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Showing posts from March, 2016

My experience performing the "Mega Backdoor Roth Contribution"

I just initiated my first mega-backdoor Roth IRA rollover, and I figured I'd give a report out since it can be confusing. And even once you get the concept down, you have to figure out the actual *mechanism* in working with your institutions to actually make the rollover.

Background
[Note: this strategy is distinct from the normal "backdoor Roth". I provide a more detailed overview on why you might want to do this in my post My company offers an after-tax 401k. Should I contribute to it?]

If you aren't familiar with this process, the Mega Backdoor Roth takes advantage of the fact that individuals can contribute after-tax, non-Roth money to an employer retirement plan such as a 401(k) if your company allows it. This is over and above the normal $18,000 annual limit for Roth or pre-tax contributions. If your company allows in-service withdrawals of this money, (or you plan on leaving your company soon), you can roll this money into a Roth IRA effectively  bypassing the…

Can getting a raise be bad if it pushes you into a higher tax bracket?

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Everyone has a co-worker, uncle, or friend who will warn you about getting a raise because it will push you into a higher tax bracket. 

They are implying that earning enough to "be in a higher tax bracket" results in less take home income than if you didn't get the raise at all. I have to admit, having all of your income taxed at 25% instead of 15% would be a huge hit! However, this involves a fundamental misunderstanding of how the US income tax brackets work. In actuality,
Only dollars earned above the tax bracket line are taxed at the higher rate. Here's a glimpse at the taxable income brackets for a single filer in tax year 2015:


If you were on track to make $37,400 taxable income in 2015, but then get a $100 dollar raise, this would push you from the 15% marginal income tax bracket to the 25% marginal income tax bracket. But out of the $37,500 you now make, only $50 (the dollars in the 25% bracket) are taxed at 25%! All the other dollars you made are still taxed …