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Correct there is an income limit for direct contributions to a Roth IRA.

Absolutely absurdly, there is no income limit to do a post-tax contribution to a non-roth-IRA, and then do an IRA to Roth-IRA conversion.


With no income limit you can:

- $6,000 post-tax dollars contribution to IRA, then do a Roth Conversion and file a IRS8606. This is a Backdoor Roth Contribution

- $19,500 pre-tax dollars contribution to 401k.

- $xxxx company matching dollars to 401k.

- ($56,000 - $19,500 - $xxxx company match) contribution to After Tax 401k, then 401k to Roth 401k conversion This is a Mega Backdoor Roth Contribution

- HSA $3,600


Tax implications:

- The money converted into the Roth IRA (the $6,000/year) you paid tax on the principle going in, and are not taxed on it nor on capital gains coming out.

- The pre-tax 401k dollars (yours & matched) you did not pay tax on the principle going in, so you are taxed on the principle and capital gains coming out

- The after tax 401k contribution, converted to Roth 401k, you paid tax on the principle going in, and are not taxed on it nor on capital gains coming out.

- The HSA you did not pay tax on the principle going in, you are not taxed on capital gains or principle going out, as long as it is for qualified medical expenses.


Extra Notes:

- Do not get tricked into rolling over old employer 401k plans to a traditional (non-Roth) IRA. If you do this, there are very complex tax implications when doing backdoor Roth contributions. If you have an existing Traditional (non-Roth) IRA, do lots of reading or buy a couple hours of time from a "Fiduciary Financial Advisor". Do not ever trust a "Financial Advisor" under any circumstances. They do not have your best interest in mind, they have their commission in mind. Fiduciary Financial Advisors don't make a commission from your decisions. Make sure that if you go this route, you find someone who only does Fiduciary advising (and doesn't split time).

- You should carefully evaluate timing on doing a 401k to Roth 401k conversion of your withheld earnings and company contributions. If you have a year that you have lower income (back to school, travel, year off), you should probably do the conversion then. The money will be taxed as ordinary income, but then treated as Roth dollars coming out.

- Beware of employer provided retirement plans with high expense ratios. Anything over about 0.30% is a ripoff and you are wasting money. You have to dig deep into the fund information to find the expense ratio.

- Shockingly, many default investments are target-date plans, and they charge outrageous expense ratios, I have seen as high as 0.90%. Compounded over 30 years this will cost you a literal fortune.


If you are a high earner with no health issues, you should be saving $65,600 per year in the above tax advantaged strategies.

Look up the BogleHeads wiki and guide for where to invest the money (Total Market LOW cost, unmanaged mutual funds).

This is not financial advice, hire your own fiduciary financial advisor

Thanks for the information. I actually didn't know about the individual 401k. Using the individual 401k would allow me to make a larger contribution ($58k) than my current SEP (income does not max out the 25% limit). However, the downside with the individual 401k is that I cannot expand and hire full-time employees.

Do you have to know if I can convert my SEP into an individual 401k?

See this amazing chart from the IRS on allowable source and destination's for rollovers: https://www.irs.gov/pub/irs-tege/rollover_chart.pdf

It does appear you can roll a SEP-IRA over to a "Qualified (pre-tax) Plan" which footnote 1 indicates includes 401K.

How much do you have in the SEP currently? You could roll $6,000 of it per year over into a Roth IRA (held at Vanguard for example).

Remember, make sure not to end up with money in a traditional IRA, or the tax situation for backdoor contributions becomes much more complex.

> - Do not get tricked into rolling over old employer 401k plans to a traditional (non-Roth) IRA. If you do this, there are very complex tax implications when doing backdoor Roth contributions.

Do you have more information on what we should be looking for here? Is the backdoor roth you're referring to different from 401(k) plan sponsored mega backdoor roth?

Yes, what you want to look into if you have existing traditional-IRA dollars is the "Pro-Rata Rule". See: https://www.kitces.com/blog/the-impact-of-the-ira-aggregatio...

Backdoor Roth: Contribute $6,000 in after-tax dollars to IRA, Immediately convert IRA --> Roth IRA. File Form 8606.

Mega Backdoor Roth: Contribute a total of ($56,00 - ($19,500 + Employer Match)) as After Tax contributions to a 401K. Convert those funds to a Roth 401k.

