Yes, I actually just tried to enroll in one but I sadly don’t meet my employer’s income requirements. He contributes the $70 directly into his Roth 401(k) where, over the next 30 years, it triples to become $210. Thank you for your links to the two posts. For whatever reason (I don’t know the history), if someone is younger than 59.5 and is taking a distribution from money that was converted less than 5 years ago, then there is a penalty although the money has already been taxed.To withdraw the earnings tax free you must be over 59.5 and the Roth account must have been originally funded 5 or more years ago. You can certainly convert traditional IRA money to Roth in any amount in any year as long as you can pay the tax. Here’s how the Secure Act could create a disaster, We were friendly with our neighbors for decades, until recently. I’m convinced that I’m doing all I can: max out my 403(b), max out my Roth IRA, and put the rest in taxable (haven’t gotten to this last step yet but am hoping to start this year). Though I can generalize my advice as much as possible, every person’s financial situation is different. Rather than overwhelm myself with trying to plan for every stage of my life, I’ve just chosen to reduce my taxes as much as possible now and then I’ll just have to figure out ways to lower my taxes as much as possible at the other stages of my life. We will be pushing our ordinary income in the form of Roth conversions up towards the top of the 12% bracket but by paying these taxes now, hopefully we will avoid a big 22% or even a 24% tax bracket should RMDs and SS hit at the same time down the road. For those with less familiarity, a “traditional“ 401(k) is funded with pretax money while a Roth 401(k) is funded with post-tax money. Our household income is high so we do NOT receive tax deductions for contributing to a traditional IRA. That rate could be hard to beat, even on a low retirement income. I have a defined compensation (pension) plan through work. That might allow me to sock more of my money away into tax-free accounts. We actually don’t make enough to get the full additional child tax credit. This is why some of the tactics I’ve discussed here could be helpful for you and some could be disastrous. :). What do you mean by deductions and exemptions? Would you personally keep contributing to your Traditional 401k once you are in the 15% tax bracket (and put the rest into a Roth 401k)? Given that future tax rates are what’s important when choosing between a traditional 401(k) and a Roth 401(k), your next question might be, “So Nick, what will future tax rates be?” Unfortunately, I have no idea! To me it seems that as I was approaching FI (5 years or less depending), I would beef up my taxable account to cover expenses. Check out this post that my buddy Jeremy at Go Curry Cracker wrote. As I said, a newbie.) Retirement is still 12 years out by my latest projection (will be age 47). Check out the first part of Pat’s comment above and The Mad Fientist’s reply. If you are also able to contribute the max of $3,250 to a Health Savings Account, that should bring down your MAGI to $67,250. I begin full time work next summer and want to be thoroughly prepared before starting! Am I missing something? The best subsidies are given to those with taxable income of 100% to 138% of the poverty level. Would you still recommend a traditional IRA over a Roth if someone can’t retire early (or not very early)? I would rather save on taxes now, however I will be earning above the deductible limit next year, and am wondering if the additional taxes I have to pay due to my Traditional IRA balance when doing a backdoor Roth IRA are worth it or if I should just contribute to a Roth this year. I don’t know whether it’s fair or not but if you can take advantage of both a 401(k) and a 457(b), you should! The last thing I’ll want to do is pay a bunch of state taxes when I’m not even living in a state. Basically, if you’re still paying income tax at all, you should be investing in tax advantaged accounts. So, please, do go ahead with the Roth 401 contributions. I still get the deduction from the 401K every year. I still have some doubts about the Roth conversion strategy though… I need to check my math but I will post a longer comment about that later. Jan my $.02. So for planning treat them the same. If I’m understanding these previous comments that money would not be taxed at all when converting from traditional to Roth? (of course I will if I get some time. Social Security Supplement, which will become around 20K/yr once I hit 62. I do know that costs are lower with the 403b but how much lower compared to the 401k administrative costs? 