I just started learning about Roth IRAs so forgive my ignorance. I have rollover IRA from a previous employer of pretax money about 15k, and last year I put in about 6000 of post tax money into it mistakenly. My magi allows me to contribute into a Roth but as a reduced amount due to my income level.

What advice would you all give about this pre and post tax Ira? My tax bracket is 24% right now, would it be better to just convert it into a backdoor IRA and deal with the tax implications or just leave it as it is? Next year assuming if my earnings don't change, I can just contribute to the Roth IRA without doing the backdoor Ira.

I have read that if your income allows you to contribute to a Roth IRA at a reduced amount, then you can't do backdoor IRAs? Or is this wrong? Because why would anyone want to contribute a reduced amount when they could put the full amount doing backdoor? I don't have a cpa and am still doing my own taxes. But if I start doing backdoor IRAs I feel like I should get one to not see things up.

Thank you!

So you are at $21,000 now total in traditional? Add the 2023 contribution (6500 assuming under 50 years old) after tax to the IRA. That brings you to $27500.

Then, convert whatever amount you are comfortable paying taxes on, understanding that next year you will pay 24% on ~54% of whatever you convert. In January, 2024, make 2024 contribution and repeat the pro rata conversion process (much less will be pre tax money each year you go).

You could recharacterize the money you put in last year that could go to Roth, but I'm not sure that really changes much in the end, it would just mean a higher percentage of your conversion would be taxable

ETA: I've never heard of any restrictions to being able to convert from IRA to Roth, which is technically what you are doing. Backdoor Roth is slang.

One more edit:. To answer should you do this.. I think yes. Clear out traditional IRA while it's low so you can use the strategy to annually be able to fund a Roth, at least as long as the option remains. Hopefully you have 401k you can use should you wish to have a tax deductible source to contribute to.

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What advice would you all give about this pre and post tax Ira? My tax bracket is 24% right now, would it be better to just convert it into a backdoor IRA and deal with the tax implications or just leave it as it is?

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I would just leave it as is, but it really depends on what you think your tax rate will be in retirement. I expect my taxable income to drop drastically in my early retirement years due to living off after tax savings and not drawing down my taxable retirement accounts right away. Those years I plan to Roth convert my pre-tax retirement savings at a rate under my current marginal tax rate.

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I have read that if your income allows you to contribute to a Roth IRA at a reduced amount, then you can't do backdoor IRAs? Or is this wrong? Because why would anyone want to contribute a reduced amount when they could put the full amount doing backdoor?

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Where things get tricky is if the backdoor Roth is a taxable event or not. If you didn't have the rollover IRA, you could do a full backdoor Roth and not owe any taxes. Since you do have the rollover IRA you will owe tax on a portion of the Roth conversion if you try to backdoor. This is why someone might want to contribute a reduced amount directly rather than backdoor. You could contribute directly to the Roth and avoid paying tax on a conversion.

2 right answers, with opposing views, isn't this fun?

I think it's helpful to put dollar numbers in the discussion where possible. 24% of $15000. Are you willing to pay $3600 in taxes next April to be done, or wait and see what the long term future brings (in assuming you are relatively young?).

That's why this stuff is tough to find a "right" or even best answer, you just have to decide what your assumptions are and act on that. Sounds like you'll be fine any way you go.

cjsag94 said:

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So you are at $21,000 now total in traditional? Add the 2023 contribution (6500 assuming under 50 years old) after tax to the IRA. That brings you to $27500.

Then, convert whatever amount you are comfortable paying taxes on, understanding that next year you will pay 24% on ~54% of whatever you convert. In January, 2024, make 2024 contribution and repeat the pro rata conversion process (much less will be pre tax money each year you go).

You could recharacterize the money you put in last year that could go to Roth, but I'm not sure that really changes much in the end, it would just mean a higher percentage of your conversion would be taxable

ETA: I've never heard of any restrictions to being able to convert from IRA to Roth, which is technically what you are doing. Backdoor Roth is slang.

