So much ROTH - do I qualify?

[NWOutlier]

Hi Everyone,

Quick question; I've been contributing to my company 401k for 8 years, the whole time they offer a ROTH version, I didn't know... so I switched my 401k to ROTH now...  Question.... if I'm under 181k AGI (Adjusted Gross Income), my wife stays home (single income family).... Are we able to have a ROTH IRA for me and a ROTH IRA for her?

So:

401k ROTH
IRA ROTH - wife
IRA ROTH - Steve

I remember if I had a standard 401k (traditional) I was unable to have a traditional IRA for myself, but I could have traditional for my wife.  All these rules are confusing - so... I like the thought of tax free money, and I want as much of it as I can get my hands on.... plus, when I'm over 70 - I don't want to think about taxes.. (meaning the goal is to live off taxable investments till 70).


let me know.

thanks.

Steve (NWOutlier)

[DrF]

Hey Steve,

Yes, you are allowed to have a ROTH for both you and your wife. But, WHY would you switch from a traditional 401k to a ROTH 401k?  You are giving up the tax benefits of the traditional 401k for perceived tax free income when you retire.  There are ways to transfer your traditional 401k to a ROTH IRA after you retire that would keep your taxes extremely low, if not non existent. It seems like you would be in a fairly high tax bracket now, and you could structure it so that you are in a very low bracket when you retire. This would make it easier to do the conversions when in retirement. So, get the tax advantage now by keeping your traditional 401k.

http://www.madfientist.com/traditional-ira-vs-roth-ira/

DrFunk

[Cheddar Stacker]

Hey Steve,

Yes, you are allowed to have a ROTH for both you and your wife. But, WHY would you switch from a traditional 401k to a ROTH 401k?  You are giving up the tax benefits of the traditional 401k for perceived tax free income when you retire.  There are ways to transfer your traditional 401k to a ROTH IRA after you retire that would keep your taxes extremely low, if not non existent. It seems like you would be in a fairly high tax bracket now, and you could structure it so that you are in a very low bracket when you retire. This would make it easier to do the conversions when in retirement. So, get the tax advantage now by keeping your traditional 401k.

http://www.madfientist.com/traditional-ira-vs-roth-ira/

DrFunk

+1.

If you make anywhere near $181K, hell if you make anywhere near $100K, don't switch your 401K from traditional to Roth. Take the tax deduction now. Then contribute to both Roth IRAs.

If you make < $80k, maybe a Roth 401k would be best but it's hard to know. I don't think you make under $100K though since that's roughly the cutoff for deducting a T.IRA.

[NWOutlier]

Maybe you're right about keeping traditional 401k; here was my logic.

I have a traditional IRA that I no longer contribute to about 80k, the money left in the traditional 401k is around 250k.  I'm only 46, if I work till 55-60 the account (once all rolled into one) would be pretty sizable and would be difficult to trasfer to my ROTH and stay below the 25% tax bracket (I thought).  to contribute to a roth, you must have 'earned' income - my guess is, this means a job or a small business or something (not investment income).  So, I'd still be working making money, plus selling off my tradictional IRA to put into my taxable vanguard and ROTHs.

Am I understanding this correctly?  I've only just started moving to ROTH on 401k, so there is only like 1000 bucks...I can quickly switch it back :) - I would love to have 17.5k tax reduction + 6500ish for HSA deduction.. that would be GREAT!

I'm no where near 181k - I'd be under 120 AGI with my current setup.

Steve

[Cheddar Stacker]

It makes more sense to take the guaranteed 25% tax deduction now and pay whatever tax you have to later. Even if you're in the 25% bracket later, you won't pay 25% effective tax.

When you pull the money from the 401k (Traditional) it will be taxed, but you have 2 exemptions plus the standard deduction (at least) which currently equals about $20K. So you could take $20K before paying any tax. Then you have the 10% bracket which is currently $18,150, and the 15% bracket which is currently $73,800.

So, if you decided you needed $95,000 to live on (which is high, but stick with me here) here's how it would break down under current tax law:

$0-$20K = 0% Tax = $0
$20K-38K = 10% Tax = $1,800
$38K-$94K = 15% Tax = $8,400
$94K-$95K = 25% Tax = $250

So you would pay $10,450 on $95K income, which is an effective rate of 11% even though you're in the 25% bracket.

