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

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  • afr
    replied
    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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  • jfoxcpacfp
    replied




    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.

    Leave a comment:


  • PenguinMD
    replied
    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!

    Leave a comment:


  • afr
    replied
    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

    Leave a comment:


  • jfoxcpacfp
    replied
    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.

    Leave a comment:


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

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  • jfoxcpacfp
    replied




    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.

    Leave a comment:


  • afr
    replied
    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?

    Leave a comment:


  • DMFA
    replied




    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).

    Leave a comment:


  • jfoxcpacfp
    replied
    The 401k is irrelevant, only personal IRA accounts matter. I think we are getting closer to a solution :-)

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  • afr
    replied
    My 401k?

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  • jfoxcpacfp
    replied




    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?

    Leave a comment:


  • afr
    replied
    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

    Leave a comment:


  • jfoxcpacfp
    replied
    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?

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