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As I dive further into the topic of Backdoor Roth accounts, Roth conversions and Mega Backdoor Roths...I realize I am a bit over my head and need to do further study to understand these topics better.

Most retirement books only devote a chapter to briefly discussing the types of retirement accounts available.

if you have an author, website or book to recommend, I would much appreciate it. thank you.
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As I dive further into the topic of Backdoor Roth accounts, Roth conversions and Mega Backdoor Roths...I realize I am a bit over my head and need to do further study to understand these topics better.


Mad Fientist

http://www.madfientist.com/

And go curry cracker

http://www.gocurrycracker.com/

have good articles on those topics.
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As I dive further into the topic of Backdoor Roth accounts, Roth conversions and Mega Backdoor Roths...I realize I am a bit over my head and need to do further study to understand these topics better.

Here's one from a few years ago - since it was from before the IRS ruling on converting 401(k) after tax contributions (what I am assuming you are calling 'Mega Backdoor Roths') - it doesn't include information on those, but it gives a good overview on the details of a backdoor Roth:
https://thefinancebuff.com/the-backdoor-roth-ira-a-complete-...

I will disagree with the recommendation that the author gives to wait between contributing and converting. I don't think that's necessary.

The mechanics of converting 401(k) after-tax contributions are dependent more on your 401(k) plan, anyway. If your plan doesn't allow after-tax contributions (mine doesn't) you can't use this technique. If it does allow them, there are likely some rules on how much you can contribute and how often you can convert. For instance, Joel's 401(k) plan does allow these contributions, up to a certain dollar amount per year, but allows you to do the conversion only once per quarter.

AJ
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This is not exactly what you asked for, but related. Once you have money, you want it to last. Worded another way, how much money do you need to retire/stop working?

I have seen dozens of opinions on the fabled "Safe Withdraw Rate" and more than a few are just plain dangerous in my view. The concept of re-entering the workforce 10 or 15 years into retirement is spooky. So let me suggest you read a dull book by the person who "invented" the 4% rule. I did not find errors - rather this is about as exciting to read as say intermediate number theory.

https://www.amazon.com/dp/0975344838/ref=wl_it_dp_o_pC_S_ttl...
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I have seen dozens of opinions on the fabled "Safe Withdraw Rate" and more than a few are just plain dangerous in my view. The concept of re-entering the workforce 10 or 15 years into retirement is spooky.
_______________________

You don't like flipping burgers or being a WalMart greeter?

Yes, getting back into the workforce after a decade or so, with the pace of world today would indeed be more than a little 'challenging'
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Thank you, I look forward to digging into this reference info.

The one question I keep coming back to is this:


Do Roth IRA conversions hold any advantages for older IRA owners (say people in their 50s), regardless of any benefits for future generations?
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RoadScholar5 asks,

Do Roth IRA conversions hold any advantages for older IRA owners (say people in their 50s), regardless of any benefits for future generations?

</snip>


If your traditional IRA is going to be large enough at age 70 to throw you into a higher tax bracket when you start the Required Mandatory Distributions (RMDs), it might make sense to reduce its size with Roth conversions well before then.

intercst
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Do Roth IRA conversions hold any advantages for older IRA owners (say people in their 50s), regardless of any benefits for future generations?

There is no investing benefit to Roth IRAs. They can invest in exactly the same universe of investments as traditional IRAs. Therefore, the benefits to a Roth are, at best, second order benefits. The main benefit must come from the investment returns themselves.

So keep the bigger picture in mind through this. The most important thing to do is to save and live below your means. The second most important thing is to invest wisely. Taxation pales in importance to these two. Taxation will never rescue you from poor investing choices, nor will it cost you all of your investment gains.

The benefit of Roth accounts is in choosing the timing of when you pay income taxes. There is no free lunch here. With a Roth IRA, you choose to pay taxes now instead of later. With a traditional IRA, you pay taxes later instead of now.

That means you need to compare your taxes now to some projection of what your taxes will be later. That makes a crystal ball (or a Magic 8 Ball, or something of similar utility) vitally important in this process. I'm being both funny and completely serious here.

