Hey everyone,
As an IB analyst starting full-time this Summer, I've naturally been thinking about my plan for personal finances as I enter the workforce. I'm frugal and have historically maxed my Roth IRA every year. I'm aware that the income limit to contribute to a Roth IRA is about $150,000, so after bonus I expect to be just around there or above that, and therefore unable to contribute directly to a Roth IRA. I plan on maxing out my 401k at work ($22,500 plus mid-single digits match) and saving a good amount on top of that, since my rent is $1,900 and I live fairly simply.
From my research, it sounds like despite being above the income limit for a Roth IRA, I could just contribute the maximum yearly amount ($6,500) to a normal IRA as post-tax contributions (so income after paying taxes), then convert that straight to a Roth IRA via a backdoor Roth IRA strategy, without paying further taxes or penalties if it's all post-tax contributions. So, I would not be deducting the IRA contributions from my income, as one can do if they are below a separate income limit. The goal here is to benefit from the Roth's tax-free gains rather than investing in traditional brokerage. This would be on top of maxing my 401k, which it sounds like doesn't eliminate my ability to contribute to an IRA. Does anyone know if this is correct? Seems too good to be true that there's a complete loophole to the income limit to fund a Roth IRA given it's after-tax dollars either way.
Curious to hear about anyone else doing similar things, and how that's gone for you. Also of course, if I'm wrong about any of the legal/tax strategies outlined, please let me know! Trying to figure out a tax-optimal strategy to make sure I'm setting myself up for success and can help my parents (and future children) out down the road.
Not in IB but my wife and I have been in a similar situation the last 5 years or so as we were beyond the income limit to contribute to a Roth IRA. I believe your reasoning is correct, the backdoor roth is definitely an option to take advantage of tax-advantaged savings. Contributing to a 401K does not limit the amount you can contribute to an IRA. After you make the contribution to your IRA, you transfer to a Roth IRA and pay tax on the amount transferred.
There are some additional savings accounts/goals to consider prior to your roth ira. A general rule of thumb is to save 15% for retirement. At $150,000, that's $22,500 or the limit for 401K. If your company offers a Roth 401K, I would contribute all $22,500 to that account and not worry about the IRA. If they do not, you could contribute $16,000 there, and then a $6,500 backdoor roth. If you have excess monthly savings beyond the 15%, which you likely will considering your rent, I would save in a brokerage account for a down payment on a house. If you're in NYC or similar where buying is not an option, just continue saving there for a house if you move or rental/investment property. Last, if your company offers and high deductible health care plan, you can save in a Health Savings Account. As a younger guy I would just save up to your company match in the HSA but can probably easily max it out ($3,850 for individual).
Thanks for the detailed response, really helpful and appreciate your thoughts. Will definitely explore the Roth 401k too if that's an option.
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