Related Posts
Conversation Starter
Best startups in the utility space?
Who needs a day between Saturday and Sunday?
Additional Posts in Personal Investment Chatter
Conversation Starter
Rising Star
Conversation Starter
What stocks are you betting on for 2018?
New to Fishbowl?
Download the Fishbowl app to
unlock all discussions on Fishbowl.
unlock all discussions on Fishbowl.
Theirs is a limit you can contribute each year to all IRAs combined. Contribute the limit to traditional IRA and convert to Roth IRA. There is no limit to how much you can convert to Roth each year.
If you already have a traditional IRA balance you need to understand how the pro rata tax works
The backdoor Roth IRA is essentially a workaround for high earners who are phased out of direct Roth IRA contributions.
You contribute after-tax dollars to a Traditional IRA (2025 limit: $7,000, or $8,000 if age 50+).
Then, you convert that amount to a Roth IRA — ideally soon after, to avoid tax on any growth.
This is a conversion, not a direct contribution, so it bypasses the income limits.
For your 401(k) contributions, you can contribute up to $23,500 ($31,000 if age 50+) to either your Traditional or Roth. Your company will typically put matching contributions into the Traditional portion, which you can always convert after separation of service (some plans allow for you to perform in-service rollovers or conversions, but it’s rare).
Pro
They do, but it’s contributed to the Traditional 401(k) portion of your plan.
The SECURE Act 2.0 made it possible for employers to contribute to your Roth 401(k) instead of just the traditional (pre-tax) side, but, Roth 401(k) contributions by your company would be taxable immediately as compensation. So you would be faced with a larger tax bill at the end of the year (because you haven’t paid the taxes yet) or face having a lower paycheck (because the excess taxes were withheld).
It’s technically allowed now, but most companies aren’t doing it because it’s administratively messy, unpopular with employees, and creates tax complications that no one wants to deal with..
Why the Roth 401k? The way I’ve been thinking about it is if you are a high earner you are paying higher taxes now than you will in retirement and the tax benefit to reduce taxable earnings is more valuable today because you can invest, etc? Am I thinking about this wrong?
If I had to do it again I would have pounced on the Roth 401k as soon as it was available. The models show my tax brackets later in life at 35%, so the RMDs are in the $300+ range. A good problem to have, but I wish I had done some things differently. FYI - typically in the 22%/24% tax bracket.
Pro
Yes. After tax contribution to traditional IRA, then converted to Roth IRA. Annual IRA limit still applies (6500 ish I think)