Roth conversions anyone done this?

[AtomApple]

I saw a clip yesterday that said you can pay a minor up to 12,500 tax free.
odd that that popped up on my Instagram feed after being on this thread…

And sorry to hi-jack the thread, this is a little off topic. But there was another clip that said there is a law that you can rent your home for up to 14 days a year without reporting income. I’m trying to go off memory here, but I think they said… if you have an LLc, you can have 6 people in your family/group rent your home for $400 each a day, that’s $38,400 tax free income in your pocket, and you can write that off for an additional 12% tax savings.
check with your local tax attorney to verify.

 

[AtomApple]

I think if you are maxing out your contributions, you should do Roth, as it would effectively be a lower contribution if you go pre-tax. (30k per year, or something like that)

 

[Telemark]

View attachment 59909

That's not maxing out your contribution. In that graphic you contributed less to the Roth than to the traditional.

If you contrinute the same 10k to each account, you end up way ahead with the Roth.

 

[AtomApple]

That's not maxing out your contribution. In that graphic you contributed less to the Roth than to the traditional.

If you contrinute the same 10k to each account, you end up way ahead with the Roth.

But in order to contribute 10k, you would have to earn 13k. (illustration is “easy math” not representing current tax laws 100%)

it is based off what you do with 10k of earned salary.

the general idea, is that nobody is breaking some cheat code with this. The only benefit would be if you were manipulating tax brackets. For a married couple, income under 89,450 is taxed at 12% and over it is 22%, for example.

 

[Brian662]

But in order to contribute 10k, you would have to earn 13k. (illustration is “easy math” not representing current tax laws 100%)

it is based off what you do with 10k of earned salary.

the general idea, is that nobody is breaking some cheat code with this. The only benefit would be if you were manipulating tax brackets. For a married couple, income under 89,450 is taxed at 12% and over it is 22%, for example.

I agree, if it were some cheat code it wouldn't be so highly debated.

 

[Telemark]

it is based off what you do with 10k of earned salary.

Right, which is why it does not contradict what I said, and what I said regarding contributions is accurate.

It is a cheat code in that it allows you to effectively contribute more of your income to your 401k, if you can afford it.

 

[AtomApple]

Right, which is why it does not contradict what I said, and what I said regarding contributions is accurate.

It is a cheat code in that it allows you to effectively contribute more of your income to your 401k, if you can afford it.

Well you can’t do Roth pretax, Roth is only post tax. Traditional 401k/Ira is pretax.

 

[Telemark]

Well you can’t do Roth pretax, Roth is only post tax. Traditional 401k/Ira is pretax.

Which is why the Roth 401k is better if you want to max out your contribution.

 

[AtomApple]

Which is why the Roth 401k is better if you want to max out your contribution.

Roth 401(k) Plans​

Created by the Economic Growth and Tax Relief Reconciliation Act of 2001, Roth 401(k)s are a hybrid, blending many of the best parts of traditional 401(k)s and Roth IRAs to give employees a unique option when it comes to planning for retirement.2


Like traditional 401(k)s, contributions are made directly from an employee’s paychecks and the employer may match part of those contributions. Unlike traditional 401(k) plans, income taxes are paid on that money before it is deposited into the account, so withdrawals will not be subject to income tax at withdrawal.3

Internal Revenue Service. "Retirement Topics—Designated Roth Accounts."

Roth IRAs​

Roth IRAs were established by the Taxpayer Relief Act of 1997 and named for U.S. Sen. William Roth of Delaware.45 What sets them apart from traditional IRAs is that they are funded with after-tax dollars, making qualified distributions tax-free.

 

[Telemark]

Roth 401(k) Plans​

Created by the Economic Growth and Tax Relief Reconciliation Act of 2001, Roth 401(k)s are a hybrid, blending many of the best parts of traditional 401(k)s and Roth IRAs to give employees a unique option when it comes to planning for retirement.2


Like traditional 401(k)s, contributions are made directly from an employee’s paychecks and the employer may match part of those contributions. Unlike traditional 401(k) plans, income taxes are paid on that money before it is deposited into the account, so withdrawals will not be subject to income tax at withdrawal.3

Internal Revenue Service. "Retirement Topics—Designated Roth Accounts."

Roth IRAs​

Roth IRAs were established by the Taxpayer Relief Act of 1997 and named for U.S. Sen. William Roth of Delaware.45 What sets them apart from traditional IRAs is that they are funded with after-tax dollars, making qualified distributions tax-free.

You literally proved my point, which was:

I think if you are maxing out your contributions, you should do Roth, as it would effectively be a lower contribution if you go pre-tax

 

[AtomApple]

You literally proved my point, which was:

I think if you are maxing out your contributions, you should do Roth, as it would effectively be a lower contribution if you go pre-tax

Ok, you win !
we Clearly have a disconnect in communication here, I have no idea what point you are trying to prove. You can’t do Roth pre-tax. it doesn’t matter if you are doing 401k or IRA. Are you saying it is better to do traditional (Pre-tax) ?