Sometimes, your taxes now are at some extreme which makes the choice easy. If you have little or no income for a year, you will have little or no tax. It's hard to do better than that, so choosing to pay taxes now (i.e. choosing a Roth IRA for that year) is an easy choice. Likewise, you may have a year with unusually high income. Perhaps you've been accumulating your company stock in an ESPP for many years, and now your company is being bought out, forcing you to sell all that stock and recognize a gain that is 2 or 3 or 10 times your annual salary. Your tax is probably never going to be higher, so choosing a traditional IRA (choosing to pay taxes later) is the obvious choice.

Maybe your taxes later are easy to predict. If you have no significant retirement savings and no significant pension plan, your future taxes are going to be small to zero because of the lack of income. So choosing to pay taxes later (a traditional IRA) is the smart choice. Or you already have a couple million dollars stashed away in 401k and IRA accounts, meaning you will have significant taxes later. But you are retiring early and will have little income for the next few years. So paying taxes now (using Roth IRAs) is the clear winner.

But most of the time, you're going to be in some kind of middle ground. You have your typical income now, and you have to project what your taxes will be in the future. That projection will need to take into account your current savings, what kind of accounts those savings are in (traditional, Roth, or ordinary), your projection of future political moves (will your tax rates increase or decrease, will structural changes in taxation happen and how will those potential changes affect you) any expected inheritances or unusual expenditures, and even your lifespan.

In short, it's a lot of guesswork with a big uncertainty factor. About the best you can do is be aware of both your financial situation and any expected changes in tax law. Then if one of the obvious situations comes up, be prepared to take advantage of that. The rest of the time, you might hedge your bets, putting some money in traditional IRAs (or 401ks) and some in Roth IRAs (or 401ks).

And don't forget the importance of savings in ordinary accounts - those without some tax deferral or acceleration mechanism. (Non-IRA and non-401k accounts) It is only in those accounts that you can get the benefit of the lower tax rate on long term capital gains and ordinary dividends. And only those accounts can benefit from tax-free municipal bond interest.

I have long advocated for entering retirement with your savings in three kinds of accounts: traditional IRA/401k accounts, Roth IRA/401k accounts, and ordinary accounts. Having all three available to you lets you pick and choose from where to take the money at the time you take it, allowing you to take advantage of whatever the tax laws are at the time. You will miss the home-run of picking the single best account for you, but you will also miss the mistake of having all of your money in the worst account for you. And even that theoretical "best" and "worst" may vary from year to year in retirement. Having some money in all three allows you to pick and choose as needed.

--Peter
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The one standing advantage of ROTHs is no RMD
But as you said, that essentially works its way as to 'when' you choose to pay your taxes.

All I know is, if we do in fact take a big dive in personal income tax rates over the next 4 years, I am hedging my bets and moving a nice chunk of money into ROTHs
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Those with 401Ks, to which they are contributing.....might wind up with regular IRAs when they leave an employer and choose to roll that 401K into an IRA.

That's what happened with me......

And just let it sit......no big deal and didn't think of converting it bit by bit......it was significant but not equal to my other savings.

Well.....I lived off the other savings for 17 years....

This year I hit RMD age...and of course, with another 17 years of growth in the IRA, it spins off a pretty significant RMD......

Now, looking back...it might have paid to have paid income taxes on converting...say 10% a year to a ROTH......which would have been a few thousand a year extra in taxes......

Then again,on the other hand......the 'foregone gain' gain on that money paid in taxes - over 17 years.... could be significant.....

Guess I'm just going to have to ramp up the charitable donations a bit more in the coming years.....be a 'benefactor' here and there.....



t.
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"But you are retiring early and will have little income for the next few years. So paying taxes now (using Roth IRAs) is the clear winner."

This is my situation.

My current buckets are an existing Roth, a 401K and various regular taxable accounts.

I have been looking into the strategy of converting my 401k to an IRA upon leaving employment and then doing annual conversions from that new T-IRA to Roth accounts - and trying to understand how it might benefit me - from all angles.

