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RIRA vs TIRA

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  • Avatar cellingson 
    Participant
    Status: Physician
    Posts: 5
    Joined: 03/11/2019

    Stupid question but thought I would ask.

     

    I hear a lot about the back door roth IRA being used and I am not sure why.

    As I understand it….

     

    If I put money into a Roth IRA, I am placing post tax dollars into it. This money is then withdrawn after age 59 tax free.

     

    The Traditional IRA gets pre tax dollars and is taxed after age 59 at my taxable rate at that time.

     

    My tax bracket now as a “high income” earner is higher then I anticipate it will be when I retire. As such it seems to make sense to but my money in an TIRA, avoid paying high tax on this money now, and then when I withdraw the money incur the tax on my money at a lower tax rate.

    For example: If I put 6000 into a roth IRA it cost me $8571 of pretax dollars (assuming a 30% tax rate).

    If I put $6000 into a TIRA it cost me $6000 pre tax dollars

     

    If each fund then grows to $24000 at the time of retirement.

    -When the RIRA matures I collect $24000 at the cost of $8571. ROI 180%

    -When the TIRA  matures I pay 20% tax on $24000 and collect $19200 at the cost of $6000. ROI 220%

     

    Am I missing something here?

     

     

     

    #198332 Reply
    Faithful Steward Faithful Steward 
    Participant
    Status: Financial Advisor, Small Business Owner
    Posts: 267
    Joined: 06/12/2017
    Am I missing something here?

    Click to expand…

    First, if you are currently a high income earner, you are probably ineligible for tax-deductible Traditional IRA contributions. That being the case, any money you contribute to an IRA of any type will be after-tax money.

    So, if all you do is contribute to a non-deductible Traditional IRA, the growth in your IRA will be taxable when taking distributions at retirement. However, if you take the second step and do the tax-free (assuming it’s done right away) conversion of your non-deductible Traditional IRA to a Roth IRA, all distributions will be tax-free at retirement.

    However, if you are eligible for deductible contributions to a Traditional IRA, your initial thinking is correct.

    Hope this helps.

    Michael Peterson, CFP® | Faithful Steward Wealth Advisors
    http://www.fswealthadvisors.com | (717) 496-0900

    #198334 Reply
    Liked by Lordosis
    Avatar Peds 
    Participant
    Status: Physician
    Posts: 3033
    Joined: 01/08/2016

    Yes you are missing something.

    #198340 Reply
    Liked by ENT Doc
    ENT Doc ENT Doc 
    Participant
    Status: Physician
    Posts: 2698
    Joined: 01/14/2017
    Disability Insurance

    Missing multiple things:

    1. You get no deduction at a 30% bracket
    2. TIRA and Roth are both after tax contributions because of #1, and therefore the optimal decision is to clearly backdoor the TIRA to a Roth
    3. It’s 59 1/2, but there are exceptions. Plus, you can remove the Roth contributions after the account is established for 5 years.

    #198345 Reply
    Liked by Lordosis, Peds
    Avatar ZZZ 
    Participant
    Status: Spouse
    Posts: 298
    Joined: 06/18/2018

    ‘My tax bracket now as a “high income” earner’

    If you’re eligible for a tax deduction for contributing to an IRA, you’re not a high income earner.

    #198349 Reply
    Liked by Peds
    Avatar cellingson 
    Participant
    Status: Physician
    Posts: 5
    Joined: 03/11/2019

    Thanks for those who responded in an informative way. Appreciate the help.

    As I have no retirement plan at work I was basing my assumptions on the IRS website which reports that I can take a full deduction despite my AIG.

    Traditional IRAs

    • Retirement plan at work: Your deduction may be limited if you (or your spouse, if you are married) are covered by a retirement plan at work and your income exceeds certain levels.
    • No retirement plan at work: Your deduction is allowed in full if you (and your spouse, if you are married) aren’t covered by a retirement plan at work

     

     

     

     

    #198442 Reply
    DMFA DMFA 
    Moderator
    Status: Physician
    Posts: 2115
    Joined: 06/24/2016

    You have no retirement plan at work? That’s uncommon.

    Are you self-employed?

    "I like money." - Frito Pendejo (Idiocracy)

    [Not a financial professional (yet), lawyer, or employee of The White Coat Investor]

    #198453 Reply
    Liked by Peds
    Avatar cellingson 
    Participant
    Status: Physician
    Posts: 5
    Joined: 03/11/2019

    You have no retirement plan at work? That’s uncommon.

    Are you self-employed?

    Click to expand…

    Yes

     

    I am setting up a solo 401k this year. So thanks to the above I have learned that this keeps me from making an IRA deduction and will do the roth rollover.

    #198456 Reply
    DMFA DMFA 
    Moderator
    Status: Physician
    Posts: 2115
    Joined: 06/24/2016

    Do a SEP-IRA for 2018. You can do this until October (since due date includes extensions). File 1040X if you’ve already done your 2018 taxes.

    I’m assuming you don’t have employees. If you do, you can’t do a one-participant plan. You’d have to do SIMPLE-IRA or safe-harbor 401(k).

    "I like money." - Frito Pendejo (Idiocracy)

    [Not a financial professional (yet), lawyer, or employee of The White Coat Investor]

    #198468 Reply
    Liked by ENT Doc
    Avatar treesrock 
    Participant
    Status: Physician
    Posts: 255
    Joined: 08/14/2017

    Do a SEP-IRA for 2018. You can do this until October (since due date includes extensions). File 1040X if you’ve already done your 2018 taxes.

    I’m assuming you don’t have employees. If you do, you can’t do a one-participant plan. You’d have to do SIMPLE-IRA or safe-harbor 401(k).

    Click to expand…

    Won’t the SEP-IRA create pro-rata issues for a backdoor Roth?

    #198499 Reply
    ENT Doc ENT Doc 
    Participant
    Status: Physician
    Posts: 2698
    Joined: 01/14/2017

    Not if you set up a i401k and roll the SEP in before 12/31/19.

    #198501 Reply
    DMFA DMFA 
    Moderator
    Status: Physician
    Posts: 2115
    Joined: 06/24/2016

    You already said you were setting up a 401(k) for 2019. You just need to rollover the SEP-IRA into the 401(k) sometime in the next 8 months and 18 days.

    "I like money." - Frito Pendejo (Idiocracy)

    [Not a financial professional (yet), lawyer, or employee of The White Coat Investor]

    #198581 Reply

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