3) Does the fact that my wife plans on working for some time, potentially to retirement age, defeat the effectiveness of the Roth conversion ladder? I think your point is that since a Roth won’t be taxed at withdrawal, the $5500 in the Roth is “more” than the $5500 in the Traditional. I haven’t read through ALL the comments, so if this question was already asked, please point me there! The 10% early distribution fee would only apply to any earnings you’ve made. Since you can easily convert your 401(k)/403(b) to a Traditional IRA after you separate from your employer, it is just one extra step to get your 401(k)/403(b) money into a Roth IRA using the tax-free method described above. Steve, You can utilize the Roth contributions while you are in the five year conversion waiting period, so having a Roth IRA is not a bad idea. Why do you not have to still pay tax on the $9k that was converted? That’s also a good point about being able to move to a state with lower taxes after retirement. Roth IRA’s have two main advantages (from my personal perspective); (1) their treatment when inherited, and (2) more investment choices compared to 401(k)’s (e.g. Before I get into the specifics, let me first recap the two major types of retirement accounts. I know the rates won’t stay the same, interest, tax, or otherwise–but that is why I’m trying to build a calculator so that as time goes on I can adjust the variables to tweak it. I’ve been considering a strategy that includes withdrawing Roth IRA contributions in order to fund a traditional IRA. He makes $55,000 gross, so our tax rate is negative each year with the child tax credit and additional child tax credit. I’d be interested in some commentary on how this changes if the protagonist expects post-retirement income similar to or above the working career period income. At our income levels we are in the deductible IRA phaseout so it seems best to just put it all in Roth IRAs. So what happens if you max out your traditional IRA every year? There is a third consideration mentioned for some people in these comments, and that is the subsidies for the ACA health insurance plans. …”from the taxable accounts.” In other words, you use the money you have in after-tax accounts such as a taxable brokerage account since that money can be withdrawn at any time. The difficulties I’ve had: Since the 403b theoretically continues to grow each year, the conversion amount must compensate for both reducing the principle and any interest. Incomes over $200K are still be eligible for non-deductible traditional IRA thanks to a recent change in rules. I can’t find anyone who has written about this strategy online, so I was wondering if you or any of your insightful readers might be able to comment on this plan. Am I interpreting this correctly? Great article–it’s made me consider this as a strategy, and I’m doing the math and schedule for myself. But then, to my surprise, the Tax Cuts and Jobs Act of 2017 passed and lowered U.S. federal income tax rates. Of course, I’m 48 and have several other accounts to draw from if/when I can retire prior to age 59 1/2, thereby allowing this to be a moot point. Also, since I’m paying the taxes on the conversion, out of a separate, there is definitely and significant compounded cost beyond the tax bill for all taxes paid. I retired three years ago and am doing this before SS and RMDs both start at 70. All else equal, this implies that the Roth 401(k) would be the better option, as you would pay a lower tax rate now (20%) than you would expect to pay in retirement (23%). If you have an income of just $18,000 in ER, as described above, then you’ll only pay $205 in state income taxes, which is only about 1.1%. We FIRE’d last year and now I’m looking to shift 100% of our rollover IRAs to ROTHs over the next 10 years for me and 20 years for my wife so that we have zero balance in our IRAs before we each hit 70. If you expect to reach FI, but then continue to work because you like it, not because you have to, then this strategy may not be relevant to you. If your income exceeds the limit with which you can claim a deduction for contributing to the Traditional IRA (<$71,000 for single filers, <$118,000 for married filing jointly filers), don't worry about doing any kind of conversion, just direct your savings directly into the Roth IRA. As the chart above suggests, investing that difference at just a 2% rate of return would result in over $250,000 in additional taxable savings for your retirement gap years. Do you have your mail forwarded overseas? Ryan, my $.02. I’m using my HSA as a retirement account, so I do not use my HSA account to pay my medical bills. What might be a good strategy for drawing on the 457? Let me repeat that. I have some immediate plans to save on taxes