Really confused about Roths

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Topic Author
Huckleberry
Posts: 31
Joined: Tue Mar 10, 2015 5:38 pm

Really confused about Roths

Post by Huckleberry »

Hello everyone,

I'm new here. My husband and I are currently in the process of reading through the various books recommended in Bernstein's "You Can Get Rich Slowly" pamphlet. Our plan is to sit down and take a hard look at our financial plan after we educate ourselves a bit more.

In the meantime, for whatever reason, I just cannot get my head around all the rules for Roth IRAs (and Roth 401(k)/Roth TSP). With only two exceptions (2008, the year I graduated from graduate school and started working; and 2013, when I was on unpaid maternity leave for five months), my MAGI (or our MAGI, once married) has always exceeded the maximum for contributing to a Roth IRA, so we've never done it. My husband could have contributed to a Roth before we got married, but didn't. As a result, all of our tax-advantaged retirement savings are in tax-deferred, rather than tax-free, accounts:

Husband's 401(k): 177k
My tIRA (rolled over from former job): 99k
TSP: 38k

We're currently contributing the max (18k each) to 401(k)/TSP. My husband's company matches up to 5% and also has profit-sharing in a variable amount (lately, another 5%). The total TSP match (including agency automatic contribution) is 5%.

Should we be converting some (or all) of my tIRA into a Roth? We do have some extra money in a taxable account that could be used to pay the taxes, although it's earmarked for an eventual down payment. We expect to be in the 33% tax bracket this year, plus 9.3% for CA. Absent tax reform, I don't see us moving into a higher bracket any time soon (we're just across the 28/33% threshold), but we could end up in a lower bracket if we move to a lower COL/lower income area, or if I take unpaid maternity leave again.

What about the Roth 401(k)/Roth TSP options? My understanding is that there's no income limits for these (but the total contribution limit for 401(k)/TSP remains 18k, including Roth contributions). Should we switch some portion of our contributions to the Roth plans?

We're both 31 and I expect our MAGI this year to be around 260-270k. We were subject to AMT last year and probably will be again this year.

Any advice would be much appreciated!
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Duckie
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Re: Really confused about Roths

Post by Duckie »

Huckleberry, welcome to the forum.

It looks like you are the one with the TSP. If that is correct you can roll your $99K over to your TSP. That will allow for future 
Backdoor Roth IRA
 contributions.

As for which is better, pre-tax or Roth, it depends on your situation. For most people pre-tax is better but there are exceptions. Here are two articles by tfb who posts here often: And here is a long discussion on this board.
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celia
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Re: Really confused about Roths

Post by celia »

Welcome and thank you for contributing to the forum.

The conventional wisdom on converting traditional retirement accounts to Roths is to do it in the years your income is lowest. Maybe one of you will return to school, take a sabbatical, or retire early. Many people on this forum (including me) retire a little early and do conversions for several years before they start collecting Social Security. (According to Boglehead past surveys, most of us plan to start taking SS at age 70 to get a much larger monthly benefit, which is nowhere near what the average American does).

I once read a posting in another forum where a retired couple, both former teachers but then in their 80s, posted how their taxes were so high. They were taking Required Minimum Distributions from traditional retirement accounts which had grown for ~50 years and the RMDs were more than their previous working salaries. They asked what they could do to reduce the taxes. Basically the answer was there wasn't anything they could do, but change their mindset. You see, the money they had set aside was not 100% theirs. It also "belonged" to the IRS and state who now were entitled to their shares. They were dismayed to realize this, but it was true. The taxes are DEFERRED only until one reaches age 70 1/2.

Another way of looking at this is that a dollar in a traditional retirement account is worth less than a regular dollar, since the taxes will be due when the dollar is withdrawn from the account. On the other hand, a dollar in a Roth is worth more than a regular dollar as it will never be taxed until after it has been withdrawn AND continues to grow (or tax laws change).

I hope this gives you another perspective, that you are possibly looking for.
A dollar in Roth is worth more than a dollar in a taxable account. A dollar in taxable is worth more than a dollar in a tax-deferred account.
Bill M
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Joined: Sun Dec 30, 2012 10:10 pm

Re: Really confused about Roths

Post by Bill M »

Welcome to the forum.

One more point to add to the confusion--there is this crazy five-year rule with Roth accounts. One of the requirements for a tax-free distribution from a Roth account is that the account exist for five years prior to the distribution. When you move funds from the 401k (or TSP) to a Roth IRA, those funds "inherit" the date from the Roth IRA. So there is a good reason to convert some minimal amount from a traditional IRA to a Roth IRA, independent of tax rates.