 

[Telemark]

My bad:

I think if you are maxing out your contributions (to your 401k), you should do Roth (401k), as it would effectively be a lower contribution if you go pre-tax (contributions to a traditional 401k).

That is to say: the contribution limit is the same for both types of 401k. If your goal is to max out your 401k contribution, you should go with a Roth 401k because the contribution is effectively larger, as it represents a larger amount of income.

 

[Jerry-B-WI]

View attachment 59909

Why would you assume a 25% tax rate and why did you stop contributing to either type of fund? There are no RMD's on a Roth account and anyone who may inherit a Roth doesn't pay tax either. I say if you're young and have a mortgage and kids to write off, you're getting a bunch of your taxes back, a Roth would be way better.

 

[AtomApple]

Why would you assume a 25% tax rate and why did you stop contributing to either type of fund? There are no RMD's on a Roth account and anyone who may inherit a Roth doesn't pay tax either. I say if you're young and have a mortgage and kids to write off, you're getting a bunch of your taxes back, a Roth would be way better.

It wasn’t my graph, I’m not that artistic.
if a married couple makes over 90k it’s 22% tax after that, and the Trump tax relief ends in 2025, so 25% is a reasonable easy number to do math with.
it is just supposed to be a simple thing to think about.

maybe you are 56 years old, and you want to invest 10k for the next 9 years, funny thing is, the math works the same whether you leave it in for 9 or 18 or 27 years.

can someone like SD put the popcorn down and chime in on this?

 

[g squared 23]

My theory is even though my income may be lower in retirement and I might be in a lower tax bracket then compared to now (therefore pretax contributions make sense), our government officials are recklessly adding to our increasingly enormous federal debt. Therefore interest rates will almost certainly will be higher in 20+ years than they are now to attempt to pay for their ineptitude, so I’m going to bite the bullet, take the tax hit now, and pile up as many Roth dollars as I can legally.


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[b116757]

I do not believe Roth accounts are subject to minimum distributions either.

 

[rocksnstumps]

That simple graph is just that. It ignores other pieces that fit into the retirement pie and really only applies to a narrow band of circumstances. One such item not covered is social security. Most will have some sort of income stream from that too but the goobermint starts to tax those benefits with up to 85% of benefit can be taxed if other contributing income for the year is high. Not an 85% tax but just that say SS you get is $1000, that whatever your tax rate is applied to $850 if beyond a certain income threshold.

Pretax IRA money taken out is part of that SS taxing equation while post tax Roth funds are not. Other tax cliffs to worry about are Medicare IRMAA or if retired before 65 what impact to ACA subsidies for health insurance. Other buzz words used all the time in retirement planning are RMDs, AGI, and MAGI

If you don't understand some of the terms above, just following that "simple" graphic may cost you some significant $$

 

[SD51555]

It wasn’t my graph, I’m not that artistic.
if a married couple makes over 90k it’s 22% tax after that, and the Trump tax relief ends in 2025, so 25% is a reasonable easy number to do math with.
it is just supposed to be a simple thing to think about.

maybe you are 56 years old, and you want to invest 10k for the next 9 years, funny thing is, the math works the same whether you leave it in for 9 or 18 or 27 years.

can someone like SD put the popcorn down and chime in on this?

What’s the current question? I’ve only been half following this.


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[TWIG]

Take it easy on me boys, as I'm just a millennial, but I've never understood going the ROTH route. To me, when investing in a traditional 401K, I'm essentially getting an interest free loan till I withdraw any money. That's a pile of money after 40 years of interest. Money that the guys that invested in ROTH don't get to accrue.

 

[AtomApple]

Take it easy on me boys, as I'm just a millennial, but I've never understood going the ROTH route. To me, when investing in a traditional 401K, I'm essentially getting an interest free loan till I withdraw any money. That's a pile of money after 40 years of interest. Money that the guys that invested in ROTH don't get to accrue.

It’s more like “deferred interest”.
for the record, I do my 6000-6500 a year in Roth/401k, then about 12-14k a year in annuity/401k/traditional. The numbers fluctuate depending on how much overtime I work in a year.

here is 1 example, remember a married couple pays 12% tax on earnings under 90k (89,450 to b exact), and 22% tax on earnings over 90k. (This does not include future limit levels being raised, or taxes going up or down)
if you are under 90k it makes a lot of sense to do Roth, because in retirement (hopefully) you are drawing out more than 90k a year, so you save 10% tax on any money over the 90k.
if you are over the 90k, you can put it in a “traditional” tax free, saving the 22%, then if you withdraw less than 90k a year in retirement, it is only taxed at 12%.

the above illustration just demonstrates that, if taxes, brackets, and investment time all stay the same, it doesn’t make you more or less money either way in the end.

another example would be: you set yourself up to draw out 90k a year to stay in that 12% bracket. But one day you decide to buy a truck/boat/land/vacation, etc. you can pull from your Roth fund, tax free, to pay for those things.

just one reason to diversify