Any growth of those investments is never taxed again (assuming you don’t withdraw the growth until 59.5 years old). For some reason they didn’t close mine, and it was 0 for the same amount of time. I know this is an old thread but Z above is only referring to the Cash Rewards CC by BofA. In fact setting up a Roth IRA account for your kids is a great way to pass money down to them that will never be taxed again. If your margins are 25% or higher I say it’s a bad idea. Let's go through this line by line. Thanks for the quick reply. I hope you at least see the advantage, whether or not you feel it is worth the hassle. But if your income is under the limit, then it might make sense to investigate Roth IRA options, since this money can grow tax-free and can be withdrawn tax-free after age 59 1/2. ), Hi – I am an academic MD and have a W2 income. Would it be worth using some of the SEP contribution to contribute to a back door Roth for 2018? Is there any fee for doing it myself? As you can see, a Roth conversion of a non-deductible traditional IRA contribution without any gains is a taxable event, it's just that the tax bill is zero for it. $10,000!! All IRAs are included in the pro-rata calculation. Other Roth IRA advantages. See a local broker. Come on Vanguard, you can do better than this. Were I to open a solo 401 K, can I start with this high amount? After working there for 3 years I have roughly 75000 in employee contributions, 50000 in match, and 25000 in after tax. I have never heard of $400 as some minimum income needed. 5) 0 So, just to make sure I understand correctly, even if I already have commingled funds, I can still rollover only the “pre tax” portion to a new 401k and keep only post-tax dollars for my Roth conversion, up to the amount of my original basis, and be able to avoid taxes at conversion? I retire early and have a few years when my taxable income is zero or minimal. However, i ran this question by an accountant and he said he thought the IRS might consider the pre-tax amounts WITHIN the 401(k) for pro-rata rule. An update on this topic: In the interim the IRS has issued a notice (Notice 2014-54 for the curious: http://www.irs.gov/pub/irs-drop/n-14-54.pdf) that clarifies the issue of the super or mega backdoor Roth. See how and why to max out your Roth IRA. Once I retire I will have a much lower marginal tax rate and I would have had almost double the money grow for 20+ years? For Postmates, drivers are paid out for the deliveries they complete according to the formula for their city. 6) Moderate interest debt Don’t want to pay too much pro rata. I am phased out of the traditional IRA tax deduction, but take advantage of maxing out my traditional 401k and come close with my HSA (work funds a portion which unfortunately counts towards your contributions). Why would I convert $230k of tax deferred into a Roth IRA and pay taxes when I’m in the highest bracket right now? My father has 200k after tax in his 401k. Once I get to the point I want to save amounts above that I will set up a defined benefit plan. 4) And, going forward, I will put 34.5k into after-tax 401k every year (my plan allows this) and withdraw it (my plan also allows this) into my TIRA, then convert that 34.5k + 5.5k = 40k to Roth IRA each year. So, I should convert the SEP IRA to Solo 401k to get it out of the way for all the back door and mega back door Roth conversions. Hi! I don’t think you can do the Mega Backdoor Roth IRA with a vanilla Vanguard Individual 401(k). Of course, the employees may not be very appreciative of that, so you might not want to mention it. Or do I have to prove I made too much money for a Roth IRA in 2017 first? Does that in any way help in my taxes if I open one for my son? The Marginal Value of the Backdoor Roth. I knew I would be paying some taxes with the conversion process this year. For pro-rata rule, do spouse’s traditional IRAs count if you file taxes jointly? Thanks for the detailed info. Ironically, upon acquiring sufficient information to assess the skill of an investment service provider, individuals end up empowered to take control of their portfolios and make their own decisions, © 2021 - The White Coat Investor – Investing & Personal Finance for Doctors. I do tax-deferred 401k contributions and have a sizable tax deferred account. There are other reasons to reconsider maxing out 401(k) contributions. So do you contribute in the traditional ira 5000 or the max of 19500? Then you roll the traditional IRA back into the 401(k). No age limit. What do you think? So can I max my 401k at 53k then convert to Roth (and pay taxes of course). If the plan is written properly, you do not, and in fact cannot, withdraw the tax-deferred employee contribution. Exactly. You could put it into Prime, but I don’t see any reason to. You can possibly even make Roth contributions for the potential to take the money back out tax-free in retirement. And then again, in 4/2017, you indicate that you made $5,500 contribution. It will then make you consent to electronic delivery of the fund prospectus. What are the expenses 3. Hi WCI. Work through Form 8606 and you’ll see why. thanks. Therefore, in theory I could sock away $81,000 post-tax under 2015 contribution limits: $5,500 “regular” backdoor Roths x me and my wife, $35,000 after-tax money converted to Roth via the above in the 403(b), $35,000 to the 457 similarly. If not, no big deal. Your new solo Roth 401k gives you a possible Roth total of $56,500 for the