>> The lack of Traditional IRA tax deductions and my inevitable barring of allowed contributions to a Roth IRA over time (as my income surpasses the allowed threshold within ~5 years) makes Roth IRA contributions more appealing at the moment.

In this scenario you don’t even have a choice – you have to contribute to your Roth, you don’t even need to do the backdoor method then. So there’s not even a choice to make here.

If the backdoor Roth strategy is nullified by congressional legislation, then of course the recommendation will change – it won’t even be valid anymore in that case. So far, that has not happened. Who knows if it will happen, but it probably won’t happen in 2022 anymore, so might as well take advantage of it now if you’re able to.

Thanks for all your help on these topics.

I’m still conflicted on this question of Traditional vs Roth, especially for IRA’s. After listening to your related podcast and reading your related post, I Googled around a bit to see other opinions. I was hoping to get your opinion on two items I found.

One item is the income limit for tax deductible contributions to a Traditional IRA. I would be ineligible to claim a tax deduction for Traditional IRA contributions (due to income), but I am still eligible for Roth IRA contributions 100% up to the limit. The lack of Traditional IRA tax deductions and my inevitable barring of allowed contributions to a Roth IRA over time (as my income surpasses the allowed threshold within ~5 years) makes Roth IRA contributions more appealing at the moment.

The other item is related to the first. This is the matter of tax law and changing legislation. Supposedly the back door strategy has a target on its back with recent proposed bills and I am worried that the strategy will no longer be around by the time I can start to take advantage of it (~25-30 years).

The current recommendation seems to be based on the current state of law around the back door strategy. Does the recommendation change if benefits of the strategy are reduced or eliminated completely? Do you think this is likely to happen?

Thanks again,
Rylan

1. Avoiding RMDs is one big reason. Another might be because your Roth IRA probably has a wider diversity of investment options to choose from.

2. If you can afford it, there’s no reason…assuming you can convert the after-tax dollars to Roth immediately. If for some reason your plan doesn’t allow for that, then it’s not worth contributing the after-tax dollars.

You’re crushing it StepenK1. Congratulations!

Thanks for sharing this Steven. You’re living the dream. Glad to hear you learned how to hack your retirement at a relatively young age – the results clearly speak for themselves, since you’re now able to enjoy stress-free, low/no-tax retirement!

I retired at 54, my wife at 51. Before going full plunge, I did continue to work a simple part-time job to keep income flowing until the numbers made perfect sense as being true. Coming into this, we had already lived debt-free for two decades. We also paid for our newly built house with cash in 2013. So, there was absolutely no debt and the house was bought basically at the bottom of the housing market in a brand new neighborhood to boot just outside of town. We had rented entirely before that while building our savings. Long long ago, we had owned a couple houses in another State during our debt-filled lives. Medical issues with one of our two kids cost us everything way back then. It’s what opened our eyes to life’s unfortunate surprises and having heavy debt with no savings. Once debt-free, we never turned back.

Anyway, let’s talk about now. Three buckets, no debt, own house free and clear, retired early:

Taxable bucket: Lots of cash and dividend stocks throwing off about $5k/year in tax-free dividends. Stock is there to cash out in a big emergency, but even that would be long-term capital gains. The rest of that account is simple pure cash. Drawing on that cash obviously generates no income or tax consequences. There is enough cash to live on until 59.5 years old. Expenses are only $25k/year. Yes, you read that right. Sounds very low until you consider that zero taxes are being paid. No rent or house payments. No car payment. No debts at all. Don’t have to drive my car to work each day, so gas expenses are low. Everything we need is within minutes of our house. Then, consider we live in Wisconsin. You’d be thinking, ouch…that’s a high tax State. But is it? While property tax would seem high relative to cost of house, the housing itself is priced much lower than many States. Then, consider that the State tax rate is a sliding scale and I’m getting it all back. Then, here comes the hidden winner in Wisconsin: Usually food costs occupy a large amount of retirement expense. Wisconsin doesn’t charge tax on food. That’s a big one. We have a Walmart 5 minutes from my house. Since we have a Walmart credit card with 5% off all purchases, including groceries and curb side pickup, we save even more on food costs. Obviously, we pay off credit in full each month to avoid interest payments.

