Following.......

The catch up contributions are only for IRA and 401k accounts, so your catch up would have to go in the 401k. The 401a side is generally viewed as the vehicle for Mega Back door Roth. You may have to contribute 19,500 on the 401k side before you are eligible for the catch up. Please get real advice from a professional or at least call the Delta Netbenefits group at Fidelity to discuss the specifics.

I have not used the 401k side or catch up contributions at Delta. Please get a real answer from Fidelity.

*DYODD, YMMV, objects in mirror...

You have to reach personal limit first before you can make catch up contributions. Last year was my first year of doing that. You don’t have to be 50 to start making them, just be in the year in which you turn 50. I turned 50 last Sept, but I had already started making catch up contributions prior to birthday because I had hit personal limit already. Have a good day!

Just a general question about the “mega-back door Roth conversion”:

For those of you who are converting 5 figures a year into a Roth, I would think that you are currently in the highest tax bracket that you will see in your life. Why pay taxes on those dollars at your highest rate now when retirement income will almost certainly put you in a lower bracket? Is it because you anticipate tax rates increasing in general in the future? What am I missing?

You may not necessarily be in a lower tax bracket. Don’t forget that traditional IRAs have required minimum distributions. It’s not unlikely that someone at our income level could have north of $5 million in retirement savings 20-30 years down the road. The RMD on that $5 mill is close to 200k, so that alone puts you in a very high tax bracket and that doesn’t even account for whatever other income streams you may have at that time.

Growth.

I use a rule of thumb that money invested in a generalized, diversified portfolio will double every 10 years (the average is actually closer to every 8 years, but it makes the math easy to say 10) If you have 10 years to grow that money, you can expect your money to be worth 2x what it is now. 20 years, 4x. 30 years, 8x.

So say I have $10,000 to invest, I have 20 years until retirement, and I'm currently in the highest tax bracket (37%) and plan on retiring into a moderate one (24%).
- Put it in a traditional: I pay nothing in taxes now. When I retire, that money is worth $40,000. At a that time, I start taking withdrawals on it, 4% ($1600) at a time. I'll pay $384/yr in taxes on that money into perpetuity, and I end up with $1216/yr to use.
- Put it in a Roth: I pay $3700 in taxes now out of pocket. At retirement, it's still worth $40,000, but now when I take my withdrawals, I have all $1600 to use, and it'll take less than 10 years for it to pay for itself. I never pay taxes on the extra $30,000.

The lower the differential on tax brackets or the more the money grows, the faster it pays for itself. Not to mention the other benefits such as the lack of a RMD and the fact that you can take out contributions from a Roth IRA penalty free at any time.

EDIT: Real world example. My wife and I are about to convert her last job's 401(k) to her Roth IRA, about $53,000. We'll pay about $12,700 on taxes on it this year, but in the 30 years until we retire, it'll grow to $425k+. At a 4% withdrawal rate and the same tax bracket, it'd only take about 3 years to pay for itself.

You are missing the groundswell of hatred towards anyone who is perceived to be a 1%er, and the desire to hold them to account for any injustices done towards the lower classes. Tax rates will go up in the future to appease the great unwashed masses, and as rich airlines pilots we are targets for the tax increases.

Are some on these forums 1%ers? from the annual W2 thread the answer appears to be yes. As a regional guy my answer is an emphatic no, but I have invested and will live a pretty decent life off those investments in retirement.... if the tax man doesn't take half away.

Awesome, thank you for the detailed response. A follow-on question: you say you would pay $3700 in taxes by converting it, but that would leave only $6300 to invest...making just $25200 at retirement. I know you said you would pay the $3700 out of pocket, but either way, that $3700 is now unable to be invested and you miss out on future growth. Therefore, the time to re-coupe must also account for 20 years worth of growth on that $3700, no?

Not trying to get into a ****ing contest or argument, just making sure I’m covering all the bases.

