Back Door Roth IRA Strategy

This is Sam from the Masking Journey Podcast, and our goal with the podcast has helped you to try to find your way in this difficult world. Your chosen Truth Network Podcast is starting in just seconds.

Enjoy it, share it, but most of all, thank you for listening and choosing the Truth Podcast Network. Medicare, IRAs, long-term care, life insurance, investments, and taxes. Now let's get started with Finishing Well. How fun today on Finishing Well with certified financial planner, Hans Scheil. Today's show, we have the backdoor Roth IRA strategy.

That's a mouthful. Pretty sure Creed and Clearwater Revival did something, dude, dude, dude, looking out my back door. So we're going to be looking out the back door today, but as I was talking about this topic that we have, and I think you're going to see that there's some real advantages for certain people in this, but for everybody listening, it relays a concept that I think is critical to understand is that there's always a third alternative to things. Things look like they're black and white, like Moses thought his back was up against the wall, right? He didn't see, you know, God could part the Red Sea if he needed to, and Joshua certainly didn't know how he was going to slaughter the Malachites all night, so he asked God to make the sun stand still.

In other words, we think we know what our limitations are, but we just simply don't. And so there's this very precious verse in Isaiah 40 that I want to read, and I want to just think about it with me. It says, and it's talking about Jesus here, and it says, he shall gather the lambs in his arms and carry them in his bosom. And I want you to think with me that like, oh my goodness, what a promise that whenever I get my ox in the ditch, and it happens quite frequently if you know me, there's this like, wow, I can simply turn to Jesus and go, can you carry me here because I got nothing? But you got to kind of die to yourself in order for that to work because he's not going to carry you if you think you got it. And it requires faith that there's something more that I know, that I understand, that he knows and he understands. And actually, if I really needed it, you know, the seed apart, or if I really needed the sun to stand still, God could make that happen if that's what he thought I needed because he loves me that much. Do I believe that?

Can I let go? And so this is kind of along those lines to me as I heard what Hans was explaining, that to some extent, you got to let go of what you think are the limitations and have faith in somebody other than yourself to help you with a strategy. So with that all said, Hans, you know, what in the world is a backdoor Roth IRA strategy? BF The thing about any IRA or 401k, which is where a lot of the IRA money starts, you got to get the money in there to begin with. You know, in other words, if you're 65 now or 62 or 64 and you've got a substantial balance in your 401k or IRA, that got put in there over a big number of years, either part by you. And then if you're in a 401k part by your employer, if they have matching and that just accumulated, and then a big part of it is earnings over time. And so this happened. So you got to get money in to the 401k or into the IRA to begin with.

And you got to do it year by year by year. And we're going to call that the front door. I mean, you go to the front door of the IRA or the front door of your house. If you consider the house, your IRA money or the home, you got to get the money in. And so when we talk about the backdoor, there's a way to get money that came in the front door as traditional IRA to get it out the back door. And then it's a Roth.

Okay. And there's a bunch of maneuvers that need to go on to make that happen. Now, well, let's just slow down for a second for those who may not know, like me, you know, two years ago, the big advantage of having that money in a Roth versus a traditional IRA is that if we pay tax on the money going into the Roth, and if we start to take that money out later, we bring it out tax free, and it doesn't affect our income or affect our social security income and those kinds of things. So to move the money into a Roth is extremely advantageous, right?

Well, it is. And then furthermore, it doesn't have any minimum distributions at 73 and beyond. So what we're, what the whole concept and as you can see, I'm very pro Roth IRA, the whole concept of our in our retirement planning and our strategy is to build up a balance, a significant balance of money that's in an IRA that you've already paid taxes on. There's no current taxes on the earnings, no future taxes on the earnings. There's no minimum distributions, yet you can pull out money anytime, tax free. And there aren't just too many vehicles.

