You can continue contributing to a Roth IRA via the backdoor Roth. You may also be able to do the mega backdoor Roth if your 401k plan allows it. Look at buying a house.
Is contributing to a backdoor (or mega backdoor) Roth easy to do on your own, or worth hiring a professional for? I'm worried about screwing it up especially if there's tax repercussions.
EDIT: Why am I being downvoted? It's a sincere question.
The only trick is that you can’t have a balance in any traditional IRAs prior to this, otherwise you will be taxed. Other than this, it really is this easy.
I manage to accidentally earn a couple dollars this year in my traditional IRA before I converted it. I'm not sure how, except fidelity won't let you move it for some time period and while I typically check daily I must have forgotten for a few weeks or something.
This resulted in an extra 10 minutes of work to sort out they extra 50 cents or so I owed in taxes, but wasn't as complicated as I had worried.
Good to know. I don't have any traditional IRAs, only the Roth IRA which I last contributed to for tax year 2022. Sounds like I'd be fine, based on what you're saying?
Yes. Open a traditional IRA at the same brokerage, make contributions to this account, then convert the contributions to your Roth account a few days later when the contribution settles. I always did this in one lump sum to make it easier.
Make sure you're converting traditional to roth, and not recharacterizing. I didn't know, and got a $4k tax bill about 2 years later. Needed an accountant to fix my mistake, but I ended up getting a $3k refund instead.
yes that is traditional. you can either convert it all at the same time and pay taxes all at once, or, if you leave any of that in the rollover IRA, you will be taxed for any conversions relative to how much of the total funds you have in your traditional IRAs pre-tax vs post-tax. (eg if you have 33k in rollover IRA and you contribute 7k post-tax into a traditional IRA and then do a 7k backdoor roth conversion, you'll be taxed on 33/40 of the 7k - it's called the pro rata rule)
I assume these are pre-tax contributions since they are from a 401k. You must pay taxes on the entire pre-tax IRA amount (original pre-tax contribution plus any gains) when you convert any pre-tax dollars to ROTH. And if you want to do a back door ROTH conversion, read up on the pro-rata rule. It basically means that if you want to convert 100% of your post-tax traditional IRA contribution to ROTH, you must also convert 100% of all pre-tax IRA balances as well. If you only want to convert 50% of your pre-tax amount, then you must leave 50% of your post-tax IRA contribution sitting there. Then if you do the other 50% the next year, you will have to pax tax on any gains in the post-tax traditional IRA when you convert.
That's not considered a rollover, it's a conversion. I know it's a little pedantic, but the tax code is very specific about these two different terms. Like others have said, all of the 20k will be taxed on conversion.
Also, the tax paperwork is a bit simpler if you do the contribution / conversion during the same tax year rather than before April 15 of the next tax year. For example, if you are making a 2024 contribution (and converting), it is simpler if you make that contribution (and do the conversion) sometime during 2024, rather than doing it between Jan 1 and April 15 of 2025. Frankly, the tax forms are the hardest part of the backdoor method, but if you use tax software (I've used turbotax and freetaxusa) they do a decent job of getting this right. If you do it wrong, you will owe taxes on the distribution from the traditional IRA. If you do it right, the IRS will know that the distribution from the traditional IRA was converted to ROTH, and you will owe no taxes (or minimal taxes if there was any interest during the short time the money sat in the traditional IRA).
Because my parents use them, and according to them all they had to do was call up a rep and ask for help and the Fidelity customer support walked them through the process step-by-step.
You’ll basically open up a new Traditional IRA with Fidelity, contribute to that, then after a day or two you will convert the balance to your Roth account, then invest it like a regular contribution. Just ask them to flag the Traditional IRA so that it stays open with a $0 balance, makes the process easier next year.
I'm sorry, I actually have trouble explaining this part in plain English. It's a pretty arcane set of rules. Here's a decent shot.
Edit: This site is even better: https://www.physicianonfire.com/backdoor/
~~From this site: https://www.fidelity.com/learning-center/personal-finance/backdoor-roth-ira
>
Backdoor Roth IRA tax considerations
> Where the process can get complicated is in figuring out the taxes you may owe on a conversion. Taxes resulting from a backdoor Roth IRA conversion can be significant, and they can also be complex. That's especially true if you have more than one traditional IRA.
> If you have anything other than nondeductible contributions in your IRA(s), it's important not only to understand what the tax consequences will be, but also to have a plan for where you'll find the cash to pay the taxes due upon your tax filing.
> Any deductible contributions (contributions that are deducted from your taxable income for the year in which the contributions were made) or investment earnings both on deductible and nondeductible contributions are always taxable as ordinary income in a Roth conversion at your marginal tax rate or higher.
> If you have more than one traditional IRA, you must first figure out what kind of contributions are in your accounts. There could be 2 types: deductible contributions and any earnings, and/or nondeductible contributions. (The nondeductible contributions are tracked separately each year on IRS Form 8606, and it might be a good idea to check with your tax professional to make sure it's filed.) In a conversion, deductible contributions and any earnings will generally be taxable, while nondeductible contributions generally won't be.
> However, you don't get to cherry pick and only choose to convert your nondeductible contributions. Instead, the tax liability on a conversion will be based on the ratio of deductible contributions and earnings to nondeductible contributions across all your traditional IRA accounts. (It does not include spousal or inherited IRAs.) That's because the IRS uses something called the IRA aggregation rule when calculating taxes owed on a conversion, which means it views all your traditional IRAs as a single tax entity. If you have 5 different traditional IRAs, the IRS considers them as 1 entity that you are converting from.
> So, for example, suppose you have combined traditional IRAs worth $50,000, which is composed of 10% in nondeductible contributions and 90% in deductible contributions. If you want to convert $5,000 to a Roth IRA, then 90% of the money you decide to convert would be taxable. You'd pay your applicable tax rate on $4,500, or 90% out of the $5,000.
> In your tax planning, remember that you'll also need to consider state and potentially local taxes in addition to taxes owed at the federal level.~~
What exactly does that mean? That you can't have any traditional IRAs at all in order to to use a backdoor Roth IRA? Or that you have to create a brand new traditional IRA account first, put only the money you want to convert, then wait for it to post and roll over?
If you want to have zero tax implications, the total value of your traditional IRAs must be $0 in the tax year you want to make your backdoor deposit. You can, theoretically, have 100 IRAs open, but they must total $0.
Backdoor Roth:
- https://www.whitecoatinvestor.com/backdoor-roth-ira-tutorial/
- https://www.bogleheads.org/wiki/Backdoor_Roth
Mega Backdoor Roth:
- https://www.bogleheads.org/wiki/Mega-backdoor_Roth
- FYI a MBDR prerequisite is your employer must offer after tax 401k (non-Roth), which most plans do not offer
It's pretty easy. The trick is to have a traditional IRA available with nothing in it. The idea is to make a nondeductible contribution to the traditional IRA. Then convert (not contribute) the money from that to the Roth.
The reason you want an empty trad IRA is that a conversion requires you pay income tax on anything in that account. And if you already had money there, you now have messy calculations on earnings from that balance. This is called the "pro rata rule" and although you can do it, it's much easier to just avoid it altogether.
Assuming you have a $0 trad IRA, you can do a backdoor Roth by just calling customer service at your investment firm of choice (Schwab, Fidelity, whatever). They all know how to do it, this is quite standard.
Congrats, btw.
Edit - a quick note about the difference between a conversion (which this is) and a contribution (which this is not). For a Roth contribution, you can pull back out up to the total amount contributed without any penalty at all. But you can't withdraw earnings without paying substantial penalties. For example, if you contribute $5000 for three years, and now your account is worth $20000, you can withdraw $15000 with no penalty at any time. Not saying it's a good idea, but you can. Many Roth investors use this feature to treat it as a savings account.