Mathematically if one were to invest $10000 now without paying 37% taxes on it it vs taking the same $10,000 and giving $3700 to the Tax man and investing the remaining $6300 the real dollar value of the withdrawals depends on the taxrate at withdrawal. Say the investment grows 10 times between deposit and withdrawal: the $10,000 becomes 100,000, but then is taxed 37,000 and you end up with $63,000 to spend. the $6300 invested becomes $63,000 so you end up with the same equivalent money. If tax rates go up (a most likely scenario given the huge amounts of government overspending lately) that $100,000 gets taxed to 50% and you are screwed.
The trick is to Invest the 37% pretax savings, but withdraw taxable money from that or the company contribution funds taxable only to a 24% tax bracket, the take any remaining spending needs from tax free Roth money.

There used to be a beneficial estate planning component to Roth IRAs, but that got Nerfed with the SECURE act a year ago. Inherited Roth IRAs now have a 10 year withdrawal window as opposed to the previous no RMD requirement.

Even with that benefit gone, there are many who expect the same or higher tax bracket in retirement.

Also, if you can save more for retirement than what is currently allowed in tax advantaged accounts, the Roth essentially allows you to prepay taxes and have more spendable income in retirement.
1 million in a Roth = 1 million spendable dollars
1 million in a traditional = 1 million - income taxes or about 630,000.
If you can pay the taxes on the contribution now, you wont be paying them from your retirement fund.

I get this, but in order to get that $1M into a Roth, it costs something...$370k. That’s money that you don’t get to spend or better yet invest...it’s gone.

For pilots (and those with equivalent career earnings) I would understand the back door Roth strategy if you think that tax rates will increase in the future...for whatever reason. But barring this, you will be taxed at your maximum life tax bracket.

Of course I maxed out my Roth when I was in the military at a VERY low tax rate (some years under 3% effective), knowing that in retirement I would likely be in a higher bracket. But now as a high-earner, I can’t make the math work to convert at this point in my career. Just doesn’t add up to me.

What do you mean you can’t invest it? Mine is in a moderate growth ETF.

What is, the taxes you incurred due to converting?

Eh...I've heard that argument and I don't buy it. If you are low to middle class and are truly limited in the amount of money you have to play with (say, $1000 in a year), then that's a realistic way to look at it. Or, alternatively, if you truly plan on living like a pauper and investing every cent you earn that isn't taken by the government, then sure. But let's be honest...the very fact that we are talking about maximizing IRA/401(k) contributions and doing backdoor or mega backdoor roths proves we can afford to have our cake and eat it too. Unless you have 3 ex wives (or just being obstinate), each of us could pay that $3700 and hardly notice it being gone.

Its not $3700. It’s $3700 plus decades of growth....the very growth you miss out on by converting it. Except you pay that tax at your current rate instead of at the likely lower rate in retirement.

And it doesn’t matter how you pay the tax; either deducted from the converted funds or out of pocket, that money is gone...today. Never getting a chance to grow.

Seems to me the back door Roth is the vehicle to use if you say, take a leave of absence and significantly reduce you income in a particular year. THAT would be the time to do it.

IF you actually invest it. Would you? Maybe, but I expect you'd be in the minority.

1% requires house hold income of $530k+ (or NW of $11M). But 95th percentile...$270k ($2.6M NW). Every captain at Delta (and probably a decent number of FO's) make that, unless they're actively trying to not work.

Doesn’t matter. The money just went to Uncle Sam. You don’t even get the choice. The only sure thing is that it isn’t in your pocket or invested. Had you not made the conversion, that money would still be in your deferred account, growing.

Eh, whatever. Feel free to do it how you want. I'm not going to try to convince you. You asked why someone would want to convert to Roth, I told you. Take it or leave it. It's a personal thing that is colored by your background and your view of money. Also because, no matter what we do, barring some life even that takes us out of the game, you and I will both retire quite comfortably with an M following a dollar sign and some set of numbers. Use it how you see fit.

Yes, you pay the taxes on your investment up front, so you won't pay taxes once retired. Follow my math below, to see why that makes sense.

My assumption is 37% tax bracket now and in retirement. There is no tax rate arbitrage.

