043R | Mega Backdoor Roth | Should I Ever Consider Using the Roth?

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Mega Backdoor Roth

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In this podcast we discuss our takeaways from Episode 43 with Fritz from the Retirement Manifesto plus an in-depth discussion of the Roth IRA conversion and Mega Backdoor Roth, and taxable income scenarios for retirement contributions.

 In Today’s Podcast we cover:

  • Our big takeaways from Episode 43 with Fritz from Retirement Manifesto
  • Brad as a ‘Mystery Reader’ for his daughter’s class plus their trip to Natural Bridge State Park and a FI lesson for his daughters
  • How to tackle drawdown strategies and how that opened our eyes
  • The concept of balance that Fritz brought up in Episode 43
  • How we each have a different path to Financial Independence and we have to find what we each value and how much safety we require
  • How important the math is, but also how the personal side is an important part of the equation
  • Jonathan’s decision to pay off his student loans early and how this may not have been optimal mathematically, but was the “right” decision for him
  • Feedback from the audience on the episode, but specific points from Danny
  • Questions surrounding inflation on your safe withdrawal rate and early retirement
  • Feedback from the audience about delaying social security
  • The distinction between the Roth IRA conversion and the Mega Backdoor Roth IRA
  • The tax issues surrounding the Roth IRA conversion

 

Practical Application of the Mega Backdoor Roth

  • Vishal and Brad share the nuances of trying to navigate the Mega Backdoor Roth: They need to allow for after-tax contributions and in-service distributions/withdrawals
  • Explanation of the Mega Backdoor Roth
  • Email from Zac about the value of using pre-tax or post-tax retirement contributions when you’re already in a low tax bracket
  • Where is the line where we’d consider putting into a pre-tax or post-tax retirement account?
  • A scenario of someone with a $25,000 income and where they’d fall in the tax brackets and how to lower that
  • A scenario of an individual with a $60,000 gross income and what they should consider with their retirement contributions
  • How would Brad and Jonathan choose if they were in this situation?
  • Itunes reviews and book giveaways

The Vault is live

Links from the show:

Books Mentioned in the Show:

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7 thoughts on “043R | Mega Backdoor Roth | Should I Ever Consider Using the Roth?

  1. I love you guys, but your advice to Zac was short sighted. With 4 kids and moderate income, he is indeed facing low statutory marginal tax rates. However, he is facing extremely high effective marginal tax rates (as high as 31% from $38k to $54k in taxable income) due to the Earned Income Tax Credit (EITC). He should read these posts:

    http://www.frugalprofessor.com/etic-guest-post-on-gocurrycracker/
    http://www.frugalprofessor.com/updated-tax-calculator/
    http://www.frugalprofessor.com/hierarchy-of-savings/

    Cliff notes version. Zac should:
    * Max out HSA + limited purpose FSA up to what he’ll use
    * Max out 401k/403b/401a/457
    * Contribute to Roth IRA (since Trad IRA doesn’t help with EITC hacking)

    I made $80k last year and was paid $8k by the federal gov’t due to EITC hacking.

      • I didn’t mean to throw you under the bus. It’s a common misperception (low income = low tax rate…what could be simpler?).

        Unfortunately the tax code is so complex that nobody understands their effective marginal tax rate. As a result, many people like Zac are doomed to make suboptimal decisions when it comes to tax planning.

  2. Great week guys: Regarding Student Loan payoff: 1. I would strenuously argue against student loans in the first place (except for some graduate school cases). 2. Pay them off with gazelle ferocity. Why? Student loans are not discharge-able in bankruptcy. I know, everyone in the FI community is earning big $ and saving lots of $$ and will never get laid off or find their family income going down, EVER. It cannot happen in the FI community. Hurricanes do not blow through cities where FIers live. Corporations that FIers work for do not get bought out. Except that it can and will – I think the most responsible advice is to get rid of these loans ASAP. Unpaid, they grow to large amounts and can haunt someone forever. This is not a loan to be clever with. It is a loan to execute with extreme prejudice.

  3. Hey Guys, thank you! Thank you! Thank you! I just found your pod cast recommended by a friend this month and I am hooked. My husband and I are 32 earning over $200,000 per year. We max out my 401k and ha e paid down all debt and are currently working on the mortgage but I kept feeling like I can do more. I called several “wealth management” forms in my town spoke to investment brokers and financial planners and they all said. You are doing great just keep it up. There is nothing else you can do. They literally told me to just sit around and wait for retirement. I have never been so frustrated. I felt like there must be some other way to optimize our spending, saving and investments. Your pod cast has shown me the way. I am so excited to be apart of the FI community I never knew there were so many people that thought like my husband and I. We are the weird financial people in our families and friends. Yes!!!! Thank you again.

  4. Great show guys, I found you guys about a month or so ago and have been trying to listen to at least 1 show a day if I have time and spreading the word of your podcast. I wanted to comment on this show because I just listened to it yesterday and today I contacted my companies plan administrator (Fidelity). I can do after-tax contributions, I’m allowed up-to 40% of my total contributions with my plan (pre-tax, roth and after-tax). I can also do an in-service withdraw, once every 6-months. This is yet another great tool to add to my retirement journey toolbox, I won’t be using this option yet as I have yet to maximize all of my pre-tax with-holdings. I’m lucky enough to have a spouse that is a public school teacher (403b and 457 advantage), so I have an extra pre-tax lever that many do not. That extra pre-tax allows us to optimize our taxes, I think our saving rate is in the 50-60% range last I checked. But we are focused on paying our home-off, which will be paid off by no later than December 2020. We believe in our strategy and we sleep good at night, so that’s all that counts right? Our motto is: We are building our nest egg, but also are having a few omelets along the way.

    I appreciate how you guys don’t bash others for their FI journey when they are taking a different path or have a different philosophy. Keep up the good work! And I look forward to 2018.

  5. I’ve been scouring the internet trying to find one question I have about the logistics of this. My 401k provider will allow me to do as many in service withdrawals as I’d like, but are there any restrictions on the number of times I can do this roll over? I felt like I had read about only being able to do one retirement account roll over per year per IRS guidelines in a different context, but does that apply here?

    IE – I get paid every two weeks, could I just pull the after tax 401k money out every other week right after it gets put in or do I need to wait for it to build up and do one big transfer once a year?

    Thanks!

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