Contributing to both the Roth IRA and 401(k)

[prohornblower]

Let's assume you are eligible for a Roth IRA and you are in your mid-20's. Say you have a 3% employer match on your 401(k), so you of course contribute 3% to your 401(k), then you max. out the Roth IRA for the year which is $4k...now you go back to contribute more to the 401(k), say you max it out at $15K for a total year retirement contribution to $19K.

Say you do this two years in a row and now have (negating earnings) $8K in the roth and $30k in the 401(k).

You leave your job, and roll your 401(k) to a rollover IRA, then convert it to a Roth (and pay taxes on the $30K).

You know have effectively contributed $38K to your Roth IRA in just two years, which is almost 5 times the "allowable" amount in that same time period.

Isn't doing this like pretty much the best possible thing a really young person with capital could do in terms of retirement investing? Assuming he has the money to pay taxes on 30k? You are basically adding 15K/year through a side-door, but totally legally.

Am I missing something here? This seems like a really good idea.

[Big TR]

Everything that has been done in that scenario is perfectly legal. Depending on the tax bracket you are in, it is probably a wise decision. If you have pulled this off, well done.

The only issue is that if the employer is a typical one, you probably have not vested in the employer match contribution on the 401k.

[prohornblower]

Vested or not, your own personal contributions would still help in this scenario.

I'm thinking this whole deal isn't really common practice because if someone had $19K to put away per yer just for retirement, they likely might earn over $100K anyway, and not be eligible for the Roth. I'm guessing there aren't many folks who could do this even if they tried.

[Dazarath]

With the new law coming into 2010 (or whatever year it is), would a professional poker player be able to contribute 40k/year to a SEP IRA and then convert it to a Roth when the law is put in place?

[Nottom]

[ QUOTE ]
I'm thinking this whole deal isn't really common practice because if someone had $19K to put away per yer just for retirement, they likely might earn over $100K anyway, and not be eligible for the Roth.

[/ QUOTE ]

I don't really agree. I think this could apply to a good portion of recent graduates. If I was pulling in 40K and and single and still living like a college student (especially if I could stay with parents or something for a couple years) it would be pretty easy to save a quite a bit of money. Of course most people in this spot go buy a new car and move into a house/apt they can't really afford and buy a bunch of stuff they don't really need while eating out every night instead.

[black_russian]

I do what you have described above but I did not know I could roll my 401k into my roth IRA...how do you do that?

[MrBlue]

President Signs Tax Reconciliation Bill

Check Page 4 of the PDF. Directly relevant to what you're saying here.

[black_russian]

Thanks for the link. I need to do some more reading. Can I do this today? or just in 2010? ALso, my 401k cannot be converted to an IRA unless I quit my job. Maybe I will by 2010 but if not, I am out of luck it seems.

I noticed that the Roth changes are under a section called "Revenue Raisers" which I assume is for the IRS. This seems a little fishy to me becasue the government is basically taking income tax they would have gotten in the future today. Obviously this raises revenues in the short term but what happens when the people who take advantage of this retire? No income for the government. It just seems they are pushing a problem off to the future. IE they need revenue today so they will sacrifice revenues in the future to fix today's problem. They will also undoubtedly need revenues in the future also so they are just delaying the inevitable. They will most likely raise taxes which makes it more desireable to opt for the Roth option today. Sorry for the rambling...

[ski]

Can someone clarify this normal IRA into Rother IRA thing for me?

If I put money in a traditional IRA this year when I am paying 35% tax and then move it to a Roth IRA after poker is over (and I'm probably paying like 20% tax) do I only have to pay 20% tax on it?

If so, SICK.

[IdealFugacity]

People are going to be contributing to Roth IRAs, and recieving distributions from their 401(k)s, in the future just as they are now so the "short-term revenue" is going to be repeated indefinitely.