Minimal taxable savings due to mega backdoor roth...a problem?
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Minimal taxable savings due to mega backdoor roth...a problem?
Hi Bogleheads,
My wife and I are 40 years old, have about $1M in tax-deferred investments and are hoping to retire in 20 years at age 60.
It has recently hit me that we're likely never going to be able to accumulate much of anything in our taxable investment account because we're pretty much tapped out after putting ~$80K/year away in tax-advantaged investments (about $20K year in Roth accounts, $60K in 401K, 403b) and that's with STILL having a lot of room to contribute more to my mega backdoor roth (currently doing $600/mo).
That said, our current plan is to retire at 60 and take social security at 70. Should I be concerned that we'll have VERY little savings in taxable? Do we need to prioritize taxable?
As always, thanks so much for your sage advice.
My wife and I are 40 years old, have about $1M in tax-deferred investments and are hoping to retire in 20 years at age 60.
It has recently hit me that we're likely never going to be able to accumulate much of anything in our taxable investment account because we're pretty much tapped out after putting ~$80K/year away in tax-advantaged investments (about $20K year in Roth accounts, $60K in 401K, 403b) and that's with STILL having a lot of room to contribute more to my mega backdoor roth (currently doing $600/mo).
That said, our current plan is to retire at 60 and take social security at 70. Should I be concerned that we'll have VERY little savings in taxable? Do we need to prioritize taxable?
As always, thanks so much for your sage advice.
Last edited by OatmealAddict on Sun Aug 14, 2022 5:06 pm, edited 1 time in total.
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Re: Minimal taxable savings due to mega backdoor roth...a problem?
Under the existing rules with regard to retirement savings you should be fine. You'll gain penalty free access to the money at 59.5 years old and you'll have a dozen years to work on traditional to Roth conversions (if that's even necessary).JimmyD wrote: ↑Sun Aug 14, 2022 8:34 am Hi Bogleheads,
My wife and I are 40 years old, have about $1M in tax-deferred investments and are hoping to retire in 20 years at age 60.
It has recently hit me that we're likely never going to be able to accumulate much of anything in our taxable investment account because we're pretty much tapped out after putting ~$80K/year away in tax-deferred investments and that's with STILL having a lot of room to contribute more to my mega backdoor roth (currently doing $600/mo).
That said, our current plan is to retire at 60 and take social security at 70. Should I be concerned that we'll have VERY little savings in taxable? Do we need to prioritize taxable?
As always, thanks so much for your sage advice.
If you consider the advice in the Prioritizing Investments wiki page, using a taxable account is low on the list.
I would keep an emergency fund in taxable, just for convenience and easy access.
Regards,
If liberty means anything at all it means the right to tell people what they do not want to hear. -George Orwell
Re: Minimal taxable savings due to mega backdoor roth...a problem?
Retirement spending does not require any money in taxable, so I don't see that as a problem myself. However, a number of posters have reported a problem with having too much in tax-deferred accounts.JimmyD wrote: ↑Sun Aug 14, 2022 8:34 am Hi Bogleheads,
My wife and I are 40 years old, have about $1M in tax-deferred investments and are hoping to retire in 20 years at age 60.
It has recently hit me that we're likely never going to be able to accumulate much of anything in our taxable investment account because we're pretty much tapped out after putting ~$80K/year away in tax-deferred investments and that's with STILL having a lot of room to contribute more to my mega backdoor roth (currently doing $600/mo).
That said, our current plan is to retire at 60 and take social security at 70. Should I be concerned that we'll have VERY little savings in taxable? Do we need to prioritize taxable?
As always, thanks so much for your sage advice.
You already have $1 million in tax-deferred accounts and you intend to put in another $80k a year and work another 20 years. It is possible that your tax-deferred accounts may grow too large and cause you a problem in your later years (RMDs). Retiring at 60 may not give you enough time to do enough Roth conversions to reduce that issue.
This problem is most often seen with people who have a pension, but I believe it can happen to others as well.
There is not really enough information to work with here, but I sense you are putting too much into tax-deferred and/or you do not plan to retire early enough.
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Re: Minimal taxable savings due to mega backdoor roth...a problem?
All of my assets (seven figures) aside from some short-term emergency fund cash, are in tax deferred accounts. I'm quite happy to not be concerned about the tax impacts from dividend/interest distributions, any exchanges or rebalancing etc... and having the potential judgement liability shields retirement accounts may offer.
