So the investment income would be taxed at 0% and the other 9K would be wiped out by the deductions and exemptions. I’ve already exceeded the amount of post-standard-retirement-age savings I need to accumulate but I still keep maxing out my tax-advantaged accounts because to me, the tax breaks are worth the added hassle of getting my money later (if I decide I need some of it before I turn 59 1/2). Interesting. Before I get into the specifics, let me first recap the two major types of retirement accounts. I do max out on MY 401k & MY Roth IRA and for my wife a 5500$ for Traditional IRA. I expect to have the properties paid off before any conversion would happen. I couldn’t agree more that the Traditional 401k outweighs the Roth, but one strategy I am hoping to use is to contribute $5,500 into my Roth now each year to help cover the 5 year gap in income (along with maxing out all other tax deferred options). I did not think about early retirement until recently, so I’ve spent the past decade or so contributing to my Roth IRA. Today. Here’s what a taxable account looks like: Not only is your money taxed before it enters the taxable account, your investment growth is also taxed along the way. Any thoughts on pre-paying property tax or becoming a c-corp to further get tax incentives? I have been active duty Army for the past six years and plan to retire after exactly 20 years in service. Looking forward to reading more from you in 2018! Nick, You were able to — in a few lines — clarify the difference between the Backdoor and Mega Backdoor Roth, which, embarrassingly, is a distinction I struggled to grasp. How about on the tax bomb with forgiveness? Yes, I will be taking advantage of the foreign earned income exclusion though when that time comes! I really enjoy my work and don’t think I want to stop working in the near future… I do want to stop in 10 or so years, but possibly work or consult part time?? Today we’re joined by a friend of the BiggerPockets podcast network, Brandon “The Mad Fientist”. The specific amounts change as tax policy changes and as we all know that changed for tax year 2018. At least that’s what I’m reading. Today we’re joined by a friend of the BiggerPockets podcast network, Brandon “The Mad Fientist”. I’ve been wondering the same. Anyway, I’m looking over your page here and GoCurryCrackers about never paying taxes again. You would want to be sure the plan offers low cost funds and is managed in a fiduciary manner, and you might also want to see if there is a “Roth 401k” option. I’m not MF but the most prudent thing to do in this situation is to simply just rollover your old 401k into a Traditional IRA with either Vanguard or Fidelity. What is a Mega Backdoor Roth IRA? Thanks a lot for answering my questions. Trading a marginal tax rate for an average tax rate makes sense no matter what you think tax rates or your personal income will be in the future. Again, fantastic article. I was reading that the 5 year timer starts Jan 1 of year of rollover; I read this to mean that you should be doing a rollover in December, when you understand your tax year implications, and you still get credit back to Jan 1. If they maxed out their Roth IRA, there is no traditional IRA money to convert. That is why he talks about the traditional retirement track and the FI track. Is the Mega Backdoor Roth IRA still possible with the new tax legislation? This would make ER before 55 difficult. Tìm kiếm các công việc liên quan đến Mad fientist backdoor roth hoặc thuê người trên thị trường việc làm freelance lớn nhất thế giới với hơn 19 triệu công việc. Rekisteröityminen ja tarjoaminen on ilmaista. No guarantees with the exploding deficit that taxes stay this low. Any thoughts? If I contribute to a Traditional IRA or 401k right now and invest the tax savings into a “taxable account,” like you mention, then wouldn’t my return on that invested money need to be greater than the tax rate of whatever bracket I will be in when I retire and pull money out (the $18k in this example would be about 10%)? I’m thinking 15%, but can’t be sure. Or is it better to invest in the Traditional versions to push the effective tax even lower??? I plan to retire in ten years, I’m 31 and will be 32 this year. There are two questions for everyone that I could use some help with: 1) With the bigger child tax credit, the triple-tax-advantaged HSA will not lower my income taxes at all. You have both options, Traditional & Roth, available with the Solo (at Vanguard anyway; check your options before opening an account with your financial institution). Is there a way to get around this penalty? You should have a non-retirement account with sufficient funds available to cover you for at least those first five years until you are able to access your rolled funds. Thank you and well done. 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. I’m worried that the Traditional contributions would nullify the conversion somehow. I updated the post so let me know if you think it’s clearer now. And your deductions are reduced at incomes lower than that. Nice run-down! If so, it’s a great way to give yourself … Thanks a lot for this summary! In this article, I’ve shown how a Traditional IRA can become a completely tax-free retirement vehicle when combined with a Roth IRA. Thank you. (surplus meaning above my SIMPLE IRA match)Since it is going to be taxed anyway on any conversion? I am slowly building a google sheet that is really tailored to our situation and accounts. HSA (if available) The added benefit is you’ll get a jump start on filing your 2014 tax return! Hi MF! Also thanks for your travel cards posts. If you are single, none of your IRA contributions are deductible if your MAGI is over $71,000. I get my mail forwarded to my parent’s house in Florida but I’ll likely still need to file a Vermont tax return. 