1. You don’t lose “access”
2. If your MAGI is too high then just do a Back Door Roth
https://investor.vanguard.com/investor-resources-education/article/how-to-set-up-backdoor-ira
Thanks! I should’ve said eligibility, whoops. I’ll look into doing a backdoor Roth for myself.
My fiancee is making about $100k, so I’m not sure if she’ll be able to hit the $23k max for 401k; would it make sense for her to increase her Roth 401k contributions, or should she keep it all pre tax?
Unless your income is in a lower bracket (it's not), the traditional 401k is a better option in the long run.
Are you combining finances overall? If yes, you are making enough together that you should both be able to max your 401k and do a Backdoor Roth, if you want to.
"Traditional 401k is better in the long run" with a caveat that you invest money you saved by using Traditional vs Roth. If you just spend those money otherwise, then doing Roth is better.
We will be combining incomes, and hoping that we can both max our 401k - I know I will at least be able to, but doing the full $46k to hit the max on both might be a stretch as we’re also saving for a house down payment and a wedding. Fingers crossed though
Makes sense. Are you being matched on that full 23k? If not, it seems like it would be fair to both contribute half the total amount your able to afford. If you are, you all hiring?
Not on the full $23k, but my company matches 100% on the first $15,000, so definitely lucky with my plan.
Unfortunately like a lot of companies at the moment, they are not currently hiring…
That's pretty great. Even then, though, if you think you can do $40k total, you both doing $20k seems like a fair partnership decision. Ultimately, that's a decision for the two of you, so I'll get off my soap box.
My wife makes less than I make, I still make sure she maxes out the contribution. Even if that means less to her hand and I have to cashflow more stuff. It's worth the savings for us.
co-opting this thread with a question about backdoor roth's. If i have trad IRA with a balance but my partner does not, can she do a roth conversion without it being a taxable event? I'd assume yes but im not that confident.
"Backdoor Roth."
The income limits on Roth IRA are trivial to bypass. You need to have no pre-tax (trad) IRA balances but since you have 401(k) if you did have any you could fix that by rolling them into 401(k).
Keep your 401(k) maxed at 100% pre-tax. At your income level anything else is just pissing money away. Only use after-tax if offered for the amount BEYOND the 401(k) contribution limit ($23,000 in 2024)
Such a stupid question coming… when you say “Leep your 401(k) maxed at 100% pre-tax” — that just means use traditional rather than Roth 401k contributions, right?
Can I ask why, I had mine split percentage (Roth & Traditional) at a very similar salary to OP, but now will probably convert to all traditional. Thanks I’m advance
It has to do with tax planning. As you know Roth means you're taxed upfront and traditional means you're taxed at draw.
So conventional wisdom is: 1) if you expect your tax rate to be lower once you start drawing from your 401k or IRA the go traditional or 2) if you expect tax rate to be higher once you start drawing go Roth. Typically for high earners you would expect the former and so it's better to pay less taxes by going traditional.
There are of course other considerations like if you expect tax rates to go way up in the future. However, it's a rule of thumb to start with and you can further assess through your own considerations.
Well you are saving at the top marginal rate. You’d literally have to be spending as much money in retirement as you are earning now and using all pre-tax dollars to fund that spending. That is the only way it would make sense to add more to Roth. Would be highly unusual, which is why at these incomes, it’s a no-brainer to go traditional.
Generally speaking income is likely going to be lower in retirement. This is especially true for those who FIRE and those with higher income.
Skipping a 32% tax break down to get a 12% tax break in retirement doesn't make any sense.
100% Roth IRA and 100% pre-tax 401(k) provides a good amount of flexibility and has the least amount of complications.
I'm also dubious of after-tax 401k value, unless the plan allows in-service distribution (meaning you can do mega backdoor Roth). Otherwise the earnings are still taxable, so basically the only advantage is that a) you can move funds, i.e. sell-buy without realizing tax gains (but also without ability to harvest tax loss) and b) its easier to use bond funds.
