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Continue making conrtibutions to non-deductible TIRA's or not?

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  • Continue making conrtibutions to non-deductible TIRA's or not?

    I'm 56 yrs. old and my wife is 51. I plan on retiring at age 67. We are in the current 33% tax bracket. I have an unmatched 401k(no rollovers allowed). We both have non-deductible TIRA's(plus old Roth IRA accounts) plus a relatively tax efficient joint taxable account.  We don't have the funds readily available to cover a Roth conversion and we anticipate being in a lower tax bracket(15%-25%) in retirement.  Would it be tax-wise to just keep maxing my 401k and limit my contributions to our joint taxable account only(which would only be subjected to capital gains tax)?

    Thanks,

     

    Andy

  • #2
    Maybe. That's not an easy answer plus I don't know what you would roll over to a Roth at this point and pay taxes on, anyway, given what you've laid out. Yes, you are saving 33% and perhaps state and local taxes on contributions to your 401k. Will you live in a state in retirement that doesn't tax retirement income?

    Given that you are only 11 years away from retirement, I guess my bigger question is why do you have to choose between $24k/year to your 401k and contributing to your joint taxable account? I would expect at this point in your career that you would be shoveling $$ into the taxable account (after the 401k and backdoor Roth contributions are completed). Another question is why do you have unconverted non-deductible TIRA's at all? i.e. - why have you not converted via the back door?

    Finally, what does your portfolio look like? How is it allocated? How often do you rebalance? How much debt do you have? What kind, terms, etc.? Too many questions (for me) to wade through before answering your original query.
    Our passion is protecting clients and others from predatory advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

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    • #3
      Put some numbers out there for people to help you.

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      • #4
        Johanna,

         

        Thanks for the reply.  Yes, I plan on maxing out my unmatched 401k without question. The question was whether or not to keep contributing to the non-deductible TIRA accounts.  The question was the non-deductible TIRA's versus the joint taxable account.  We a way behind on retirement savings and I'm in a situation where going more than another 10.5 yrs. would be intolerable for me.  Our "only" debt is a principal balance of 195k on our home(30 yr. [email protected]%) that we plan on eventually selling(current est.current value 345k) and move to FL and downsizing to a condo.  The following are our current income and holdings-

        My wife and I are both W-2's-my ave. income(paid 100% commission) is 235k and my wife's is 35k(no 401k) all pretax. We receive no benefits thru employment.

        401k-180k(60/40 mix) pooled office account managed thru Raymond James-no match and allows for no rollovers
        non-deductible TIRA-71k(max out yearly)-Vanguard STAR
        old Roth IRA-11k(no longer contribute)

        wife-non-ded TIRA-53k(max yrly)-Vanguard STAR
        old Roth IRA-12k

        joint taxable account-81k:Vanguard Emerging Markets Stock Index Fund-3100
        Vanguard Health Care Fund-9200
        Vanguard Limited-Term Tax Exempt Fund-15,400
        Vanguard Total Int'l Stock Index-6700
        Vanguard Total Stock Market Index -46,500

         

        The reason why we haven't converted is due to the fact that I'd be paying well over $7000 in taxes at our current tax bracket, which is quite frankly unaffordable for us at this time. I'm assuming it would less costly for us to do in retirement as we'd be in a lower tax bracket.

         

        Andy

         

         

         

         

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        • #5
          Andy it looks like your net worth is 408k including home equity.  I think it will be hard to retire on that.  Working another 10 years may be your only option.  Can you bump up your saving rate?  Do you track your expenses?  I think it is immaterial whether you do a non deductible Ira or not.  I would try to do both.  Can move your money to vanguard or schawb from Raymond James?

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          • #6
            Andy - I suppose, more to the point, my question is: why aren't you converting to backdoor Roth IRAs every year when you contribute to your nondeductible TIRAs? Then you won't owe any taxes and your money will begin to grow tax-free. You should do this before contributing to the taxable account. As for the built-in gains in your current nondeductible TIRAs, convert in the next bear market.

