High Earners 50 and Up Get Two-Year Reprieve From IRS on 401(k) Rule https://www.wsj.com/articles/high-earners-50-and-up-get-two-year-reprieve-from-irs-on-401-k-rule-3a6d4727


"Roth-style catch-up contributions now won't be mandated until 2026, not 2024

Higher earners age 50 and up will get two more years to use pretax dollars for all of their retirement savings in 401(k)s and similar plans, after the Internal Revenue Service delayed a new requirement. "






This is good for me. I can't contribute to a Roth IRA because of income.

I thought Roth and Income limits were only applicable to IRA not 401(k)...

I'm above the limit for Roth IRA so I quit contributing to that entirely and getting reduced tax advantage on my traditional IRA so I no longer contribute to that as well. I still do a mix of regular and Roth 401(k) though.

Everything else just goes to the brokerage and other investments.

Logos Stick said:

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High Earners 50 and Up Get Two-Year Reprieve From IRS on 401(k) Rule https://www.wsj.com/articles/high-earners-50-and-up-get-two-year-reprieve-from-irs-on-401-k-rule-3a6d4727


"Roth-style catch-up contributions now won't be mandated until 2026, not 2024

Higher earners age 50 and up will get two more years to use pretax dollars for all of their retirement savings in 401(k)s and similar plans, after the Internal Revenue Service delayed a new requirement. "






This is good for me. I can't contribute to a Roth because of income.

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That is good news.

You can contribute to a Roth 401k regardless of income.

And you can also contribute to a Roth IRA if your income is above the limits through the backdoor approach of contributing to a Traditional IRA and then converting it to a Roth IRA.

Why would I want to contribute pre-tax instead of Roth? How is that a benefit for someone making $145k

Is there a consensus cutoff earnings where pretax is better Roth?

True about the backdoor approach. Pay the tax on the front end due to reduced/loss of tax advantage but yes, getting it into the ROTH pulls it tax free again on the back end.

Biding their time until they simply seize all 401Ks and IRAs.

Kenneth_2003 said:

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True about the backdoor approach. Pay the tax on the front end due to reduced/loss of tax advantage but yes, getting it into the ROTH pulls it tax free again on the back end.

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It's a very simple decision... if you can't get a tax break on a Traditional IRA, then why wouldn't you put some after-tax money into a Roth IRA and let it grow tax free? Assuming you have the coin for it of course.

hoosier-daddy said:

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Why would I want to contribute pre-tax instead of Roth? How is that a benefit for someone making $145k

Is there a consensus cutoff earnings where pretax is better Roth?

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For IRA... NOT 401(k) if you are single or married filing separately you start to see reduced Roth contribution limits at $138,000 AGI. Roth IRA is removed entirely as an option at $153,000 AGI.

It's up in the 200s for married filing jointly.

As for the Traditional IRA you start to lose deductability if you have a 401(k) and make over $83,000 AGI
https://www.irs.gov/retirement-plans/2023-ira-deduction-limits-effect-of-modified-agi-on-deduction-if-you-are-covered-by-a-retirement-plan-at-work

https://www.irs.gov/retirement-plans/amount-of-roth-ira-contributions-that-you-can-make-for-2023

"For a bit" being the operative part of the headline.

This is for 401k, not IRA. I don't qualify for Roth IRA and contribute max Roth 401k.

I must be missing something

OP closed his post stating

Quote:

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This is good for me. I can't contribute to a Roth because of income.

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I then replied asking/stating that there is no income limit to participating in a Roth 401(k). Likewise the WSJ article is behind a paywall so the headline snip is about all there is to read.

hoosier-daddy said:

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This is for 401k, not IRA. I don't qualify for Roth IRA and contribute max Roth 401k.

I must be missing something

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I don't qualify for Roth IRA "through the front door" either, meaning a direct contribution to a Roth IRA.

So if you have after-tax money in an account that is producing income but you're paying taxes on that income, why wouldn't you move it to a Roth IRA where it can grow tax free?

The way to do that is a "back door" contribution where you contribute to a Traditional IRA without a tax break, and then convert it a week later to a Roth IRA. Perfectly legal. Been doing it for many years. And that money is growing tax free.

Rapier108 said:

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Biding their time until they simply seize all 401Ks and IRAs.

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I wish more people realized this. Sigh....

MemphisAg1 said:

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Kenneth_2003 said:

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True about the backdoor approach. Pay the tax on the front end due to reduced/loss of tax advantage but yes, getting it into the ROTH pulls it tax free again on the back end.

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It's a very simple decision... if you can't get a tax break on a Traditional IRA, then why wouldn't you put some after-tax money into a Roth IRA and let it grow tax free? Assuming you have the coin for it of course.