year. or But if it is in a regular brokerage account, you have to pay tax on the $57,000 of gains you made. ?typo on step 3. You still have more money. I understand that it will take a few years until I can really start investing meaningfully in the Vanguard account anyway because of minimum requirements (3k). Your email address will not be published. Any further ideas on how to handle my wife’s non-deductible IRA contributions since her current deductible IRAs present a conversion problem vis-a-vis the ‘pro-rata rule’? Also , I have heard that I am subject to penalty if I open a roth ira if my employer is already providing a 403B ? No. What I do is I put the cream in an empty cup. If not, it doesn’t sound like the mega backdoor Roth is an option for you. You are left with only employer (35k) contribution. Completely agree given the implications of not filing your 5500 or filing it late. Typically, the person doing this is going to have a very high income, far higher than the average doctor, and would prefer Roth contributions to tax-deferred contributions. Once you mix them, you’re not getting the cream back out, it all comes out as a mixture. But a reasonable hierarchy for a typical attending would be: 1) 401K up to the match Only recommended if it is a relatively small amount and you can afford to pay the taxes out of current earnings or taxable investments with relatively high basis. I didn't expect it to happen on Sunday as the markets are closed and so is Vanguard, but even by Monday (January 4th) evening I could not move on to the next step. I do this every January 2nd. I do some disability reviews/surveys that earn me $500-6000/yr – do I have to have an EIN to open a Solo 401K? Other companies will make you wait until the next day or even a week or so. Should You Make Roth or Traditional 401(k) Contributions? Фахівці Служби порятунку Хмельницької області під час рейдів пояснюють мешканцям міст та селищ, чим небезпечна неміцна крига та закликають бути обережними на річках, ставках та озерах. (rather than the original amount I rolled over from my old 401k). I have a situation. 4) 0 If you did a backdoor Roth in 2012, you should have done a 2012 8606 9 months ago. If you understand the rules of both of these steps, putting them together is no problem. I fall in the #2,but my income is not astronomical. So, I’m only going to be able to do 21.5k per year to this (ie 17.5 pre-tax + 13 pension + 21.5 after-tax = 52k). So I have missed out on the 2017 backdoor IRA, but I will do it for 2018 (your #3) early enough in 2018 to take the advantage of the entire year. I've heard from a couple of people on this one, and the consensus seems to be that it is illegal, although if someone has some information showing that isn't true, I know some people who would be very interested. 9 Comments Share. I am going to stick with Spartan Index funds, and even have access to “Advantage” shares (similar to Vanguards Admiral shares with super low ER.) One argument about maxing out Roth IRA is that you should do it at the beginning of the year. Get details on IRA withdrawals. This year I got an IRS notice saying I owed $10,000 on my Roth Conversion from the year he did my taxes. I wish I had something like this post 5 years ago. A couple of minutes online and no money. My question is, would an in-service withdrawal be subject to the pro-rata IRA rules just like a Backdoor roth ira contribution? Just go into your Roth IRA account: You can see the $6,000 credit there. But the amazing news is, in Fidelity for example, I can buy whatever I want; ETFs, stocks, mutual funds etc. I am an employee at a major hospital corporation. It’s still an interesting thought experiment for how much one can tweak the rules. Just realized my son actually has to earn some money before I can put money for his Roth. I’d like to roll this over to a Roth, and would expect, since it’s already been taxed, it would be considered a non-qualified IRA, and as such, the conversion would be taxfree, as you outlined above. That’s kind of too late for what you’re trying to do. Would it be useful to you? Pairing that with the Cash Rewards CC gets you 3.5% back on groceries/wholesale clubs and 5.25% back on gas (up to $2500 per quarter). AND you do some independent contracting work and can contribute to an Individual 401k for 20-25K per year. Can I open an individual 401k with say Fidelity. More likely, they won’t take anything out until you’ve been at the job for 6-12 months. Net Result: paid tax on TIRA funds (because salary too high for write off), but gains and distributions will be tax free from the Roth IRA after a 5 year waiting period. Vanguard won’t let you do it the same day, so I have to wait one day anyway. 