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Pre-tax maxing out vs Backdoor Roth

Home Retirement Accounts Pre-tax maxing out vs Backdoor Roth

  • Avatar Flapper 
    Participant
    Status: Dentist
    Posts: 34
    Joined: 12/13/2018

    Ok, so dumb question here… a softball as Jim would say.  If it is more logical to max out the pre-tax buckets while we are in our high income years, then why do we do the backdoor Roth IRA?  If the Roth space is post tax, should we not do a traditional IRA?  I am thinking it’s the pro-rata rule and not having a traditional account balance on Dec 31 each year but not sure.  If that’s the case, then why are we allowed to have traditional 401k? Because it’s not an IRA?

    Thanks!

    Also, a second question more on taxes and business set up….

    Was wondering what you may advise given my situation of having the approximate income of 200-225K when the goal is to have as much left over after taxes as possible while putting as much away in tax deferred plans as possible.  I am 37 and really want to retire early.  Now I am at a 34% savings rate and may be able to reach FI by age 53.  I want to shorten this even further if possible.

    Of course, I could switch everything up to become an owner (I am a contract dentist now) and make double what I make now (with tons more debt and potential stress), but I am wanting to see what things may look like to optimize the path that I am currently at (ie… income cap at 225K).

    Is it an S-corp with wages at 80K, 100K, or 150K?  Sole proprietor and take is all as wages? There are too many moving parts to get a clear cut answer.  Ex is that if all you want to max out is the QBI deduction then you take the lowest reasonable salary, but then you can’t max out the 401K.  Is there a spreadsheet where these numbers can be inputted to find the happy middle ground?

    Anyone thoughts?

    Thanks again!

     

    #238225 Reply
    Avatar JBME 
    Participant
    Status: Spouse
    Posts: 571
    Joined: 03/26/2018

    yes you’re asking the wrong question. The mantra Jim says it to put 20% towards retirement. That’s $45k in your instance. $19k goes to your pre-tax 401k. $6k more goes into your backdoor Roth IRA (which you also do for tax diversification). You still need to save another $20k more. If sounds like you can set up an i401k so you can make employeR contributions to get another $20k into pre-tax 401k space but I’ll leave others to answer that for you.

    Your first question is easy-you do both

    #238230 Reply
    Avatar StarTrekDoc 
    Participant
    Status: Physician
    Posts: 2150
    Joined: 01/15/2017

    With your savings rate you should be maxing out both and anything else you can find that’s tax sheltered. 529 if you have kids.

    As a contractor you can setup some other options that folk here can offer up too.

    #238233 Reply
    Avatar Peds 
    Moderator
    Status: Physician
    Posts: 4715
    Joined: 01/08/2016
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    If it is more logical to max out the pre-tax buckets while we are in our high income years, then why do we do the backdoor Roth IRA?

    Click to expand…

    because you are a high earner so it is easy to fill up all available tax advantaged spaces.

    If the Roth space is post tax, should we not do a traditional IRA?

    Click to expand…

    how exactly do you plan to do that if you do not qualify?

    Because it’s not an IRA?

    Click to expand…

    yes the pro-rata rule only applies to IRA type accounts.

    Sole proprietor and take is all as wages? There are too many moving parts to get a clear cut answer.

    Click to expand…

    if you only make 225 then this is an easy answer. no scorp.

    #238234 Reply
    Avatar Flapper 
    Participant
    Status: Dentist
    Posts: 34
    Joined: 12/13/2018

    Thank you!  Yes, I do have an i 401k and max out both my employer and employee portion.  The employer portion of the 401k is 19K and is pre-tax traditional per IRS.  The employee portion (25% of W2 income) is in a Roth 401k space, but after reading Jim’s post about maxing out the pre-tax buckets, I am thinking of switching this to a pre-tax deferral.  Agree?

    I am also married, so I can and do put that extra $6K into a Roth IRA.

    #238284 Reply
    Avatar jacoavlu 
    Moderator
    Status: Physician, Small Business Owner
    Posts: 2465
    Joined: 03/01/2018

    Thank you!  Yes, I do have an i 401k and max out both my employer and employee portion.  The employer portion of the 401k is 19K and is pre-tax traditional per IRS.  The employee portion (25% of W2 income) is in a Roth 401k space, but after reading Jim’s post about maxing out the pre-tax buckets, I am thinking of switching this to a pre-tax deferral.  Agree?

    I am also married, so I can and do put that extra $6K into a Roth IRA.

    Click to expand…

    wait, start back at the beginning

    are you an independent contractor, or employed by a practice?

    if an independent contractor, sole proprietorship or S corp?

    and you have the employee vs employer contribution numbers backwards. Employer contributions are always pre tax.

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

    #238286 Reply
    Liked by Peds
    Avatar Flapper 
    Participant
    Status: Dentist
    Posts: 34
    Joined: 12/13/2018

    So why no s corp PEDS?  Is this just looking at taking the sol prop at a W2 of 225K to max out the 401k to $56K a year?   Does this benefit outweigh the legal protection of the s corp, the QBI pass through deduction, etc?  I know this may be a value judgement on my part, just wanting to get others thoughts. Thanks!

    #238287 Reply
    Avatar jacoavlu 
    Moderator
    Status: Physician, Small Business Owner
    Posts: 2465
    Joined: 03/01/2018

    Much was addressed in your prior thread

    Help Uncover All pre-tax deferral options

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

    #238294 Reply
    Liked by Peds
    Avatar Flapper 
    Participant
    Status: Dentist
    Posts: 34
    Joined: 12/13/2018

    I am in independent contractor working for a private office, and set up myself as an s corp.  I see that my CPA continues to confuse me more and more.  He said that 19K was the employer portion and TD ameritrade confirmed that this is how it’s set up in my account.  It’s a set 19K pre-tax contribution (but I see now that the 19K is set as the max an EMPLOYEE can contribute to the plan).

    I am reading now that “25% of salary/compensation” is in regard to SEP plans, but mine is a solo 401k, so this does not apply.  Correct?

    For a solo 401K the EMPLOYEE portion can be either Roth (post tax) or traditional defferral (pre-tax) and that limit for 2018 was 18,500 and for 2019 is 19K.

    In my situation, does anyone know how much the employer contribution can be per year?  In my research, it’s saying that the employer can contribute enough so that the combined amount both employee and employer does not exceed $56k.  But that’s 37k, much more than the 19K that I as the employee am contributing.  So I think I’m getting it wrong (if it’s called a match, can it be more than 19K?)

    Thanks!

    #238301 Reply
    Avatar jacoavlu 
    Moderator
    Status: Physician, Small Business Owner
    Posts: 2465
    Joined: 03/01/2018
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    How much salary does Corp pay you?

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

    #238302 Reply
    Avatar Peds 
    Moderator
    Status: Physician
    Posts: 4715
    Joined: 01/08/2016

    How much salary does Corp pay you?

    Click to expand…

    70K…

    #238304 Reply
    Avatar jacoavlu 
    Moderator
    Status: Physician, Small Business Owner
    Posts: 2465
    Joined: 03/01/2018

    at a salary of 70k employee deferral of 19k (pretax or Roth) would be allowed and max employer pretax contribution is 17.5k (25% of W2 salary)

    that said 70k is almost certainly an unreasonably low salary for a dentist working full time and with net income to the Corp of 200k or greater

    based on the info we have, I think it’s most likely that OP needs to find a new, competent CPA, needs someone with real knowledge to review what’s happened with the 401k and figure out if there’s a mess that needs fixed with regards to contributions that have already happened, S corp needs dissolved, needs to do business as a sole prop. That’s my guess

     

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

    #238310 Reply

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