Because a large chunk of the money is from Roth IRA contributions or Roth conversions, those amounts are available to my pre-59.5 without penalty, so if I needed to dip into it for an emergency, or decided to retire early, I could easily start a "Roth IRA Conversion Ladder" to fund the early retirement.
If you have the opportunity to put additional money into a tax deferred retirement account, I wouldn't let the opportunity slip by in favor of using a taxable account. There are ways to get the money out of retirement accounts early without penalty, there are no ways to go back in time and put the additional amounts in to the tax deferred/tax free account. If you put the money into a tax deferred traditional IRA/401k and decide you really wish you had payed taxes on that money, you can always convert it to Roth and be tax free forever, which is a much better deal than paying taxes on it so you can put it into a taxable account.
You don't want to be 100% tax free income in retirement though, you'll want at least enough taxable income to take advantage of the standard deduction, and maybe even the bottom tax brackets relatively low rate.
Because a large chunk of the money is from Roth IRA contributions or Roth conversions, those amounts are available to my pre-59.5 without penalty, so if I needed to dip into it for an emergency, or decided to retire early, I could easily start a "Roth IRA Conversion Ladder" to fund the early retirement.
If you have the opportunity to put additional money into a tax deferred retirement account, I wouldn't let the opportunity slip by in favor of using a taxable account. There are ways to get the money out of retirement accounts early without penalty, there are no ways to go back in time and put the additional amounts in to the tax deferred/tax free account. If you put the money into a tax deferred traditional IRA/401k and decide you really wish you had payed taxes on that money, you can always convert it to Roth and be tax free forever, which is a much better deal than paying taxes on it so you can put it into a taxable account.
You don't want to be 100% tax free income in retirement though, you'll want at least enough taxable income to take advantage of the standard deduction, and maybe even the bottom tax brackets relatively low rate.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham
Re: Minimal taxable savings due to mega backdoor roth...a problem?
You tell us how much you have in tax deferred, but not in Roth. Roth IRA contributions are readily accessible. MBR conversions in an IRA have pretty lenient conditions, depending on your actual process. If you are doing an in plan Roth conversion, rather than rolling out to IRA, that will still be readily available at retirement.
The income cutoff for Roth IRA contributions is generally within the 22% bracket, so I would ask that you double check your income bracket, especially with income increasing this year.
The income cutoff for Roth IRA contributions is generally within the 22% bracket, so I would ask that you double check your income bracket, especially with income increasing this year.
Re: Minimal taxable savings due to mega backdoor roth...a problem?
https://www.irs.gov/retirement-plans/pl ... e-for-2022
married filing jointly or qualifying widow(er) < $204,000
single, head of household, or married filing separately and you did not live with your spouse at any time during the year
< $129,000
22% bracket for filing jointly tops at $178,150
for filing single/separately tops at $89,075
You can be well into the 24% bracket and still able to contribute to a Roth IRA.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham
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Re: Minimal taxable savings due to mega backdoor roth...a problem?
For many situations, Roth beats taxable hands down even though current tax law treats equities in taxable accounts favorably.
Re: Minimal taxable savings due to mega backdoor roth...a problem?
Assuming a 4% real return and a 5%/yr withdrawal ratio, with no further traditional contributions, in 20 years you could withdraw $1M * 1.04^20 * 5% = $109.6K/yr. For MFJ this AGI (assuming standard deduction) is the start of the 22% bracket. Different assumptions could lead to a different conclusion.
How does an expected 22% federal (plus whatever state) marginal rate on withdrawals compare with your current federal+state marginal tax rate saving for traditional contributions? This gets at retiredjg's point about how you might choose between traditional vs. Roth contributions.
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Re: Minimal taxable savings due to mega backdoor roth...a problem?
OP here. To clarify, we have about $250K in Roth accounts. The remainder (about $750k) in tax deferred. Apologies for the confusion on that.
sailaway wrote: ↑Sun Aug 14, 2022 10:07 am You tell us how much you have in tax deferred, but not in Roth. Roth IRA contributions are readily accessible. MBR conversions in an IRA have pretty lenient conditions, depending on your actual process. If you are doing an in plan Roth conversion, rather than rolling out to IRA, that will still be readily available at retirement.
The income cutoff for Roth IRA contributions is generally within the 22% bracket, so I would ask that you double check your income bracket, especially with income increasing this year.
Re: Minimal taxable savings due to mega backdoor roth...a problem?
No problem - just multiply the $109.6K/yr * 0.75 = $82K/yr. That's firmly in the 12% federal bracket (again, based on the given assumptions).
