100% VTSAX strategy for Roth IRA investment. I did and they were uncharacteristically forthcoming; tax is usually the third rail when it comes to investment advice. If I put Mrs. RB40’s income back in and remove the conversion, we’d pay about $7,000. Thanks for the clarification. If you convert $37,834 from traditional to Roth, you’d have +$10,000 in taxable income. ), Withdraw the 1 year of expense from the Roth IRA, Self-employment tax: $2,544 (This is 50% of my self-employment tax liability.). I just fix the (). It’s pretty amazing to defer tax and then pay little to no tax on that amount. I had called Fidelity and confirm it. We’d have to have some earned income to get that credit. I have been maxing out my 401k for 20 years and there is a sizeable sum in there. I doubt your total portfolio has 40% of it's equities in international, so rebalance accordingly. No matter how hard I try, I can’t legally get down to those levels. The following two tabs change content below. Something to think about for early retirees. Why wouldn’t you consider a global market cap weighted fund like Vanguard Total World (VT/VTWAX)? Any other reasons to do this or not? A great way to avoid the 10% penalty is to build a Roth IRA ladder. I have read that the IRS expects in this case, that you pay yourself a “reasonable” salary. Or else work part time on something I enjoy. We could draw down our dividend portfolio as well, but I would like to wait until we’re at least 50 to do that. It’s not a Roth yet, but when you leave your employer, that after tax money can be converted into a Roth without taxation. Learn how your comment data is processed. Convert 401k to traditional IRA. It is funny how the tax code is set up in a way that encourages retirement and investing, and discourages work income. Joe: “I’m 24 years old in California with a Roth IRA, SEP IRA, solo 401(k) with some Roth, maxed out and make a $100,000 a year. but I think you mean you have positive $32,000 in income right? I guess you have to take all existing IRAs into account. Good luck! This is mostly geared toward the executives. Tax is boring and I’m ready to stop thinking about it for another 11 months. It says the IRS looks at one’s total holdings regardless of where the IRAs are held. My 2018 IRA is currently fully funded in VTSAX. I have started to learn about how a backdoor Roth IRA can be done by opening an IRA with after tax dollars and then converting to a (backdoor Roth IRA). Just curious, where does it say that? I am working toward fully funding my 2019 401k and IRA. Mrs. RB40 is planning to retire soon and I want to start building a Roth IRA ladder when she does. Although, if I take out my business income and rental, then I would have to pay a little tax on the conversion. I'll probably end up adding something else in to my IRA. 1. Your tax accountant is the best person to look at your situation. I am working toward fully funding my 2019 401k and IRA. Can you please explain how did you get -16000 for rentals? Does this sound legitimate to you? You should talk to a professional financial planner if you need more help with your finance. I’m not an expert either. It seems $36,000 is near some sort of threshold. Hopefully the proceed from selling the rental will be able to cover that tax bill. I didn’t know that about the ACA. That’s mind blowing! I thought you always had to pay some tax. For instance, selling stocks short in a Roth IRA isn't typically allowed. I have been wondering if I could contribute to my i401k and do a Roth IRA conversion in the same year. When Mrs. RB40 retires, our earned income will drop quite a bit and it would be a good time to start our Roth IRA ladder. Our income increases from $32,000 to $68,000, but the amount of tax owe remains the same. Primarily I’d like to consolidate everything into a single Roth, where I’ll make ongoing contributions once I find another job. A Roth IRA offers many benefits to retirement savers. I’m pretty sure you can. I like to play around with Taxcaster, forecasting different early retirement income scenarios, seeing how small changes in different places affect the total tax. We have to pay self-employment tax even if our taxable income is zero. Check with your tax guy. I’d argue it’s better than what most people pay for, but I like to have a more diverse IRA. Here’s my attempt to explain what’s going on: Taxable income: $32,000 Adjustments: $27,044 AGI: $4,956, Deductions/Exemptions: $32,790 “Taxable income” = AGI – Deductions = (-$27,834). Much better valuations available outside the U.S. Our entire equity allocation is VT. VT has a modest ER premium (0.09%) to VTI (0.04%) + VXUS (0.09%) due to lower AUM. Questions! Putting $27,000 in adjustments in () is right as it is a deduction. Now, let’s add the Roth IRA conversion to the mix. She’s got a bunch of accounts. In the 10% tax bracket, you’d owe $1,000 in taxes. The Roth IRA has other major advantages. Legally, you can add somewhere between $50k and $55k (I’m not sure which it is). But what is Mrs paying in federal tax liability so we can see the whole picture? Convert 1 year of living expense from the tax-deferred accounts to Roth IRA. Hey Joe, very interesting to read, thanks for sharing. As an Australian the details are a little hazy to understand but I follow your logic. Sounds like a good way to leave a little something for the kid. The Roth IRA allows workers to contribute to a tax-advantaged account, let the money grow tax-free and never pay taxes again on withdrawals. In summary, John and Mary’s 2018 taxable Roth IRA … * If you contribute to an IRA, that means your income had to have been below a certain low income threshold in the first place ~$70,000 or something right? I rolled over my old 401k into a Roth IRA when I left my job. The IRS consider the 401k as one pot so it will be some kind of ratio. Real estate might be a good idea. 401k contributed max every year. 100% a year for four years sounds unlikely. Yes, I believe the process should be allowed. We won’t have to pay any additional tax on the Roth IRA conversion. My rental income is a bit too high to get away with no tax, but I am still planning on doing some conversions. I’m 24 and have 1,500 in pretax accounts sponsored by former employer labeled: – Employee pre-tax vesting — 100% immediate vesting – Employer vesting — 100% immediately vested, Can I roll these over to a Roth? I’m sure your tax code has its own strange points. John and Mary’s total 2020 Medicare Part B premiums are now $4,512.00 each, or $9,024.00 for both. I own VTSAX in my 401k and Roth and have a spousal IRA with the Schwab total market fund (which has an even lower expense ratio than Vanguard). The deduction is nice if you can take advantage of it. My mind is blown b/c I feel too dumb to follow the logic in your post! Just repeat this every year until your 59 ½. However, it turns out much better than that. Should I do a Roth conversion from my solo 401(k) into my Roth IRA now?” OK. Cindy from Podcast 253. How can this be possible? If I change the conversion amount to $40,000, the tax liability would increase a little. We should be able to do this trick if the law doesn’t change. As I started to do more digging, it seems there is some kind of formula to use. For investors seeking broader diversification, VTSAX is the better bet. For each two dollars of AGI over $100,000, the $25,000 limit is reduced by one dollar. and am now at the stage on trying to decide what I should invest my Roth IRA … I might change it to S corp if the Trump tax cut comes through. (This is a taxable event. You could probably increase your conversions even more and take advantage of the savers credit at that income level to wipe out additional tax. Press J to jump to the feed. (Getty Images) I’m not quite to this point in life so I have some time yet, and who knows, tax law could be amended before I’m ready to take advantage of it in 10 years or so. I assume you lose the tax advantages of real estate when you hold in an IRA. Thanks! My 2018 IRA is currently fully funded in VTSAX. ACA will complicate things. Privacy, Sign up to receive new articles via email. I estimate we’d have around $25,000 from dividend, rental income, interest, and whatever is left from business income after tax and 401k. You can also start investing in ETFs at much lower than $1,000. I admit my situation is a little unorthodox, but it could be replicated. * When you put a number in (), the meaning is negative fyi. If I could I’d move everything to post tax dollars, but I don’t want to take on the tax burden. Maybe this is where I’m most confused. But how I’ll survive for 5 years will be primarily through my taxable brokerage account. That’s awesome. Stash also lets you invest in thousands of stocks and ETFs using fractional shares, which makes it … The tech company stock appreciates by 100% a year for four years. The tax benefits from rental are great — yes — in the short term, but please know what happens if/when you sell the property. Actually, I’m not exactly sure why the tax isn’t increasing. I will get it straightened out this year. I suppose that is reasonable after all… I might not understand how 401k works when you are the employer and employee. These two things will help you bridge the 5 years gap in