by moving to a no-state income tax area, or even go out of country to get the federal income exclusion. If your income goes above the tax deferred threshold for a single person (currently about $63K I think) you would probably want to shift to a Roth contribution. Is there anyway around this? I have to ask, where in Japan do you live? Roth IRAs, on the other hand, do not have a required minimum distribution (RMD). HSAs have been OK to me (return ~4% per year)- but I am still not using them (I have a cash flow sufficient right now & for next five years to take care of expenses) so I am 90% invested in equities. Here you are making pre-tax contributions to the IRA or 401K and then the gradual conversion has nothing to do with finding a backdoor to the income limit, it is about limiting the converted amount to minimize the tax paid. I guess im a little confused how the withdrawals from the taxable account in the first 5 years relate to the 4% safe withdrawl rate of your entire portfolio. I look forward to hearing from you again soon. You have changed my mindset on what investment vehicle to choose. Therefore I couldn’t convert any tax-free. Why do I listen to “conventional wisdom” vs thinking for myself?? More than half of my income producing assets are in taxable accounts and I just am not sure how much taxable passive income I’ll actually generate. I’ll probably write a post about it after I look into it more next year. Thanks for the awesome article, enjoyed reading it and interesting results…. Conversely, if you earn too much to get the Traditional IRA tax deductions, you’d also be better off contributing to a Roth, a Mega Backdoor Roth, or simply a taxable account. I’ve known a few people who have volunteered there and it’s been positive experiences for all of them. If your income is low enough that you don’t have to pay taxes anyway, additional tax deductions aren’t going to help you so you should just put your money into a Roth. Any comments on the strategy are appreciated. Any thoughts? We also own an investment property, and by keeping our MAGI low, we can write off up to 50K in passive losses, bringing our taxes to near-zero. I’m still on the fence as well. Is there a way to covert it to traditional without any crazy penalties or taxes? Looking at my MAGI, I would not qualify for tIRA deductions. Is there anything you’d do differently in my case? I’m 57 and plan to retire at 70 if my health holds out. Thank you for all your well-researched articles. If I make roughly 50K a year and is the head of household, what benefits do I get around tax time? If it is, then you will be paying the same (or higher tax rates) when converting. For #2, the idea is to do a conversion when the taxes are minimal. I was curious how you file your taxes, i.e. of all the fi blogs and podcasts, i have really enjoyed yours. Our Roth IRA is all Vanguard stock/bond index mix, so I’m not too worried about it’s volatility. Again, fantastic article. Investor B instead decides to max out his Traditional IRA and then slowly convert it to a Roth IRA after he turns 40. Don, my $.02. (surplus meaning above my SIMPLE IRA match)Since it is going to be taxed anyway on any conversion? I assume this only works if you meet the qualifications for deduction set by the irs? What do you think is best? Remember to include all your fees! 0 to 9,075 10% P my $.02. That is around the income amounts where capital gains start being taxed. You can easily open a Roth and Traditional IRA at Vanguard and do a rollover (trustee to trustee transfer). Depending on your Adjusted Gross Income, you may not even be able to contribute to an IRA at all (check out this article for IRA income limits). I would imagine that you are going to get your 401k by maxing out and reinvesting to quite possibly exceed that amount by 59. The reason is that most likely your new employer 401k will not offer options as great as the Vanguard or Fidelity Traditional IRA. Brian Setzer, If you are out of the country most of the year you also get a substantial income tax exemption. The rule of thumb is to contribute to Roth as long as one is in the 15% tax bracket or lower. The no sales tax states are AK, MT, OR, NH, DE. Success! Even though the fees are bad for your 401(k), I’d say it is still worth maxing it out but only if you switch from a Roth to a Traditional (check out my addendum on this JLCollinsNH post for my reasoning behind this). Why is this true? Simple and easy to understand. 