Should I max out my pre-tax retirement options?

[Anonymous]

40yo gov worker married to a 45yo gov worker, with a combined hhi of $300k, 2 young kids. We're already maxing out our Roth retirement options ($20,500 for a 457 and 401k each in 2022). I have contributed zero dollars to my post tax accounts (which have a max limit of $6k/year). We don't need the money monthly so I won't miss the reduction from my paycheck, but is there any reason not to do this? The kids' 529s are also in good shape. Between our retirement accounts today, plus our pensions, I'm not worried about our retirement funds but still if I don't need the money today is it silly not to max out all of my retirement options? Or should I invest them into something more liquid?

[Anonymous]

You both should be maxing TSP, HSA and back door Rothy’s. That will come out to something like $25K + $7K + $7K annually for each over. Put $15K each annually into each kid’s 529 and the remainder of any into a taxable brokerage account.

[Anonymous]

Anonymous wrote:40yo gov worker married to a 45yo gov worker, with a combined hhi of $300k, 2 young kids. We're already maxing out our Roth retirement options ($20,500 for a 457 and 401k each in 2022). I have contributed zero dollars to my post tax accounts (which have a max limit of $6k/year). We don't need the money monthly so I won't miss the reduction from my paycheck, but is there any reason not to do this? The kids' 529s are also in good shape. Between our retirement accounts today, plus our pensions, I'm not worried about our retirement funds but still if I don't need the money today is it silly not to max out all of my retirement options? Or should I invest them into something more liquid?

At your income you should have done pre-tax before Roth. I mean, your decision there was kind of idiotic.

[Anonymous]

Similar financial situation as you.

Me: 22.5K in pretax TSP + 6K in backdoor Roth + 2.5K in dependent care FSA +10K in I-bonds with Treasury Direct. Anything else goes in my taxable brokerage or joint 529.

Spouse: 22.5K in pretax 401K + 22.5K in pre-tax 457B + 6K backdoor Roth + 2.5K dependent care FSA + 2K in HSA + 10K in I-Bonds. Also contributes to 529, but no taxable brokerage account.

[Anonymous]

You should definitely do the backdoor Roth if you don't need the money day to day because the gains are tax free when you withdraw them.

[Anonymous]

Yes you should. I don't understand why you haven't.

[Anonymous]

Anonymous wrote:You should definitely do the backdoor Roth if you don't need the money day to day because the gains are tax free when you withdraw them.

Gains are tax free IF you meet the minimum 5 year account requirement and age requirement (59.5).

The nice thing about the backdoor Roth is that you can pull out the principal after 5 years, if you need it for something, before you hit age 59.5. You can then continue to let any gains remain invested. Backdoor Roth is also really great for day trading and options, since you have no real-time tax liability so long as all the monies remain in the Roth IRA.

The Roth IRA also doesn't count against your assets when assessing your kids for college financial aid.

[Anonymous]

Anonymous wrote:Similar financial situation as you.

Me: 22.5K in pretax TSP + 6K in backdoor Roth + 2.5K in dependent care FSA +10K in I-bonds with Treasury Direct. Anything else goes in my taxable brokerage or joint 529.

Spouse: 22.5K in pretax 401K + 22.5K in pre-tax 457B + 6K backdoor Roth + 2.5K dependent care FSA + 2K in HSA + 10K in I-Bonds. Also contributes to 529, but no taxable brokerage account.

Wow +1 exactly!

[Anonymous]

Pp, I meant +1 except for the 457B. That's nice.

[Anonymous]

Anonymous wrote:

Anonymous wrote:40yo gov worker married to a 45yo gov worker, with a combined hhi of $300k, 2 young kids. We're already maxing out our Roth retirement options ($20,500 for a 457 and 401k each in 2022). I have contributed zero dollars to my post tax accounts (which have a max limit of $6k/year). We don't need the money monthly so I won't miss the reduction from my paycheck, but is there any reason not to do this? The kids' 529s are also in good shape. Between our retirement accounts today, plus our pensions, I'm not worried about our retirement funds but still if I don't need the money today is it silly not to max out all of my retirement options? Or should I invest them into something more liquid?

At your income you should have done pre-tax before Roth. I mean, your decision there was kind of idiotic.

This. Roth here is glaring financial illiteracy. At your income, a traditional 401k is the ONLY way to contribute to a tax-deferred retirement vehicle (other than the HSA). Your retirement income will be far lower than your W-2 income during your wage earning years, so why lock in your tax rate at 24% now? As govvies you could have anywhere from 8 all the way up to 20-ish years between retiring and SS/RMDs to convert a boatload of pre-tax 401k/457 monies to Roth at a much lower tax rate.

Also the 2023 Roth IRA limit is $6500 now, but this doesn’t apply to you due to being over the income limits. Your only option is a back-door Roth. Personally, I wouldn’t even bother and would rather toss any extra funds into VTI 100% in a taxable brokerage account and call it a day.