the Roth IRA ladder and you’d pay less tax as a bonus. Ok, I see what you are talking about. Right. VTSAX is one of Vanguard’s flagship funds, and it is always within their top 10 most popular investments. I might be missing something but it’s the question that came to mind as I thought through this. With only $6,000 a year, you guys agree to invest more aggressively. You definitely blew my mind! I wasn’t sure if there would be any benefit to doing these two things at once. The same combined contribution limit applies to all of your Roth and traditional IRAs. Self employment + rental properties + Roth is a very powerful combination. That’s pretty good. There is another way to accomplish your goal. My 401K has 40% in international, but the IRA reduces that percentage somewhat. For conversion and rollover, this exception kicks in after 5 years. The reason you don’t have to pay the 10% penalty is because the penalty doesn’t apply to your contribution to the Roth IRA. As with every case, the answer was “probably”, making numerous assumptions. That means you don’t have to pay tax on the earning. The traditional IRA only has pre-tax money in it. They are both pretty helpful, usually. If this was earned income, my tax would be much less than $5,000. Is there a piece that I’m missing? Roth IRA rules dictate that as long as you've owned your account for 5 years* and you're age 59½ or older, you can withdraw your money when you want to and you won't owe any federal taxes. I’m depending on H&R Block to get this right. In the first table, our taxable income drops to zero. The property tax around here is pretty high. A lot of my 401k contribution came from when we were in the 25% and 28% bracket. You can contribute 25% as an employer. A Roth IRA is an individual retirement account that offers tax-free growth and tax-free withdrawals in retirement. Whew, I hope I didn’t lose too many people. Thanks for your comments. I’ve got to re-read your post. Does anyone know how to perform a backdoor Roth IRA? If your AGI is low, you can use rental losses to offset earned income. Thanks for the follow up.. Not very flexible, but another way to access the funds prior to age 59.5 without penalty. In your case it looks like you are doing just that, contributing a large part of your business income directly to 401k. Just buy the coverage on your own or try to get into a subsidized affordable health care exchange plans. So Income ($32,000) means you have negative income. Great tax write off too. I’m wondering, under this scenario, how you would fund your normal living expenses. Primarily we look to cover expenses from dividends. See comments below. We’re planning on trying this trick ourselves, but we’re not banking our early retirement on it lasting forever! That’s after all the deduction and employee contributions, though. You must take into account your other existing IRAs including roll-over IRAs. Of course, hopefully this will be far off in the future. Be sure and save some of the tax money to pay that — you’ve already accumulated a future $4k tax bill ($16,000 * 25%) for the future. Here is our tax profile from 2015 after I remove Mrs. RB40’s W2. Your marital status, children under 17, type of income and how much… just a few of the variables. Ive spent the past few weeks researching on investing/index funds etc. Yes it doesn’t apply against self employment tax. I’m happy making just enough and not paying a lot of tax as well. I don’t have any experience with that, but real estate is usually good in general. She’s 24, making a hundy a year. Yes, it’s a big loophole for early retirees. All the rentals are under both our names. I am only 20 years old, but I have saved up some money to invest and I definitely new to the investing world but I already set up a Roth IRA account with Vanguard, however the target date index fund 2060 has a higher ER than I prefer and I don’t really need bonds right now. Yes, I would stop contributing to my i401k and just use that money to fund our cost of living. http://www.nytimes.com/2015/09/23/your-money/401ks-and-similar-plans/irs-ruling-makes-after-tax-contributions-more-attractive.html?_r=0. So you should be able to claim the savers credit I think. That’s a great point. You will need fund 5 years of living expenses before you get the first penalty free withdrawal from your Roth IRA. We have to pay self employment tax no matter how much we make. Sorry, I’m not more helpful. The nice thing is that you were likely in a high tax bracket during your working years, but when you do your ladder you will be in a low tax bracket. 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