It's a tax free savings account. Right, which is the reason that the government has attempted to obviously put limits on it was, and I love what you said in the video that, you know, when you see the government start to put limits on something, this is telling you, wow, this is this must be a really good thing if we can make take advantage of it, right? Well, yeah, the first thing you're going to do when you see limits on something is you're going to see whether they apply to you or not. Okay, and that's what I'm going to do as a professional is if you're under the limit, you say, Oh, good, I'm under the limit. So this limit doesn't apply to me. And if you're over the limit, then you know what you're saying is, gee, I can't do that. The government is prohibiting me from doing that or limiting me from doing that. And what I was saying generally is when the government limits you in doing a particular strategy, it's probably a pretty good strategy.

I mean, in other words. And so the Ross came out in 1997, the Roth IRA was not a thing before 1997. And the guy's name from Texas, the Congress person that sponsored the bill, his last name was Roth.

And it just they named it after him. So the Roth IRA is after tax money going in, same contribution limits, and that kind of thing. But you're putting in after tax money, so no tax deduction. But then then it's going to grow tax free over the years. And then furthermore, it's when you pull it out, it's going to be tax free.

And if you die with money in there, it's going to go to your kids tax free. So it's really a tax free savings account. And there's only two items that I know of or two products or two types of accounts is one is a is a Roth IRA or Roth 401k that's tax free forever. And the other one is life insurance with cash value where you can build up another tax free savings account.

And they behave a little bit differently. And there's pluses and minuses to both. But we're going to just stick on the Roth for today. And the Roth has limitations. And the one we're talking about today, the limitation that we're talking about today is the the limitation of a contribution to a Roth IRA. So and right from the beginning in 1997, they put a limit they said, for p this is not for the well to do people. So if you have more than a certain amount of income, and back then it was a little over $100,000 for a couple, and it was under 100,000 for a single, but there was a number and if you earn more than this amount, you cannot contribute to a Roth IRA period.

Okay. And that was the rule and night and it's still the rule, the numbers higher now. And it's actually for a couple, it's 218,000 for married filing jointly, and for a single it's 138,000.

So if you make an IRA contribution, you can make an IRA contribution to a traditional IRA, or a pre tax IRA, but you can't make a contribution to a Roth IRA if you're over those amounts. Now, we have a strategy and this is not a product. It's a strategy.

And we're going to we're going to really outline some of the steps in the second part of the show. But just out of curiosity, because I'm ignorant, you know, on this, what happens if you would, if you made over, you know, you made contributions to a Roth IRA, and then turned out that year, you got a big commission you didn't know about, and oh, wow, I made 230,000 and I've already put money in this IRA this year, what happens then? You may not know. Well, well, no, I know the answer to that is somebody's got to catch it. And they're probably not going to catch it.

Now, we're on a Christian radio show here. So I don't want to encourage that you now take advantage of the fact that they're not going to catch it because now you're going to come now that you have this information. But so just to answer the question is they may or may not catch it because all you need to do when you open a Roth IRA or you contribute to a Roth IRA is you need just to certify that you didn't make over the amount.

Okay. And, you know, like, I'm supposed to ask you that when, and I do when you're just making a contribution to a Roth. And, or if you do it on your own, through a brokerage service or whatever, over the web, you're asked that question, and then you answer it, no, and you stick the money in there. There are no really are Roth IRA police that I don't know of anybody really going back. But you are subject to.

Oh, yeah, if you did, that's that. Well, that's a, you know, that could make the whole IRA. It could blow up the whole IRA is to make an improper contribution.

And at the very least, if you're going to fix it, you'd have to withdraw the money and pay some penalty in taxes. Okay. So, so a good idea. Yeah, it's not a good idea.

And it's not a good idea to really do this planning without getting professional help with somebody. And frankly, a lot of financial advisors are not that spiffy on this stuff, as they just get out the computer and ask the questions and put the money in here. What I'm going to show you in the second part of the show is the backdoor Roth IRA strategy. So while we've got a lot of show, you can tell left to come, you haven't heard about the strategy yet.

But we're going to get to that when we come back. But we want to remind you, this show is brought to you by Cardinal guide.com, where you're going to see the seven worries tabs and today's worry is that of IRAs. And so you would click on that and there you would see there's a video on this whole subject, which has a beautiful illustrations and show notes and all that stuff that goes into this back door IRA, Roth IRA strategy, as well as you know, all of Hans's book is contact information. If you want to consider this kind of thing, he would love to help you with it. It's all there at cardinal guide.com.

