In short, I'll be investing a lump sum of cash soon outside of my 401(k) contributions, and looking to ensure I'm understanding the nuances at a high level of the different account types and strategies...
Is the primary advantage of contributing after-tax to a TIRA the fact that you know you won't be taxed on dividends or capital gains until you withdraw from the TIRA? Whereas in a Taxable Brokerage Account, that isn't the case?
Can you call me out if you see something incorrect below?
Traditional IRAs (outside of company-sponsored 401(k):
Pros:
1) Consolidate your old 401(k) balances from previous employers in from one account and invest it as you see fit
2) Earnings are tax-deferred; no dividends or capital gains are taxed until withdrawals occur after the age requirement is met
3) Convert to Roth IRA using backdoor method regardless of your AGI levels (conversion limited to no more than 6K or 7K per year depending on income limit, or the amount you already have in your TIRA that you plan to convert). You must pay income taxes on the entire converted pre-tax amount + unrealized gains of the converted amount to date.
Cons:
1) RMDs are required once you hit 72
2) Penalized for withdrawing under Age 59 (unless withdrawn for first time home purchase)
3) A proposed bill in congress may remove the Roth IRA backdoor conversion method in 2022 or 2023, requiring an unwinding starting in 2022
4) You have to keep track of after-tax contributions with Form 8606. If not disciplined in tracking after-tax contributions, you could be double-taxed at time of withdrawal
5) Limited to 6K (or 7K dependingon age) each year
Roth IRAs:
Pro:
Gains grow tax-free
Con:
Can't contribute directly once your AGI surpasses the IRS limits
Taxable Brokerage Accounts:
Pros:
1) Liquid; no penalties for withdrawals at any point
Cons:
1) Taxed in the year when these events occur: dividends are paid, you sell equities and realize gains, mutual funds and/or ETFs experience realized gains and pass that income on to you, triggering realized gains (you have no say, other than getting rid of the mutual fund or ETF before it happens)
Is the primary advantage of contributing after-tax to a TIRA the fact that you know you won't be taxed on dividends or capital gains until you withdraw from the TIRA? Whereas in a Taxable Brokerage Account, that isn't the case?
Can you call me out if you see something incorrect below?
Traditional IRAs (outside of company-sponsored 401(k):
Pros:
1) Consolidate your old 401(k) balances from previous employers in from one account and invest it as you see fit
2) Earnings are tax-deferred; no dividends or capital gains are taxed until withdrawals occur after the age requirement is met
3) Convert to Roth IRA using backdoor method regardless of your AGI levels (conversion limited to no more than 6K or 7K per year depending on income limit, or the amount you already have in your TIRA that you plan to convert). You must pay income taxes on the entire converted pre-tax amount + unrealized gains of the converted amount to date.
Cons:
1) RMDs are required once you hit 72
2) Penalized for withdrawing under Age 59 (unless withdrawn for first time home purchase)
3) A proposed bill in congress may remove the Roth IRA backdoor conversion method in 2022 or 2023, requiring an unwinding starting in 2022
4) You have to keep track of after-tax contributions with Form 8606. If not disciplined in tracking after-tax contributions, you could be double-taxed at time of withdrawal
5) Limited to 6K (or 7K dependingon age) each year
Roth IRAs:
Pro:
Gains grow tax-free
Con:
Can't contribute directly once your AGI surpasses the IRS limits
Taxable Brokerage Accounts:
Pros:
1) Liquid; no penalties for withdrawals at any point
Cons:
1) Taxed in the year when these events occur: dividends are paid, you sell equities and realize gains, mutual funds and/or ETFs experience realized gains and pass that income on to you, triggering realized gains (you have no say, other than getting rid of the mutual fund or ETF before it happens)