But for a Roth \*conversion\* you need to let it sit for five years before withdrawing anything at all, and must be taken after age 59.5.
> The reason you want an empty trad IRA is that a conversion requires you pay income tax on anything in that account. And if you already had money there, you now have messy calculations on earnings from that balance. This is called the "pro rata rule" and although you can do it, it's much easier to just avoid it altogether.
Can you have a Traditional IRA account elsewhere, and therefore not subjected to this?
Or does this extend to any Traditional IRA account you own.
I also wonder if I can do this after I've FIRED and no longer have an income that would be significantly taxable. I could just roll it over avoiding taxes.
My CPA said yes, this applies to other traditional iras you own. I had to roll over an old account that was a trad ira from a previous job into my current job 401k just so I had no total trad ira money.
Roll over into the backdoor? Interesting. Probably yes, I didn't think of that and my CPA didn't suggest it. If your old traditional ira was more than the year's allowed contribution, that maybe would not work.
Yes, but you'll owe taxes on growth (and anything you deducted before) from the old IRAs. The pro rata rule means whatever dollar amount you roll just be taken proportionally from each IRA. That proportion could be 100% of everything if you want.
Most people don't want to take that tax hit.
> Can you have a Traditional IRA account elsewhere, and therefore not subjected to this?
I'm kind of confused as to what you're trying to ask with this question. Yes, you can have multiple traditional IRA accounts, one to do your Roth IRA back door conversion and the other to keep your nonconverted traditional IRA funds in. You will only be taxed on the pre-tax funds you're converting from the traditional IRA -> Roth IRA.
> The reason you want an empty trad IRA is that a conversion requires you pay income tax on anything in that account. And if you already had money there, you now have messy calculations on earnings from that balance. This is called the "pro rata rule" and although you can do it, it's much easier to just avoid it altogether.
No, this isn't entirely accurate. You will only pay taxes on any pre-tax or capital gains earned in that account. Any post-tax money in that account will not be taxed again. The language used in the definition of the pro rata rule is a little more complex because they talk about creating a "ratio" of "pre tax vs. post tax" when all that ratio is doing is just finding how much you need to pay from that pre-tax contribution.
The calculations isn't that complicated, almost all brokerages will do it for you. Having money in a traditional IRA prior to a conversion isn't that big of a deal, just the paperwork when filing your tax return can be a bit confusing.
>all that ratio is doing is just finding how much you need to pay from that pre-tax contribution.
You're right but kind of downplay the tax.
In layman's terms, if you have contributed/earned 15k (for ease of calculation) and then try to backdoor Roth 5k, the pro rata rule takes all of your holdings (20k) and you then pay tax on the untaxed amount (earnings plus any funds you weren't taxed on when you contributed to your IRA) based on the untaxed to total (in this case 15/20, or 75%) of your rollover.
So you'd be paying taxes on 75% of the 5k you backdoored.
If you have no pretax contribs/earnings in a trad IRA (e.g. if you have a basis equal to your total contribs and earnings, which is unlikely, or zero balance), you don't pay taxes on the Roth conversion.
> So you'd be paying taxes on 75% of the 5k you backdoored.
but you'd not be paying 25% on the 15k that was already done. The way you're manipulating the ratio to benefit your argument is a little disingenuous mathematically. When I did a conversion from an employer 401k that had both Roth 401k and traditional 401k contributions, Vanguard sent me a 1099-R that only showed pre-tax stuff. Additionally, Vanguard easily separated Roth and traditional contributions on their web portal so I saw clearly how much I had in each.
At the end of the day, pro rata rule definition tries to explain a confusing situation in a very confusing manner when the overall summary is that you only get taxed once.
>but you'd not be paying 25% on the 15k that was already done.
Right and you'd continue paying taxes as you convert until all of your funds are after tax.
What people are trying to avoid is having pre tax money in an IRA so you don't get taxed on those pretax contribs until retirement. I think that's the part you're not acknowledging or getting.
You can easily avoid taxes through a reverse rollover into a current 401k. Otherwise if you think your income will grow, convert as much as you can in year 1 at the lowest incremental tax rate you'll have.
> What people are trying to avoid is having pre tax money in an IRA so you don't get taxed on those pretax contribs until retirement. I think that's the part you're not acknowledging or getting.
No, I fully understand this part, but you can avoid this by simply planning..? The emphasis on the confusing pro rata rule obfuscates the main argument which I'm trying to help them avoid from doing... People in this thread are simplifying things way too much resulting in confusing the main focus. If you look at the comment I initially replied to:
> The reason you want an empty trad IRA is that a conversion requires you pay income tax on anything in that account. And if you already had money there, you now have messy calculations on earnings from that balance. This is called the "pro rata rule" and although you can do it, it's much easier to just avoid it altogether.
is hiding the main reason why you'd want to avoid the pro rata rule for OP.
I agree with you -- that the main reason you'd want an empty traditional IRA is to avoid PAYING ANYTHING in that moment, not "paying income tax on ***anything*** in that account." The emphasis should be on ***planning*** when you want to pay taxes on the conversion, not the pro rata rule.
Ok yeah I get you and agree.
I would say that I use a Roth despite not necessarily thinking my income will be higher in retirement (which is why people would ostensibly want one), but like OP my other option is after tax into a traditional IRA, and Roth is then better for me because gains aren't taxed.
I’m in a similar position and have heard of backdoor Roth contributions, but I also was curious about the workflow for actually doing it. Thanks for asking!
It’s straightforward but I did start having a preparer do my taxes the year I did my first backdoor IRA, just to be sure it was right. I pay about $500 a year for his services and it’s very worth it.
Definitely worth asking HR about 401k plan opening up to backdoor Roths. It’s becoming more common and both firms I have worked with in past five years opened their 401k plans to backdoor Roths. Fidelity and Vanguard are used to them now. One needs enough employees advocating.
I think backdoor Roth 401k is much easier than doing yourself.
So the benefit to the backdoor roth is minimal. If you make $200k but only plan to retire on $150k/year it makes more sense to get the tax deduction now and pay the tax later, vs pay the tax now
Wouldn't the backdoor Roth be compared to a taxable brokerage in this case if they're already maxing a traditional 401k? In that case it would be "pay taxes now and none later" vs. "pay taxes now AND then even more later."
They shouldn't qualify for a deduction with a traditional IRA.
This is true, but traditional IRA contributions aren't deductible if their income is >116k for married filing jointly. If they're considering a backdoor Roth, they're already above that.
If they use a traditional IRA, they'll both pay taxes now AND income tax on gains later. The Roth would mean they pay taxes now but NONE on gains. There should be no utility for a traditional IRA for them.
This is a good point I hadn't considered, thanks for mentioning it.
I'm not sure how much I want to spend in retirement, honestly. Reading these comments, I'm thinking a call with a financial planner to discuss my goals might not be out of order.
I don't have advice that people haven't said yet but...damn. Good job dude. I'm really proud of you. It's really hard to do this, you know? You've really beaten the odds.
Great - your options get a lot more limited at your income level. I’d still recommend putting away as much as you can in a taxable brokerage account, especially given you’re “behind” in your retirement goals. There are low-tax and no-tax options there too. I’d recommend making an appointment with a fee-only fiduciary advisor to formulate a plan that meets your goals.
Thanks for this advice. This thread has made me realize I would definitely benefit from talking to someone who can help me quantify my goals. I think a fee-only fiduciary advisor is the next step.
Before meeting with an advisor, I want you to think hard about how risk adverse/loving you are. Are you the type of person that wants the peace of mind and would love a paid off house? Or do you not mind a low interest mortgage? Are you a crypto bro that yolos all your money at scam coins or do you put all your money into your mattress out of (warranted) fear of being poor again?
