If you “maxed out your Roth IRA contribution” then whatever you do is not a “backdoor” Roth, it is just a typical Roth conversion. Of course you would still have to stay under the 45k of income above – but does this make any sense? So I’m probably on my 4th or 5th time reading this, always thinking and adjusting things in my head. I had heard about backdoor Roth contributions before but I never looked into the strategy because I’ve always been within the Roth income limits. Cheers! This would be a ladder with a five year wait. Instant gain! joint or married filing separately. So this means a dilemma — do you continue to do Roth conversions or do you instead limit or stop doing them, so as to keep your MAGI low enough to get ACA related Advance Premium Tax Credits. What are your thoughts on Roth 401k plans? As a non-US citizen not working in the US, I’m not sure having a US account would be beneficial or wise. The Roth IRA Horse Race is an advanced strategy that allows you juice your IRA conversions. Thanks for the awesome blog and the well thought out posts! How would paying taxes now to contribute to a Roth (or straight to a taxable account) be more advantageous than paying taxes much later at a lower tax rate? I make $88,000 a year (filing single), and will shortly be maxing out contributions to my 401k. I linked this post in my latest and have linked various other articles of yours as I am trying to spread the word and help others as much as you’ve helped us. To make things simple, assume they each start with nothing, make $60,000 a year, and can happily live off of $18,000 per year. Should I worry about maxing out my tax sheltered accounts (and using the IRA ladder), or would I be better off using that money to get more real estate? I’m excited to continue working towards FI! HSAs have been OK to me (return ~4% per year)- but I am still not using them (I have a cash flow sufficient right now & for next five years to take care of expenses) so I am 90% invested in equities. Same advice, use the ladder approach later in life if you expect your income to go down significantly. Contribute to pre-tax retirement accounts like 401(k)s, 403(b)s, Traditional IRAs, etc. The separate contribution limit for 457(b) plans was not changed. With the 20% 199A deduction, how will that impact solo 401k contributions? Just stumbled upon it yesterday from a reddit post and I’ve already read 10+ of your blog posts (and signed up for your newsletter). I agree that tax diversification can be a useful strategy especially if you have plans for early retirement. This tips the scales in favor of Traditional contributions for even more people. Since Roth Contributions can be pulled out at any time, you could live tax free off of your previous working-life contributions during the 5-year window. The bill is unfortunate for those of us in states with high income and property taxes. OK, I misunderstood the Roth IRA rules then. Find out how you can access retirement funds early (without paying any penalties) and learn the best withdrawal strategy for early retirees! Hello! Our household income is high so we do NOT receive tax deductions for contributing to a traditional IRA. It helps because of the company perks pushes my salary above 95% percentile (US average income). For 2018 and until the law changes again, you can’t recharacterize a conversion. Yes, you could argue that the $5,000 in question is the last $5,000 of the $20,000 total, so it is the part that is taxed at 15%, but I’d probably see it as just part of the average, since I’m withdrawing $20,000 per year no matter what. There were rumors that the new tax bill would require FIFO accounting (First In, First Out) but that didn’t make it into the final bill so Specific Identification of Shares has survived too! Depending on where in California you live, you can call that your weather tax, since I can’t imagine living in most of those states without breaking the bank in AC or Heating costs! Both Roth and tax-deferred accounts benefit from tax-free growth, unlike a taxable account that is subject to tax … Your email address will not be published. I discovered you after watching the documentary FIRE. At one point there was chatter about limiting pre-tax contributions to either 401k / 403b or 457 up to a combined limit (~$18.5k), but not being able to fully fund both types of accounts up to that limit. Cari pekerjaan yang berkaitan dengan Mad fientist backdoor roth atau upah di pasaran bebas terbesar di dunia dengan pekerjaan 19 m +. We also may travel further now knowing the power of points for great credit! My wife, and I have the perk of telecommuting and gross roughly $210K a year on W2s and some flexible side gigs for about another $20K. $71,000 + $45,650 = $116,650 (no Traditional IRA contribution can be deducted). My savings rate is just barely enough to cover a 401k and either a Roth or Traditional IRA (so, $23k/yr). Also, I’m not sure if it’ll be worth starting one since I don’t plan on staying with the firm long term. If you instead wait to start the conversion when your income is significantly lower or when your income is coming from more tax-efficient sources like long-term capital gains and qualified dividends, you could pay very little tax (or none at all) on the conversions. Do you have to be careful to make sure you have things listed in accounts with joint ownership? Cheers, Andre, Andre, my $.02. Im so late to the game! But because our income is modest, we can’t quite max out our two 457 plans, and are