Does a BackDoor Roth IRA beat a Traditional IRA in the end???

[DR R]

I would like to ask a question about investing in back door Roth IRA even when you are at a high tax bracket today.   I am assuming that I will be at the same high tax bracket when I retire due to high required minimal distributions.  Although we don't know what tax brackets in the future will be, let us just make an assumption that they will be equally high as today.  With that said, is it better to invest today in a back door roth IRA than the traditional pretax IRA?    I think the backdoor Roth IRA is a better choice because I can fully fund the Roth backdoor IRA with the same after tax dollar amount as I would fund the traditional IRA with pretax money.  For example, I could fund either account with $7k.  If both accounts grow at 7% compounded interest, in 10 years,  the Roth account will double to $14k  but the value of the traditional IRA will be reduced by my tax bracket at the time of withdrawal which at a 30% tax bracket as an example, would reduce the net withdrawal by approx. $4k.  So it seems that the Roth investment ( backdoor)  would be a much sounder and valuable investment.   Many FA's disagree and suggest that the final withdrawal value is the same but I don't see how this true.  I would appreciate your thoughts.  Thanks.

 

 

[StarTrekDoc]

So a lot of this in the doc realm is the pretax advantage in high income earners and tax bracket shifting over time. The new brackets make that less likely and concern of the reverse can happen too now.

We are square in the 24% and rmd risk too so the first bucket filled is roth

[nephron]

you can't deduct a traditional ira contribution if you are in a high income bracket

[Dreamgiver]

Yes, since at the average physician's income there is no deduction for for a trad IRA

 

[Peds]

did you not understand the answers from your last post?

https://www.whitecoatinvestor.com/forums/topic/contributions-to-solo-401k-and-ira/

[Peds]

DR R wrote:

Many FA’s disagree and suggest that the final withdrawal value is the same but I don’t see how this true.

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you do understand you have to account for taxes right in your scenario that cant happen?

[jacoavlu]

DR R wrote:

I am assuming that I will be at the same high tax bracket when I retire due to high required minimal distributions.

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I wouldn't assume this. Have you examined how much balance you would have to have in an IRA that would result in RMDs which would put you in the same tax bracket in retirement as you're in today?

 

The important fault in your logic is that you're ignoring the immediate tax savings on pretax money, and what those saved dollars become over time. Put another way, you're ignoring the up front "tax cost" of Roth dollars when there is pretax space available.

Some have pointed out it doesn't matter, because you can't deduct an IRA contribution anyway. But it's still a fair question because many of us have the pretax vs Roth decision to make in a 401k.

[DR R]

Assume I have no retirement vehicle and my income is too high to contribute in a regular Roth IRA.   My choices could be either contribute to a traditional IRA or back door Roth.  Since I can fund either of these at the maximal amount of $7K,  it seems that the backdoor Roth would result in a much larger final value at withdrawal than the traditional IRA because the Roth IRA withdrawal will not be taxed at the end.  By contributing the same amount of money, either pretax or after tax, the after tax Roth contribution seems to be the better choice.  I understand that the back door roth contribution is money that has already been taxed but this would allow me to essentially invest the equivalent of almost $10K pre tax money versus only $7K pretax dollars in the traditional IRA. I certainly understand that I cannot deduct the traditional IRA contribution if I have already contributed maximally to another retirement vehicle such as a 401K but that was not my question.

 

[DR R]

PEDS-   my previous post was a different situation and does not apply to what I am asking now.

[jacoavlu]

DR R wrote:

invest the equivalent of almost $10K pre tax money versus only $7K pretax dollars in the traditional IRA.

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it's just a math problem and you have to make lots of assumptions - future tax rates, rate of return, length of investment most importantly - so have you actually done the math?

[ZZZ]

It's 7k. Do either. You're overthinking it. In that situation, if you're not saving tons of after tax dollars, you're in trouble either way.

[Peds]

DR R wrote:

I can fully fund the Roth backdoor IRA with the same after tax dollar amount as I would fund the traditional IRA with pretax money.

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again, do you see the flaw in that statement?

pretax vs post tax.....what do you think happens to the tax?

[Insurancepro]

DR R wrote:

By contributing the same amount of money,

It's not the same amount of money. The Roth contribution costs $7,000, the pretax contribution costs less than that.

[DR R]

My question is not being addressed.   When FA's say that there is no diff between a traditional and roth IRA in terms of the FINAL net value, they are assuming that the starting contribution to the traditional IRA is higher than the starting contribution to the Roth IRA.   However, I believe this is incorrect because  it is desirable to maximize the contribution to a tax free, compounded growth investment.   So, it is desirable to put the maximal limit into the Roth IRA, even though this represents after tax dollars.   I am again assuming that tax bracket today and in the future will be the same in this example because that is what people advise when making decisions about investment strategies.

 

 

 

 

 

 

[jacoavlu]

DR R wrote:

My question is not being addressed.

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please restate your question, because perhaps I've misunderstood