With that level of income, and subject to the AMT, you're likely in the exemption phaseout zone. Your marginal rate is 35% until the phaseout ends, and then drops to 28%. I considered the years at 28% to be "low tax years" and used them for Roth conversions.
Topic Author
Huckleberry
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Joined: Tue Mar 10, 2015 5:38 pm

Re: Really confused about Roths

Post by Huckleberry »

Thank you, Duckie, celia, and Bill M! Your responses are very helpful. In particular, thank you Duckie for the links to tfb's posts, which I found quite elucidating.

I hadn't considered the possibility of rolling my tIRA (currently in a target retirement fund at Vanguard) into TSP. This is probably a good idea, given TSP's low costs and the availability of the G fund. This would also enable me to start making back-door Roth contributions.

So here's my current plan (I'm not going to run out and do this today, but maybe in a couple weeks after mulling it over with my husband):

(1) Move tIRA into TSP.
(2) Husband contributes max (18k) to t401(k); I contribute max to tTSP.
(3) Continue saving for college ($500/month into 529).
(4) Meet down payment savings goal (note: we already have a six-month EF).
(5) Use "extra" savings, likely from husband's year-end bonus, to contribute max to non-deductible tIRAs ($5.5k each), then convert to back-door Roths.
(6) Excess in taxable accounts.

I think this approach makes the most sense for now. In future years, it might make sense to shift some of our t401(k)/tTSP contributions into Roth 401(k)/Roth TSP, but I don't think that time will come until we're either done saving for other goals (down payment, college), we move to a lower tax state, or our income decreases due to me staying home with kids or going part time.

If you think I'm missing something, please weigh in!
Logan T
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Location: Colorado

Re: Really confused about Roths

Post by Logan T »

Huckleberry wrote: (1) Move tIRA into TSP.
(2) Husband contributes max (18k) to t401(k); I contribute max to tTSP.
(3) Continue saving for college ($500/month into 529).
(4) Meet down payment savings goal (note: we already have a six-month EF).
(5) Use "extra" savings, likely from husband's year-end bonus, to contribute max to non-deductible tIRAs ($5.5k each), then convert to back-door Roths.
(6) Excess in taxable accounts.
Sounds like a great plan!
You really don't need to begin saving for retirement before you reach 60. At that point, simply save 250 percent of your income each year and you'll be able to retire comfortably at 70. -Jonathan Pond
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OZAR
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Re: Really confused about Roths

Post by OZAR »

Great Plan!

You might also be able to use a HSA (Health Savings Account) for additional tax advantage space.

http://www.wsj.com/articles/health-savi ... 1401481345
Topic Author
Huckleberry
Posts: 31
Joined: Tue Mar 10, 2015 5:38 pm

Re: Really confused about Roths

Post by Huckleberry »

Thanks. I hadn't considered using an HSA to gain additional tax-advantaged space. I'll look into that. We're not currently on a high-deductible plan, so we're not eligible to contribute to an HSA (at least, that's my understanding) but we planned to look into other insurance options during the next open season.
2stepsbehind
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Re: Really confused about Roths

Post by 2stepsbehind »

Huckleberry wrote:
(1) Move tIRA into TSP.
(2) Husband contributes max (18k) to t401(k); I contribute max to tTSP.
(3) Continue saving for college ($500/month into 529).
(4) Meet down payment savings goal (note: we already have a six-month EF).
(5) Use "extra" savings, likely from husband's year-end bonus, to contribute max to non-deductible tIRAs ($5.5k each), then convert to back-door Roths.
(6) Excess in taxable accounts.
...
If you think I'm missing something, please weigh in!
I would change the order as follows as you can always use your roth to pay for college and I don't believe California offers a tax deduction for 529 contributions:
(1) Move tIRA into TSP.
DO THIS TODAY. IT WILL TAKE A COUPLE OF WEEKS AND YOU WANT TO BE ELIGIBLE TO MAKE A 2014 IRA CONTRIBUTION
(2) Husband contributes max (18k) to t401(k); I contribute max to tTSP.
(3) Contribute max to non-deductible IRAs FOR 2014 ($5.5k each) IF YOU NEED TO, DIVERT MONEY FROM YOUR SIX-MONTH EF FOR THIS PURPOSE AND THEN REPLENISH and any "extra" savings for contribution year 2015 and convert to back-door Roths.
(4) Meet down payment savings goal.
(5) Looking into HDHP/HSA
(6)Contribute to 529
(7) Excess in taxable accounts
Topic Author
Huckleberry
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Joined: Tue Mar 10, 2015 5:38 pm