One more edit:. To answer should you do this.. I think yes. Clear out traditional IRA while it's low so you can use the strategy to annually be able to fund a Roth, at least as long as the option remains. Hopefully you have 401k you can use should you wish to have a tax deductible source to contribute to.

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This is smart. Thank you! I was a little confused on how to calculate the pretax and post tax amounts when you start converting over to Roth, but I think I figured it out.

cjsag94 said:

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2 right answers, with opposing views, isn't this fun?

I think it's helpful to put dollar numbers in the discussion where possible. 24% of $15000. Are you willing to pay $3600 in taxes next April to be done, or wait and see what the long term future brings (in assuming you are relatively young?).

That's why this stuff is tough to find a "right" or even best answer, you just have to decide what your assumptions are and act on that. Sounds like you'll be fine any way you go.

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Yes I'm 42, so it'll be a while before I retire. Thank you for the insight.

hypeiv said:

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What advice would you all give about this pre and post tax Ira? My tax bracket is 24% right now, would it be better to just convert it into a backdoor IRA and deal with the tax implications or just leave it as it is?

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I would just leave it as is, but it really depends on what you think your tax rate will be in retirement. I expect my taxable income to drop drastically in my early retirement years due to living off after tax savings and not drawing down my taxable retirement accounts right away. Those years I plan to Roth convert my pre-tax retirement savings at a rate under my current marginal tax rate.

Quote:

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I have read that if your income allows you to contribute to a Roth IRA at a reduced amount, then you can't do backdoor IRAs? Or is this wrong? Because why would anyone want to contribute a reduced amount when they could put the full amount doing backdoor?

---

Where things get tricky is if the backdoor Roth is a taxable event or not. If you didn't have the rollover IRA, you could do a full backdoor Roth and not owe any taxes. Since you do have the rollover IRA you will owe tax on a portion of the Roth conversion if you try to backdoor. This is why someone might want to contribute a reduced amount directly rather than backdoor. You could contribute directly to the Roth and avoid paying tax on a conversion.

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Thank you for your help! I will have to think about which option is best for me in the future.

BenTheGoodAg said:

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cjsag94 said:

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That's why this stuff is tough to find a "right" or even best answer, you just have to decide what your assumptions are and act on that. Sounds like you'll be fine any way you go.

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I agree with this point. Some simple math to reinforce - all things being equal, the result is the same. The important thing is to invest.

https://i.imgur.com/67N7ihg.jpg

However, if you simply assume tax rates go up, then Roth is probably the winner. Alternatively, if you assume your spending in retirement goes down (putting distributions in a lower bracket), Traditional would probably be the winner. There's probably a lot of different scenarios which could push that either way - some of those assumptions are in your control and others are not.

Personally, I think a mix of both helps hedge against a lot of questions about the future.

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Thank you! The graphic is helpful

For me, I lean heavier on Traditional, but I agree that a mix of both is probably the right approach for most. At the very least, I think the Roth-only crowd should pump the brakes and fully think about things.

For me, I am 100% certain that I will be in a lower tax bracket when I retire. Probably much lower. If you're in a paid-off house then it's very possible to live comfortably on the high side of the 12% married tax bracket… which is a significantly discounted tax rate from where I am now.

Maybe my priorities will change and I'll regret my decision but right now I have no qualms with the idea of being frugal when I'm old, so the future equivalent of 80k in the 2045 tax bracket doesn't sound too shabby to me. I'll happily enjoy my discretionary income now while my brain and body are still fully functional and my kids are young and still like me. I'll live like old people when I'm old, and I'll enjoy it. Up yours, Dave Ramsey.

So for me, if I am dropping to the 12 line, that means that not only do tax rates have to go up a lot to match my current taxes, but that tax rates near the bottom have to go up a lot - which is a political no-no for both parties (at least nominally). I'm willing to take that bet.

I agree and I think it's also important to realize that just because you spend $200k a year in retirement, that doesn't mean you will have $200k in taxable income. You could be using after tax money money you had invested and you would only owe tax on the capital gains, so while you might be spending a lot you might actually have a much lower taxable income which could open the door for some Roth conversions early in retirement.

