I don’t qualify for a Roth IRA due to income limits, and I’m not clear on the advantages of a backdoor IRA. I expect my tax bracket in retirement to be much lower than now, so I don’t fully see the need. Still, I notice a lot of people maxing out their backdoor IRAs. What am I missing?
What could I be leaving on the table?
Edit: Currently maxing out 401k, HSA, and putting the rest into IVW and a few other stocks.
If you’re looking at a backdoor Roth, it probably means you’ve already maxed out all your available traditional retirement accounts (401k, HSA, etc.).
At that point, the choice becomes either a regular taxable account, where you’ll pay capital gains taxes, or a Roth IRA, which grows tax-free.
@Beck
Exactly. If you’re deciding between a 401k and Roth, there’s some debate. But choosing between Roth and a taxable account? Easy call unless you love paying taxes.
Emory said:
@Beck
Exactly. If you’re deciding between a 401k and Roth, there’s some debate. But choosing between Roth and a taxable account? Easy call unless you love paying taxes.
Probably a simple question here, but why would my tax rates be higher? Are we talking about if my RMD ends up super high and pushes me up?
@Wilder
You mean RMD? Yep, exactly. If your investments have grown a ton, you might end up in a higher bracket just trying to take out your required minimum distributions.
@Wilder
And honestly, tax rates could go up over time. Who knows what the landscape will look like. We could end up with tax rates like Europe.
@Beck
Yeah, maxing out both the HSA and 401k.
With a backdoor Roth, you’re taxed only once. The money grows tax-free, and you can withdraw it tax-free too.
Compared to a taxable brokerage, you’re avoiding capital gains taxes altogether.
>I expect my tax bracket in retirement to be much lower.
Unless you end up with a ton in tax-deferred accounts, then RMDs could be so big they actually push you into a higher bracket and trigger extra charges on Medicare.
@Andrew
In that case, you’d use lower brackets in retirement to do Roth conversions. It reduces RMDs and avoids Medicare charges down the line. A good financial planner could map this out for you too.
If you expect to have significant wealth in traditional retirement accounts, RMDs will eventually make it hard to stay in a low bracket, even if you try to keep withdrawals low.
Most high earners aren’t able to drop to a super low tax bracket in retirement due to the amount they accumulate. If you don’t start paying taxes on it now, the RMDs will just keep pushing you into higher brackets over time.
You could try to do Roth conversions later, but you may as well just start now, pay the taxes, and have one less thing to worry about. Roth accounts also don’t have RMDs, so there’s no rush to withdraw once you’re retired.
Honestly, a financial planner could help you figure out the best strategy here.
Are you asking because you’re unfamiliar with capital gains taxes, or just unsure about Roth IRA withdrawals not being taxed?
Halston said:
Are you asking because you’re unfamiliar with capital gains taxes, or just unsure about Roth IRA withdrawals not being taxed?
That’s only relevant if you factor in the benefit of taking the tax deduction now and investing it. If your retirement tax bracket is lower than now, then traditional wins out.
Of course, it’s hard to predict future tax rates, so having both Roth and traditional accounts is smart.
@Rex
“Investing the difference”
“If your tax bracket is lower in retirement”
Two big assumptions:
For example, my retirement income is projected to be about double what I make now.
@Brook
Original poster asked about what he’s missing out on, so I’m working with their assumption of a lower tax bracket. Not questioning if most people actually invest the tax savings, just laying out what OP might not realize they’re missing.
@Rex
I was just pointing out that these assumptions can sometimes be a bit shaky.
@Brook
I invest every bit into IVW, so I don’t deviate from my plan.
@Rex
If you’re over the income limit for traditional IRA deductions, what tax deduction are you talking about?
People often forget about deductions. Even with 401k withdrawals, some income won’t be taxed.
@Rex
If you can’t contribute directly to a Roth IRA, you also can’t deduct contributions to a traditional IRA. That’s the whole reason for a backdoor Roth.