If you put it in a Roth 401K you will pay 25% tax now and 0% tax later.
If you put it in a Trad 401K you will pay 0% tax now and 11% tax later.

Make sense?

[DrF]

You are confusing the Roth "contribution" with "conversion". When you convert to a Roth you don't have to have any earned income. And, it is preferable if you DON'T have any other income when you do your conversion. Less income during the conversion phase will keep you in a lower tax bracket. Keeping your Traditional 401k is the best way to go here.

DrFunk

[NWOutlier]

Holy Crap!  Nice!

Ok, I just read the MadFientist article as well as your comment DrFunk (Brilliant clarification!)  does this also mean I can convert more than the 5500-6500 allowed per year?

- I believe there is a lightbulb starting to appear above my head (its on a dimmer switch coming on slowly)... so, question - based on the article (http://www.madfientist.com/traditional-ira-vs-roth-ira/) it states by 59 1/2 my conversion should be complete. 

What if I am working until I'm 60?  I got a late start and have a series of targets to hit from low through high - so I believe to get to my optimal number it may require me to work until 60 unless I can retire at 55 and live off my taxable vanguard account and allow the retirement accounts to further mature.

so - if I have to work till 60, can I start converting between 60-70?

[Cheddar Stacker]

Enlightening huh? This should be required reading in High School/College/When you get your first job. Very big advantage once it sinks in.

You can convert the entire balance in 1 year, but you wouldn't want to because your tax bill would be too high.

You don't have to ever complete a conversion, 59.5 is just a good goal. My goal is 70.5 before the RMD's kick in on the T.IRA.

If you put the 401K in Traditional it should allow you to retire earlier.

If you retire after 55 you can begin to draw down your 401k without penalty, another little known rule.

You don't ever have to convert these funds either, but it makes sense to do so, and you can do it whenever you want.

Retire at 55, begin drawing (or converting, or a combination of both) $100K/year (total account balance/number of years between 55-70) and you will pay roughly 12% tax on the full conversion/withdrawal.

Any additional income will increase the tax burden, so taxable investments and social security income will change the picture a bit, but you have a lot of options.

[DrF]

Madfientist puts 59 1/2 as the goal because then you could have all of your money in a Roth with absolutely NO limitations on withdrawals, and they would all be tax free. This is the optimal situation though. As CS said, based on very good modeling (http://www.madfientist.com/retire-even-earlier/), putting the money in your Traditional 401k will get you to retirement goal faster than the Roth 401k.

There is loads of information out there. It is like falling down a rabbit hole. Have fun realizing you are ahead of 95% of the world. And with your HUGE salary you are indeed ahead of the game.

Best,

DrFunk

[kpd905]

I don't think you'd want 100% of your money in a Roth at 59 1/2, unless you have at least some income coming in from somewhere.  Otherwise you'd be wasting your tax-free standard deduction and personal exemption space.

[DrF]

I don't understand your post. Why would you need your standard deduction and personal exemption?

[Cheddar Stacker]

Just another tax planning wrinkle. Don't convert too much while paying taxes when you could convert less, save some for later conversion, and always make sure you convert at least enough to use up the automatic deductions you will receive.

[kpd905]

You can have tax-free income or Roth conversion using your standard deduction and personal exemption space.  You'd be better off having some money still in a traditional IRA so as a married couple you could withdraw ~$20k tax free each year from it. 

[DrF]

Ah, got it.

[NWOutlier]

ok; *mind blown* - scoured the articles, cross refrenced, etc... once I saw this statement "he had more money to invest in the taxable account " and I realized I would have over a 20k reduction in taxable income, I was sold!

I love putting money into my taxable account, that's my cushion! my living money! it allows me to leave my retirement money longer to mature! - but now, I need to go back to my plan and figure out when I would like to begin these conversions (meaning retire from working a job)... it's all doable at about 55 for me (maybe 50-iffy).

Thank you everyone! you probably made me a few hundred thousand dollars ! 

S.

[Cheddar Stacker]

Awesome. I vote retire at 52. That seems like a good number for you.

Thanks go to the madfientist, and MMM, and the entire community. I knew none of these strategies a few years ago.

[DrF]

Back of napkin math -

You indicate that you have at least $330,000 currently (80k traditional IRA + 250k 401k).

If you maxed out your traditional 401k, HSA, and 2 Roth IRA's for the next 6 years you would have an additional $216,000 (w/o dividends/interest/price appreciation).