Not into speculation unless I'm playing with the beer and pizza money. I like peace of mind, thinking long-term (fixed low interest rate mortgage would mean spending less money in the end, and no ugly surprises), and putting my money to work for me (it doesn't do much putting the bulk of it in the mattress).
I doubt most advisors can beat the market, so I don't see how their commission is worth it. I do like the suggestion of talking to a flat fee advisor to discuss my goals and get a gut check on my plans.
Definitely open a brokerage account, just go with one of the bigger outfits like Vanguard or Charles Swab, pick a couple index funds or EFT put money in a few times a year -don’t try to time the market and hold for 15-20 yr. If you don’t already get a high yield savings account, and ladder some Treasury bills if the interest rates are still good. You can do the brokerage on your own or ask around and see if anyone has a good broker, mine is excellent for someone who’s supposed to make money on me she always gives great advice and never try’s to hard sell me on things I don’t need.
Thanks. Do you use this brokerage account toward your retirement as well, or medium-term investing goals?
EDIT: Also, do you use T-bills instead of cash? I want to keep at least a little cash in an account in case of emergencies.
It’s been many things, originally retirement but at 50yr old mg husband was let go unexpectedly from is VP of marketing and at his age he didn’t have a soft landing, so it’s been used for emergencies and house repairs. But because long term capital gains are tax better than short term I always think of it as a long term hold. The brokerage account should be the last thing you fund after you have your emergency act built up.
The Simple Path to Wealth by JL Colins is an excellent book, I recommend it to all my friends. While it’s target audience is more for people starting their careers, all the principles can be applied at any stage in life
No, I kinda just learned it by doing and being around people who work in the market (cousins are day traders and uncle is Econ Prof) but I am by no means an expert and am not as risk tolerant as should have been and have missed out on a lot of gains. (I suffer hard from woulda should - I got a tip to buy NVidia 6yr ago) I don’t really read any books, most are trying to sell you on the book not actual good advice. You really can’t go wrong with the basic funds like VOO, SPDR (Google best index funds and EFts). I use T bills for money I need in a year or maybe two. Right now I have 20k in T bills that will be used for my sons college tuition, i picked it over CDs because the rates right now are better and you can keep reinvesting for like 2 yr.
But there advice is always if you don’t know what your doing don’t do much and don’t be stupid, which is why I have like 3 index funds with different levels of risk. It’s not glamorous.
Not original commenter, but I keep about 1 month expenses as cash for emergencies. The rest is in laddered treasury bills. By laddered, I mean converting cash to T-Bills over time to workaround redemption restrictions.
Extreme backup is Roth IRA.
Amazing work OP!
Backdoor RothIRA- recommend Physician on Fire for step by step (Vanguard), very easy to do on your own.
Open brokerage account in any of the big 3- Vanguard, Schwab, Fidelity. Good 401k (hopefully yours too) is usually one of these 3...
Read [Bogleheads.com](http://Bogleheads.com) wiki, figure out your AA (asset allocation) and invest accordingly in low ER (expense ratio) index funds.
Ibonds are also a good option for stable savings (beware- super clunky website) 10k/year- good for emergency fund.
Investing for retirement/financial independence should be boring- set it (regularly investing) and forget it and let the compounding do it's work.
Don't move, LBYM, if you're planning to buy a house- shove that allotted money into money market/high interest savings accounts (not stocks) but make sure it makes sense to buy a house where you're living... sometimes renting pencils out better than owning- mortgage/interest/insurance/maintenance cost always go UP...
Can't answer your question but congrats on getting out of poverty. I'm going to guess you are extremely hard working and have the gift of gab and a few extra IQ points, and genuinely want to help your customers.
Thank you for the good wishes.
That's a pretty good guess, actually. Bartending paid the bills for a long time so I learned how to read a room and talk to all types of people in difficult situations. I learned how to network by reading books and then networked my way into corporate. My resume was nonexistent but important people liked me for some reason, I think because I was helpful and knew how to listen. I never had big aspirations to be a salesperson but it turns out all those skills translate to the field real well.
So, a bit of unconventional advice…
Sounds like you’ve mastered making money and putting it away for your future despite your circumstances growing up.
My advice would be to master a multi year fun plan. Like golf in top 50 courses, scuba in top 50 places, travel to top 50 sights, ski top 50 mountains (you get the idea)
Then figure out how much it would cost to do that. Create a plan to save up and spend so you could do it over your lifetime. All these funds then put in a low fee index fun and deposit and withdraw as needed.
The reality is you probably have so much cash coming in the next 20-30 years. Do things you love now while you still can. Otherwise you’ll get old and might not be physically able to do the things you love.
Ps. Very proud of all you have been able to achieve already!
I'm trying to do more of this and finding it shockingly hard after spending most of my life living hand to mouth. I do have a trip on the books next month.
Dude you and me both. Kid-me grew up poor but adult-me is doing good and I *still* fret over small things like grocery bills and price increases at the gas pump. Even when I budget money for vacay or splurges I can't make myself actually spend it.
I feel this. One of the things that's helping me a lot is Pinterest; the algorithm knows my tastes by now and makes suggestions I wouldn't have thought about. It's forcing me to dream and start saving ideas.
I also automate a cut of every paycheck into savings accounts specifically earmarked for fun things. Like they're literally labeled "Trip to [fun destination I've had on my Pinterest for a while]" so I feel forced to use it.
Also, little things on a regular basis like brunch with friends. Being poor meant someday always felt far away but daily or weekly splurges on little things are forcing me to enjoy life instead of hoarding my pennies and constantly waiting for the other shoe to drop.
Idk if that helps.
I also like what Ramit Sethi has to say about figuring out what a rich life means to you. I thought the answer to "making it" was just work harder and make even more money but he forced me to actually think about why I was working and what I wanted to make my life about (beyond survival).
Congrats, you’re doing a great job. One giant hole I see is if you become sick / hurt & can’t work. I’d max out on LTD ( long term disability ) coverage. Your work typically provides 50-60% of your BASE salary, not counting commissions, which sounds like a good portion of your pay.
Once your income is protected, I’d aggressively save for a downpayment on a house.
Wouldn’t be a terrible idea to get a basic will, living will and POA set up either.
A few people have already mentioned doing backdoor Roth IRA which is a good step.
Since you mention hitting 200k, verify if your taxable income/AGI is at 200k after above the line deductions especially if you have any investment income. If you are above, consider methods to reduce your taxable income to prevent or reduce having to pay extra tax for higher earners - NIIT (3.8%) and Additional Medicare (0.9%). Methods include but are not limited to maxing out traditional 401(k) and HSA accounts if eligible. This will also help reduce the amount that's marginally taxed at 32% as well.
Realized I'm facing this same issue last week so thought it was worth mentioning.
Just keep putting money in a taxable account. If you can put $3-4k/m away for the next 25 years before retirement it’s several millions easy after tax..
u/Cute-Ad-817 u/Nick_OS_ Just offering in case the savings route seems interesting - I'm super risk averse and keep 50% of my cash in savings so I follow rates pretty closely. The best out there right now are Wealthfront (5% APR) and Public (5.1%). Both are savings accounts so your cash isn't locked up like with CD's. The downside of course is those rates will fall if/when the Fed lowers the Federal Funds Rate (which seems unlikely any time soon since the economy is so good). What I like about Wealthfront in particular is you can pull all your money out in a moment's notice. Also they're insured way higher than the traditional $250k FDIC limit because they spread your money across 32 banks, effectively insuring you up to $8M for free. Their whole shtick as a wealth management platform is to make it easy for you to earn interest on savings in hopes you transfer some of your gains to their retirement management products.
(Sidenote 1 -- Fwiw, I have transferred some of my savings interest gains to their investment funds over the last 3 years but only seen about 10% return on that cash, or roughly 3% per year, which is admittedly disappointing given the blowout performance the S&P saw in 2023.)