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. Great article, you wrote about things I have never even thought about, and that is amazing given my CPA certification. I was considering a low-cost index fund, but I believe you have to have $10,000 to start one? Running the numbers, I currently fall into the 15% tax bracket and will for at least the next few years. You can have a traditional IRA converted to a Roth IRA tax free…. and a child tax credit of $2,000 (that is completely refundable up to $1,000 and partially above $1,000), would there be a refund of zero, about $1,120, or something else? Also, don’t have a whole lot left over to save along the way after maxing out my TSP contributions. You can definitely contribute to both an IRA (deductible or nondeductible/Roth) as well as a 401K plan in the same year. The goal is to shuffle things so that you never pay taxes on the money; not at the time of contribution, nor conversion, nor withdrawal. It is the use of the traditional IRA that causes you to have that extra 5k of taxable income, all of which will be taxed at your marginal rate. Thanks a lot for the comment, xyzzy. So I’m effectively limiting my “net” contribution to the 401(k) by also stuffing the government’s (future) taxes in there. Yeah, “bridging the gap” between FIRE and 59 1/2 was the main concern behind my original question. This is of course why the conversion strategy proposed in this post works. My strategy throughout my 20’s was to plow as much money into my Roth 401k and Roth IRA as possible due to the obvious benefits of no taxation in retirement; however, since the early retirement bug bit me in the past year when I found ERE and MMM (and now your blog today), I’m not so sure . I know you strategy focuses on early retirees (moving a 401K to a traditional IRA and then Roth IRA) but when your employer offers both what do you do?. He’s back! He’s back! and 5) would anyone be concerned if the bulk of their retirement savings is in Voya as opposed to, say, Vanguard or some such? 2% of $500,000 is only $10,000 so I must still withdraw $10,000 which is taxable income. I’m really glad to hear you’re enjoying the site. I would love to use Traditional, but my employer caps my tax-free contributions to 25% of my income. I do agree taxable money should be used before withdrawing from Roths in most situations though. The real milestone where you can’t get around taxes on the traditional IRA is when you are forced to start taking RMDs at 70.5 (as well as taking social security if you are able to defer it that long financially). (after age 70.5). So let me make sure I understand this. I know for a fact that there has to be a cost-of-living number where if you need to withdraw say 100k a year out of your pre-tax traditional 401k, you are now paying taxes on things you never would have paid taxes on in a Roth to begin with and you were better off using a Roth for your retirement accounts. I haven’t seen that question addressed. Do your calculations take this into account? Maybe someone else out there has tried it and could chime in? That’s great you are able to do that though and it is definitely worth the extra effort to get the tax-free growth that Roth IRAs provide. Thanks for the help! To answer your question, if you’re single with no other income, you’d be able to convert $10,000 completely tax free in 2013 ($6,100 standard deduction and $3,900 exemptions). Right now, the bulk ($700,000) of my retirement money is in a traditional IRA. So my accountant recommends maxing out her 403b before contributing to my retirement accounts, which I will do. It makes for a nice easy reference. But you said your wife does and will work probably longer than you so how do you avoid her taxable income raising your joint income while you are performing these roth conversions? I’ve never really understood how that works. 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! Thanks a lot for the link. Lovin’ the blog so far, great post. I’ve been out of commission for a few days, so sorry for the delayed reply, but I’m glad to see Justin stepped in with an excellent response (thanks a lot, Justin!). This should completely avoid the income limits for the Roth and there aren’t (I don’t think) any income limits for a Roth conversion. What do you mean by deductions and exemptions? That’s also a good point about being able to move to a state with lower taxes after retirement. Thanks for the awesome article, enjoyed reading it and interesting results…. I’ve posted before about a small additional benefit for someone with similar goals to my own: Having this pre-tax tIRA money means my monthly contributions to my nest egg are just a little bit bigger (and my growth quite a bit faster over time), so this helps me achieve my goal “coast-FI” number considerably sooner than if I brought home the money and invested it otherwise or paid low-interest debts. It’s a shame that 401ks are dripping with fees. Can I use Backdoor methods to create a Roth IRA on my Wife’s account along with Traditional