Lets pretend you have $79,365 budgeted for retirement. That would become $50,000 after 37% income tax for a Mega Roth. After 20 years at 8% returns, that is now worth $233,048 with no taxes due. All $233k is spendable cash.

Your argument was to put $50,000 in a pre-tax account and invest the rest, rather than prepay taxes. The $50,000 pretax grows to the same $233,048, but income taxes are due on withdrawals leaving you with $146,820 in spendable cash. Your $50k pretax contribution leaves $29,365 that is taxed and reduced to $18,500. Assuming that the remaining $18,500 is invested at 100% tax efficiency (Unicorn ETF with no annual dividends, distributions or investment exchanges) and earned the same 8% return, the account is now $86,228, which is reduced to $70,312 after long term capital gains tax on the growth. $146,820 + $70,312 = $217,132 or LESS than $233,048 of spendable cash in the Roth account.

IF you could have invested ALL of your money in a pre-tax account the results would have been the same $233K of spendable cash. The problem is that the money you "saved" in taxes gets taxed and the earnings on that also get taxed.

Summary: This strategy works well for people who are limited by the IRS 415c limits. If you expect to remain in the same tax bracket at retirement, you are better off with a Roth.

This is just one basic example, there are numerous combinations and permutations of income tax and capital gains tax that can impact the numbers. Every investor has unique circumstances that will impact their decision.

Or if you were displaced to a lower paying seat and won't get a fat profit sharing check next month. Or if you have huge depreciation deductions from your real estate investments. Or if you took accelerated depreciation on business assets. Or if you are expecting to remain in your current tax bracket in retirement. Or if an inherited Roth IRA is part of your estate plan. Or you just want to do what the cool kids are doing. Or any number of possibilities that fit your situation.

A clarification. The circumstances forcing the $29,365 to be paid to tax is due to the fact that you choose to pay the tax “out-of-pocket” (as indicated in a previous post), in which case tax has already been paid on that amount, so the $29,365 doesn’t get taxed again.

This was the alternative to deducting the amount from the converted funds. In which case, in your example, it would reduce the “principle” by the tax due, thus reducing your basis and hence growth.

BUT, you must do one or the other. Thus, if you pay the tax “out-of-pocket”, there is no choice as to whether you keep the $29,365 or if you “would have” invested it or not. There is no alternative...it’s gone. Had you not paid out-of-pocket, again there is no choice, the $29,365 on top of the converted amount doesn’t exist. The very fact that we are talking about the $29,365 is because you chose to do a back door Roth.

Yes, I get all that. I own commercial real estate and understand all the deductions and depreciations. And I get that everyone’s situation is different. But after 18 pages in the thread, those specifics haven’t been mentioned. It seemed like the back door Roth is the thing to do, just for the sake of doing it. I was wondering what I was missing. But based on the responses, it turns out I wasn’t missing anything.

This entire thread is about MBDR, but I think you are confusing it with a Roth conversion.
79,365 of W2 earnings = 50,000 MBDR Roth annual contribution
79,365 of W2 earnings also equals 50,000 Traditional plus 18,500 (29,365 minus taxes) for hookers and blow or a taxable investment account.

As for Roth conversions, the tax similarities still apply. If you have the money to pay the taxes vs reducing principle in the Roth account post conversion, you will have more spendable money. A 50K Roth conversion yields a tax liability of 18,500.
50K in a Roth account becomes more spendable money than 50K in a Traditional PLUS 18,500 in a taxable. The math is clear, but setting up the problem correctly can be problematic.

Unconstrained by contribution limits, your above comparison works. Suppose the tax man sets a maximum contribution of 6,300 and the remainder is in a taxable account. Your 10,000 option now becomes 6,300 in the tax deferred account, pay income taxes on the remaining 3,700, then invest 2,331 in a taxable non-retirement account. The answer is 58,070 traditional vs 63,000 Roth.

Scale the limit from 6,300 up to 19,500 and you have a real world comparison to 401k vs Roth 401k.
Scale the example up to 58,000 to be in sync with IRS 415C limits and you see where the MBDR becomes appealing.

