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Backdoor Roth Questions - Do I have this right?

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  • Backdoor Roth Questions - Do I have this right?

    Hoping to do Backdoor Roth IRAs for wife and I, but we're financial n00bz. We have a rollover IRA with ~$48k and a traditional IRA with ~$9k in Vanguard. Our combined income is ~$213k, hence tax bracket is 24%.

    Is this assumption correct:

    If we convert the 9k to a Roth IRA, that will add 9k in income, hence tax will increase by ~$2160? (9k x .24)

    Similarly, if we did the same with the 48k rollover it would increase tax by $11520? (48000 x .24)

    We currently have the discretionary income to afford both of those, but how do I determine if that makes more sense than converting the 48k IRA to an individual 401k?

    Thanks!

  • #2
    you math seems right assuming adding that "income" doesn't shoot you into the 32% bracket.

    Be aware if you live in a state with income tax you'll be paying that too, so you need to add your state marginal rates to your federal marginal rate

    Moving $48k from a pre-tax IRA to a pre-tax i401k isn't converting. Converting suggests a taxable event to me. What you are doing is a rollover from the IRA to an i401k. BTW, to do the backdoor Roth now and in the future (if it hasn't gone away) you need a $0 balance in ALL IRAs by 12/31 of the year. So if you're going to do the backdoor going forward, you need to do something with this $57k. Convert some to a Roth IRA is one idea. Putting it into your i401k is another idea. One is a taxable event and the other is not. But you need to get the balance to $0 one way or another

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    • #3
      Thanks JBME, yes that was why I asked - I'm planning to move this $ out of the IRAs.

      Good things to keep in mind. Even if we converted both IRAs to Roth, it would not bump us into the 32% tax bracket.

      I'm in Ohio, and apparently we DO have state income tax. Trying to figure out what these rates are and how it would affect things. (I assume local tax is also an issue?) In the meantime, assuming we could afford to pay the tax increases due to the Roth conversions, would that mean it makes sense to do that rather than moving the $ a 401k? Obviously it's dependent on a case-by-case scenario, but how do I evaluate my own case?

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      • #4
        https://tax.ohio.gov/wps/portal/gov/...nual-tax-rates

        It’ll be subject to any income tax (federal, state, local).

        If you’ll be in the 24% marginal bracket then I’d probably try to get as much in the Roth now. Once you became an attending you’ll find it gets much more expensive getting money into that space.

        Comment


        • #5
          Originally posted by CinciResident View Post
          Thanks JBME, yes that was why I asked - I'm planning to move this $ out of the IRAs.

          Good things to keep in mind. Even if we converted both IRAs to Roth, it would not bump us into the 32% tax bracket.

          I'm in Ohio, and apparently we DO have state income tax. Trying to figure out what these rates are and how it would affect things. (I assume local tax is also an issue?) In the meantime, assuming we could afford to pay the tax increases due to the Roth conversions, would that mean it makes sense to do that rather than moving the $ a 401k? Obviously it's dependent on a case-by-case scenario, but how do I evaluate my own case?
          With "apparently" I'm a bit concerned you didn't already know Ohio had a state income tax, unless you just moved there in the last few months But to answer your question, you want to do this in relatively low-income years. Ohio isn't a no income tax state but I see basically 4% from Cord and that's quite low. So from your math you will lose 28% rather than 24% to taxes. You're going to need to google if the city and county you live in have an income tax. Most do not but hey you might be unlucky. If they do have an income tax, you need to stack that on top of the 28%.

          Still, I'm in agreement with Cord that most likely you want to convert all of this to a Roth IRA if it keeps you in the 24% federal bracket

          Comment


          • #6
            Whatever you decide to do, you need to do it quickly. The backdoor may be closing on 12/31/2021; if it does close and you've not completed your backdoor Roth IRAs by then, you'll be out of luck.

            Comment


            • #7
              Originally posted by CordMcNally View Post
              https://tax.ohio.gov/wps/portal/gov/...nual-tax-rates

              It’ll be subject to any income tax (federal, state, local).

              If you’ll be in the 24% marginal bracket then I’d probably try to get as much in the Roth now. Once you became an attending you’ll find it gets much more expensive getting money into that space.
              Ah, I made this back when I was a resident, but I'm an attending now. So yes, it would be pretty expensive... We can afford it, but how do we gauge if it's worth it rather than rolling it into an i401k?

              Comment


              • #8
                Originally posted by JBME View Post

                With "apparently" I'm a bit concerned you didn't already know Ohio had a state income tax, unless you just moved there in the last few months But to answer your question, you want to do this in relatively low-income years. Ohio isn't a no income tax state but I see basically 4% from Cord and that's quite low. So from your math you will lose 28% rather than 24% to taxes. You're going to need to google if the city and county you live in have an income tax. Most do not but hey you might be unlucky. If they do have an income tax, you need to stack that on top of the 28%.

                Still, I'm in agreement with Cord that most likely you want to convert all of this to a Roth IRA if it keeps you in the 24% federal bracket
                Indeed, we can afford it... Is there a way to calculate the long term benefits of choosing to convert to Roth IRA rather than roll into 401k?

                Comment


                • #9
                  Originally posted by artemis View Post
                  Whatever you decide to do, you need to do it quickly. The backdoor may be closing on 12/31/2021; if it does close and you've not completed your backdoor Roth IRAs by then, you'll be out of luck.
                  Thanks, good to know.

                  Comment


                  • #10
                    Originally posted by CinciResident View Post

                    Ah, I made this back when I was a resident, but I'm an attending now. So yes, it would be pretty expensive... We can afford it, but how do we gauge if it's worth it rather than rolling it into an i401k?
                    Part of it is trying to determine which space is most valuable to you and part is trying to guess what future tax rates are. You're right there on the cusp where a logically argument could be made for either one. I would probably still vote Roth just based on generalities.

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