            Assume you didn't know about backdoor Roths before posting this? And that's how you built up the large n.d. TIRA balances?
            Our passion is protecting clients and others from predatory advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

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            • #7
              The pro rata clause would have caused me too much money to cover the conversion. I figured it would be less costly for us to do in retirement years at a lower tax bracket

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              • #8




                The pro rata clause would have caused me too much money to cover the conversion. I figured it would be less costly for us to do in retirement years at a lower tax bracket
                Click to expand...


                I'm sorry, I don't see anything in your list of investments to invoke the pro-rata clause. You would need pre-tax TIRAs, SEP-IRAs, or SIMPLE-IRAs. What am I missing?
                Our passion is protecting clients and others from predatory advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

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                • #9
                  My 401k?

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                  • #10
                    The 401k is irrelevant, only personal IRA accounts matter. I think we are getting closer to a solution :-)
                    Our passion is protecting clients and others from predatory advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

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                    • #11




                      My 401k?
                      Click to expand...


                      Not subject to pro-rata - only individual accounts that have either been deducted or never been taxed (SEP-IRA, SIMPLE-IRA, and pre-tax or deducted TIRAs).

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                      • #12
                        Me and my wife's TIRA's are individual accounts that have been non-deductible since 2007. Prior to that we each had claimed deductions for tax yrs. 2005 and 2006.  By my accounts I have a traditional IRA worth $71k and a basis of $39.5k
                        and my wife has a traditional IRA worth $53k  and a basis of $26.5k.  If I convert the IRA to a Roth now I will pay tax on $71k - $39.5k = $31.5k, at 33% that's $10.4k.  My wife My wife will pay tax on $53k-$26.5k=$27.5k and at 33% will pay $9,100.  Have I been doing this all wrong?

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                        • #13




                          Me and my wife’s TIRA’s are individual accounts that have been non-deductible since 2007. Prior to that we each had claimed deductions for tax yrs. 2005 and 2006.  By my accounts I have a traditional IRA worth $71k and a basis of $39.5k
                          and my wife has a traditional IRA worth $53k  and a basis of $26.5k.  If I convert the IRA to a Roth now I will pay tax on $71k – $39.5k = $31.5k, at 33% that’s $10.4k.  My wife My wife will pay tax on $53k-$26.5k=$27.5k and at 33% will pay $9,100.  Have I been doing this all wrong?
                          Click to expand...


                          Well, I was going by what you originally posted:


                          non-deductible TIRA-71k(max out yearly)...wife-non-ded TIRA-53k(max yrly)-Vanguard STAR
                          Click to expand...


                          I don't know if you have been doing this all wrong. Your numbers have all changed.
                          Our passion is protecting clients and others from predatory advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

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                          • #14
                            The basis was taken from the amounts noted on my 8606 forms from last tax return

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                            • #15
                              Hi Johanna,

                               

                              I am aware of the backdoor Roth but am not sure how much the conversion will cost me if I do it now, or whether it would better to wait until I retire(and am in a much lower tax bracket) to convert.  A number of years ago, when my income was lower, I opened a Roth IRA with Vanguard in 2004 making a $2700 contribution and $2500 in 2005.  The current value of that account is $10,713(I haven't contributed to it since).  We also opened a Roth IRA in my wife's name and contributed $2700 in 2004, $2500 in 2005 and $5000 in 2012(in error and subsequently corrected and paid a 6% penalty in 2014 tax returns). The value of her Roth is currently $11,913.  We claimed an $8000 IRA deduction on our 2006 returns(not sure on 2005 returns as I currently don't have them).  We're also currently not in a position to be able to contribute to both the non-deductible IRA's and joint taxable account.  Any help would be greatly appreciated.

                               

                              Thank You,

                               

                              Andy

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