IRA? I realize the 457 is sweet because you can take it out early…but it does ultimately get taxed as ordinary income. Austin, my $.02. No post that I have read so far summarizes so succinctly all key strategies we need to keep in mind and plan for in advance. To cover that five year waiting period for the first batch converted to be available, should you invest into a Roth IRA 5 years early so that you withdraw the principal and live on that? Show Notes. Can somebody clarify this for me please? Today though, let’s dive into some of the strategies I’ve already written about to see what’s still possible under the new legislation…. It’s amazing how many engineers and software developers are on the path to early financial independence. If you know you won’t be able to convert tax free is it worth the “hassle” of the ladder? Total net worth right now is about 1MM (mostly in our house though :( ). They’re talking about contributing the maximum you can, currently $18000, with only a portion being matched. 21-36 for a total of fifteen working years. Maybe because I’m an engineer :-). What I’m really trying to say, I think, is that I can fit more of “my” money in a 401(k) when I contribute to a Roth rather than a traditional–I’m sure you’ve thought about this. Success! However, if your time period is long, say 20 years, it’s better to convert early and have the roth grow tax free at a compound rate. I see in the comments where you indicate $10,000 based on the deduction and personal exemption (single filer) so I’m intepreting that as follows: if I get $20K from capital gains and dividends I’ll pay $0 tax on that (under the income limits) so basically my $10K conversion would be ordinary income that would be reduced to $0 once you consider the deduction and personal exemption. To lower tax payment after FI, does 401K have to be rolled over to a traditional IRA account first, THEN to a ROTH IRA? Since my income is high, I just max out my 401K, 17K/yr (pre-tax contribution) and get the full company match. MEGA Backdoor Roth IRA. Goal: Find the best theoretical conversion amount for each year, for up to 40 years, that will completely drain the 403b, and minimize the taxes paid (and the lost time-value of paying taxes earlier rather than later). ArchiLife, it sounds like you are doing great. How can the 9k be tax free – you said earlier it would be counted as ordinary income and that you were in the 15% tax bracket so why isn’t it and the other $25k taxed at 15%. Spending some time going back and re-reading your articles, all are fantastic. (FYI – I’m a SCORE volunteer helping others start businesses; great organization for small biz owners and entrepreneurs looking for free business advice). Thank you for your excellent summary of the new tax law strategies. I’m doing that right now to reach FI next year, full retirement 2 years after (got to get a boat :-). Perhaps unsurprisingly, Brandon is a developer like Andrew. I make $60,000/year; in ten years that’ll reach around $70,000. Thank you Brandon for keeping us informed! Thank you for making this information available and easily digestible. Would you recommend a home equity line of credit, interest only with a 10 year period, to fund early retirement, take the tax deduction IF you itemize, and forgo an early withdrawal penalty, while you wait and convert? I just think the benefits of tax-free contributions far exceed the benefits of tax-free withdrawals so I’d always choose a Traditional 401(k), when given the choice. Being self employed is great in that it can give you some flexibility in setting your salary and potentially deferring income to manage taxes. the conversion) – $6,100 standard deduction – $3,900 exemption = $0 tax. I am concerned or perhaps just confused that the “pro rata” rule would prevent me from minimizing taxes on the conversion of traditional IRA to Roth IRA. This changed some, and perhaps got simpler, with the 2018 tax changes that happened after you posted your question. The recharacterization horse race seemed like kind of a PITA, so I’m not sad to see it go. ... Mega Backdoor Roth… Also, you indicate in an interview that you can move all the money over to a roth in this way – assuming an ere of 29 and that you would need to finish by 59 – that works out to 9k * 30 years = 360k. Now that it’s in there, I can see that it makes the post even clearer and more complete so I really appreciate the feedback! We do have a relatively high sales tax to make up for it, though the cost of living is substantially cheaper than some of the other non-income tax states. How does this work out for those of us in states where traditional IRA contribution are taxed? Your email address will not be published. I too reached the same conclusion with my mortgage. Can you roll over the IRA when you are still working to avoid taxes later or does this only work when in a lower tax bracket and not working as much? As TFB’s article says, “Until you know you can generate from your Traditional 401(k) enough income to fill the lower brackets, it doesn’t make sense to contribute to a Roth 401(k).”, That can be reworded as “[When] you know you can generate from your Traditional 401(k) enough income to fill the lower brackets, it [does] make sense to contribute to a Roth 401(k).”, Or, as TFB says, “If you have a defined benefit pension plan and/or you expect to have a large balance in Traditional 401(k)/IRA, large enough to fill the lower brackets every year, then contributing to Roth makes some sense.”