Re: Minimal taxable savings due to mega backdoor roth...a problem?
This does not change my thinking much. I still think you need to consider if you might be putting too much into tax-deferred accounts.
However, if you meant you are putting $80k into tax-advantaged accounts and not all of that is going into tax-deferral....that could change things a lot.
So, how much is going into 401k, 403b, 457, and traditional IRA? How much into Roth accounts?
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Re: Minimal taxable savings due to mega backdoor roth...a problem?
From 60 to 70 you will want to take the majority of withdrawals from tax deferred, to avoid taxation of SS benefits and lessen the effect of RMDs. I would not exhaust all tax deferred though.
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Re: Minimal taxable savings due to mega backdoor roth...a problem?
If you stop working at 60 you can begin withdrawing from your t-ira/401k and since you will have no other income you will probably be in a lower tax bracket. I'm assuming you are in a higher tax bracket now so I think it's actually a tax advantage to contribute pre-tax dollars now and pay the taxes while in a lower bracket later.
Re: Minimal taxable savings due to mega backdoor roth...a problem?
It might be helpful to edit the OP to reflect that you have $750k in tax deferred and how much of the $80k annual savings is going to tax deferred (aka traditional) vs Roth.
Both traditional and Roth are tax sheltered, but only traditional is tax deferred.
Re: Minimal taxable savings due to mega backdoor roth...a problem?
Although I am a little further along in the journey (age 50), I think we may have similar situations and potential concerns:
Current Portfolio: 1.7M
401k/IRA: 1.25M (72%)
Roth: 340K (20%)
HSA: 54K (3%)
Cash: 100K (6%)
Desired Retirement: Age 60
I have been doing Mega Backdoor for the last 3 years and drawing down cash to fund it as my income can not support maxing all of the available tax advantaged opportunities each year. I believe that prioritizing contributions to tax advantaged accounts is the best way to reach my long term goals and thus far have never had a taxable account as such for investing purposes.
However, I have been thinking about the need to have a sufficient amount of cash available during early retirement to provide flexibility to manage income and conduct Roth conversions. My initial thinking is maybe 200-300K (couple of years living expenses / conversions). I have not yet decided when / how I may do this...but suspect it will may need to start in the next 5 years to give me enough time and space to accomplish it.
To that extent, based upon the limited information you have provided us, I think you have some time yet before you need to think too much about a taxable account and would suggest you keep on plugging away as you are.
Best wishes.
Current Portfolio: 1.7M
401k/IRA: 1.25M (72%)
Roth: 340K (20%)
HSA: 54K (3%)
Cash: 100K (6%)
Desired Retirement: Age 60
I have been doing Mega Backdoor for the last 3 years and drawing down cash to fund it as my income can not support maxing all of the available tax advantaged opportunities each year. I believe that prioritizing contributions to tax advantaged accounts is the best way to reach my long term goals and thus far have never had a taxable account as such for investing purposes.
However, I have been thinking about the need to have a sufficient amount of cash available during early retirement to provide flexibility to manage income and conduct Roth conversions. My initial thinking is maybe 200-300K (couple of years living expenses / conversions). I have not yet decided when / how I may do this...but suspect it will may need to start in the next 5 years to give me enough time and space to accomplish it.
To that extent, based upon the limited information you have provided us, I think you have some time yet before you need to think too much about a taxable account and would suggest you keep on plugging away as you are.
Best wishes.
Re: Minimal taxable savings due to mega backdoor roth...a problem?
I retired this year at the end of June at age 46 off of $1M in taxable, $100k in 401k/Roth, and 21.5 years vested into a state pension.
I know this in controversial but my plan is to use dividends to live off of. By doing this I will pay $0 federal taxes. You can make up to around $80k per year currently from qualified divs and pay $0 federal taxes on them.
My div income this year is $36k and I expect my div growth rate to be at least 6% per year going forward. I'm using SCHD and VYMI split 60/40 i.e. current global market cap weights. Over the life of each etf I have a combined average growth rate per year of 11.65% in the current 60/40 split. Individually SCHD has an avg growth rate per year of 12.10% and VYMI is 10.97%.
I know this in controversial but my plan is to use dividends to live off of. By doing this I will pay $0 federal taxes. You can make up to around $80k per year currently from qualified divs and pay $0 federal taxes on them.