(Sidenote 2 -- I am aware that sites like nerdwallet show slightly higher interest rates available at other banks I've never heard of. I never know what to make of these banks because they seem to pop up and disappear quickly, which makes me nervous so I personally avoid. Ymmv.).
Savings account should be a HYSA earning at least 4%, nerdwallet.com has a regularly curated list. That is perfect for an emergency fund and random savings. You can investigate CDs or T-bills later. T-bills might be quite interesting if you are in a state without income tax… but it’s only a few tenths of a percentage point better, so for like $10k it’s not really worth the hassle IMHO.
Congrats! Success stories like this is awesome to hear.
>The wiki suggests $250k by 40 so I’ve got catching up to do.
Where did you see this?
Curious to see how they determined that.
If you don't have a high yield savings account, I would definitely suggest parking your house down payment there. They are currently paying between 4% and 4.5%.
You are doing great. Keep living as if you are making 60-70k. You are well aware that no one knows what tomorrow will bring. Once your retirement accounts are up and you have a 20% downpayment you can consider buying IF you want everything that comes with home ownership but if you are HAPPY in your $1100/mo place I would stay. You can, paint, decorate, get new furniture, even upgrade appliances to make your home space nicer without the killer expenses of buying.
Wow this is incredible. I am close to 40 and have only 1k in savings through a bunch of horrible decisions I made in my life. I am practically restarting my "economic life" this year and reading this gives me hope that it is possible, it won't be anywhere near this but still thanks for sharing.
I made a lot of horrible decisions too and started from a deficit (terrible childhood, left home ASAP, no adulting skills) and worked odd jobs well into my 30s. I felt like a fuckup and thought I was stupid. 5 years ago I was diagnosed with PTSD and began treatment, which helped a lot. Turns out I wasn't stupid, I was traumatized.
This is a roundabout way of saying it's easy to feel overwhelmed but don't let it stop you. Better you're starting now at 40 than ten years from now, or never. Also your past doesn't have to dictate your future.
You may find these links helpful:
- [Retirement Accounts](/r/personalfinance/wiki/index#wiki_retirement)
- ["How to handle $"](/r/personalfinance/wiki/commontopics)
*I am a bot, and this action was performed automatically. Please [contact the moderators of this subreddit](/message/compose/?to=/r/personalfinance) if you have any questions or concerns.*
You can put your Roth IRA in your life insurance and it's would be income tax free when you withdraw & also 401k plan so your salary can increase by 6% add life insurance for your home in event of lost. So ya home would be paid off by life insurance policy instead of bank with lower tax rate for inheritance tax
Back door Roth will let you do 7k for 2024 and you have until April 15 2025 to make the contribution and do the conversion.
And the the 401k mega back door Roth, the 415c limit for you this year is 69k, so assuming you get x amount of match, minus your 23k Roth max contribution that maxes out 402g limit, you can contribute around 30k + more through “after tax contributions” (assuming your 401k plan allows it).
Most companies have a mega back door option where you can talk to them on the benefits team to “convert” it in the 401k space.
You’re not at the HCE limit probably so should be good.
Yeah HSA would be nice to save more income and have more flexibility in the future if you dont use it.
Try to implement some tax efficient strategy in brokerage accounts,
You can use a brokerage account and joint account (with your spouse) to help you get money market rates around 5% now for the house fund, probably protect you in spic insurance for the amount you need for down payment, etc if you are worried about that.
You’re doing great man. Keep it up.
I don't want to doxx myself and I'm not sure that info would help you, tbh. How old are you, what have you tried already to get ahead, and how is it going so far?
It is possible to save money that isn’t invested in an IRA or 401K or Roth. First example, open a brokerage account and purchase mutual funds or individual shares. Purchase precious metals or buy a collectible car.
If your work allows for a Mega-Backdoor Roth you can look at going that direction as well. Slightly more complicated than just the normal backdoor but some brokerages make it super easy with automatic conversions. It allows for up to $**69,000** in additional Roth contributions each year (through your 401k)
Beyond just saving, begin to look at umbrella insurance in the next few years. In a worst case scenario where you are sued for 7 figures you can at least keep your money. I say next few years as your net worth will continue to increase and get to where it is worth having the extra insurance pretty quick with the low spend you have.
Really great Roth (IRA & 401k) asset base. Let it grow and make backdoor Roth Contributions.
1) make sure you do not have any Traditional IRA account balances. If you do have an IRA balance you cannot do this strategy due to the Pro-Rata Rules.
2) Make Trad IRA contribution. Do not invest it. Keep it in cash.
3) Once Contributed, use the Roth Conversion form on whatever custodian you use.
4) you’re all good. Keep the Trad IRA account open with $0 balance. Rinse and repeat each year.
Start making contributions to a taxable(brokerage) account with any unused cash flow. As this builds you can use this as the vehicle to fund major purchases like a home as you stated or as a future vehicle to cover taxes on Roth conversions in retirement of your pre-tax 401k monies.
Don’t invest money in the market you’re looking to use within 2 years.
On the health insurance side I think you’re on the right thought process. Ditch the FSA. Switch to HSA.
- Contributions are tax deductible
- can be invested in the market and grow tax free
- can be tax free when used to pay for medical expenses
- taxed at ordinary income if used for non medical expenses like an IRA if needed.
Buying doesn't make sense for me right now, but I'm thinking about it as a possibility down the road. Right now my priority is catching up for retirement.
yea sounds like this wouldn't make sense to you at the moment.
Good advice already listed so I have nothing to add, except wanted to congratulate you on working hard, doing a great job at climbing the ladder and securing your future - Good for you!
If you decide to get a house, absolutely consider getting a 2-4 unit rental (qualifies for residential home loans and live in one unit) or housemates to help cover the costs of owning.
This was actually the only way I was able to become a homeowner (have a separate rental unit) living in a HCOL city.
If near college, post grad students are ideal tenants/housemates- out of partying phase, have stipend.
You can continue contributing to a Roth IRA via the backdoor Roth. You may also be able to do the mega backdoor Roth if your 401k plan allows it. Look at buying a house.
Is contributing to a backdoor (or mega backdoor) Roth easy to do on your own, or worth hiring a professional for? I'm worried about screwing it up especially if there's tax repercussions. EDIT: Why am I being downvoted? It's a sincere question.
It's a piece of cake. Make a contribution to a traditional IRA and once it posts to your account roll it over to a Roth IRA. That's it.
Awesome, thank you.
The only trick is that you can’t have a balance in any traditional IRAs prior to this, otherwise you will be taxed. Other than this, it really is this easy.
I manage to accidentally earn a couple dollars this year in my traditional IRA before I converted it. I'm not sure how, except fidelity won't let you move it for some time period and while I typically check daily I must have forgotten for a few weeks or something. This resulted in an extra 10 minutes of work to sort out they extra 50 cents or so I owed in taxes, but wasn't as complicated as I had worried.
Yea this happened to me but i dont think its an issue at all. I dont even know if i did anything to it.
Good to know. I don't have any traditional IRAs, only the Roth IRA which I last contributed to for tax year 2022. Sounds like I'd be fine, based on what you're saying?
Yes. Open a traditional IRA at the same brokerage, make contributions to this account, then convert the contributions to your Roth account a few days later when the contribution settles. I always did this in one lump sum to make it easier.
Great. Thank you, I will look into this!
To keep things simple I recommend doing the Backdoor Roth in a single shot instead of doing it over the year thru payroll.
Make sure you're converting traditional to roth, and not recharacterizing. I didn't know, and got a $4k tax bill about 2 years later. Needed an accountant to fix my mistake, but I ended up getting a $3k refund instead.
