Hello PF. So I’m in my mid/late 20’s and trying to get more serious about planning for retirement. I’ve read the wiki, I’ve surfed the NerdWallet and White Coat Investor articles, but I’m still finding it very hard to understand the intricacies involved in a backdoor Roth IRA. I’ve followed the obvious steps for saving and emergency funds, now I’m hoping to get some advice on how I should approach my retirement contributions based on my specific financial situation.
As I mentioned before, I’m in my mid/late 20’s. I’m making around $130,000/yr and maxing out my 401k and contributing $5500 to an IRA. I have a traditional IRA totaling around $70,000 from an old 401k rollover, as well as a brokerage account that I started contributing to in high school and early in my career.
I want to make sure I’m maximizing my savings. I think the main source of my confusion is that everything I read seems to favor Roth IRAs, and recommend a backdoor Roth if you no longer qualify. I understand that my existing Traditional IRA from the 401k rollover makes the backdoor conversion more complicated - if I understand the pro-rata rule correctly, if I were to contribute $5500 AFTER-TAX to my traditional IRA tomorrow then convert that after-tax $5500 to a Roth IRA, only ~8% (5500/70000) of that conversion would be tax free, and I’d be taxed again on the remaining 92% (~$5000) of that conversion.
My head is already spinning after just writing that out - does it seem like it still makes sense for me to pursue the backdoor Roth approach given my situation? My future spouse will be making ~$200,000/yr in a few years, so we’ll both be in higher tax brackets early on and looking to maximize our contributions going forward. Do these higher tax brackets early on make a difference? This circles back to me finding it hard to understand why everything I read seems to favor the Roth IRA either directly or via back door.
Any suggestions or insights would be very helpful! Thanks guys.
Submitted July 04, 2017 at 12:44PM by backdoor_brainfart http://ift.tt/2tNlbfW
