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Roth Vs Traditional

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  • Roth Vs Traditional

    Have started to contribute to a traditional IRA and backdoor it into a Roth IRA so our withdrawals can be tax free at retirement.

    This strategy only works when ones tax burden at a later stage is higher than it is currently...why don't folks just work part time or maybe pick up a few shifts the year(s) before they retire so that they have a low tax burden? Thereby making a traditional IRA work for them..?

  • #2
    You are misunderstanding what a Backdoor Roth is and is for. It has absolutely nothing to do with the pre-tax vs. post-tax determination.

    You do not contribute via a Backdoor Roth IRA process instead of a traditional IRA or Roth IRA. You contribute via a Backdoor Roth IRA process, because your income and active participation in an employer retirement plan makes you ineligible for a traditional IRA or Roth IRA contribution.

    At physician level incomes you should be maximizing any pre-tax contributions to employer retirement plans first. A Backdoor Roth IRA process is a method to increase your tax-advantaged space. This is because tax-free investing is always better than taxable investing, your only other option.

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    • #3
      Most high income professionals can't make deductible contributions to a traditional IRA and can't contribute directly to a Roth.  For these people, the backdoor Roth is a no-brainer irrespective of what they anticipate their tax bracket to be.

       

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      • #4
        I do think I am misunderstanding and thanks for taking the time to educate!!

         

        I contributed to a traditional IRA last year as my income was too high to directly contribute to a Roth IRA.

        I then asked Fidelity to use the backdoor Roth to recharacterize it as a Roth IRA. What is the advantage of doing so? Thanks again

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        • #5




          Most high income professionals can’t make deductible contributions to a traditional IRA and can’t contribute directly to a Roth.  For these people, the backdoor Roth is a no-brainer irrespective of what they anticipate their tax bracket to be.

           
          Click to expand...


          A tax deductible contribution you mean? Why is a backdoor Roth a no brainer?

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          • #6




            Most high income professionals can’t make deductible contributions to a traditional IRA and can’t contribute directly to a Roth.
            Click to expand...


            Exactly.  The backdoor Roth has no downside in that situation, other than having to fill out Form 8606 every year.  And the limits on the yearly contributions for 401k/403b and 457b plans are much higher than the limits on the yearly contributions on IRAs, so most docs eventually end up with a lot of money saved in tax-deferred accounts, which means big RMDs down the road (and those high RMDs mean they also end up paying high taxes on their Social Security payments and pay more for Medicare; it's not just the money from the RMD which ends up being taxed).  A backdoor Roth IRA gets at least some retirement money into the non-RMD side of the pool; partial Roth conversions performed after retirement but before before reaching age 70 1/2 also help smooth out the tax burden.

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            • #7


              A tax deductible contribution you mean? Why is a backdoor Roth a no brainer?

              If you have access to other retirement plans such as a 401k, then above a certain income limit (for 2018 that limit is $73,000 if filing singly, or $121,000 if married and filing jointly) the contribution you make to a traditional IRA can't be deducted from your taxes.  You contribute using post-tax money, and then also pay taxes at the other end when you start making withdrawals after you retire (and then the government tells you when you HAVE to start withdrawing the money, and the minimum you HAVE to take out each year).  That's worse than a Roth IRA, where you contribute with post-tax money but later withdrawals are both tax-free and not subject to RMDs.  Hence the use of the backdoor Roth.

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              • #8







                Most high income professionals can’t make deductible contributions to a traditional IRA and can’t contribute directly to a Roth.  For these people, the backdoor Roth is a no-brainer irrespective of what they anticipate their tax bracket to be.

                 
                Click to expand…


                A tax deductible contribution you mean? Why is a backdoor Roth a no brainer?
                Click to expand...


                Yes, I mean high income professionals can't make a tax-deductible contribution to a traditional IRA; therefore, a backdoor IRA is a no-brainer because it is the only way for high income professionals to get more tax advantaged space beyond 401k or other options at work.

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                • #9




                  I do think I am misunderstanding and thanks for taking the time to educate!!

                  I contributed to a traditional IRA last year as my income was too high to directly contribute to a Roth IRA.

                  I then asked Fidelity to use the backdoor Roth to recharacterize it as a Roth IRA. What is the advantage of doing so? Thanks again
                  Click to expand...


                  I hope you are using incorrect terminology and didn't ask Fidelity to recharacterize the traditional IRA to a Roth IRA. That is not a Backdoor Roth. A Backdoor Roth is a non-deductible contribution to a traditional IRA account, followed by a Roth conversion.

                  If you did a recharacterization of the traditional IRA to a Roth IRA. That is treated as if the traditional IRA contribution never happen as if you had made the contribution as a Roth IRA. Since your income was too high, the entire resulting Roth IRA contribution would be an excess contribution.

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                  • #10







                    Most high income professionals can’t make deductible contributions to a traditional IRA and can’t contribute directly to a Roth.  For these people, the backdoor Roth is a no-brainer irrespective of what they anticipate their tax bracket to be.

                     
                    Click to expand…


                    A tax deductible contribution you mean? Why is a backdoor Roth a no brainer?
                    Click to expand...


                    Because you can't do anything else!

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