The biggest thing we are all missing is that commercial real estate investments are a better retirement vehicle than anything being discussed on this thread. Forget the Roth and double down on CRE.

Ah, you are correct, I am thinking straight conversion, not MBDR. As to your second point, I’ll have to play around with the numbers.

Totally. That’s plan A! Also the key to early retirement.

But then you have to look at your tax rate upon withdrawal.
Assuming over 65 with a total retirement fund of $5M that you invested less than that amount at the marginal tax rate of 37%. you can safely withdraw 4% or $200,000 yearly
TaxYear2020 over 65 has a married standard deduction of $26,450
so you now have $173,550 being taxed
the first $19,750 is at 10% or $1,975
up to $80250 is at 12% or $7260
Then to $171050 is 22% or $19,976
And the final $2499 is now at 32% or $800
for a total tax bite of $30,011 on that annual $200,000 withdrawal or 15%

I admit my analysis comes from a Regional Pilots perspective who is only a 5%er without working with a tax advisor, so the Standard "Your mileage will vary", "everyone's situation is different" "consult a professional" comments hold true.
IMHO the best way is to contribute the maximum to Roth accounts when you're in the 0-12% brackets, and move to investing pretax money (max $26000 over 50, but $58000 with company plan"X") as you get into the 24% and higher brackets. That way in retirement desiring a $200,000 expense account, you can withdraw $106,700 from the accounts that are taxed, with the remaining $93,300 from the Roth accounts.
Better yet is to invest those pretax dollars when you live in a high tax rate state like California, then move to Texas or Florida in retirement and not have to pay state income taxes on the withdrawals. on second thought, if you're from California move to Washington instead of Texas

Rerun the numbers with the 3700 you are paying in taxes now going into the investment account and growing tax deferred. You will get a very different result. The same with your real world example and the 12,700 you are paying upfront.
The reality of the Roth verses traditional argument is that it comes down to tax rates at retirement which are unknown. If you live in a state with a income tax that also changes the equation more in favor of a traditional IRA especially if you plan on retirement in a tax free state.

Setting aside unique situations regarding estate planning, the Roth vs Traditional math problem comes down to several basic assumptions and limitations.

What is the tax rate in your contribution year vs your withdrawal year?
-Assuming you are below the contribution cap and can invest your savings in the same tax deferred manner, this is likely your only concern. Make your assumptions regarding tax rate and move on.

Are you limited by the contribution cap?
- Congratulations, you are rich enough to have a money problem. Your "tax savings" from a traditional IRA/401k can't be invested in the same vehicle. You are investing in a taxable account.

What is the tax efficiency of the non-deferred account?
-If you have hit the contribution cap and the "tax savings" is invested in a taxable account, the tax efficiency of the underlying investments matters. BRK would be 100% tax efficient since they pay no dividend. An index ETF is highly efficient, but not 100%. A mutual fund will be even less efficient. Trading in and out of positions also hurts the tax efficiency. 95% Efficiency means you are deferring taxes on 95% of the gains, but pay taxes on 5% of that year's gains each year.

Finally once you have made the above determinations,
-What is your current income tax rate?
-What is your current capital gains tax rate?
-What is your assumed income tax rate in retirement?
-What is your assumed capital gains tax rate in retirement?

In general, after modelling several scenarios, the benefits of 100% tax free growth in a Roth are enough to overcome a 9% income tax drop in retirement when the "tax savings" amount is invested in a taxable account with 95% efficiency. All models included 20% LT Capital Gains tax and 3.5% Net Investment Income Tax on the taxable account portion.

Summary: The government has been bought off by financial institutions to create plans that incent wage earners to hand over their money for decades of management fees, before seeing any return. If your goal is financial independence vs a large pile of money to look at, buy a business, buy income producing real estate or invest passively in commercial real estate. The End.

