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

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  • #16
    I am sorry, I'm just not able to follow all of the numbers because the information in your posts are not congruent. Might be worth your while to discuss with your CPA. Also, you know you do not have to do conversion all in one fell swoop, right? Can do incrementally over a period of years.
    Our passion is protecting clients and others from predatory advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

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    • #17
      Thanks Johanna for your reply.  I do realize the conversion can be done incrementally.  Would you still recommend doing the conversion if I can reasonably expect to be in a lower tax bracket in retirement?  And maybe doing the conversion at that time?

       

      Thanks

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      • #18
        You'll need to do the math and make some best guess assumptions.

         

        Remember the reason you convert to Roth is because you pay tax NOW but get future gains FREE. So if you wait till you retire you will need to pay the future gains when you convert.

         

        For instance let's say you have $100 today and your tax bracket will drop in 10 years time (for simplicity let's say it goes from 30% to 20% and cost basis is 0). Let's say you get incredibly lucky and it grows from $100 to $1000 in those 10 years. Well when you convert you have to pay tax for that gain, so on the gain alone you would pay $1000 x 20% = 200.

         

        Now if you would have just converted right away you would have paid $100 x 30% = 30. So in that scenario you would have been better paying the tax early and getting the future earnings for FREE.

         

        So as you can see you need to essentially predict the future to know what will be best. But of course if you could do that then you'd retire now .

         

        Given no one really knows what's going happen in the future, the other reasonable approach is to convert partial gradually and you're hedging each way where paying tax first is better and paying tax later is better. One good thing is that you can REVERSE your conversions so if after you do your ROTH conversion and your holding tank which means you paid tax on something that is now worth less than you can "change" your mind. This requires careful planning but does give you flexibility.

         

        Also if you're looking to do a CLEAN backdoor, one strategy that I have personally done is talk to your CURRENT 401k employer and see if you can do a "reverse" roll-in, where you ROLL IN your everything ABOVE your cost basis into your 401k (essentially all the money that you haven't been taxed on). Not all employers allow this  (you need to ask your 401k admin) and some of them require paperwork stating that the money coming in is only pre-tax money (in reality it would be silly to roll in post-tax money cause when you take it out later you'll be paying double tax) but it will set you up to do a clean backdoor roth.

         

        But back to the original question if it's still worth contributing non-deductible TIRA every year, and there still is benefit cause you still don't pay for any gains (think dividends) till you withdraw later, so you do get benefit from compounding on the tax you would have paid if it was just in a regular brokerage account. Of course if you only keep highly tax-efficient holdings then yeah the benefit is moot, but you do have the option to convert to ROTH at any time which does have value.

        Good luck!

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        • #19




          Thanks Johanna for your reply.  I do realize the conversion can be done incrementally.  Would you still recommend doing the conversion if I can reasonably expect to be in a lower tax bracket in retirement?  And maybe doing the conversion at that time?

          Thanks
          Click to expand...


          I just don't have an answer for that w/o a plan. Possibly, but my preference is increments whenever there is a correction in the market and a mass conversion in a bear market. Of course, this works better for 6-figure accounts - increments in market corrections will probably get the job done for you. On average, the market experiences a correction of around 14% annually.

          I have a good example in our financial Guide for Established Attendings, page 11.
          Our passion is protecting clients and others from predatory advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

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          • #20
            PenguinMD,

             

            What figures would I need to do the math for the cost of a conversion?  And fwiw, the administrator of my 401k will not allow a roll in.

            Thanks,

            Andy

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