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:40yo gov worker married to a 45yo gov worker, with a combined hhi of $300k, 2 young kids. We're already maxing out our Roth retirement options ($20,500 for a 457 and 401k each in 2022). I have contributed zero dollars to my post tax accounts (which have a max limit of $6k/year). We don't need the money monthly so I won't miss the reduction from my paycheck, but is there any reason not to do this? The kids' 529s are also in good shape. Between our retirement accounts today, plus our pensions, I'm not worried about our retirement funds but still if I don't need the money today is it silly not to max out all of my retirement options? Or should I invest them into something more liquid?

At your income you should have done pre-tax before Roth. I mean, your decision there was kind of idiotic.

This. Roth here is glaring financial illiteracy. At your income, a traditional 401k is the ONLY way to contribute to a tax-deferred retirement vehicle (other than the HSA). Your retirement income will be far lower than your W-2 income during your wage earning years, so why lock in your tax rate at 24% now? As govvies you could have anywhere from 8 all the way up to 20-ish years between retiring and SS/RMDs to convert a boatload of pre-tax 401k/457 monies to Roth at a much lower tax rate.

Also the 2023 Roth IRA limit is $6500 now, but this doesn’t apply to you due to being over the income limits. Your only option is a back-door Roth. Personally, I wouldn’t even bother and would rather toss any extra funds into VTI 100% in a taxable brokerage account and call it a day.

NP here:
Huh? Why?

Backdoor Roth is getting funded with the same post-tax dollars as a taxable brokerage. Why would you impose taxes on yourself at some point in the future (i.e., invest in brokerage account)? That makes zero sense. If you have excess funds to put in a taxable brokerage, the first $6.5K should go in a backdoor Roth IRA. You'd be stupid not to do that. You can withdraw Roth principal contributions at any time without penalties or taxes, if you need the money for something.

The Roth IRA is so much more flexible and powerful than a brokerage account.

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:40yo gov worker married to a 45yo gov worker, with a combined hhi of $300k, 2 young kids. We're already maxing out our Roth retirement options ($20,500 for a 457 and 401k each in 2022). I have contributed zero dollars to my post tax accounts (which have a max limit of $6k/year). We don't need the money monthly so I won't miss the reduction from my paycheck, but is there any reason not to do this? The kids' 529s are also in good shape. Between our retirement accounts today, plus our pensions, I'm not worried about our retirement funds but still if I don't need the money today is it silly not to max out all of my retirement options? Or should I invest them into something more liquid?

At your income you should have done pre-tax before Roth. I mean, your decision there was kind of idiotic.

This. Roth here is glaring financial illiteracy. At your income, a traditional 401k is the ONLY way to contribute to a tax-deferred retirement vehicle (other than the HSA). Your retirement income will be far lower than your W-2 income during your wage earning years, so why lock in your tax rate at 24% now? As govvies you could have anywhere from 8 all the way up to 20-ish years between retiring and SS/RMDs to convert a boatload of pre-tax 401k/457 monies to Roth at a much lower tax rate.

Also the 2023 Roth IRA limit is $6500 now, but this doesn’t apply to you due to being over the income limits. Your only option is a back-door Roth. Personally, I wouldn’t even bother and would rather toss any extra funds into VTI 100% in a taxable brokerage account and call it a day.

NP here:
Huh? Why?

Backdoor Roth is getting funded with the same post-tax dollars as a taxable brokerage. Why would you impose taxes on yourself at some point in the future (i.e., invest in brokerage account)? That makes zero sense. If you have excess funds to put in a taxable brokerage, the first $6.5K should go in a backdoor Roth IRA. You'd be stupid not to do that. You can withdraw Roth principal contributions at any time without penalties or taxes, if you need the money for something.

The Roth IRA is so much more flexible and powerful than a brokerage account.

I think some people don't understand how to do backdoor or think it's too complicated. I am a late starter but my backdoor ROTH is already over 130k (another 130k for my spouse). It adds up.

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:40yo gov worker married to a 45yo gov worker, with a combined hhi of $300k, 2 young kids. We're already maxing out our Roth retirement options ($20,500 for a 457 and 401k each in 2022). I have contributed zero dollars to my post tax accounts (which have a max limit of $6k/year). We don't need the money monthly so I won't miss the reduction from my paycheck, but is there any reason not to do this? The kids' 529s are also in good shape. Between our retirement accounts today, plus our pensions, I'm not worried about our retirement funds but still if I don't need the money today is it silly not to max out all of my retirement options? Or should I invest them into something more liquid?

At your income you should have done pre-tax before Roth. I mean, your decision there was kind of idiotic.

This. Roth here is glaring financial illiteracy. At your income, a traditional 401k is the ONLY way to contribute to a tax-deferred retirement vehicle (other than the HSA). Your retirement income will be far lower than your W-2 income during your wage earning years, so why lock in your tax rate at 24% now? As govvies you could have anywhere from 8 all the way up to 20-ish years between retiring and SS/RMDs to convert a boatload of pre-tax 401k/457 monies to Roth at a much lower tax rate.