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Probably will do that this year, just haven't yet.

As for my 401(k) I contribute to the employer match plus a little extra, but I'm not maxing it out. I don't like the investment options and the fees are high. It's managed through Insperity (a payroll and benefits manager) and it's just f'ing awful. The fees more than eat the tax advantage on that cash.

hoosier-daddy said:

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This is for 401k, not IRA. I don't qualify for Roth IRA and contribute max Roth 401k.

I must be missing something

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Ouch!

You're paying 22%+ tax rate to avoid much lower tax rates in retirement.

Unless you think you'll double your take home in retirement.

MemphisAg1 said:

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Logos Stick said:

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High Earners 50 and Up Get Two-Year Reprieve From IRS on 401(k) Rule https://www.wsj.com/articles/high-earners-50-and-up-get-two-year-reprieve-from-irs-on-401-k-rule-3a6d4727


"Roth-style catch-up contributions now won't be mandated until 2026, not 2024

Higher earners age 50 and up will get two more years to use pretax dollars for all of their retirement savings in 401(k)s and similar plans, after the Internal Revenue Service delayed a new requirement. "






This is good for me. I can't contribute to a Roth because of income.

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That is good news.

You can contribute to a Roth 401k regardless of income.

And you can also contribute to a Roth IRA if your income is above the limits through the backdoor approach of contributing to a Traditional IRA and then converting it to a Roth IRA.

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Ok, the last paragraph... how does that work?



And per Internet..

"The Roth IRA income limits for 2023 are less than $153,000 for single tax filers, and less than $228,000 for those married, and filing jointly."


So I can give up to $7k to traditional IRA after taxes , then convert to a Roth IRA?

Kenneth_2003 said:

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OP closed his post stating

Quote:

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This is good for me. I can't contribute to a Roth because of income.

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I then replied asking/stating that there is no income limit to participating in a Roth 401(k). Likewise the WSJ article is behind a paywall so the headline snip is about all there is to read.

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Roth IRA

Logos Stick said:

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So I can give up to $7k to traditional IRA after taxes , then convert to a Roth IRA?

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Yes. $6.5k if you're <50 yrs old and $7.5k if you're >50

If you're married, you can do it for your spouse also. So $13k or $15k per year.

There are many articles on the internet explaining this. Here's a random one I pulled https://www.investopedia.com/how-to-set-up-a-backdoor-roth-ira-4584775

bmks270 said:

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hoosier-daddy said:

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This is for 401k, not IRA. I don't qualify for Roth IRA and contribute max Roth 401k.

I must be missing something

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Ouch!

You're paying 22%+ tax rate to avoid much lower tax rates in retirement.

Unless you think you'll double your take home in retirement.

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Ok, why would you not max your 401k? Especially for high income folks?

Logos Stick said:

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Kenneth_2003 said:

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OP closed his post stating

Quote:

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This is good for me. I can't contribute to a Roth because of income.

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I then replied asking/stating that there is no income limit to participating in a Roth 401(k). Likewise the WSJ article is behind a paywall so the headline snip is about all there is to read.

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Roth IRA

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But the article/headline makes no mention of IRA. It's appears to be in regards to catchup contributions on a 401(k). Totally different.

bmks270 said:

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hoosier-daddy said:

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This is for 401k, not IRA. I don't qualify for Roth IRA and contribute max Roth 401k.

I must be missing something

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Ouch!

You're paying 22%+ tax rate to avoid much lower tax rates in retirement.

Unless you think you'll double your take home in retirement.

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The analysis is fairly simple in that you want a Roth if you think tax rates will be the same or higher for you in retirement then now. Potentially a little lower tax rate is also good for Roth due to better distribution options if you don't plan to tap the IRA/401k. If you think your tax rate will be lower due traditional. Given current deficit levels, I think tax rates are likely to be higher in the future even if you have lower earnings.

This assumes they don't change the law and tax Roth IRA/401k distributions which I think is unlikely but far from a 0% chance especially if you have a high net worth.

Thanks

bmks270 said:

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hoosier-daddy said:

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This is for 401k, not IRA. I don't qualify for Roth IRA and contribute max Roth 401k.

I must be missing something

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Ouch!

You're paying 22%+ tax rate to avoid much lower tax rates in retirement.

Unless you think you'll double your take home in retirement.

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1) Taxes are only going up
2) Earnings are not taxed upon withdrawal with Roth 401k but earnings are taxed on pre-tax 401k
3) I'm not a financial expert, just a guy trying not to screw up my retirement investments!

Kenneth_2003 said:

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Logos Stick said:

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Kenneth_2003 said:

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OP closed his post stating

Quote:

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This is good for me. I can't contribute to a Roth because of income.