We'll be right back with so much more finishing well. Investment Advisory Services offered through Brookstone Capital Management LLC, abbreviated BCM, a registered investment advisor. BCM and Cardinal Advisors are independent of each other.

Insurance products and services are not offered through BCM but are offered and sold through individually licensed and appointed agents. Cardinal Advisors is not affiliated with or endorsed by the Social Security Administration or any other government agency. Welcome back to Finishing Well with Certified Financial Planner, Hans Scheil, my good friend. And today's show, we're talking about a back door Roth IRA strategy for people who have incomes over $218,000. But it's good to know that their strategies, when you think you're limited, it's always good to get professional help, right?

Well, sure it is. And the show is not only for people over $218,000 or over $138,000 because we do Roth conversions for a lot of people that have smaller incomes than that or less income than that, but they've built up a significant 401k or IRA balance. And it's a big bunch of taxable money that's gonna create some real tax problems for them later on. So the Roth IRA strategy and having a big balance in a Roth is something that we just believe in philosophically, okay? I mean, we just, I do, and I've done this myself with my retirement money, and I don't recommend it for everybody.

It just depends. I mean, I'd say 20, 30% of the clients we help, we don't recommend a Roth strategy, okay? We're gonna get more into a distribution strategy and perhaps not even delay in social security. So it just depends, but I'd say 60 to 70% of the clients that we do plans for, if they have enough money to do it in pre-tax money, we're going to delay social security till later, and we're gonna live off of their IRA money or their 401k money for the years of the delay.

We're not gonna pay a lot of taxes during those years unless we do a Roth conversion strategy with another bulk of it, because once we get on social security at 70, if we got two social security checks in the household or for a single person, and that's a pretty substantial social security check, maybe we're substantial social security check, now our goal is gonna be to pay no tax or very little tax on the social security income, and we can do that by withdrawing from either a Roth IRA account for income or borrowing from a cash value and a life insurance policy, or a combination of the two. So back to my story about the Roth IRA came about in 1997, not a lot of people took advantage of it, some people did, and then the people that did probably didn't do it in their 401k, well they couldn't do it in their 401k because they weren't even available inside of 401k plans until the late 2000, 2007, eight, nine, somewhere in there, they said okay so we can have this Roth side of a 401k, and you can direct your contributions, a lot of people are not even aware of that, so this hasn't done, there hasn't been that great of a job of promoting the whole concept of it, especially during accumulation and to the extent that it was promoted, people rejected it because they said why would I want to forego the tax deduction, blah blah blah blah blah, and there's a lot of arguments that just kind of built against that that are somewhat self-serving, and me, most of the people I deal with are in their 60s, some early 70s, some 50s, but a lot of our people are in their 60s, they're either gonna retire soon or in the next few years, or they've already retired, and they know they've got enough money, so they just kind of retired, and now they come into me to try to make sense of everything, and just philosophically I'd like you to have as much Roth IRA as you can possibly have by the time you hit 70 and beyond is so that you, number one, won't pay a lot of taxes or any tax on your social security, and you really won't pay much tax on anything because you're gonna have a lot of your income coming from out of the Roth or out of the life insurance, and you're just gonna be tax-free over 70, and it's hard to argue with the benefits of that, and then a lot of people don't spend their money anyhow, and so it just accumulates tax-free, and that money's gonna go to their kids or their heirs or their spouse or whoever it's gonna go to, and then it's gonna be tax-free to them, it's gonna stop the tax bomb business, so just philosophically it's a good thing. So now we're up at 2007, 2008, 2009, and they started the Roth 401k, but a lot of 401ks didn't adopt it right away, okay? They just, the only way to put money in there was on the traditional side, the same way you've always done it, and earlier, when we get ready for the show, you're asking me, wait a minute, they limit a Roth IRA to people below a certain income level, so in other words, they exclude it from the well-to-do people, but you can make any amount of money and still contribute to a 401k, and you had a big question mark on your face, and like, well, it's just the two things weren't designed together, and people have been in it, so the answer to that is you could make a boatload of money, and most people that make a boatload of money are contributing the maximum to the 401k, because it's a sweet deal. Right, and a lot of them don't know that you can get a Roth 401k. Yeah, well, a lot of them don't know that, and they're even maybe a little, before they meet me, kind of against it, because it's paying taxes sooner than you have to, and their CPAs against it, but once they see the wisdom of this, then now they want to start doing some conversions, and the first place I send them, and I could send a lot of you today, if you're still working, contributing to a 401k, and you're not putting any in the Roth, and this kind of interests you, go on the computer or call HR and make a change of your contribution. Start putting them into the Roth side of it, and it'll start building up, so there you got to start.

