If you are above the income limit to contribute to a Roth IRA, you’ve probably at least heard of something called a backdoor Roth IRA contribution. Depending on how immersed you are in the world of finance, and how comfortable you are DIY-ing, you may be hesitant to do a backdoor Roth yourself - or you may already be using the strategy.
Curious as to what your marginal tax rate was when doing Roth conversions as suggested by this article versus what your effective tax rate is in retirement. I think this article may be leading people down the wrong road.
It depends (the answers to everything). If somebody saves $3.5 Million by 65 years old and now you have 7 years till RMD at 72 years old. That about $500k a year in spending money and Roth conversions before the RMD age. Said retired person could do nothing which will be a larger tax bill down the road. The point being not everyone will be in a lower tax rate later, marginal or effective. If could and might just be close to the same now.
Good chance most people will be in a lower rate when retired, but not everyone. Not a bad problem to have.
I think my limits are much higher as a 51 year old than you shared in the article of 22,500, right?
I also think it is possibly foolish to have people paying their top marginal tax rate when they could put those dollars into a pretax fund and pay a much lower effective rate on their withdrawals in retirement. I think perhaps its just a flashy way to get what people think is the best thing going, a after tax Roth IRA. Put together an article on why pre and post tax accounts give you the same result if your tax rate is the same before and after retirement.
Adam is right, for those age 50+ you can put an extra $7,500 in your 401(k) and an extra $1,000 in your Roth IRA. The reason why we use top marginal rate is because those dollars are essentially going off (or coming out at the top). If you start to contribute to pre-tax instead of Roth, that reduces your taxable income in your highest marginal tax bracket. Likewise, if you contribute to Roth and reduce your taxable income in retirement, that will reduce your taxable income in your highest marginal tax bracket.
Yes, for those that are 50+ years old in 2023, one can contribute an extra $7,500 per year in one's 401(k)/403(b), for a total of $30,000 per year (i.e., $22,500 + $7,500).
Also, as you mentioned, for those with higher income, it's almost always better to contribute to a Traditional (pre-tax) 401(k)/403(b) rather than one of their Roth counterparts. This is because of the instant tax deduction, which is sizable for those in the higher tax brackets.
Great article, Been doing that for years and now retired.
Curious as to what your marginal tax rate was when doing Roth conversions as suggested by this article versus what your effective tax rate is in retirement. I think this article may be leading people down the wrong road.
It depends (the answers to everything). If somebody saves $3.5 Million by 65 years old and now you have 7 years till RMD at 72 years old. That about $500k a year in spending money and Roth conversions before the RMD age. Said retired person could do nothing which will be a larger tax bill down the road. The point being not everyone will be in a lower tax rate later, marginal or effective. If could and might just be close to the same now.
Good chance most people will be in a lower rate when retired, but not everyone. Not a bad problem to have.
So if you have a Roth portion of your employer sponsored 401k, can you still do the backdoor conversion from a separate, traditional IRA?
drex is right, they are separate limits and contributions, so as long as you qualify for both you can do both!
401K and IRA limits and contributions are separate. The answer is yes. Call the company who has your IRA, they will tell you the same
That’s great to know. Thanks
I think my limits are much higher as a 51 year old than you shared in the article of 22,500, right?
I also think it is possibly foolish to have people paying their top marginal tax rate when they could put those dollars into a pretax fund and pay a much lower effective rate on their withdrawals in retirement. I think perhaps its just a flashy way to get what people think is the best thing going, a after tax Roth IRA. Put together an article on why pre and post tax accounts give you the same result if your tax rate is the same before and after retirement.
Adam is right, for those age 50+ you can put an extra $7,500 in your 401(k) and an extra $1,000 in your Roth IRA. The reason why we use top marginal rate is because those dollars are essentially going off (or coming out at the top). If you start to contribute to pre-tax instead of Roth, that reduces your taxable income in your highest marginal tax bracket. Likewise, if you contribute to Roth and reduce your taxable income in retirement, that will reduce your taxable income in your highest marginal tax bracket.
Yes, for those that are 50+ years old in 2023, one can contribute an extra $7,500 per year in one's 401(k)/403(b), for a total of $30,000 per year (i.e., $22,500 + $7,500).
Also, as you mentioned, for those with higher income, it's almost always better to contribute to a Traditional (pre-tax) 401(k)/403(b) rather than one of their Roth counterparts. This is because of the instant tax deduction, which is sizable for those in the higher tax brackets.