therefore not putting anything into IRAs either. But you said your wife does and will work probably longer than you so how do you avoid her taxable income raising your joint income while you are performing these roth conversions? If you can only contribute to a non-deductible Traditional IRA, you might as well just go with a Roth. Success! Then, if you want it to be in a Roth account, you can convert it back to a Roth (backdoor Roth). The Mega Backdoor Roth is similar to the Backdoor Roth but it allows you to potentially contribute an extra $36,000 to your Roth IRA every year. Just reading this post now, hopefully you get notified – I was under the assumption that 457 plans were created for government or nonprofit employees only because they don’t get 401ks…how can it be fair for a person to double dip 401k/457? I get my mail forwarded to my parent’s house in Florida but I’ll likely still need to file a Vermont tax return. The Solo allows you to save significantly more tax free now (Traditional IRA) and/or pay taxes now (Roth). Of course this amount will change over time for inflation and back-and-forth about tax policy. To this point I have been following the traditional path with a view to a roth conversion ladder, but this book has made me think it may be time to hedge. Because one is not required to have earned income to contribute to an HSA, it’s possible to use this approach even if one’s entire income stream is derived from qualified plans. https://www.facebook.com/BiggerPockets/videos/260093645465456 I am a small business owner, Dustin, and the Roth is way better for me than the traditional since it grows completely tax free. Today though, let’s dive into some of the strategies I’ve already written about to see what’s still possible under the new legislation…. Could this strategy be correctly labeled as a graduated backdoor Roth IRA? However, once I retire and start drawing my pension, my income will be great enough that it will be difficult to stay below the 25% bracket. In the end, isn’t this just the same question we always face with Traditional vs Roth – what you think your income will be when you retire vs now, and subsequently what your taxable amount is/will be? I have a few questions. And of course my employer was myself, but when you’re setup as your own business, it’s a valid business deduction. How much of your taxable account is safe to withdraw? I have the same question. Starting next year, would you recommend me to start putting money into a traditional IRA and then convert them into a Roth IRA when I retire? My wife and I both max out our 401k accounts through work. WOW! Yes, the conversion can be taken without penalty after 5 years but not the earnings. Many states will add back the capital gains as income and tax it; they don’t follow the federal brackets. Whoops, posted my comment to the wrong blog. Ben, yes IRA contributions are still deductible; but the limits have changed and there at a certain point are only partially deductible. I do agree taxable money should be used before withdrawing from Roths in most situations though. Hi Mad FI – LOVE your site. Ia percuma untuk mendaftar dan bida pada pekerjaan. Any thoughts or suggestions for our situation would be welcomed. I just found it a few days ago but it’s really increasing my knowledge! is realistic with rising healthcare costs and inflation, but to each his/her own for sure. Didn’t know about most of it :), Brandon – Thank you for the outstanding analysis, both in recapping the tax strategies and restating that almost all of them are included. Awesome post FI! Index funds in taxable are still quite tax-efficient. Hi Biceps…sorry I’m only seeing this now. The bigger question becomes how good is your 401k. I’ve recently stumbled upon your blog, and I absolutely love it. There is probably an 80% chance I’ll retire by then so I will probably adopt your strategy. Here’s a great article covering the different retirement account options available to self-employed people – http://www.obliviousinvestor.com/sep-vs-simple-vs-solo-401k/. But if I fund a Roth 401(k) instead, I won’t hit the contribution limit as quickly because I’ll have to pay tax on my investments now. Your post is quite interesting and got me thinking. If I’m understanding these previous comments that money would not be taxed at all when converting from traditional to Roth? Brandon, the ability to tax gain harvest will be significantly reduced for those who currently itemize. the conversion) – $6,100 standard deduction – $3,900 exemption = $0 tax. Note: To avoid paying a 10% early-withdrawal penalty, you have to wait five years after the conversion (or until you turn 59.5, if that’s sooner) to withdraw the converted funds from the Roth. (Fantastic podcast this week, by the way.). You actually have an awesome opportunity there. Thanks for setting me straight. Let me know in the comments below! Looks like the exclusion applies to foreign earned income. Suppose for example, I only have 6k of other income and still withdraw of 5k. This means you just need to have contributed enough to your Roth to last you those first 5 years of retirement, and then make sure you rollover enough from your other retirement accounts each year so that 5 years down the line when it becomes available, you live on the now-free-to-withdraw funds. You also have to figure out if it is worth the added hassle of keeping track of everything for the IRS for a few months of tax-free growth. 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