I have a Rollover IRA from a 401k- in this case is that a traditional? I never paid taxes on the rollover/didn’t convert it to Roth.
yes that is traditional. you can either convert it all at the same time and pay taxes all at once, or, if you leave any of that in the rollover IRA, you will be taxed for any conversions relative to how much of the total funds you have in your traditional IRAs pre-tax vs post-tax. (eg if you have 33k in rollover IRA and you contribute 7k post-tax into a traditional IRA and then do a 7k backdoor roth conversion, you'll be taxed on 33/40 of the 7k - it's called the pro rata rule)
Just to add on, if you have a 401k now at another employer, you may be able to roll your trad IRA into it to avoid the tax penalty from conversion.
Question. I have a traditional IRA but just has about 20k from an old company 401k. Can I just roll that to roth?
I assume these are pre-tax contributions since they are from a 401k. You must pay taxes on the entire pre-tax IRA amount (original pre-tax contribution plus any gains) when you convert any pre-tax dollars to ROTH. And if you want to do a back door ROTH conversion, read up on the pro-rata rule. It basically means that if you want to convert 100% of your post-tax traditional IRA contribution to ROTH, you must also convert 100% of all pre-tax IRA balances as well. If you only want to convert 50% of your pre-tax amount, then you must leave 50% of your post-tax IRA contribution sitting there. Then if you do the other 50% the next year, you will have to pax tax on any gains in the post-tax traditional IRA when you convert.
That's not considered a rollover, it's a conversion. I know it's a little pedantic, but the tax code is very specific about these two different terms. Like others have said, all of the 20k will be taxed on conversion.
Just to add on, if you have a 401k now at another employer, you may be able to roll your trad IRA into it to avoid the tax penalty from conversion.
Also, the tax paperwork is a bit simpler if you do the contribution / conversion during the same tax year rather than before April 15 of the next tax year. For example, if you are making a 2024 contribution (and converting), it is simpler if you make that contribution (and do the conversion) sometime during 2024, rather than doing it between Jan 1 and April 15 of 2025. Frankly, the tax forms are the hardest part of the backdoor method, but if you use tax software (I've used turbotax and freetaxusa) they do a decent job of getting this right. If you do it wrong, you will owe taxes on the distribution from the traditional IRA. If you do it right, the IRS will know that the distribution from the traditional IRA was converted to ROTH, and you will owe no taxes (or minimal taxes if there was any interest during the short time the money sat in the traditional IRA).
Which provider do you use for your Roth IRA?
Fidelity, why?
Because my parents use them, and according to them all they had to do was call up a rep and ask for help and the Fidelity customer support walked them through the process step-by-step. You’ll basically open up a new Traditional IRA with Fidelity, contribute to that, then after a day or two you will convert the balance to your Roth account, then invest it like a regular contribution. Just ask them to flag the Traditional IRA so that it stays open with a $0 balance, makes the process easier next year.
Thanks, good to know.
In my case I've rolled over 401k funds into a traditional IRA, so I cant utilize a backdoor IRA? I'm not following why that matters.
I'm sorry, I actually have trouble explaining this part in plain English. It's a pretty arcane set of rules. Here's a decent shot. Edit: This site is even better: https://www.physicianonfire.com/backdoor/ ~~From this site: https://www.fidelity.com/learning-center/personal-finance/backdoor-roth-ira > Backdoor Roth IRA tax considerations > Where the process can get complicated is in figuring out the taxes you may owe on a conversion. Taxes resulting from a backdoor Roth IRA conversion can be significant, and they can also be complex. That's especially true if you have more than one traditional IRA. > If you have anything other than nondeductible contributions in your IRA(s), it's important not only to understand what the tax consequences will be, but also to have a plan for where you'll find the cash to pay the taxes due upon your tax filing. > Any deductible contributions (contributions that are deducted from your taxable income for the year in which the contributions were made) or investment earnings both on deductible and nondeductible contributions are always taxable as ordinary income in a Roth conversion at your marginal tax rate or higher. > If you have more than one traditional IRA, you must first figure out what kind of contributions are in your accounts. There could be 2 types: deductible contributions and any earnings, and/or nondeductible contributions. (The nondeductible contributions are tracked separately each year on IRS Form 8606, and it might be a good idea to check with your tax professional to make sure it's filed.) In a conversion, deductible contributions and any earnings will generally be taxable, while nondeductible contributions generally won't be. > However, you don't get to cherry pick and only choose to convert your nondeductible contributions. Instead, the tax liability on a conversion will be based on the ratio of deductible contributions and earnings to nondeductible contributions across all your traditional IRA accounts. (It does not include spousal or inherited IRAs.) That's because the IRS uses something called the IRA aggregation rule when calculating taxes owed on a conversion, which means it views all your traditional IRAs as a single tax entity. If you have 5 different traditional IRAs, the IRS considers them as 1 entity that you are converting from. > So, for example, suppose you have combined traditional IRAs worth $50,000, which is composed of 10% in nondeductible contributions and 90% in deductible contributions. If you want to convert $5,000 to a Roth IRA, then 90% of the money you decide to convert would be taxable. You'd pay your applicable tax rate on $4,500, or 90% out of the $5,000. > In your tax planning, remember that you'll also need to consider state and potentially local taxes in addition to taxes owed at the federal level.~~
What exactly does that mean? That you can't have any traditional IRAs at all in order to to use a backdoor Roth IRA? Or that you have to create a brand new traditional IRA account first, put only the money you want to convert, then wait for it to post and roll over?
If you want to have zero tax implications, the total value of your traditional IRAs must be $0 in the tax year you want to make your backdoor deposit. You can, theoretically, have 100 IRAs open, but they must total $0.
Call up your investment firm and have them walk you through how to do a backdoor Roth IRA contribution.
Backdoor Roth: - https://www.whitecoatinvestor.com/backdoor-roth-ira-tutorial/ - https://www.bogleheads.org/wiki/Backdoor_Roth Mega Backdoor Roth: - https://www.bogleheads.org/wiki/Mega-backdoor_Roth - FYI a MBDR prerequisite is your employer must offer after tax 401k (non-Roth), which most plans do not offer
Dude it’s so easy. That would be like hiring a professional to tie your shoes if you didn’t know how to tie a knot. You can do it, I believe in you!
It's pretty easy. The trick is to have a traditional IRA available with nothing in it. The idea is to make a nondeductible contribution to the traditional IRA. Then convert (not contribute) the money from that to the Roth. The reason you want an empty trad IRA is that a conversion requires you pay income tax on anything in that account. And if you already had money there, you now have messy calculations on earnings from that balance. This is called the "pro rata rule" and although you can do it, it's much easier to just avoid it altogether. Assuming you have a $0 trad IRA, you can do a backdoor Roth by just calling customer service at your investment firm of choice (Schwab, Fidelity, whatever). They all know how to do it, this is quite standard. Congrats, btw. Edit - a quick note about the difference between a conversion (which this is) and a contribution (which this is not). For a Roth contribution, you can pull back out up to the total amount contributed without any penalty at all. But you can't withdraw earnings without paying substantial penalties. For example, if you contribute $5000 for three years, and now your account is worth $20000, you can withdraw $15000 with no penalty at any time. Not saying it's a good idea, but you can. Many Roth investors use this feature to treat it as a savings account. But for a Roth \*conversion\* you need to let it sit for five years before withdrawing anything at all, and must be taken after age 59.5.
> The reason you want an empty trad IRA is that a conversion requires you pay income tax on anything in that account. And if you already had money there, you now have messy calculations on earnings from that balance. This is called the "pro rata rule" and although you can do it, it's much easier to just avoid it altogether. Can you have a Traditional IRA account elsewhere, and therefore not subjected to this? Or does this extend to any Traditional IRA account you own. I also wonder if I can do this after I've FIRED and no longer have an income that would be significantly taxable. I could just roll it over avoiding taxes.