Also the 2023 Roth IRA limit is $6500 now, but this doesn’t apply to you due to being over the income limits. Your only option is a back-door Roth. Personally, I wouldn’t even bother and would rather toss any extra funds into VTI 100% in a taxable brokerage account and call it a day.

NP here:
Huh? Why?

Backdoor Roth is getting funded with the same post-tax dollars as a taxable brokerage. Why would you impose taxes on yourself at some point in the future (i.e., invest in brokerage account)? That makes zero sense. If you have excess funds to put in a taxable brokerage, the first $6.5K should go in a backdoor Roth IRA. You'd be stupid not to do that. You can withdraw Roth principal contributions at any time without penalties or taxes, if you need the money for something.

The Roth IRA is so much more flexible and powerful than a brokerage account.

Well, a few things:

1. Taxable account can be accessed at any time for any purpose
2. Ability to do tax loss harvesting
3. If you earn less than $80k in retirement, there are no capital gains taxes

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:40yo gov worker married to a 45yo gov worker, with a combined hhi of $300k, 2 young kids. We're already maxing out our Roth retirement options ($20,500 for a 457 and 401k each in 2022). I have contributed zero dollars to my post tax accounts (which have a max limit of $6k/year). We don't need the money monthly so I won't miss the reduction from my paycheck, but is there any reason not to do this? The kids' 529s are also in good shape. Between our retirement accounts today, plus our pensions, I'm not worried about our retirement funds but still if I don't need the money today is it silly not to max out all of my retirement options? Or should I invest them into something more liquid?

At your income you should have done pre-tax before Roth. I mean, your decision there was kind of idiotic.

This. Roth here is glaring financial illiteracy. At your income, a traditional 401k is the ONLY way to contribute to a tax-deferred retirement vehicle (other than the HSA). Your retirement income will be far lower than your W-2 income during your wage earning years, so why lock in your tax rate at 24% now? As govvies you could have anywhere from 8 all the way up to 20-ish years between retiring and SS/RMDs to convert a boatload of pre-tax 401k/457 monies to Roth at a much lower tax rate.

Also the 2023 Roth IRA limit is $6500 now, but this doesn’t apply to you due to being over the income limits. Your only option is a back-door Roth. Personally, I wouldn’t even bother and would rather toss any extra funds into VTI 100% in a taxable brokerage account and call it a day.

NP here:
Huh? Why?

Backdoor Roth is getting funded with the same post-tax dollars as a taxable brokerage. Why would you impose taxes on yourself at some point in the future (i.e., invest in brokerage account)? That makes zero sense. If you have excess funds to put in a taxable brokerage, the first $6.5K should go in a backdoor Roth IRA. You'd be stupid not to do that. You can withdraw Roth principal contributions at any time without penalties or taxes, if you need the money for something.

The Roth IRA is so much more flexible and powerful than a brokerage account.

Well, a few things:

1. Taxable account can be accessed at any time for any purpose
2. Ability to do tax loss harvesting
3. If you earn less than $80k in retirement, there are no capital gains taxes

Correct on all 3 points. And in regards to #3, not just in retirement, but at any time it’s advantageous. Our son was a March baby in 2014. Wife quit her job to SAHM the day before he was born and I had known a layoff was coming soon for me. We were able to zero out that year’s W-2 income by maxing out our pre-tax 401k’s for the year before the axe fell, while maxing traditional IRAs as well. Then we sold off ~$100k worth of long-term capital gains at 0%, figured out how much of it we needed to make it thru the year unemployed, and immediately bought back the majority of what we sold to reset the cost basis upward.

It takes a long time backdooring Roth contributions to get to a meaningful sum. And each backdoor Roth IRA conversion can’t be touched for at least five years without penalty. Roth accounts also cripple early retirement strategies. The 100% flexibility of a taxable account is the real advantage of it. Just like a Roth, principal contributions can be withdrawn any time tax free. And if you never cash out any capital gains and leave it to your heirs, then they get it all tax free with the step-up in basis. If you give your heirs a Roth account, well, you just went thru a bunch of extra steps for the exact same result.

I guess what I’m saying is that backdoor Roths are a drop in the bucket at HHI >$300k, and not exactly worth the effort or handcuffs when you can just plunk it into a taxable account instead. For high income folks, the best time to Rothify your pre-tax money is the years between retirement and taking Social Security when your earned income, thus tax rate, is at its absolute lowest it ever will be. The money you earn via W-2 or 1099 will be by far the most expensive money you’ll ever encounter.

[Anonymous]

Just to be clear, you don't have any pre-tax retirement options because you are already maxing out your 401ks with after-tax funds, and your income is too high to contribute directly to an IRA. Your only option would be switch your contributions from Roth 401k to Regular 401k, but that is not saving additional money. As others have mentioned, the only way to put additional money in tax-advantaged accounts is doing the Backdoor Roth.