We are supposed to be getting another tax deferred vehicle soon. The MCBP is going to be for excess 401k retirement money. I plan to max my contribution (19,500) and that will in turn max my MCBP money. 2021 will be a good earnings year and hopefully 2022 will have a PS contribution as well. 58,000 + 6500 (catch up) + excess to MCBP could end up being 75,000ish in tax advantaged retirement savings per year.

58,000 and 6,500 for 2021 (That's what resurrected this thread)

The low rate of return on the MBCBP makes in suitable for those within 5 years of retirement who are looking to increase their cash position. Pilots with a longer time horizon would do better by investing elsewhere. My personal preference would be direct ownership of real estate or a share of a syndication that pays the sponsor only on performance, not acquisition, disposition, etc...

Yup, I edited it. The MCBP is going to be a conservative vehicle which allows for higher risk in the other vehicles to adjust for your total risk tolerance. If you have bonds in your diversified portfolio, the MCBP replaces that conservative investment.

Yep it's a good conservative vehicle to shelter some money from taxes. I may even put in a few dollars myself a decade down the road. My view of risk doesn't fit within the constraints of the investments available at Fidelity. I stick to either equities or cash to buy equities when they go on sale. Rather than investing in bonds, I chose real estate for stability and income because it has a built in hedge against inflation. A little bit of leverage actually tips the odds in your favor when it comes to inflation.

I agree with this for non-retirement investments. Ultimately I guess all wealth can be used for retirement but I am planning to maximized the retirement accounts because of the tax advantages. Taxed investments I prefer to hold and pay capital gains on at sale, instead of income tax. Real estate is only one way to do that, which I will defer to your expertise on. My experience has been marginally successful with real estate but the level of effort has become excessive for the return. Even green slips and stocks require less effort IMHO. Mutual and hedge funds even less. I guess my point is "to each his/her own." Any tax advantage available should be considered, including the MCPB. A rebalancing based on risk can be done by those in the overage range because they are earning in excess of the $240,625 you mentioned earlier. Those individuals are probably captains or senior FOs and over or soon to be 50 and most likely have a conservative element in their retirement portfolio. This is a way to keep uncle Sam at bay or save 20+% of that money.

Nothing, filler

If Biden is successful at lowering the estate tax threshold, an inherited IRA could take a serious haircut. Paying 37% income tax now could save 45% estate tax later. After the estate tax is paid, non-spousal heirs still owe income tax from RMDs on the inherited traditional IRA. The RMDs will likely keep heirs in a higher bracket, so forget the tax rate arbitrage.

Just for fun lets say you leave behind 1 million in life insurance, 1 million in real estate and 3 million in an IRA. Under the proposed plan, you owe 45% estate tax on 1.5 million or 675K due and payable upon death. This leave a net estate value of $4.325 million. Assuming you paid the estate taxes out of the life insurance proceeds, your heirs are left with a McMansion, $325K cash and an IRA worth 3 million. Income taxes are due on the IRA, which must be distributed over 10 years, adding 300k per year to your non-spousal heirs annual income. Even a college student working part time is in a high tax rate now.

-$1 million house
-$325k cash after estate taxes paid from life insurance
-$3 million IRA 10yr RMD with income taxes due

If you converted your 3 million IRA into a Roth it shrinks by 37% to $1.89 million. Added to the insurance and Mc Mansion, your estate is now 3.89 million, with an estate tax bill of 175K leaving a net estate of $3.715. You have left behind a house, $1 million of cash from life insurance and 1.89 million in the Inherited Roth IRA. The life insurance and Roth IRA are 100% spendable cash. The 10yr RMD from the inherited Roth does not get taxed.

-$1 million house
-$825K cash after estate taxes paid from life insurance
-$1.89 million Roth IRA 10yr RMD, no taxes due, doesn't increase heirs taxable income

610K or 20.3% income tax on the Inherited Traditional IRA/401K is the break even point compared to the Roth example.

WB SC is so engaging that I had time to do all this math. Back to being productive on my side hustle, so I can create the aforementioned problem.

Under the proposed Biden plan, the responsible approach is to spend most of what you have. Buy a Corvette, so it isn't taxed down to a Miata for your heirs.