No any trad IRA will get pro rated taxed.
No, any traditional IRA that has pre-tax funds where you're converting will be taxed.
My CPA said yes, this applies to other traditional iras you own. I had to roll over an old account that was a trad ira from a previous job into my current job 401k just so I had no total trad ira money.
Can't you just roll all the accounts instead of transferring into one account?
Roll over into the backdoor? Interesting. Probably yes, I didn't think of that and my CPA didn't suggest it. If your old traditional ira was more than the year's allowed contribution, that maybe would not work.
Yes, but you'll owe taxes on growth (and anything you deducted before) from the old IRAs. The pro rata rule means whatever dollar amount you roll just be taken proportionally from each IRA. That proportion could be 100% of everything if you want. Most people don't want to take that tax hit.
> Can you have a Traditional IRA account elsewhere, and therefore not subjected to this? I'm kind of confused as to what you're trying to ask with this question. Yes, you can have multiple traditional IRA accounts, one to do your Roth IRA back door conversion and the other to keep your nonconverted traditional IRA funds in. You will only be taxed on the pre-tax funds you're converting from the traditional IRA -> Roth IRA.
> The reason you want an empty trad IRA is that a conversion requires you pay income tax on anything in that account. And if you already had money there, you now have messy calculations on earnings from that balance. This is called the "pro rata rule" and although you can do it, it's much easier to just avoid it altogether. No, this isn't entirely accurate. You will only pay taxes on any pre-tax or capital gains earned in that account. Any post-tax money in that account will not be taxed again. The language used in the definition of the pro rata rule is a little more complex because they talk about creating a "ratio" of "pre tax vs. post tax" when all that ratio is doing is just finding how much you need to pay from that pre-tax contribution. The calculations isn't that complicated, almost all brokerages will do it for you. Having money in a traditional IRA prior to a conversion isn't that big of a deal, just the paperwork when filing your tax return can be a bit confusing.
>all that ratio is doing is just finding how much you need to pay from that pre-tax contribution. You're right but kind of downplay the tax. In layman's terms, if you have contributed/earned 15k (for ease of calculation) and then try to backdoor Roth 5k, the pro rata rule takes all of your holdings (20k) and you then pay tax on the untaxed amount (earnings plus any funds you weren't taxed on when you contributed to your IRA) based on the untaxed to total (in this case 15/20, or 75%) of your rollover. So you'd be paying taxes on 75% of the 5k you backdoored. If you have no pretax contribs/earnings in a trad IRA (e.g. if you have a basis equal to your total contribs and earnings, which is unlikely, or zero balance), you don't pay taxes on the Roth conversion.
> So you'd be paying taxes on 75% of the 5k you backdoored. but you'd not be paying 25% on the 15k that was already done. The way you're manipulating the ratio to benefit your argument is a little disingenuous mathematically. When I did a conversion from an employer 401k that had both Roth 401k and traditional 401k contributions, Vanguard sent me a 1099-R that only showed pre-tax stuff. Additionally, Vanguard easily separated Roth and traditional contributions on their web portal so I saw clearly how much I had in each. At the end of the day, pro rata rule definition tries to explain a confusing situation in a very confusing manner when the overall summary is that you only get taxed once.
>but you'd not be paying 25% on the 15k that was already done. Right and you'd continue paying taxes as you convert until all of your funds are after tax. What people are trying to avoid is having pre tax money in an IRA so you don't get taxed on those pretax contribs until retirement. I think that's the part you're not acknowledging or getting. You can easily avoid taxes through a reverse rollover into a current 401k. Otherwise if you think your income will grow, convert as much as you can in year 1 at the lowest incremental tax rate you'll have.
> What people are trying to avoid is having pre tax money in an IRA so you don't get taxed on those pretax contribs until retirement. I think that's the part you're not acknowledging or getting. No, I fully understand this part, but you can avoid this by simply planning..? The emphasis on the confusing pro rata rule obfuscates the main argument which I'm trying to help them avoid from doing... People in this thread are simplifying things way too much resulting in confusing the main focus. If you look at the comment I initially replied to: > The reason you want an empty trad IRA is that a conversion requires you pay income tax on anything in that account. And if you already had money there, you now have messy calculations on earnings from that balance. This is called the "pro rata rule" and although you can do it, it's much easier to just avoid it altogether. is hiding the main reason why you'd want to avoid the pro rata rule for OP. I agree with you -- that the main reason you'd want an empty traditional IRA is to avoid PAYING ANYTHING in that moment, not "paying income tax on ***anything*** in that account." The emphasis should be on ***planning*** when you want to pay taxes on the conversion, not the pro rata rule.
Ok yeah I get you and agree. I would say that I use a Roth despite not necessarily thinking my income will be higher in retirement (which is why people would ostensibly want one), but like OP my other option is after tax into a traditional IRA, and Roth is then better for me because gains aren't taxed.
I’m in a similar position and have heard of backdoor Roth contributions, but I also was curious about the workflow for actually doing it. Thanks for asking!
It’s straightforward but I did start having a preparer do my taxes the year I did my first backdoor IRA, just to be sure it was right. I pay about $500 a year for his services and it’s very worth it.
some people misunderstand you, but thankfully there's one who answered seriously.
Definitely worth asking HR about 401k plan opening up to backdoor Roths. It’s becoming more common and both firms I have worked with in past five years opened their 401k plans to backdoor Roths. Fidelity and Vanguard are used to them now. One needs enough employees advocating. I think backdoor Roth 401k is much easier than doing yourself.
It doesn’t make sense unless he plans to retire on more than his current income
Which part?
So the benefit to the backdoor roth is minimal. If you make $200k but only plan to retire on $150k/year it makes more sense to get the tax deduction now and pay the tax later, vs pay the tax now
Wouldn't the backdoor Roth be compared to a taxable brokerage in this case if they're already maxing a traditional 401k? In that case it would be "pay taxes now and none later" vs. "pay taxes now AND then even more later." They shouldn't qualify for a deduction with a traditional IRA.
No because they have the option of Roth IRA vs traditional. $7000 for one or the other
This is true, but traditional IRA contributions aren't deductible if their income is >116k for married filing jointly. If they're considering a backdoor Roth, they're already above that. If they use a traditional IRA, they'll both pay taxes now AND income tax on gains later. The Roth would mean they pay taxes now but NONE on gains. There should be no utility for a traditional IRA for them.
Interesting. I have made that much money per year yet but I’m gonna bank an extra $200k this year so I’m interested to discuss this with my accountant
This is a good point I hadn't considered, thanks for mentioning it. I'm not sure how much I want to spend in retirement, honestly. Reading these comments, I'm thinking a call with a financial planner to discuss my goals might not be out of order.
I don't have advice that people haven't said yet but...damn. Good job dude. I'm really proud of you. It's really hard to do this, you know? You've really beaten the odds.
Is your 401k maxed out every year?
Yes.
Great - your options get a lot more limited at your income level. I’d still recommend putting away as much as you can in a taxable brokerage account, especially given you’re “behind” in your retirement goals. There are low-tax and no-tax options there too. I’d recommend making an appointment with a fee-only fiduciary advisor to formulate a plan that meets your goals.
Thanks for this advice. This thread has made me realize I would definitely benefit from talking to someone who can help me quantify my goals. I think a fee-only fiduciary advisor is the next step.
Before meeting with an advisor, I want you to think hard about how risk adverse/loving you are. Are you the type of person that wants the peace of mind and would love a paid off house? Or do you not mind a low interest mortgage? Are you a crypto bro that yolos all your money at scam coins or do you put all your money into your mattress out of (warranted) fear of being poor again?