Another detail, you may see discussion about avoiding the "Step Doctrine" for backdoor Roth contributions. This is no longer required as the IRS has blessed Back Door contributions, after an obscure footnote in a 2018 congressional report.

- Footnote Commentary: https://www.forbes.com/sites/ashleaebeling/2018/01/22/congre...

- IRS Explicitly Acknowledges: https://www.napa-net.org/news-info/daily-news/case-week-de-v...

- More: https://www.fa-mag.com/news/irs-finally-says-back-door-roth-...

- https://www.physicianonfire.com/backdoor/

- https://www.biglawinvestor.com/backdoor-roth-ira-step-by-ste...

Thank you so much, you're giving out great advice for free..

While I agree that user wikibob is investing significant amounts of their time dispensing genuinely helpful advice, I would also like to point out that much of their advice sets you up for retirement, and is not going to be optimal for anyone who has other goals.

For best results, people (especially young people) should do their own homework and know their own risk tolerance and financial goals. Putting thousands of dollars towards retirement won't help you if what you really needed was to pay off your credit card, or to set aside money for your child's college, etc. etc.

I completely agree.

If you have any unsecured debt (college, credit cards, vehicle) I would strongly suggest paying it off completely before doing any retirement savings.

If you have or plan to have kids, you need to investigate 529 college savings plans and determine the best mix for you of retirement versus 529 savings.

Getting into other uses for money such as founding your own startup (given we’re on a Y-Combinator website), I’d suggest thinking long and hard about your level of risk tolerance. If you’re happy with the risk, go for it! If you’d be happier knowing your retirement is completely secured from some years of high earning and high retirement savings, go for that.

A big key to retirement savings is really deeply understanding just how big the impact of compound interest is. Go pull up a compound interest calculator, graph a curve, something conservative say 7% growth rate over 20 years. Then do it over 40 years. The difference is amazing.

To add just a tiny addition to your excellent summary: Some employers’ plans also allow you to convert after-tax 401(k) contributions to your personal Roth IRA (as opposed to its Roth 401(k). Otherwise same as the mega-back door. You might prefer this if your Roth IRA gives you more flexibility in investments.

Now that is a fascinating tidbit.

All this tax advantaged retirement savings is an almost entirely shadow-world when it comes to compensation. In tech places like http://levels.fyi has done amazing at leveling the playing field, but something small like an employer offering after-tax 401k, or only having horrible high fee fund options, makes a significant difference over the years.

Can you use a throwaway and name some names of employers that you know offer the after-tax-401k-to-personal-Roth option?

This is not entirely correct. If you participate in an employer 401K and have an income greater than $76K (as a single person) in 2020, you can't contribute to your traditional IRA. Well, you can't deduct the contribution, so you're putting in after tax income. I learned this when Turbo Tax wouldn't let me deduct my IRA contribution. Oops! So now I have to go through the hassle of clawing the money out of my traditional IRA, or I'll have to pay tax on it again when I take it out.

See this => https://www.investopedia.com/ask/answers/07/401(k)_ira.asp

You're looking for the section called "Deductibility of IRA Contributions If You Also Have an Employer Plan (2021)".


I am not sure which part you are stating is not correct. The intention is to contribute after-tax income.

For your situation, a better move would be for you to do a Roth Conversion of the money in your traditional-IRA to move it to Roth IRA dollars. You do this with your broker, and then file form 8606 with the IRS.

The $6,000 "Roth Backdoor" is indeed with post-tax dollars. This is intended. There are significant benefits to having the majority of your retirement savings in a Roth, including no minimum distributions, and the ability to withdraw funds for unqualified reasons 5 years after your last contribution.

This is not financial advice, hire your own fiduciary financial advisor

> $6,000 post-tax contribution to IRA, then Roth Conversion

"post-tax" is the important bit!

Correct, the $6,000 you put into your IRA is funded with money that you pay ordinary income tax on.

You then do a IRA to Roth IRA conversion with your retirement plan provider (Vanguard, Fidelity, etc).

Then you file IRS form 8606 to report two things:

- Nondeductible contributions you made to traditional IRAs.

- Conversions from traditional IRAs to Roth IRAs.

This is not financial advice, hire your own fiduciary financial advisor

Interesting. I'll look into it.

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