My div income this year is $36k and I expect my div growth rate to be at least 6% per year going forward. I'm using SCHD and VYMI split 60/40 i.e. current global market cap weights. Over the life of each etf I have a combined average growth rate per year of 11.65% in the current 60/40 split. Individually SCHD has an avg growth rate per year of 12.10% and VYMI is 10.97%.
Retired in 2022 at the age of 46. Living off of dividends.
Re: Minimal taxable savings due to mega backdoor roth...a problem?
Just to clarify, most, if not all state pensions are taxable. So, your pension plus dividends must be under the limit in order for the dividends to be tax free. Now, if your pension happens to be roughly equal to your standard deduction, these are effectively similar concepts.jh wrote: ↑Sun Aug 14, 2022 2:19 pm I retired this year at the end of June at age 46 off of $1M in taxable, $100k in 401k/Roth, and 21.5 years vested into a state pension.
I know this in controversial but my plan is to use dividends to live off of. By doing this I will pay $0 federal taxes. You can make up to around $80k per year currently from qualified divs and pay $0 federal taxes on them.
My div income this year is $36k and I expect my div growth rate to be at least 6% per year going forward. I'm using SCHD and VYMI split 60/40 i.e. current global market cap weights. Over the life of each etf I have a combined average growth rate per year of 11.65% in the current 60/40 split. Individually SCHD has an avg growth rate per year of 12.10% and VYMI is 10.97%.
Also, I get the same tax treatment whether it is from dividends or selling.
Re: Minimal taxable savings due to mega backdoor roth...a problem?
And if you retire earlier, you can withdraw Roth conversions from at least five years ago tax-free at any age. Also, if you leave your job after age 55, you can withdraw from the 401(k) at that age with no penalty, just regular tax. (If you roll the 401(k) into an IRA, you lose that benefit; you can only withdraw penalty-free at 59-1/2.)retired@50 wrote: ↑Sun Aug 14, 2022 8:44 am Under the existing rules with regard to retirement savings you should be fine. You'll gain penalty free access to the money at 59.5 years old and you'll have a dozen years to work on traditional to Roth conversions (if that's even necessary).
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Re: Minimal taxable savings due to mega backdoor roth...a problem?
Thank you. I've just done that. Out of the $80K/year we're saving, $20K is going into Roth accounts while the remaining $60K is between a 401k and 403b.
Re: Minimal taxable savings due to mega backdoor roth...a problem?
With $750k in tax deferred and adding $60k (and going up) a year for 20 more years, I think you still need to give some thought to whether you will need that much in tax-deferred. If there is a pension, consider putting less in tax-deferral. Without a pension, just keep an eye on it.
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Re: Minimal taxable savings due to mega backdoor roth...a problem?
Thank you. There will be no pensions. Just our savings and social security (hopefully).retiredjg wrote: ↑Sun Aug 14, 2022 5:22 pm With $750k in tax deferred and adding $60k (and going up) a year for 20 more years, I think you still need to give some thought to whether you will need that much in tax-deferred. If there is a pension, consider putting less in tax-deferral. Without a pension, just keep an eye on it.
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Re: Minimal taxable savings due to mega backdoor roth...a problem?
Does the $20k going into Roth accounts consist of $6k each to Roth IRAs and $7.2k ($600/mo) into Roth via a mega back door?
Is the $60k going into your 401k and 403b all Traditional contributions ($41k employee elective deferrals and $19k employer match)?
Is the $60k going into your 401k and 403b all Traditional contributions ($41k employee elective deferrals and $19k employer match)?
Last edited by HomeStretch on Sun Aug 14, 2022 5:47 pm, edited 1 time in total.
Re: Minimal taxable savings due to mega backdoor roth...a problem?
A couple of really big employer matches?
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Re: Minimal taxable savings due to mega backdoor roth...a problem?
Of the $60k to tax deferred:HomeStretch wrote: ↑Sun Aug 14, 2022 5:36 pm What is the breakdown of the $60k going into your 401k and 403b? Is $7.2k ($600/mo) going into Roth via a mega backdoor with the remainder of $52.8k going into Traditional ($41k employee elective deferrals and $11.7k employer match)?
$20,500 to 401k with $8k match
$20,500 to 403b with $11k match
Of the $20k to Roth:
$6k to my backdoor Roth
$6k to wife's backdoor Roth
$8k to my mega backdoor Roth
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Re: Minimal taxable savings due to mega backdoor roth...a problem?
Keep contributing any extra $ to Roth (rather than Taxable) via the 401k mega back door Roth. As others have pointed out, the funds will be accessible. When you retire, not having taxable income from dividends & interest in Taxable accounts will give you more space to do Roth conversions, qualify for higher ACA subsidies, etc.