I know a retired couple worth over $5 million who vacation and travel all the time who got all three COVID stimulus checks because their taxable income was below the threshold.

deadbq03 said:

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For me, I lean heavier on Traditional, but I agree that a mix of both is probably the right approach for most. At the very least, I think the Roth-only crowd should pump the brakes and fully think about things.

For me, I am 100% certain that I will be in a lower tax bracket when I retire. Probably much lower. If you're in a paid-off house then it's very possible to live comfortably on the high side of the 12% married tax bracket… which is a significantly discounted tax rate from where I am now.

Maybe my priorities will change and I'll regret my decision but right now I have no qualms with the idea of being frugal when I'm old, so the future equivalent of 80k in the 2045 tax bracket doesn't sound too shabby to me. I'll happily enjoy my discretionary income now while my brain and body are still fully functional and my kids are young and still like me. I'll live like old people when I'm old, and I'll enjoy it. Up yours, Dave Ramsey.

So for me, if I am dropping to the 12 line, that means that not only do tax rates have to go up a lot to match my current taxes, but that tax rates near the bottom have to go up a lot - which is a political no-no for both parties (at least nominally). I'm willing to take that bet.

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How many people are really Roth-only, though? Legally, company matches have to be traditional, right?

I mean my inputs are 100% Roth, but my matches are Traditional, and my company matches 8% plus another 8% in a separate traditional type retirement account. So, for me, that's a solid mix.

On thing that is left out of this chart is it assumes your effective tax rate in retirement will be the same as your marginal tax rate today. If you are in the 22% marginal rate for your income, your actual effective tax rate is likely half that.

hypeiv said:

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On thing that is left out of this chart is it assumes your effective tax rate in retirement will be the same as your marginal tax rate today. If you are in the 22% marginal rate for your income, your actual effective tax rate is likely half that.

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I agree, and it's a good point. I was just trying to keep it simple and reinforce why the assumptions are important from the poster above.

The reality is that the whole picture can complex. Speaking for myself, my starting salary was a 1/3 of what it is today. But single/no dependents, a higher marginal tax rate. When I got married, my marginal rate went down. As my income went up, my rate went back up. Then I had kids, and further combined with Trump tax changes on child tax credits/deductions, the rate went back down. I'm sure as my kids age out of the tax credits, and potentially my income goes up, my tax rate will go back up. My retirement plan has changed, too - both with our growing family, and growing income. There are times where my marginal tax rate was lower than my expected tax rate during retirement, and vice versa. All that said, good to be aware of your target, understand your assumptions, understand your other contributing factors (ie other investments and income streams), and be poised to make a change if external factors change.

The other thing I don't see mentioned on this topic, but I think touches on marginal vs effective tax rates, is that a blended mix gives you some tax benefits during retirement, or at a minimum, the ability to pull the levers as needed to fit the situation:

Example: Withdraw $200,000 a year at retirement - could nitpick some details, but meant for illustration

All Roth:
- Income - Taxes paid up front at highest income tax bracket(s) (higher effective tax rate),
- Withdrawal - $200,000 not taxed at withdrawal.

50/50 Blend:
- Income - Traditional amount tax deferred, Roth amount taxed after deferment at highest remaining income bracket.
- Withdrawal - $100,000 traditional withdrawal taxed at lower brackets (lower effective tax rate), $100,000 Roth withdrawal not taxed.

All Traditional:
- Income - No taxes paid up front, all deferred.
- Withdrawal - $200,000 taxed at withdrawal at higher brackets (higher effective tax rate)

I agree with the mix and in a perfect world people would be going all in on Roth when they are in the entry level of there career and in the lower marginal tax bracks and then flip to traditional when they get into the higher brackets.

But it depends on a lot of factors. If you plan to have rental income that matches your current salary in retirement for example, you would basically be withdrawing at the marginal rate so it might be better off in Roth to lock in our historically low tax rates.

Best online service to open a Roth or Traditional IRA account?

Lots of good free ones to pick from now: Fidelity, Schwab, Vanguard, Merrill Edge... I'd stick with one of those 4