2) You can always do Roth conversions, and no matter what one’s age, the best time to do it is when other income and taxes are lowest. I’ve always joked about wanting to retire today, and I say joked because I didn’t see how it could be possible. I’m thinking that by maxing it out every year I can take advantage of those tax-free gains for my old age retirement, but I’d be able to withdraw the principle to help get me through those bridge years before my ROTH Conversion Ladder Money is available. I would appreciate the documentation to further my learning. Lots to map out. Of course this amount will change over time for inflation and back-and-forth about tax policy. I (we) stopped contributing to our traditional/rollover IRA’s years ago because all the “experts” and online calculators said it was better to contribute to the ROTH IRAs long term and never have to pay tax on the distributions. So if you convert $10,000 from your Traditional IRA and it grows to $12,000 after 5 years, you can withdraw $10,000 without being penalized, no matter how old you are. I think it is, but it makes things a little more complicated for some. At lower tax brackets, that savings might not be that much. From reading your article and the other comments on this page, I’m thinking that we should still contribute to a traditional IRA to allow us to pursue a backdoor ROTH IRA. You can have a traditional IRA converted to a Roth IRA tax free…. I work for a state university, and have access to a 457(b). A traditional 401(k) has the advantage of more options later on, but a Roth may be the smarter choice for big savers. Is Suze Orman right? That is why he talks about the traditional retirement track and the FI track. If you decide to go with a Traditional IRA, you pay tax when you withdraw the money and if you go with a Roth IRA, you pay the tax up front. You might see some more from me regarding the more contentious asset allocation issues…, My pleasure, Joe. It’s a delicate balancing act for sure, when you add in ACA/Healthcare subsidies to the mix. The US progressive tax system has standard deductions and brackets. I already changed my strategy based on this but its nice to hear it from you. Are you eligible and plan to draw the pension at 40-ish, or do you need to live off other funds until you can collect the pension? Hello! That $5,000 contribution they made in 2014 is just part of the amount they withdraw that year so it is being taxed at their average rate. However, this will vary from state to state. Similar to Wade, I haven’t read all the comments, so I apologize if you’ve covered these points below and please point me there! Both invest all leftover money into taxable accounts. Your analysis has proven me wrong. Such a pain! I’m no longer able to make tax-deductible Traditional IRA contributions so I happily just fully fund my Roth IRA every year instead. Or live west South Dakota (no income tax) and shop at Montana (no sales tax). How did Sally end up with more in retirement than Sam? So I see, I am not the only one to have found your blog through MMM :-). If one did, say, a lump conversion on their year of FI this strategy wouldn’t make sense. Is a traditional IRA really the wrong way to invest for retirement? My wife, and I have the perk of telecommuting and gross roughly $210K a year on W2s and some flexible side gigs for about another $20K. We would like to do some Roth Ira conversions before we move to France and before we start receiving social security, but don’t know if France will tax us on the Roth Ira distributions once we begin taking them. You might also want to consider the tax situation in the state you will retire in. You don’t wait to do the conversion. The taxes they paid on their conversions were far lower than what they would have paid had they made Roth 401(k) contributions from the outset. Erik, I’ve been considering the same exact thing. This strategy is referred to as a Roth IRA Conversion Ladder and you may be wondering why everyone doesn’t do this. Thank you for sharing the knowledge. I have been active duty Army for the past six years and plan to retire after exactly 20 years in service. I have a few questions. Right now, my current investments are about evenly split between Roth and Traditional retirement accounts (Roth: IRA rollover from prior employer Roth 401k, current contributions to employer Roth 401k, and current contributions to Roth IRA; Traditional: 401k matching from current employer, 401k rollover from prior employer, plus the ever popular Ultimate Retirement Account (aka HSA)). Also I was super confused about whether to chose a ROTH IRA or a traditional IRA but you definitely made it alot simpler for me to understand…definitely looks like my best route is the traditional ira then convert it to Roth Ira.. Thxs. The IRA contribution limits are $5,500 for individuals in 2013 (subject to income). If you are taking money out of the Roth at the same time as putting money into the Roth you net picture really