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Re: Minimal taxable savings due to mega backdoor roth...a problem?
Thanks so much. That makes sense regarding the dividend and interest income.HomeStretch wrote: ↑Sun Aug 14, 2022 5:58 pm Keep contributing any extra $ to Roth (rather than Taxable) via the 401k mega back door Roth. As others have pointed out, the funds will be accessible. When you retire, not having taxable income from dividends & interest in Taxable accounts will give you more space to do Roth conversions, qualify for higher ACA subsidies, etc.
I definitely need to read up on Roth conversions. Is the idea that I'd move funds from the 401k and 403b to our Roth accounts while in a lower tax bracket?
Re: Minimal taxable savings due to mega backdoor roth...a problem?
That is indeed the general idea.
While "tax bracket" is often used as a convenient shorthand, it's the marginal tax rate that matters. As that article notes, "The marginal tax rate is often the same as the individual's tax bracket, but not always."
The quick estimate made in earlier posts of the income you would incur from traditional withdrawals (whether converted to Roth or spent), and the consequent marginal rate/tax bracket, is a way to estimate whether traditional or Roth contributions now would work best for you in the long run. Is that part clear, or is that included in what you will be reading up on?
Re: Minimal taxable savings due to mega backdoor roth...a problem?
Isn't that plan dependent? I think my 401k only allows a one time distribution. If I'm right I fail to see how I can do Roth conversions before SS kicks in to reduce a high 401k balance. (Just saying, maybe don't count on ability to take multiple distributions from 401k.)
Cheers
I had money, I had none. I had money, I had none. But I never been so broke that I couldn't leave town. (Jim, Ray, Robby, John)
Re: Minimal taxable savings due to mega backdoor roth...a problem?
You are correct, it is plan dependent. The one-time distribution makes the age 55 plan impractical, but SEPP is available.OhBoyUhoh wrote: ↑Sun Aug 14, 2022 9:00 pmIsn't that plan dependent? I think my 401k only allows a one time distribution. If I'm right I fail to see how I can do Roth conversions before SS kicks in to reduce a high 401k balance. (Just saying, maybe don't count on ability to take multiple distributions from 401k.)
Cheers
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Re: Minimal taxable savings due to mega backdoor roth...a problem?
750k with 60k/year is going to be ~3.4 million. At 4% you are looking at bit over 130k. So yeah you will have some money in the 22% bracket. Looks like about 35k tax deferred would max out the 12% bracket. Now I would guess they are paying 22% now (Not many people making 100k are saving 40k tax deferred and another 20k in a roth. And if they are, they have no need to work til 60....) so it is sort of a wash about doing roth/traditional with the rest. 20 years is a long time for random stuff (layoffs, benefit cuts, health issues, poor market returns or just deciding to retire at 55) to show up which makes trying to super optimize this stuff not worth the effort. Personally I wouldn't do anything till I was at 1.5-2.0m or so. But that is based on very limited info about your situation and plans.FiveK wrote: ↑Sun Aug 14, 2022 10:58 amAssuming a 4% real return and a 5%/yr withdrawal ratio, with no further traditional contributions, in 20 years you could withdraw $1M * 1.04^20 * 5% = $109.6K/yr. For MFJ this AGI (assuming standard deduction) is the start of the 22% bracket. Different assumptions could lead to a different conclusion.
How does an expected 22% federal (plus whatever state) marginal rate on withdrawals compare with your current federal+state marginal tax rate saving for traditional contributions? This gets at retiredjg's point about how you might choose between traditional vs. Roth contributions.
Now the one argument for taxable is that you have short term spending in the next 20 years that you can't cash flow. I would argue you are better off taking contributions out of your Roth is those cases show up.
Re: Minimal taxable savings due to mega backdoor roth...a problem?
It is plan dependent. Some plans only allow 1 distribution - so living on age 55 distributions does not work for everybody.OhBoyUhoh wrote: ↑Sun Aug 14, 2022 9:00 pmIsn't that plan dependent? I think my 401k only allows a one time distribution. If I'm right I fail to see how I can do Roth conversions before SS kicks in to reduce a high 401k balance. (Just saying, maybe don't count on ability to take multiple distributions from 401k.)
Cheers
However, this does not affect your ability to do Roth conversions. All you need to do is do the 1 time rollover (which is not taxable) and do Roth conversions from IRA.
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