. I have a 457 plan that I plan to contribute the max to for another 10 years, at which point I will be 60 (not that early, I know…) and the account will have about $350,000 in it (it’s earning 4% in Voya [formerly ING] and is 100% invested in “stable principal,” meaning nowhere near the stock market). Am I missing something? I heard Congress wants to base upon income instead of tax brackets like before. I guess it would depend on which one lowered the tax bil the most, ya? You just need to make sure you have enough to “bridge the gap” between FIRE and 59 1/2 when you can access more of the tIRA/401k/403b contributions. I’m excited to continue working towards FI! The wisdom is that we should pay our mortgage off early to free up money, but after spending days running the numbers, I changed my strategy and am NOT paying off my mortgage early. Great article – very clear. My wife and I both max out our 401k accounts through work. I don’t qualify for HSA (and my work doesn’t charge me anything for my current insurance, nor offer any stipend if I decline it), so I’ll just keep going with the Roth IRA. Thanks so much for the post MF. I’ve since run the numbers to find a Roth conversion ladder is possible in my case without pushing me into a higher tax bracket. You said in your post that we should contribute to an Traditional IRA during your working years for the tax deduction on your income but what if your AGI is over limit >$72,000 limit resulting in no tax deduction. At one point I would have called myself an organic chemist, but with my new job I’ve kind of been shifted to more of a synthetic/polymer materials scientist. I guess we can always move though. Today we’re joined by a friend of the BiggerPockets podcast network, Brandon “The Mad Fientist”. 1) You are absolutely correct. However, I have recently decided that I need some diversification (at the very least in some tax-advantaged retirement accounts). I know the traditional funds provide a great value in that my money will grow tax-deferred. A) continue maxing out our 401k accounts AND make non-deductible contributions to a Traditional IRA? Join over 100,000 others on the Mad Fientist email list and get instant access to my FI Spreadsheet! I plan to retire at 70. But we will have enough Roth IRA contributions to last 5+ years of living expenses. Never even heard of a IRA horse race before so I guess it’s no love lost :] thanks for the report. Is it not the deductions you can take during early retirement that make the Traditional IRA to Roth IRA conversion tax-free that make this strategy beneficial? Is there any potential disadvantage to starting this conversion 5 years pre-ER, so that it is ready to go right away? Employer 401ks usually have higher expense ratios (ER) that really eat into your investments over the years that you’re employed. An accountant (or FI forums) can be quite helpful here, as most people are unaware of all the possible exemptions and deductions. Does the money has to sit in the IRA for a minimum of five years? I plan to wait until I walk away from my career and do the Roth conversions when my (passive) income is more in the 10-12% tax bracket. I make $88,000 a year (filing single), and will shortly be maxing out contributions to my 401k. If you have no other deductible traditional IRA’s, then you convert the non-deductible traditional IRA to a Roth IRA with no additional tax since you never got the tax deduction in the first place on those funds due to your income. Do you do your taxes yourself using an online tool like TaxAct or TurboTax? It is my understanding that there is a 10% withdrawal penalty regardless of the amount for any funds taken from a 401 or traditional IRA before the age of 59 and a half. Thank you so much for what you do for others, and especially for young people like me. Esp loved your ‘get a university job’ article. If I understand correctly, once I convert the ~10k from traditional to roth, that amount won’t be taxed if I had no other income because of standard deductions and exemptions and it will be penalty free after 5 years. My wife and I work for state government (fairly relaxed lifestyle, 40.0-hour week, but hopelessly underpaid). With this income, will the conversion ladder work for me, or should I be putting into Roth. Fidelity has a good calculator for this year and 2018.https://www.fidelity.com/calculators-tools/ira-contribution-calculator . 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). I wouldn’t want someone to come across this post in passing and use it for their IRA strategy only to be getting double-taxed for being above the income limits. For example, I want to live on $30K a year in my ER. I found this Forbes article about the IRA conversion you speak of: http://www.forbes.com/sites/josephsteinberg/2012/12/12/warning-about-roth-ira-conversions-often-misunderstood-irs-rule-can-cost-you-money-and-aggravation/ It warns against conversions because if you have more IRA money than the amount you want to convert to Roth, you pay tax on ratio of taxable to total. Opening an … That is 38,700 for singles and 77,400 for couples above the standard deduction. You rock! 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. Do you have your mail forwarded overseas? One would already have over 300k to convert over time to the Roth ladder. Hello! 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