Roll-over IRA bucket(s): In order to satisfy ACA health insurance requirements, we need to show income. That’s where the Roth conversions kick in. We combine the Roth conversion with the dividends paying out of the taxable account to “program” our yearly income. Using the ACA calculators we can figure out how much to convert each year and not go over the amount that would generate a monthly insurance cost. We can push $40k/year “income” at this moment in time, and the credits basically cover all the insurance for my wife and I. Before anyone has a hissy-fit with doing that, be aware that the government’s own website encourages early retirees specifically to use ACA. It’s a specific benefit that they want early retirees to take advantage of while they are transitioning to Medicare later on at 65 years old. We wish we did not have to take Medicare at 65.

Roth bucket(s): My wife and I already had established Roth accounts many years ago and had funded them. So, there are plenty of funds in them already that have 5 years accumulated time to meet withdrawal requirements. The Roth conversions are in-process before we reach 59.5 as well.

Another important change we are making is pushing Social Security off to 70. This maximizes our Social Security, which we really don’t need during our 60’s. More importantly, this gives us more time to get funds transferred out of our traditional roll-overs and not trip up SS taxes.

The health advantages of retiring in our 50’s have been huge. We have both lost large amounts of weight, eat healthy, sleep well, stress is so low and we don’t beat our bodies up. My weight is where it was back in high-school! BMI is perfectly centered. Can’t remember seeing myself look so fit. Combine this with being in my 50’s means able to do so much NOW, and reduce probabilities of bad health in the later years.

So, we basically “program” our yearly “income” for taxes and ACA purposes. The Standard Deduction gobbles up most of the conversion as tax-free (~$25k). We are taxed at 10% for a small remaining part of the conversion (~$10k). The dividends are tax-free (~$5k). The ACA is free at this level. No State/Federal/FICA income taxes to pay. We live off of actual dividends/cash until 59.5. The food is tax-free. Property tax is reasonable ($3700/yr).

Hope I didn’t miss anything. It works. It’s real. Look forward to discussion and/or feedback…

Yeah it’s not going to be right for every single taxpayer, but I do believe given the flexibility and optionality it provides, compared to taking the tax hit right up front (with a Roth), it will end up being the right choice for *nearly all* taxpayers.

Thanks Andrew! There are always options. You obviously put a lot of thought into this. The approach of doing Roth conversions is a great approach even if you can’t achieve the zero tax bracket. Any $$ you convert and pay in a lower tax bracket is a win (as long as you have the cash to pay the taxes). My only quibble with the thesis is “it’s always better to do traditional”. I have value for having money in taxable, tax deferred & tax exempt for maximum flexibility.

David, you raise good points. It’s true, this strategy might not be the right fit for everyone. But for many, it will. There are also ways to mitigate some of the risks you identified.

For example, you need spending money for the first 5 years, but if you plan early enough around it and amortize it in the years leading up to retirement/FIRE, you could have your 5 years of expenses ready to go by the time you pull the trigger. That money could be a laddered bond portfolio that matures a year’s worth of spend each year.

You could also live for a few years in a lower cost foreign country during the first few years of retirement when you’re relatively young, have more energy and interest in traveling, and that could drastically reduce the amount of money needed during the first 5 years in the first place.

Also if you go abroad, you might be able to get really good quality healthcare for cheaper than Obamacare, even if you pay out of pocket, because many countries have more affordable healthcare than the US. If you stay in the US, the 400% FPL threshold is indeed a real obstacle, if you absolutely must get Obamacare + the subsidy at the same time.

If you have a rental property, you might have enough depreciation expense to zero out your income, even though you’re still collecting cash flow – no tax on that. (If you’re mortgage is already paid off, this may be harder.) With stock, you can take out a portfolio loan if you need spending money without incurring any taxes, capital gains, or triggering any MAGI thresholds.

You don’t have to convert the entire 401k balance to Roth to benefit, either. Even if you convert only a fraction, it’s a fraction that entirely escaped taxation that would not have otherwise been able to do so had you contributed directly into a Roth. If you’re able to convert half your 401k balance, then spend the other half during the first years of retirement when your tax rate is super low, and before RMDs kick in, then you’ve still enjoyed some serious tax breaks / arbitrage that would not have been possible had you only been contributing to Roth your entire life.