hasn’t changed much. He has been doing trad to Roth conversions of $25K every year with no problems. Once you give up the ability to contribute pre-tax money to an IRA in 2014, you can’t get that back so I’d rather take advantage of that IRS gift now and then figure out ways to pay less tax later. Most individuals earning less than $220,000 and own a business producing income are able to contribute more to a Solo 401(k) versus a Traditional or SEP IRA. Thanks. I learned about GCC this past week and found this article through them. You are exactly right with your interpretation. You can then do the backdoor Roth for additional savings. For example, I could see saving up lots of cash and using that for the first year of retirement (early or otherwise) and do a 401k/IRA to Roth IRA conversion at that point when you have zero income (other than dividends and interest), which would in theory cause none of the conversion to be taxed at all. Good points made in the article, but it seems worth emphasizing as others in the comments have mentioned that IRA deductions go away above certain income limits depending on filing status. To me it seems like for IBR plans, especially PAYE/REPAYE, it’s a massive advantage to do trad IRA’s and HSA (as well as maxing your SEP IRA or Solo401k. Au contrare – one can withdraw from their Roth IRA PRIOR to age 65 is they take “a series of “substantially equal periodic payments” made over the life expectancy of the IRA owner.” >90% of my net worth is in real estate equity (it is what I understand and I like that it pays me income (8-15%) every month on top of all its other benefits). Assuming one maxes it for fifteen years or so straight out of University and has a total contribution of over 300k before gains does it bring up the Roth vs IRA debate again? I’m curious what you’d do in my situation…. 1) With the numbers in mind, will i still be able to contribute to a ROTH IRA? The average rate however is, Which is of course lower than my marginal rate of 15%. I have a salaried job and contribute to our 401K tho I’m a ways from maxing it out. I agree that tax diversification can be a useful strategy especially if you have plans for early retirement. It’s news to me, but my employer would allow me to double my contributions by using a 457. If you retire early, how are you able to pull from the IRA, TSP, etc without penalty before age 59 1/2? How about on the tax bomb with forgiveness? I originally planned on opening a roth IRA account as I think I’d be in a higher tax bracket in retirement, but now thinks it makes more sense to open a traditional one as I won’t be working in the US by then. Over the past 30 years, the laws have changed considerably in favor of 401K and IRA accounts which allow people like us to benefit from pretty much automatic retirement planning now a … I can’t see any real difference. What you’ll notice though is that Investor B actually has quite a bit more in his taxable account. Sure! Notice that on the spreadsheet for FI, he had listed $140 a,month for health care and we had not found anything that cheap. Also, it turns out someone brought up the same idea earlier in the comments. Quick question: I’m currently covered by a retirement plan at work and been maxing out my 401K with company match and maxing out my Roth IRA. I think the best way to decide on Roth vs Traditional is to try and make your taxable income for every year to be in the same tax bracket or as close to it as possible. Thanks for all your good work! This is exactly what I have been doing since I stopped working in 2007 at age 54. For example, New York State residents who are at least 59½ are entitled to a state income-tax deduction of up to $20,000 if that money comes from a qualified retirement plan and meets some other criteria. Great article. If you’re married, filing jointly, you won’t pay any with exemptions. But we will have enough Roth IRA contributions to last 5+ years of living expenses. As a 27 year-old who has only recently begun to realize that financial independence is possible, you are an inspiration. We’ll probably have way more traditional 401k/IRAs than we need, but if we retire early and our taxable accounts grow well, we’ll have the chance to do some Roth conversions then (and, ideally, at some point, might start putting some of our traditional 401k contributions into Roth 401ks, when we’re certain we’ll have more than enough in traditional 401ks to fill our lower tax brackets in retirement) Would it make more sense in my situation to use an taxable account since I will be needing the money in ten years? Assume when they retire, they withdraw $20,000 every year from their IRA to live on. 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