedback; thought maybe I had found a way to do it but unfortunately it looks like that will not be an option.  I was reading about the MEGAbackdoor Roth last night as I wasn't familiar with the specifics.  I will double check with my current 401(k) though just to confirm that none of this is possible before I completely rule it out.

Thanks,
Derek

mynewchoice

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Re: Non-deductible investment options
« Reply #5 on: August 26, 2017, 04:51:45 PM »
Yes just post on Craigslist that you have a dog-walking service.

Do you have or can you come up with some self-employment income? If so, open up a solo 401(k), rollover the traditional IRA into it. Voila, no more pesky IRA monies messing up the backdoor Roth.

I do have some self-employment income; not a lot mind you as I used to be an active blogger that earned about $10k per year.  While I haven't actively blogged in a number of years, those sites still earn me close to $2k per year.  Maybe the solo 401(k) would be an option, but certainly I need to read up on that.  I am guessing that with one of these, there aren't limits that would prevent from rolling those funds over to it.  I am sure there are limits on what I can contribute from my self-employment income (i.e. I would assume if I am only earning $2k in SE income I cannot contribute more than that).

Thanks for that guidance.

Assuming that I am able to do the solo 401(k) and roll the Simple / tIRA over to it, does that mean doing the non-deductible contributions to a tIRA and then doing the backdoor Roth would be a better option than just doing non-deductible investments into a taxable account?  Anything that should be considered to decide between the two options?

Thanks,
Derek

DavidAnnArbor

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Re: Non-deductible investment options
« Reply #6 on: August 26, 2017, 04:55:25 PM »
Definitely do the backdoor Roth, once that money is in there, it's never taxed again.

Paul der Krake

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Re: Non-deductible investment options
« Reply #7 on: August 26, 2017, 05:00:37 PM »
Yep, doing the backdoor Roth is definitely the way to go- but you should read about it and decide for yourself.

Article that explains the gist of the solo 401(k) for backdoor Roth purposes:
https://thefinancebuff.com/solo-401k-self-employment.html


mynewchoice

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Re: Non-deductible investment options
« Reply #8 on: August 26, 2017, 05:23:10 PM »
Yep, doing the backdoor Roth is definitely the way to go- but you should read about it and decide for yourself.

Article that explains the gist of the solo 401(k) for backdoor Roth purposes:
https://thefinancebuff.com/solo-401k-self-employment.html



Definitely do the backdoor Roth, once that money is in there, it's never taxed again.

Thanks, I will read up on these tonight and explore the options at Vanguard as well.  It sounds as though it should be pretty simply to set up with them and transfer the other two IRAs with them over to that account, and then start the backdoor.

I didn't mention my wife's accounts earlier, but she also has a tIRA with about $30k.  Unfortunately her employer (she is a preschool teacher) doesn't offer any type of retirement savings and she doesn't have any SE income.  Therefore it seems as though the above scenario would only be applicable for my account.  My SE income is as a sole-proprietor so unless I changed my structure I don't believe she could be covered under that.

Thanks again,
Derek

DavidAnnArbor

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Re: Non-deductible investment options
« Reply #9 on: August 26, 2017, 05:26:53 PM »
Your wife is allowed to participate in a solo 401k as an employee of the self-employed business. She answers the emails etc.

I think your only allowed one IRA contribution per person. So if she already contributes the max to a tIRA, then she can't then add additional non-deductible IRA contributions in order to do the backdoor Roth.

mynewchoice

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Re: Non-deductible investment options
« Reply #10 on: August 26, 2017, 05:37:57 PM »
Your wife is allowed to participate in a solo 401k as an employee of the self-employed business. She answers the emails etc.

I think your only allowed one IRA contribution per person. So if she already contributes the max to a tIRA, then she can't then add additional non-deductible IRA contributions in order to do the backdoor Roth.

We are no longer contributing to her tIRA because our income is too high for deductible contributions. Currently both of our tIRAs are just sitting idle at Vanguard with no new contributions. I have so much to learn, and here I thought I was doing alright lol.

Thanks,
Derek

DavidAnnArbor

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Re: Non-deductible investment options
« Reply #11 on: August 26, 2017, 06:54:46 PM »
in that case have her roll over her tIRA in the solo401k that you have together jointly. then you can do a him/her backdoor roth.

JohnSteed

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Re: Non-deductible investment options
« Reply #12 on: August 27, 2017, 02:47:04 AM »
Definitely do the backdoor Roth, once that money is in there, it's never taxed again.

Until the government changes the law.

mynewchoice

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Re: Non-deductible investment options
« Reply #13 on: August 27, 2017, 09:23:47 PM »
Definitely do the backdoor Roth, once that money is in there, it's never taxed again.

Until the government changes the law.

Spent some time this evening reading through this old post and all the comments that rank the taxable account ahead of the Roth.

http://www.gocurrycracker.com/roth-sucks/

As I have far more hoops to jump through to setup a solo 401(k) and move the funds from tIRA and Simple over before I can make non-deductible contributions to then convert over to Roth, I won't deny reading this article has me contemplating the taxable account.

Paul der Krake

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Re: Non-deductible investment options
« Reply #14 on: August 27, 2017, 09:50:27 PM »
Definitely do the backdoor Roth, once that money is in there, it's never taxed again.

Until the government changes the law.
The same government whose representatives are all 50 years old and up, high income, and whose constituents and themselves massively benefit from tax-advantaged accounts?

Obama coyly suggested revamping the 529s, a much more niche tax-advantaged program, during his second term. There was immediate backlash and it was a political non-starter. Ain't nobody got the balls to touch the All Mighty Roth. If they really want cuts, they'll find them elsewhere.