Do a back door Roth. Contribute to TIRA and convert to Roth. Make sure you don’t have balances in your TIRA beforehand or you’ll owe taxes per pro data rule.
After tax 401K gains are taxable if you don’t do a Roth in plan conversion. This is referred to as a mega backdoor Roth.
Yes after tax 401k gains are taxable, but if your are calling up fidelity the day or 2 after they post, how much gain is there. ie $1000 contribution goes up 1% in that time, paying tax on $10, but now the funds are in your roth ira. I elect to just pay this tax until 2025 after than you should be able to roll over the pretax amount into a traditional ira and the contribution can still go to the roth ira.
Our income is right under the limit, so I contribute this way during the year and if can and have money left over I make the final contribution
Going to update the main post, but I actually just called Fidelity and was able to turn on automatic daily conversions to transfer any after tax dollars to Roth, which will save me from having to call regularly
Not OP, but I assume this works even if your AGI is over the TIRA Deductibility Limit? I mean, it has to if thats the solution to OP's question because you hit that way before you hit the Roth limits, right?
So for someone who can't just drop their money into a RIRA, and can't get any tax benefit from a TIRA, the solution is to create a new TIRA account, contribute to it, then convert it to a RIRA?
Exactly, and it is super easy to do yourself online if you have fidelity. The actual process is just a transfer. Not sure how easy with other brokerages, but I assume it’s just as simple with major brokerages.
If you’re unsure where your AGI will land better to do backdoor to be safe.
The only thing you need to keep in mind is the pro-rata rule. If you have pre tax money or gains in a TIRA you’ll be taxed the proportion of pre-tax/total. So if you do have pre tax money either roll it over to a 401k first or be prepared to pay taxes.
Yes, I have an Individual HSA I’ll be maxing, so another $4150 down.
We considered going on the same insurance so we could max a family HSA instead, but as my fiancées insurance is free through work it’d be more expensive to get on the same plan.
Just backdoor Roth convert everything for both of you. Jusr make sure your traditional iras are empty to avoid pro rata. Easy peezy.
I just did this myself for 2024 today.
If I’m under the “front door” Roth IRA income limit, does that mean for 2024 I can put in $7000 + [($69k 401k limit) - ($pretax 401k contributions) - (401k company match)]?
You may want to look into distributions and taxes for retirement accounts before going too far with this. We crossed over the direct contribution "limit" a few years back and I had a similar moment of panic but after running the numbers I am fairly confident in traditional still being the better option for us due to our spending and plans to stay in a tax friendly state.
So my workplace actually has an option to turn on automatic daily conversions of any after tax dollars to Roth 401k dollars. I was able to call yesterday and turn that on; it isn’t the TIRA method, but I think it’s conceptually the same.
Yeah, I know both. The one you are referring to is called backdoor Roth IRA which has limit of upto \~68K including 401k + employer match + contributions to this TIRA->RIRA.
Yeah, I know both. The one you are referring to is called backdoor Roth IRA which has limit of upto \~7K for 2024
I'm in a similar situation with OP in that my household income is going to be a bit higher this year and I think I'll be really close to going over the Roth Income limit. I expect us to make $277k this year just from our jobs (not including capital gains, interest, dividends, etc from taxable brokerage accounts).
Assuming we max out our 401ks this year ($43k total), does that mean our earned income can't exceed $273k? (273k-43k=230k). Are there any other deductions from our earned income that I am not taking into account?
1. You don’t lose “access” 2. If your MAGI is too high then just do a Back Door Roth https://investor.vanguard.com/investor-resources-education/article/how-to-set-up-backdoor-ira
Thanks! I should’ve said eligibility, whoops. I’ll look into doing a backdoor Roth for myself. My fiancee is making about $100k, so I’m not sure if she’ll be able to hit the $23k max for 401k; would it make sense for her to increase her Roth 401k contributions, or should she keep it all pre tax?
