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

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  • Avatar DR R 
    Participant
    Status: Physician
    Posts: 41
    Joined: 12/20/2017

    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.

     

     

    #238370 Reply
    Avatar StarTrekDoc 
    Participant
    Status: Physician
    Posts: 1966
    Joined: 01/15/2017

    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

    #238373 Reply
    Avatar nephron 
    Participant
    Status: Physician
    Posts: 154
    Joined: 05/09/2019

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

    #238374 Reply
    Dreamgiver Dreamgiver 
    Participant
    Status: Physician
    Posts: 839
    Joined: 03/09/2017

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

     

    #238375 Reply
    Avatar Peds 
    Participant
    Status: Physician
    Posts: 4240
    Joined: 01/08/2016

    did you not understand the answers from your last post?

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

    #238380 Reply
    Avatar Peds 
    Participant
    Status: Physician
    Posts: 4240
    Joined: 01/08/2016
    Many FA’s disagree and suggest that the final withdrawal value is the same but I don’t see how this true.

    Click to expand…

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

    #238381 Reply
    Liked by ZZZ
    Avatar jacoavlu 
    Moderator
    Status: Physician, Small Business Owner
    Posts: 2282
    Joined: 03/01/2018
    I am assuming that I will be at the same high tax bracket when I retire due to high required minimal distributions.

    Click to expand…

    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.

    The Finance Buff's solo 401k contribution spreadsheet: https://goo.gl/6cZKVA

    #238383 Reply
    Liked by Peds
    Avatar DR R 
    Participant
    Status: Physician
    Posts: 41
    Joined: 12/20/2017

    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.

     

    #238397 Reply
    Avatar DR R 
    Participant
    Status: Physician
    Posts: 41
    Joined: 12/20/2017

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

    #238398 Reply
    Avatar jacoavlu 
    Moderator
    Status: Physician, Small Business Owner
    Posts: 2282
    Joined: 03/01/2018
    invest the equivalent of almost $10K pre tax money versus only $7K pretax dollars in the traditional IRA.

    Click to expand…

    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?

    The Finance Buff's solo 401k contribution spreadsheet: https://goo.gl/6cZKVA

    #238399 Reply
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    Avatar ZZZ 
    Participant
    Status: Spouse
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    Joined: 06/18/2018

    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.

    #238400 Reply
    Liked by StarTrekDoc, Peds
    Avatar Peds 
    Participant
    Status: Physician
    Posts: 4240
    Joined: 01/08/2016
    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.

    Click to expand…

    again, do you see the flaw in that statement?

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

    #238402 Reply
    Avatar Insurancepro 
    Participant
    Status: Financial Advisor, Insurance Agent
    Posts: 47
    Joined: 03/26/2019
    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.

    #238407 Reply
    Avatar DR R 
    Participant
    Status: Physician
    Posts: 41
    Joined: 12/20/2017

    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.

     

     

     

     

     

     

    #238412 Reply
    Avatar jacoavlu 
    Moderator
    Status: Physician, Small Business Owner
    Posts: 2282
    Joined: 03/01/2018
    My question is not being addressed.

    Click to expand…

    please restate your question, because perhaps I’ve misunderstood

    The Finance Buff's solo 401k contribution spreadsheet: https://goo.gl/6cZKVA

    #238417 Reply

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