Roth IRA to supplement 401(k)?

Grouse and Brewery Builder, are you guys making non-deductible contributions to a Traditional IRA? If so, can I ask why you’d go that route instead of putting it in a taxable investment account?

For you younger guys, a word of warning. Do not heavily invest in 401k’s blindly. Invest as much as you can on other investments like Roth’s, HSA, or even traditional IRA’s.

Financial advisor told us over investing in 401k’s can have a serious issue when you hit 70-1/2 years old and are forced to take money out of the 401k. It a required distribution withdrawal. And there is a tax hit as income.

Just something to keep in mind.

toddrun wrote:

For you younger guys, a word of warning. Do not heavily invest in 401k’s blindly. Invest as much as you can on other investments like Roth’s, HSA, or even traditional IRA’s.

Financial advisor told us over investing in 401k’s can have a serious issue when you hit 70-1/2 years old and are forced to take money out of the 401k. It a required distribution withdrawal. And there is a tax hit as income.

Just something to keep in mind.

401k/IRA required distributions are only a significant concern if you have enough assets overall that you don’t need to make the withdrawals. Having significant assets anywhere is a good problem to have.

john23 wrote:

Grouse and Brewery Builder, are you guys making non-deductible contributions to a Traditional IRA? If so, can I ask why you’d go that route instead of putting it in a taxable investment account?

I am in this camp, aka Back Door Roth. This applies if you don’t qualify for a Roth due to income.

Post tax contributions to a traditional IRA in 2020. January 2021 then convert to Roth, repeat each year. It’s a legal loophole to contribute post tax money to a Roth if you aren’t allowed to go the direct route.

patk wrote:

<div class=”d4p-bbt-quote-title”>john23 wrote:</div>
Grouse and Brewery Builder, are you guys making non-deductible contributions to a Traditional IRA? If so, can I ask why you’d go that route instead of putting it in a taxable investment account?

I am in this camp, aka Back Door Roth. This applies if you don’t qualify for a Roth due to income.

Post tax contributions to a traditional IRA in 2020. January 2021 then convert to Roth, repeat each year. It’s a legal loophole to contribute post tax money to a Roth if you aren’t allowed to go the direct route.

Got it – that makes sense with the roth conversion assuming it fits with your tax strategy.

Also, some other options for collecting after 55 and before 59 1/2 may be: rule of 55, rule of 72T and SEPP (substantially equal periodic payment).

john23 wrote:

Grouse and Brewery Builder, are you guys making non-deductible contributions to a Traditional IRA? If so, can I ask why you’d go that route instead of putting it in a taxable investment account?

Essentially, are you talking about the so-called back door Roth?

We are boxed in as to what we can do / what it makes sense to do because of employer contributions to other plans and to our tax situation. If we start messing around, we essentially lose more than we gain.

But that’s why I said for the younger guys out there and for whoever qualifies, make sure you understand that Roth eligibility is not a sure thing. Have a strategy to contribute as much as you can, as early as you can so that you can take advantage of tax-free-coming-out benefits of the Roth.

toddrun wrote:

Financial advisor told us over-investing in 401k’s can have a serious issue when you hit 70-1/2 years old and are forced to take money out of the 401k. It a required distribution withdrawal. And there is a tax hit as income.

You are correct, although as I wrote earlier, this is certainly in the category of a first-world problem or as they say, a good problem to have.

What CAN happen is that if you have a large 401k and you hit 70.5, you are required to take a minimum withdrawal called a Required Minimum Distribution from the plan each year. The “problem” comes in if that RMD is large enough, it can push you into a significantly higher tax bracket and then the government gets a much larger bite out of your 401k when RMD kicks in.

So yes, if you’re eligible, use the Roth to its full advantage, but it has to make sense. There is no point in turning down an employer contribution to a 401k to invest in a Roth where you get nothing from an employer. Also, you have to “do the math” on the fact that 401k contributions reduce your taxable income as you contribute.

Grouse, I was under the impression that you are still contributing to an IRA even though you don’t qualify for a Roth, which would mean that you are contributing to a Traditional IRA even though the contributions aren’t deductible. I could see this making sense if you want to back-door a Roth as patk described (assuming that is part of your tax strategy). But otherwise, I’d think the benefit of contributing non-deductible income to a traditional IRA is outweighed by the flexibility of a taxable brokerage account. I’m going to assume I misunderstood and that you’re not making non-deductible contributions to a traditional IRA.

john23 wrote:

Grouse and Brewery Builder, are you guys making non-deductible contributions to a Traditional IRA? If so, can I ask why you’d go that route instead of putting it in a taxable investment account?

We do it because the interest grows tax free. Just another way to grow tax free when you have exhausted everything else.

By the way, no kids here, so no place to put money there.

This thread has been great, valuable, and appears to be helpful to many. Grouse especially, I appreciate your advice. To me some of the best advice includes the phrase “I wish I would’ve done xyz…” I don’t mean to prosper from another man’s shortcoming, but I really appreciate the brutal honesty and helping out others.

crappie55369 wrote:

Just thinking through this a bit…

With a 401k your money goes in tax free meaning more goes in to grow with investments. With a Roth money goes in already taxed so you have less going in to invest.

So the question really is which would net you more the additional money going in and invested in a 401k or the non taxed money taken out of the Roth in retirement. Not sure I explained that the best

Say you have 20k and you put 10k into a 401k and a taxed 10k in a Roth. So let’s say that means you pit 7500 into the Roth and 10k into the 401k. Let’s say the amount of time each will be invested is 20 years. Will that additional $2500 in the 401k earning over 20 years net you more than the taxes that will be applied on the backend….

Correct me if I’m thinking about it wrong or missing something. I feel like I have my thoughts slightly mixed up

remember that your withdrawal at the end is not a giant tax free lump sum. Its x amount to meet your monetary needs. Where as with a traditional is X amount to meet your monetary needs plus taxes. so even if you factor in taxes at the same rate throughout your entire life, its basically a wash for you during your life.

The advantage of a roth though is when you die and pass it to your children. There is also the feeling that taxes in the future are not likley to be less than they are now.

There is a reason that so many high income earners participate in back door roths. I believe it is prudent to get whatever match you can and pound the rest of it away into a roth. and once you max out your roth, open one for your wife and keep at it.