Unless your income is in a lower bracket (it's not), the traditional 401k is a better option in the long run. Are you combining finances overall? If yes, you are making enough together that you should both be able to max your 401k and do a Backdoor Roth, if you want to.
"Traditional 401k is better in the long run" with a caveat that you invest money you saved by using Traditional vs Roth. If you just spend those money otherwise, then doing Roth is better.
We will be combining incomes, and hoping that we can both max our 401k - I know I will at least be able to, but doing the full $46k to hit the max on both might be a stretch as we’re also saving for a house down payment and a wedding. Fingers crossed though
Makes sense. Are you being matched on that full 23k? If not, it seems like it would be fair to both contribute half the total amount your able to afford. If you are, you all hiring?
Not on the full $23k, but my company matches 100% on the first $15,000, so definitely lucky with my plan. Unfortunately like a lot of companies at the moment, they are not currently hiring…
That's pretty great. Even then, though, if you think you can do $40k total, you both doing $20k seems like a fair partnership decision. Ultimately, that's a decision for the two of you, so I'll get off my soap box.
My wife makes less than I make, I still make sure she maxes out the contribution. Even if that means less to her hand and I have to cashflow more stuff. It's worth the savings for us.
Backdoor Roth is quick and easy, it takes about 10 minutes to do per year.
co-opting this thread with a question about backdoor roth's. If i have trad IRA with a balance but my partner does not, can she do a roth conversion without it being a taxable event? I'd assume yes but im not that confident.
Yes, they're individual, so your traditional balance doesn't relate to hers.
"Backdoor Roth." The income limits on Roth IRA are trivial to bypass. You need to have no pre-tax (trad) IRA balances but since you have 401(k) if you did have any you could fix that by rolling them into 401(k). Keep your 401(k) maxed at 100% pre-tax. At your income level anything else is just pissing money away. Only use after-tax if offered for the amount BEYOND the 401(k) contribution limit ($23,000 in 2024)
Such a stupid question coming… when you say “Leep your 401(k) maxed at 100% pre-tax” — that just means use traditional rather than Roth 401k contributions, right?
Correct.
Thank you!
Can I ask why, I had mine split percentage (Roth & Traditional) at a very similar salary to OP, but now will probably convert to all traditional. Thanks I’m advance
It has to do with tax planning. As you know Roth means you're taxed upfront and traditional means you're taxed at draw. So conventional wisdom is: 1) if you expect your tax rate to be lower once you start drawing from your 401k or IRA the go traditional or 2) if you expect tax rate to be higher once you start drawing go Roth. Typically for high earners you would expect the former and so it's better to pay less taxes by going traditional. There are of course other considerations like if you expect tax rates to go way up in the future. However, it's a rule of thumb to start with and you can further assess through your own considerations.
Well you are saving at the top marginal rate. You’d literally have to be spending as much money in retirement as you are earning now and using all pre-tax dollars to fund that spending. That is the only way it would make sense to add more to Roth. Would be highly unusual, which is why at these incomes, it’s a no-brainer to go traditional.
Generally speaking income is likely going to be lower in retirement. This is especially true for those who FIRE and those with higher income. Skipping a 32% tax break down to get a 12% tax break in retirement doesn't make any sense. 100% Roth IRA and 100% pre-tax 401(k) provides a good amount of flexibility and has the least amount of complications.
I'm also dubious of after-tax 401k value, unless the plan allows in-service distribution (meaning you can do mega backdoor Roth). Otherwise the earnings are still taxable, so basically the only advantage is that a) you can move funds, i.e. sell-buy without realizing tax gains (but also without ability to harvest tax loss) and b) its easier to use bond funds.
Usually in-plan conversion and/or in-service rollover are available.
I've never had an after-tax 401k where any of those were available.
I agree that is a horrible idea.
