posted by Automatik

Not really, this is the work around. 

https://www.whitecoatinvestor.com/how-to-do-a-backdoor-roth-ira-with-schwab/

My MAGI is over the limit to contribute and I have zero in a Roth currently. The plan is to gradually convert my Traditional over the next few years to lesson the tax hit. Then go the backdoor route. Contribute the max to the Traditional ASAP, once January comes, and convert it immediately to minimize taxable earnings.

I thought I would need a CPA, but after a few hours of Google, reading, and ChatGPT....I figured it out.

this is what i do. i started doing it before i hired my financial advisor in Pittsburgh back in 2018, but kept doing it  and didn't really think it was a big deal.

my new company offers a Roth 401k and I'm 100% funding that  option now and not putting anything into the pre-tax 401k route. the thought being i can use the principal i've contributed to bridge the gap from 50 (or whenever i retire) and 59.5 when i can start drawing the gains without penalty

posted by j_crazy

my new company offers a Roth 401k and I'm 100% funding that  option now and not putting anything into the pre-tax 401k route. the thought being i can use the principal i've contributed to bridge the gap from 50 (or whenever i retire) and 59.5 when i can start drawing the gains without penalty

It really needs to be based on a projection of your tax rate in retirement.  If that's equal or higher than your current bracket, THEN you should fund a Roth.  I've done a lot of analysis on this, and for a single person IMO that max is somewhere around $500k (in order to avoid RMDs making your SS taxable, taking into account property taxes, maybe mortgage interest and other deductions).  Probably double that for married couples.  Although lower if your house is paid off and you have low property taxes.

There are other games you can play, like massive backdoor conversions in the years between retirement and collecting SS (but, again, IMO you max your SS if you begin taking the lower amount at 62.5 because market gains meet or exceed the higher SS you get waiting longer to take the benefit).  The taxable SS is a hard trap to avoid, because cap gains will also trigger that.

My employer also offers after-tax 401k contributions.  Not every plan allows this, but I then immediately roll those over into a Roth IRA tax-free.  Basically, I'm saving into a Roth IRA instead of a brokerage (which is otherwise subject to cap gains tax).

I still max out my pre-tax 401k contribution because I expect to be in a lower bracket in retirement.  Not sure how long they will continue to allow backdoor conversions, but my plan in retirement would be to drain my brokerage first before collecting SS, and also backdoor conversions of 401k so my distributions are small enough to offset with deductions.

This is my general rule of thumb:  If you're in the lowest two tax brackets, you should fund a Roth.  If you're early in your career (and making less money), you're probably better off in a Roth so it can grow.  Later in your career when you're in a higher bracket, over a decade you can grow a pretty sizeable 401k with the catch-up contribution and employer match.

The middle two brackets is more of a wash.  IMO, that's a bracket you'll probably find yourself if you build a decent nest egg with 401k and SS.

If you're in the top 2-3 brackets, it probably saves you in the long run to max the pre-tax contribution.  If the laws don't change, you will be able to do some tax arbitrage converting that to Roth before you begin collecting SS.  You can do it while collecting SS, too, but the conversion will trigger taxes on that SS and then it doesn't make a ton of sense.

posted by j_crazy

open a traditional, fund it but don't invest, convert it to roth and roll it into existing roth IRA.  that's what i do every year, do it for myself and my wife.

I also do this.  Wish I knew about it 10 years ago, and backdoor converted some during the pandemic when my income took a big hit.

$7k per year or whatever the limit is won't move the needle much for me inside of [hopefully] 10 years from retirement.  But the cap gains savings vs. a brokerage might pay for a new car down the road.