If you can retire on ~$546,000 (or more depending on what other assets you have), then pull the trigger at 52.

Best of luck!

[teen persuasion]

I don't think you'd want 100% of your money in a Roth at 59 1/2, unless you have at least some income coming in from somewhere.  Otherwise you'd be wasting your tax-free standard deduction and personal exemption space.

Another reason to have some non Roth income would be for ACA subsidies.  Zero income = zero subsidies (Medicaid only).

[Cheddar Stacker]

I don't think you'd want 100% of your money in a Roth at 59 1/2, unless you have at least some income coming in from somewhere.  Otherwise you'd be wasting your tax-free standard deduction and personal exemption space.

Another reason to have some non Roth income would be for ACA subsidies.  Zero income = zero subsidies (Medicaid only).

I love your perspective teen persuasion. You give an entirely new angle to these discussions that I don't hear anyone else giving. Thank You, that's a very good point. It becomes moot once you reach Medicare age (currently 65) but if you have a gap between IRA depletion and Medicare you might need to fill it with some other income source.

[The Vacant Road]

Steve,

What is your goal?  Are you trying to become financially independent?  I assume so if you're on this site.  If so, please stop contributing to a retirement account.  Yes, that sounds absurd, I am aware, but how is a retirement account going to free you?

Some of the absolute worst advice for someone trying to become rich, wealthy, or financially free is to invest within a retirement account.  This is a difficult one for people to swallow, but I assure you it's true. 

Think about it.  Does a retirement account send you checks in the mail each month (cash flow/passive income)?  How can you pay your bills without cash flow?  Thus, how can you be financially free without income to pay your bills? 

I would suggest seeking a different asset class to invest within.  My personal favorite is real estate.  Paper assets offer little to zero cash flow, minimal tax advantages (in comparison), and zero control.

Best of luck.         

[kpd905]

Steve,
 please stop contributing to a retirement account. 

Steve, don't listen to this advice.  Giving up the tax savings of retirement accounts would delay FI by many years.

[NWOutlier]

I love these forums; ok, I've already moved my future contributions back to traditional (before tax).  Now; let's see if I can go polar opposite from the original post, which of these 2 scenarios you like:

Scenario 1: (all items are fully funded to the max) - 29,550 reduction in taxable income
401k Traditional 17.5k
IRA Traditional (Wife) <--- Keep traditional for maximum pre-tax withdrawal 5500
IRA ROTH (mine)
H.S.A (Also pretax) 6550

Scenario 2: 24,050 reduction in taxable income
401k Traditional
IRA ROTH (Wife)  <---- switch wife to ROTH to have 2 ROTH's (NOT converting traditional to ROTH, just stop contributing to Traditional and open a new ROTH)
IRA ROTH (mine)
H.S.A (Also pretax)

[kpd905]

In regards to those scenarios, would you still have money in the 25% bracket at that point?  If so, I'd probably go with traditional until you get into the 15% bracket.  If you are in the 15% bracket, then either doing one or two Roth IRAs at that point should be fine.

We are currently maxing out a Roth IRA each year, which I think will be nice to have just in case we want some extra income without making us go over a certain tax threshold. 

[NWOutlier]

Yes even at the having deductions @ the 29k level - I'm in the 25% tax bracket.  I'm unable to deduct enough to lower my tax burden.

Looks like I'll keep my wife's current ira and contribute to it as traditional:

17,500 - 401k - Traditional
 5, 500 - Wife's IRA - Traditional
 6, 550 - H.S.A - Heal Savings
 5, 500 - My IRA - ROTH
12-18k - Taxable Account (Also VTSAX)
Include a little employee matching from the 401k and I have a reasonable amount of money filling my accounts to get me outa my situation.


Thanks everyone; I have more confidence in my decision now.

s.

[Cheddar Stacker]

Is the catch-up contribution 50 or 55 years old? I always forget. Worth a look though, because if it's 50 you will qualify for another $5,500 in 401k deferral in a few years.

[NWOutlier]

its age 50! I didn't know the 401k catch up was so much!  I knew about the extra 1000 for the IRA's - but wow!  this is going to ROCK!

https://401k.fidelity.com/public/content/401k/Home/HowmuchcanIcontrib

[DrF]

You should consider front loading all your accounts, see here for details. It seems like you have enough expendable income for it.

http://www.madfientist.com/front-loading/

Just make sure to leave some available to get your company match.