Thanks
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The benefit of Roth accounts is in choosing the timing of when you pay income taxes.




You can also pull out contributions tax- and penalty-free.
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You can also pull out contributions tax- and penalty-free.

Not tax free, the taxes were prepaid. Important to understand when deciding between Roth & Traditional IRA's.
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Do Roth IRA conversions hold any advantages for older IRA owners (say people in their 50s), regardless of any benefits for future generations?

The only real advantage is that, by paying the tax with non-IRA money, you effectively are putting extra money into the Roth.
The DISadvantage is that you'll be paying ~25% tax rate now instead of ~15% after you retire (depending on your personal tax situation.
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Minimizing taxes, or keeping as much of what we earn as possible, I assume is most people's objective. But it's rather difficult to achieve in practice because there are so many variables. That forces us to make a lot of guesses about future tax laws, income and expenses, and necessitates continually determining whether to defer, or pay more taxes today to save more later. And that is pretty much a lifelong pursuit, daunting even for those well educated and knowledgable about current tax laws. That says a lot about our tax system.

Tax advisors generally assume income in retirement will be lower than during one's working years, so usually it makes sense to max-out tax deferred investments to minimize taxes today, and then if contribution limits permit and resources are abundant enough then put what you can into Roth. But that's not a perfect formula because if you have income or significant expenses in retirement, it could be more advantageous to have as much money as possible in Roth and/or savings.

Assuming one retires at 62, that affords you 8 years before RMDs kick in. That period is likely the best time to convert regular IRAs to Roth, which has a dual effect; (1) it reduces one's regular IRA total (by the amount converted), which effectively reduces the amount one will be required to draw each year to comply with RMD schedules. (2) it gives one more Roth to work from to keep tax exposure down. But rhetorically I wonder whether that is the best approach.

I always figured deferring as much as possible today was the best option for me. So over the past 15 years I've maxed out tax deferring options, and I've seldom contributed to Roth. Where contribution limits permitted, and when I had enough, I took my tax returns and sometimes additional money from savings, and put it into Roth. That strategy has led to a lopsided 7.3:1 ratio of regular IRA to Roth, and a 2:1 ratio of regular IRA to Roth+savings (i.e. non-taxable).

I expect to narrow those ratios down a bit by the time I retire, but I suspect I will still end up lopsided, even if I am able to do significant conversions after retirement before RMDs come into play. I would guess this is how many end up as they are looking down the stretch to their retirement. Our current tax system basically herds us into this kind of mix.

What is your mix? I'd be curious to know what others are seeing.

If anyone knows of any useful references or guidelines for calculating these things I'd love to know about them.

-----
Invest wisely my friends
CMFSoloFool
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Hello SoloFool

My percentage breakdown is as follows

Tax deferred accounts 46%

tax free (Roth) 38%


taxable accounts 16%


Retiring in 1 or 2 years, working withdrawl selection

based on whatever the tax code is at the time.


Jim k
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Thanks Jim. Mine are currently 68% tax deferred, 9% Roth and 23% taxable accounts.

Did you get to your mix by specifically opting for Roth over tax deferred, or by conversion?

-----
Invest wisely my friends
CMFSoloFool
Ticker Guide: AFSI, NTGR, OTEX, RAVN & VRSK
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Hi SoloFool

My wife and I decided to max out the roths to achieve

a balance in retirement allowing for flexibility in

withdrawl type to best maximize our net income in retirement.

We have gotten the match at a minimum in our workplace plans.

most of the time contibruting more. Basically 15 to 20% of

our income for 24 years.now retirement is right around the corner.

2 kids through college That was a fun 8 yrs keeping the retirement

plan going plus 20 percent of our income for 8 years for college.


JK


PS Iomega got me started here owned it may 95 through may 96

What a ride!
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Jim, thanks for the update. It makes sense. I'm still 6-8 years away from retiring, so I may have to start channeling more to my Roths.

Curious what ratios others may be aiming for.

-----
Invest wisely my friends
CMFSoloFool
Ticker Guide: AFSI, NTGR, OTEX, RAVN & VRSK
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