Re: Really confused about Roths

Post by Huckleberry »

We've already filed our 2014 taxes. Does that mean it's too late to make a non-deductible 2014 contribution to an IRA?
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Duckie
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Re: Really confused about Roths

Post by Duckie »

Huckleberry wrote:We've already filed our 2014 taxes. Does that mean it's too late to make a non-deductible 2014 contribution to an IRA?
No, it's not too late. Since the contributions will be non-deductible there is no need to amend anything. You will need to fill out and file IRS Form 8606 to track your basis. You will probably only have to fill out lines 1, 2, 3, and 14 on Part I. There will be two forms if you both contribute, one form per person. These forms can be filed separately without the rest of the 1040 forms.

Make sure the custodian knows the contribution is for 2014.

Be aware that you cannot roll over that basis amount to your TSP.
retiredjg
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Re: Really confused about Roths

Post by retiredjg »

I hate to add to the confusion, but there is one other article from tfb that suggests that people with pensions should consider using Roth TSP. I'm not sure I'm in perfect agreement, because with your high income, I think you need to reduce your taxable income as much as possible. But you should read it and decide for yourself. Be sure to read the comments as well.

http://thefinancebuff.com/most-tsp-part ... h-tsp.html

Confusion aside, the traditional vs Roth decision gets lots of attention around here, but in many cases it is just not possible to determine with certainty which will be best in the future. Try to keep in mind that saving money is more important than whether it is saved in Roth status or not.
Topic Author
Huckleberry
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Joined: Tue Mar 10, 2015 5:38 pm

Re: Really confused about Roths

Post by Huckleberry »

Thank you all! I've started the process of rolling my tIRA into my TSP account. Assuming it's processed in time, I'll make a 2014 non-deductible contribution. We'll also make a 2014 non-deductible contribution for my husband (who has never had an IRA) and we'll both plan on making 2015 contributions. The White Coat Investor blog was helpful for the explanation of the Form 8606.

As for the pension and its impact on the tTSP v. Roth TSP decision, my current position is limited to five years. Even if I stick around until the last day and *just* make the requirement of fives years creditable service, my eventual pension would be pretty minimal. Maybe I'll find another job in federal service, but I'm not counting on it.
retiredjg
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Re: Really confused about Roths

Post by retiredjg »

Huckleberry wrote:Thank you all! I've started the process of rolling my tIRA into my TSP account. Assuming it's processed in time, I'll make a 2014 non-deductible contribution. We'll also make a 2014 non-deductible contribution for my husband (who has never had an IRA) and we'll both plan on making 2015 contributions. The White Coat Investor blog was helpful for the explanation of the Form 8606.
The rollover does not have to be processed first. It simply has to be completed by the end of the year in which you do a Roth conversion. If you want to do both 2014 and 2015 contributions and convert only once, that will work too.

Remember that your 2014 contributions are filed with your 2014 taxes.
Topic Author
Huckleberry
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Joined: Tue Mar 10, 2015 5:38 pm

Re: Really confused about Roths

Post by Huckleberry »

retiredjg wrote:The rollover does not have to be processed first. It simply has to be completed by the end of the year in which you do a Roth conversion. If you want to do both 2014 and 2015 contributions and convert only once, that will work too.

Remember that your 2014 contributions are filed with your 2014 taxes.
Good to know. Thanks, retiredjg!
retiredjg
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Re: Really confused about Roths

Post by retiredjg »

Huckleberry wrote:
retiredjg wrote:The rollover does not have to be processed first. It simply has to be completed by the end of the year in which you do a Roth conversion. If you want to do both 2014 and 2015 contributions and convert only once, that will work too.
Remember that your 2014 contributions are filed with your 2014 taxes.
Good to know. Thanks, retiredjg!
Keep in mind that the end of the year thing is critical or your conversion will be pro-rated. Check out line 6 of the Form 8606 demonstration. Don't put it off.
Topic Author
Huckleberry
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Joined: Tue Mar 10, 2015 5:38 pm

Re: Really confused about Roths

Post by Huckleberry »

My Form TSP-60 is in the mail, so let's hope they can process the rollover by year end! :)
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