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Backdoor Roth-IRA vs tax-deferred retirement contributions

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  • Backdoor Roth-IRA vs tax-deferred retirement contributions

    Hey folks. I keep going back and forth between the backdoor Roth-IRA and maxing out my 403b and 457b. I have the ability to backdoor up to 57K annually into my Roth-IRA via my employer's defined contribution plan, but also have two tax-deferred accounts above to think about. I just started my attending job, so I was thinking since my income for this year will not be the full attending salary (more like 50% attending salary)…. it MAY?? make more sense to contribute more heavily towards the backdoor Roth since my tax bracket is not as high as it will be next year. Overall my plan is to have a diverse retirement portfolio in tax-deferred and Roth, but I’m not sure what the “optimal” allocation is right out of residency. Next year when my taxable income will be fully attending money, I plan to max tax-deferred accounts first and then do as much backdoor as possible. Any thoughts or suggestions? Thanks so much! Always appreciate learning from all of you.

  • #2
    Your terminology is confusing. Please clarify if you are talking about direct contributions to a Roth retirement account, a Mega Backdoor Roth or a backdoor Roth IRA. Your likely 2020 tax bracket would help make decision as well. The difference between current tax bracket and predicted tax bracket in retirement is more meaningful than comparing to 2021

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    • #3
      Backdoor Roth and Mega backdoor Roth are 2 separate entities. Therefore you can put both $6k into backdoor Roth (no-brainer) and $57k into mega backdoor Roth (or traditional 401k) depending on your current and projected future tax rates.

      What is your marginal tax rate this year versus what you expect it to be next year?

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      • #4
        Do both. You have until next April to do your backdoor Roth for this year.

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        • #5
          I think we need clarification and information. What is your expected income this year? What is your expected income next year + fwd? Also see this thread.
          Our passion is protecting clients and others from predatory and ignorant advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

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          • #6
            Sorry, my terminology was not great. Expected income this year ~124,000, next year will be ~250k. I already maxed out my Roth-IRA w/ the 6K direct contribution. Now I have the option to contribute after-tax dollars to a DCP plan (up to 57K, including employer match). I can then roll-over this money into my already established Roth-IRA. Would this be considered a mega-backdoor Roth? I figured backdoor contributions make more sense right now because even if I maxed out the tax-deferred accounts, my marginal tax rate would still remain 24%. Next year though, I believe the tax-deferred accounts make sense to max first.

            Predicted marginal tax rate this year - 24%
            Predicted marginal tax rate next year - 35%

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            • #7
              Originally posted by Momo View Post
              Sorry, my terminology was not great. Expected income this year ~124,000, next year will be ~250k. I already maxed out my Roth-IRA w/ the 6K direct contribution. Now I have the option to contribute after-tax dollars to a DCP plan (up to 57K, including employer match). I can then roll-over this money into my already established Roth-IRA. Would this be considered a mega-backdoor Roth? I figured backdoor contributions make more sense right now because even if I maxed out the tax-deferred accounts, my marginal tax rate would still remain 24%. Next year though, I believe the tax-deferred accounts make sense to max first.

              Predicted marginal tax rate this year - 24%
              Predicted marginal tax rate next year - 35%
              Your general idea of Roth this year and tax deferred next year does make sense.
              If your DCP has a Roth option then would contribute $19,500 if you can.
              Note that employer match will be tax deferred not Roth
              If you still have money available to contribute then could do Mega Back-door Roth if your plan allows both non-deductible after-tax contributions and in-service distributions. Your income however will likely limit you from "maxing out" the 57K this year
              One other concern: it is now November, which means that you have a limited number of paychecks left this year and may need to substantially increase your contributions to the DCP from salary reduction to take advantage of the above discussion

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              • #8
                Originally posted by Momo View Post
                Now I have the option to contribute after-tax dollars to a DCP plan (up to 57K, including employer match). I can then roll-over this money into my already established Roth-IRA. Would this be considered a mega-backdoor Roth? Yes
                Also agree with suggestions from notanotherusername . While after-tax contributions can technically be made until the tax filing deadline, your employer may not allow that so your contribution threshold may be how much you make on your remaining 2020 paychecks.

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                • #9
                  Match wherever that is first.

                  Then Megabackdoor 57k this year. Next year really up to you where to draw the line.

                  I would split the difference since you're just starting off and megabackdoor up to your line between 24k bracket and then pretax the 457 if same options as the 403b. 457 really helps if you FIRE before 60 and want to access the dollars without penalty and leave the pension untouched to avoid early penalty.

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