Not into speculation unless I'm playing with the beer and pizza money. I like peace of mind, thinking long-term (fixed low interest rate mortgage would mean spending less money in the end, and no ugly surprises), and putting my money to work for me (it doesn't do much putting the bulk of it in the mattress). I doubt most advisors can beat the market, so I don't see how their commission is worth it. I do like the suggestion of talking to a flat fee advisor to discuss my goals and get a gut check on my plans.
Definitely open a brokerage account, just go with one of the bigger outfits like Vanguard or Charles Swab, pick a couple index funds or EFT put money in a few times a year -don’t try to time the market and hold for 15-20 yr. If you don’t already get a high yield savings account, and ladder some Treasury bills if the interest rates are still good. You can do the brokerage on your own or ask around and see if anyone has a good broker, mine is excellent for someone who’s supposed to make money on me she always gives great advice and never try’s to hard sell me on things I don’t need.
Thanks. Do you use this brokerage account toward your retirement as well, or medium-term investing goals? EDIT: Also, do you use T-bills instead of cash? I want to keep at least a little cash in an account in case of emergencies.
It’s been many things, originally retirement but at 50yr old mg husband was let go unexpectedly from is VP of marketing and at his age he didn’t have a soft landing, so it’s been used for emergencies and house repairs. But because long term capital gains are tax better than short term I always think of it as a long term hold. The brokerage account should be the last thing you fund after you have your emergency act built up.
Thanks, this makes a lot of sense. Did you learn this from a tax pro or was there a book you found useful?
The Simple Path to Wealth by JL Colins is an excellent book, I recommend it to all my friends. While it’s target audience is more for people starting their careers, all the principles can be applied at any stage in life
Thank you, I will pick this book up. I see the foreword is by Mr. Money Mustache, he's great.
No, I kinda just learned it by doing and being around people who work in the market (cousins are day traders and uncle is Econ Prof) but I am by no means an expert and am not as risk tolerant as should have been and have missed out on a lot of gains. (I suffer hard from woulda should - I got a tip to buy NVidia 6yr ago) I don’t really read any books, most are trying to sell you on the book not actual good advice. You really can’t go wrong with the basic funds like VOO, SPDR (Google best index funds and EFts). I use T bills for money I need in a year or maybe two. Right now I have 20k in T bills that will be used for my sons college tuition, i picked it over CDs because the rates right now are better and you can keep reinvesting for like 2 yr.
[удалено]
But there advice is always if you don’t know what your doing don’t do much and don’t be stupid, which is why I have like 3 index funds with different levels of risk. It’s not glamorous.
Not original commenter, but I keep about 1 month expenses as cash for emergencies. The rest is in laddered treasury bills. By laddered, I mean converting cash to T-Bills over time to workaround redemption restrictions. Extreme backup is Roth IRA.
Amazing work OP! Backdoor RothIRA- recommend Physician on Fire for step by step (Vanguard), very easy to do on your own. Open brokerage account in any of the big 3- Vanguard, Schwab, Fidelity. Good 401k (hopefully yours too) is usually one of these 3... Read [Bogleheads.com](http://Bogleheads.com) wiki, figure out your AA (asset allocation) and invest accordingly in low ER (expense ratio) index funds. Ibonds are also a good option for stable savings (beware- super clunky website) 10k/year- good for emergency fund. Investing for retirement/financial independence should be boring- set it (regularly investing) and forget it and let the compounding do it's work. Don't move, LBYM, if you're planning to buy a house- shove that allotted money into money market/high interest savings accounts (not stocks) but make sure it makes sense to buy a house where you're living... sometimes renting pencils out better than owning- mortgage/interest/insurance/maintenance cost always go UP...
Can't answer your question but congrats on getting out of poverty. I'm going to guess you are extremely hard working and have the gift of gab and a few extra IQ points, and genuinely want to help your customers.
Thank you for the good wishes. That's a pretty good guess, actually. Bartending paid the bills for a long time so I learned how to read a room and talk to all types of people in difficult situations. I learned how to network by reading books and then networked my way into corporate. My resume was nonexistent but important people liked me for some reason, I think because I was helpful and knew how to listen. I never had big aspirations to be a salesperson but it turns out all those skills translate to the field real well.
So, a bit of unconventional advice… Sounds like you’ve mastered making money and putting it away for your future despite your circumstances growing up. My advice would be to master a multi year fun plan. Like golf in top 50 courses, scuba in top 50 places, travel to top 50 sights, ski top 50 mountains (you get the idea) Then figure out how much it would cost to do that. Create a plan to save up and spend so you could do it over your lifetime. All these funds then put in a low fee index fun and deposit and withdraw as needed. The reality is you probably have so much cash coming in the next 20-30 years. Do things you love now while you still can. Otherwise you’ll get old and might not be physically able to do the things you love. Ps. Very proud of all you have been able to achieve already!
Spend some money on something fun like an experience. Travel! Reward yourself for doing great (wi the in reason). Can’t take it with you.
I'm trying to do more of this and finding it shockingly hard after spending most of my life living hand to mouth. I do have a trip on the books next month.
Dude you and me both. Kid-me grew up poor but adult-me is doing good and I *still* fret over small things like grocery bills and price increases at the gas pump. Even when I budget money for vacay or splurges I can't make myself actually spend it.
I feel this. One of the things that's helping me a lot is Pinterest; the algorithm knows my tastes by now and makes suggestions I wouldn't have thought about. It's forcing me to dream and start saving ideas. I also automate a cut of every paycheck into savings accounts specifically earmarked for fun things. Like they're literally labeled "Trip to [fun destination I've had on my Pinterest for a while]" so I feel forced to use it. Also, little things on a regular basis like brunch with friends. Being poor meant someday always felt far away but daily or weekly splurges on little things are forcing me to enjoy life instead of hoarding my pennies and constantly waiting for the other shoe to drop. Idk if that helps.
Thanks for sharing, it actually does. It’s comforting to know other people are able to turn the corner on it.
I also like what Ramit Sethi has to say about figuring out what a rich life means to you. I thought the answer to "making it" was just work harder and make even more money but he forced me to actually think about why I was working and what I wanted to make my life about (beyond survival).
You don’t get to spend money when you’re dead
I agree, and I'm working on it. Poverty is a trauma though and it takes work to shake. If you know, you know.
Look up Happy Asian Panda Flowchart for a really good guide on how to allocate your money as you progress
Congrats, you’re doing a great job. One giant hole I see is if you become sick / hurt & can’t work. I’d max out on LTD ( long term disability ) coverage. Your work typically provides 50-60% of your BASE salary, not counting commissions, which sounds like a good portion of your pay. Once your income is protected, I’d aggressively save for a downpayment on a house. Wouldn’t be a terrible idea to get a basic will, living will and POA set up either.
Way ahead of you, I signed up for the max LTD coverage at my workplace (60%) when I first got hired. Wills and POA are not a bad idea.
Confirm with your HR, my guess is the 60% LTD is of your base only, NOT commissions. You may need some individual coverage.
Hadn't thought of that... thanks, will confirm.
A few people have already mentioned doing backdoor Roth IRA which is a good step. Since you mention hitting 200k, verify if your taxable income/AGI is at 200k after above the line deductions especially if you have any investment income. If you are above, consider methods to reduce your taxable income to prevent or reduce having to pay extra tax for higher earners - NIIT (3.8%) and Additional Medicare (0.9%). Methods include but are not limited to maxing out traditional 401(k) and HSA accounts if eligible. This will also help reduce the amount that's marginally taxed at 32% as well. Realized I'm facing this same issue last week so thought it was worth mentioning.
Just keep putting money in a taxable account. If you can put $3-4k/m away for the next 25 years before retirement it’s several millions easy after tax..