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I then replied asking/stating that there is no income limit to participating in a Roth 401(k). Likewise the WSJ article is behind a paywall so the headline snip is about all there is to read.

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Roth IRA

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But the article/headline makes no mention of IRA. It's appears to be in regards to catchup contributions on a 401(k). Totally different.

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It is. But that's the only thing they allows tax protection for current income.

You can contribute to a traditional IRA, but that's after tax. Or as says, a backdoor Roth.

bmks270 said:

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hoosier-daddy said:

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This is for 401k, not IRA. I don't qualify for Roth IRA and contribute max Roth 401k.

I must be missing something

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Ouch!

You're paying 22%+ tax rate to avoid much lower tax rates in retirement.

Unless you think you'll double your take home in retirement.

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Yes and no....
The backdoor Roth IRA comes into play for mid-high income earners WITH an employer sponsored retirement (usually a 401(k) but could also be a 403(b) plan).

For single filers with an AGI above $153,000 you cannot contribute to a Roth IRA. If you have an employer sponsored retirement plan you lose the ability to defer taxes on a traditional IRA when your AGI is above $83,000, but you are still allowed to contribute.

So you're presented with two options. Invest up to $6,500 (the IRA contribution limit for 2023 for filers 50 and under, it's higher if you're over 50) into a Traditional IRA with no tax advantage. So yes, taxed at your marginal tax rate. If its kept in the IRA you would withdraw it in retirement as ordinary income. OR you can backdoor it into a ROTH IRA and pay no tax on the earnings in retirement.

Otherwise you could pay tax on it today, like you're going to anyway since you're over the IRA tax advantage limit based on income, and pay (most likely) 15% long term capital gains when you withdraw it whenever.

IRS... Clear as mud my friend!

Hoyt Ag said:

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Rapier108 said:

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Biding their time until they simply seize all 401Ks and IRAs.

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I wish more people realized this. Sigh....

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Just a reminder, if you are in favor of Texit, all of your deferred taxes will be due at time of finalizing the divorce. Not to be paid during retirement, but due on demand.

Something to think about.

Logos Stick said:

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bmks270 said:

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hoosier-daddy said:

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This is for 401k, not IRA. I don't qualify for Roth IRA and contribute max Roth 401k.

I must be missing something

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Ouch!

You're paying 22%+ tax rate to avoid much lower tax rates in retirement.

Unless you think you'll double your take home in retirement.

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Ok, why would you not max your 401k? Especially for high income folks?

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It's the Roth part that hurts.

Tax brackets gradually increase with income.

When you save the money using Roth, you pay the highest tax bracket rate on the money saved!

When you withdraw the money as income, you pay the lowest brackets first.

You're paying 22%+ tax rates on all of your savings to avoid paying 10 and 12% tax rates on the first portion of income withdrawal in retirement.

Unless you think tax rates or your income will more than double, it just doesn't make sense for most savers to pay high marginal rates on retirement savings because of the way the tax brackets work.

Logos Stick said:

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bmks270 said:

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hoosier-daddy said:

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This is for 401k, not IRA. I don't qualify for Roth IRA and contribute max Roth 401k.

I must be missing something

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Ouch!

You're paying 22%+ tax rate to avoid much lower tax rates in retirement.

Unless you think you'll double your take home in retirement.

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Ok, why would you not max your 401k? Especially for high income folks?

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A couple of reasons...
1) fewer hurdles if you want to access cash before 60. Important if you're looking to retire early
2) 401(k) income (non-Roth 401(k)) is taxed as ordinary income vs. capital gains (could be a tossup)
3) take advandage of investment options potentially more lucrative than your very structured 401(k). IRA's do open up more options for things like real estate, metals, etc.
4) better investment options outside of your employers chosen plan.

Kenneth_2003 said:

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Otherwise you could pay tax on it today, like you're going to anyway since you're over the IRA tax advantage limit based on income, and pay (most likely) 15% long term capital gains when you withdraw it whenever.

IRS... Clear as mud my friend!

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A distribution from any retirement plan, if taxable, is taxable at ordinary income rates, not long term capital gain rates.

one safe place said:

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Kenneth_2003 said:

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Otherwise you could pay tax on it today, like you're going to anyway since you're over the IRA tax advantage limit based on income, and pay (most likely) 15% long term capital gains when you withdraw it whenever.

IRS... Clear as mud my friend!

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A distribution from any retirement plan, if taxable, is taxable at ordinary income rates, not long term capital gain rates.

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The implication was that you invest it OUTSIDE of your retirement plans because unless you backdoor Roth there is no tax advantage in your traditional IRA under the scenario I outlined.

Sorry, I should have specified into a regular brokerage in my post.