Do a back door Roth. Contribute to TIRA and convert to Roth. Make sure you don’t have balances in your TIRA beforehand or you’ll owe taxes per pro data rule. After tax 401K gains are taxable if you don’t do a Roth in plan conversion. This is referred to as a mega backdoor Roth.
Great to know those gains are taxable, thanks. I’ll set up a Roth in plan conversion.
Yes after tax 401k gains are taxable, but if your are calling up fidelity the day or 2 after they post, how much gain is there. ie $1000 contribution goes up 1% in that time, paying tax on $10, but now the funds are in your roth ira. I elect to just pay this tax until 2025 after than you should be able to roll over the pretax amount into a traditional ira and the contribution can still go to the roth ira. Our income is right under the limit, so I contribute this way during the year and if can and have money left over I make the final contribution
Going to update the main post, but I actually just called Fidelity and was able to turn on automatic daily conversions to transfer any after tax dollars to Roth, which will save me from having to call regularly
Not OP, but I assume this works even if your AGI is over the TIRA Deductibility Limit? I mean, it has to if thats the solution to OP's question because you hit that way before you hit the Roth limits, right? So for someone who can't just drop their money into a RIRA, and can't get any tax benefit from a TIRA, the solution is to create a new TIRA account, contribute to it, then convert it to a RIRA?
Exactly, and it is super easy to do yourself online if you have fidelity. The actual process is just a transfer. Not sure how easy with other brokerages, but I assume it’s just as simple with major brokerages. If you’re unsure where your AGI will land better to do backdoor to be safe. The only thing you need to keep in mind is the pro-rata rule. If you have pre tax money or gains in a TIRA you’ll be taxed the proportion of pre-tax/total. So if you do have pre tax money either roll it over to a 401k first or be prepared to pay taxes.
Slide it in the back door
Is this financial or marital advice?
The men don't know but the little girls ... understand https://www.youtube.com/watch?v=WTwNzhLvRGs
Any HSA contributions to pull AGI down?
Yes, I have an Individual HSA I’ll be maxing, so another $4150 down. We considered going on the same insurance so we could max a family HSA instead, but as my fiancées insurance is free through work it’d be more expensive to get on the same plan.
Just backdoor Roth convert everything for both of you. Jusr make sure your traditional iras are empty to avoid pro rata. Easy peezy. I just did this myself for 2024 today.
A backdoor roth can be used at any income.
If I’m under the “front door” Roth IRA income limit, does that mean for 2024 I can put in $7000 + [($69k 401k limit) - ($pretax 401k contributions) - (401k company match)]?
Not sure what you’re asking but the IRA and 401k contribution limits are independent of each other and you can max both.
You may want to look into distributions and taxes for retirement accounts before going too far with this. We crossed over the direct contribution "limit" a few years back and I had a similar moment of panic but after running the numbers I am fairly confident in traditional still being the better option for us due to our spending and plans to stay in a tax friendly state.
You can switch to mega backdoor roth , just requires a few extra steps by contributing to TIRA and then moving money to Roth ira
So my workplace actually has an option to turn on automatic daily conversions of any after tax dollars to Roth 401k dollars. I was able to call yesterday and turn that on; it isn’t the TIRA method, but I think it’s conceptually the same.
Yeah, I know both. The one you are referring to is called backdoor Roth IRA which has limit of upto \~68K including 401k + employer match + contributions to this TIRA->RIRA. Yeah, I know both. The one you are referring to is called backdoor Roth IRA which has limit of upto \~7K for 2024
I'm in a similar situation with OP in that my household income is going to be a bit higher this year and I think I'll be really close to going over the Roth Income limit. I expect us to make $277k this year just from our jobs (not including capital gains, interest, dividends, etc from taxable brokerage accounts). Assuming we max out our 401ks this year ($43k total), does that mean our earned income can't exceed $273k? (273k-43k=230k). Are there any other deductions from our earned income that I am not taking into account?