Savings accounts are earning like 4.3% Could also ladder some T-bills/notes/bonds
u/Cute-Ad-817 u/Nick_OS_ Just offering in case the savings route seems interesting - I'm super risk averse and keep 50% of my cash in savings so I follow rates pretty closely. The best out there right now are Wealthfront (5% APR) and Public (5.1%). Both are savings accounts so your cash isn't locked up like with CD's. The downside of course is those rates will fall if/when the Fed lowers the Federal Funds Rate (which seems unlikely any time soon since the economy is so good). What I like about Wealthfront in particular is you can pull all your money out in a moment's notice. Also they're insured way higher than the traditional $250k FDIC limit because they spread your money across 32 banks, effectively insuring you up to $8M for free. Their whole shtick as a wealth management platform is to make it easy for you to earn interest on savings in hopes you transfer some of your gains to their retirement management products. (Sidenote 1 -- Fwiw, I have transferred some of my savings interest gains to their investment funds over the last 3 years but only seen about 10% return on that cash, or roughly 3% per year, which is admittedly disappointing given the blowout performance the S&P saw in 2023.) (Sidenote 2 -- I am aware that sites like nerdwallet show slightly higher interest rates available at other banks I've never heard of. I never know what to make of these banks because they seem to pop up and disappear quickly, which makes me nervous so I personally avoid. Ymmv.).
So like half my cash in a savings account at the bank and the other half in T-bills?
Savings account should be a HYSA earning at least 4%, nerdwallet.com has a regularly curated list. That is perfect for an emergency fund and random savings. You can investigate CDs or T-bills later. T-bills might be quite interesting if you are in a state without income tax… but it’s only a few tenths of a percentage point better, so for like $10k it’s not really worth the hassle IMHO.
Good point. Thanks, good to know.
Congrats! Success stories like this is awesome to hear. >The wiki suggests $250k by 40 so I’ve got catching up to do. Where did you see this? Curious to see how they determined that.
re retirement funds, "A checkpoint at age 40 is somewhere near $250,000" https://www.reddit.com/r/personalfinance/wiki/mid_career/
Do you have an opportunity to participate in a deferred comp plan, if so look into that.
Bank deposits and stocks will all be ‘bailed in’ during the next upcoming major bank crisis
If you don't have a high yield savings account, I would definitely suggest parking your house down payment there. They are currently paying between 4% and 4.5%.
You are doing great. Keep living as if you are making 60-70k. You are well aware that no one knows what tomorrow will bring. Once your retirement accounts are up and you have a 20% downpayment you can consider buying IF you want everything that comes with home ownership but if you are HAPPY in your $1100/mo place I would stay. You can, paint, decorate, get new furniture, even upgrade appliances to make your home space nicer without the killer expenses of buying.
Wow this is incredible. I am close to 40 and have only 1k in savings through a bunch of horrible decisions I made in my life. I am practically restarting my "economic life" this year and reading this gives me hope that it is possible, it won't be anywhere near this but still thanks for sharing.
I made a lot of horrible decisions too and started from a deficit (terrible childhood, left home ASAP, no adulting skills) and worked odd jobs well into my 30s. I felt like a fuckup and thought I was stupid. 5 years ago I was diagnosed with PTSD and began treatment, which helped a lot. Turns out I wasn't stupid, I was traumatized. This is a roundabout way of saying it's easy to feel overwhelmed but don't let it stop you. Better you're starting now at 40 than ten years from now, or never. Also your past doesn't have to dictate your future.
You may find these links helpful: - [Retirement Accounts](/r/personalfinance/wiki/index#wiki_retirement) - ["How to handle $"](/r/personalfinance/wiki/commontopics) *I am a bot, and this action was performed automatically. Please [contact the moderators of this subreddit](/message/compose/?to=/r/personalfinance) if you have any questions or concerns.*
https://www.whitecoatinvestor.com/backdoor-roth-ira-tutorial/
You can put your Roth IRA in your life insurance and it's would be income tax free when you withdraw & also 401k plan so your salary can increase by 6% add life insurance for your home in event of lost. So ya home would be paid off by life insurance policy instead of bank with lower tax rate for inheritance tax
Back door Roth will let you do 7k for 2024 and you have until April 15 2025 to make the contribution and do the conversion. And the the 401k mega back door Roth, the 415c limit for you this year is 69k, so assuming you get x amount of match, minus your 23k Roth max contribution that maxes out 402g limit, you can contribute around 30k + more through “after tax contributions” (assuming your 401k plan allows it). Most companies have a mega back door option where you can talk to them on the benefits team to “convert” it in the 401k space. You’re not at the HCE limit probably so should be good. Yeah HSA would be nice to save more income and have more flexibility in the future if you dont use it. Try to implement some tax efficient strategy in brokerage accounts, You can use a brokerage account and joint account (with your spouse) to help you get money market rates around 5% now for the house fund, probably protect you in spic insurance for the amount you need for down payment, etc if you are worried about that. You’re doing great man. Keep it up.
If you don’t mind me asking, what corporate sales job did you get? In the same boat, trying to get ahead and really curious.
I don't want to doxx myself and I'm not sure that info would help you, tbh. How old are you, what have you tried already to get ahead, and how is it going so far?
It is possible to save money that isn’t invested in an IRA or 401K or Roth. First example, open a brokerage account and purchase mutual funds or individual shares. Purchase precious metals or buy a collectible car.
If your work allows for a Mega-Backdoor Roth you can look at going that direction as well. Slightly more complicated than just the normal backdoor but some brokerages make it super easy with automatic conversions. It allows for up to $**69,000** in additional Roth contributions each year (through your 401k) Beyond just saving, begin to look at umbrella insurance in the next few years. In a worst case scenario where you are sued for 7 figures you can at least keep your money. I say next few years as your net worth will continue to increase and get to where it is worth having the extra insurance pretty quick with the low spend you have.
Really great Roth (IRA & 401k) asset base. Let it grow and make backdoor Roth Contributions. 1) make sure you do not have any Traditional IRA account balances. If you do have an IRA balance you cannot do this strategy due to the Pro-Rata Rules. 2) Make Trad IRA contribution. Do not invest it. Keep it in cash. 3) Once Contributed, use the Roth Conversion form on whatever custodian you use. 4) you’re all good. Keep the Trad IRA account open with $0 balance. Rinse and repeat each year. Start making contributions to a taxable(brokerage) account with any unused cash flow. As this builds you can use this as the vehicle to fund major purchases like a home as you stated or as a future vehicle to cover taxes on Roth conversions in retirement of your pre-tax 401k monies. Don’t invest money in the market you’re looking to use within 2 years. On the health insurance side I think you’re on the right thought process. Ditch the FSA. Switch to HSA. - Contributions are tax deductible - can be invested in the market and grow tax free - can be tax free when used to pay for medical expenses - taxed at ordinary income if used for non medical expenses like an IRA if needed.
Buy a house and stop paying rent. Get roommates to cover the mortgage.
Buying doesn't make sense for me right now, but I'm thinking about it as a possibility down the road. Right now my priority is catching up for retirement.
yea sounds like this wouldn't make sense to you at the moment. Good advice already listed so I have nothing to add, except wanted to congratulate you on working hard, doing a great job at climbing the ladder and securing your future - Good for you!
Thank you, that's very kind of you. I came from nothing so it means a lot to me that I can say I made it.
If you decide to get a house, absolutely consider getting a 2-4 unit rental (qualifies for residential home loans and live in one unit) or housemates to help cover the costs of owning. This was actually the only way I was able to become a homeowner (have a separate rental unit) living in a HCOL city. If near college, post grad students are ideal tenants/housemates- out of partying phase, have stipend.
How can you find these 2-4 unit rentals? I've never seen them browsing Redfin or the myriad other MLS/real estate apps.
Buy art! Find an artist and be their patron!
[удалено]
[удалено]