2) In-service withdrawals are definitely an option and can be written into a plan document. https://www.whitecoatinvestor.com/late-contributions-to-the-backdoor-roth-ira/. A practice owner with multiple employees probably can't do a Mega Backdoor Roth IRA (the original impetus behind writing this post) due to profit-sharing laws. Puny. Then he can backdoor the remaining 5k at no tax liability. If you have extra cash to invest after maxing out a 401(k) or other retirement plan at work, it’s wise to consider your options. Once your individual 401K plan his $250K, you do have to file an additional form (5500) each year. Since the market goes up most of the time, I would convert yours sooner rather than later. I meant a regular Roth IRA that was not done backdoor style. I like to keep investing as simple as possible which every year doing a conversion doesn’t seem to be. Would it be better to use a non-deductible IRA or Who knew the minimum to open a solo 401k was so small?! The income phase-out range for taxpayers making contributions to a Roth IRA is $120,000 to $135,000 for singles and heads of household. A very high-income physician who expects to still be well into the top bracket in retirement (i.e. Exactly. Harry Sit's blog, The Finance Buff, has a nice tutorial showing how to fill out form 8606 using Turbotax, which, believe it or not, is trickier than doing it by hand. Remember that for a high earner with a retirement plan at work, a traditional IRA contribution is NOT deductible. If you’re going to convert the whole thing, a SEP-IRA may work just fine. He has spent more time than I have understanding the Mega Backdoor Roth. I fear I have really screwed up my attempt at the backdoor Roth conversion. The Roth money goes to a Roth IRA and the other money (after-tax plus taxable gains) goes to a traditional IRA and is then converted to a Roth at minimal cost. I think you can design a custom plan and get that though. We are also doing the HSA and dependent saving accounts based on your posts. 1.3M pretax. I suppose that would be an expense. How did the US budget deficit perform based on the president? Looking to max out tax deferred retirement contributions for 2018. 5) Backdoor Roth IRAs – Salary deferrals to Roth 401(k)s have age 59 ½ restriction (unlike basis available after 5 years in a backdoor Roth IRA) I just graduated so my income is reduced for 2015 to about 170. Third, the prorata calculation only has to do with dollars in IRAs, not the number of accounts. I agree it gets tricky with employees, and sometimes a Backdoor Roth IRA isn’t worth what you may have to do to get it. $400 will do. Currently, total non-deductible contributions are around 40K and the total value of the account is around 55K. I've recently accepted a new position where I am earning quite a bit more per year. Then hit continue. Look it over, then hit submit and you'll go to the standard Vanguard confirmation screen which looks like this: On Day 3, you can finally choose the investment you want in the Roth IRA. Similar to what I did with my after-tax TSP money when I got out of the service. 2a) 5500 Just wanted to run this by you as, i’ve kept reading old IRS rules, old posts, so i’m not sure what is allowed. That’s true. What do you think? I am also investing in Real Estate, paying off significant student loans etc, saving etc…. If I prefer to invest my SEP with vanguard funds I don’t want to place my money with a different firm. Roth IRA conversions are, Herzberg says, “not favorable if you are about to move from a low-income tax state, such as Florida, to a high tax … While it is “cleaner” to make your contribution and your conversion all in the same calendar tax year, you can make your contribution up until your tax filing date of the next year. What you advise for her? No. You can probably do that if you want. The person above could also transfer 20k into any 401k/403b that accepts transfers. Be sure that you do your conversion prior to December 31st, as you do not want any money in the SEP-IRA on December 31st, lest you screw up the pro-rata calculation for your additional Backdoor Roth IRA. I definitely see how it can be beneficial, but you are omitting the fact that it costs money to setup you’re own 401k as a corporation, followed by the ongoing accounting costs of filing returns for the 401k. If you’re reading this deeply into the blog you should have a pretty good understanding on the investment process and likely do better than the vast majority of Merrill advisors. I usually recommend that a self-employed physician use an Individual 401K instead of a SEP-IRA. As a 1099 SCorp this would be most advantageous, correct? Absolutely. When I asked my CPA about this he seemed to think after-tax contributions to the 401k were not a good idea because I would run into the pro-rata rule (similar to backdoor roth) when I converted the after-tax yearly contribution to a roth IRA, thus incurring taxes. Hmmm…..That’s a great idea. Late Contributions to the Backdoor Roth IRA has more details about doing this but hasn't been updated in a while, so let's do it now. I did this the first time this year and it didn’t take more than 15 mins. Legal? It is very straightforward. Sounds like it might be time to move on to a taxable account. When you exchange/ convert to some other funds like Vanguard Total Stock Exchange, does it create any issues? But I don’t think this is specified by the IRS, but rather by the plan document. p.s Sorry about my freudian slip earlier — white coat, not white goat…although the way medicine is going and how the medical profession is “fighting back”, I understand why my brain went there. A Roth IRA is funded with money that’s already been taxed, so you’re not limited by the contributions you’ve made in other funds. Some 401Ks not only permit $17.5K of either tax-deferred or Roth contributions, but ALSO permit you to contribute your own, after-tax money into the plan up to the $52K limit. Convert the entire sum to a Roth IRA. Should I just continue to invest in a taxable account or is there some way I can take advantage of the after-tax portion of my plan? Awesome for you! Thanks for the help I appreciate it! 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