That's as quick as flipping a switch. Now your paycheck's going to go down, because you're going to be putting after-tax money in there, but it's a step in the right direction, okay? Exactly. Now let's talk about the two strategies, the backdoor Roth IRA strategy. So if you're over the income limits, and been over the income limits, and you've wanted to contribute to a Roth, but haven't because of the income limits, we can do this backdoor thing. So if you're over 50, you can put 7,500 bucks in an IRA, and you can put it into a non-deductible IRA, okay?

And you say, well, what is that? Well, it's not a Roth. It's a traditional IRA, but you're choosing to make the contribution out of after-tax money, and then you can't deduct it, but then it's going to come back to you later as tax-free money out of the traditional IRA. But the earnings on it are going to be taxable just like any other money in a traditional IRA. But we're not going to leave it in there very long in its non-deductible stage.

We're going to get it in there. You can do this on your spouse as well, even if your spouse isn't working. You can do this to the tune of $15,000 if you're both over 50 and just want to use working. You had that much income, and now you're going to have 15 grand in two different, or 7,500 in each, non-deductible IRA, and then we're going to convert it, the non-deductible 7,500 bucks, to a Roth, and we're not going to pay any taxes on the conversion, and we want to do this quickly because we don't want it to grow because we'll have to pay some tax on the converted part of the growth.

So anyhow, call me if you want to learn more about this. It's the backdoor Roth IRA strategy, okay? Now there is also the mega backdoor Roth IRA strategy, and that's even more complicated, but it is for some people who have a substantial income. They're already contributing the maximum to the 401k. They're getting the maximum match, and now they'd like to get more money into the Roth side of things. It's within the 401k.

The limit is $73,500 in contribution in a year for a person who is over 50, and so we simply add up the amount they contributed, which is the maximum, probably $30,000, and then we add up the company matching. That adds into that number, and we subtract that from $73,000, and if your IRA will accept it, we're going to make a non-deductible IRA contribution to the traditional side, okay, just like we did in the smaller one, but this is going to have a bigger number on it, and then we're going to immediately roll it out to an IRA, a non-deductible, an IRA that we didn't take a tax deduction, and then once it's into the IRA, then we're going to convert it, so there's a whole bunch of steps in this, and I don't want to teach people how to do this on the radio. I'm just telling you that there's more ways to get larger amounts than the limits in the front door.

Right, right, wow, and there you go. I mean, that's the idea is that philosophically, we're trying to get as much money, I like the way you put it, in a bucket that you can access without having to pay tax so that you don't end up paying tax on your Social Security at over 70. In other words, you've got more disposable income coming from all different sources that are not taxable. Well, yeah, and you get people, if you add up your two Social Security checks, especially if you can wait till 70, or at least the main breadwinner waits till 70, if the other one's younger, you started at that, and you add up what those checks are going to be, and then you make those tax-free, a lot of times it doesn't take that much money, in addition to that, by the month, to just, you know, it's all tax-free, and then you live off of that, you don't have any minimum distributions, maybe you have a year where you don't even have to take that out, or I have a lot of people say, look, I want to give my money away to my kids while I'm alive, while I can watch them enjoy it. This show is brought to you by cardinalguide.com, and at Cardinal Guide you can see how to contact Hans, you know, obviously his contact information's all there, of course, all the resources at the Seven Worries tab, and of course his book, The Complete Cardinal Guide to Planning for Living in Retirement, it's all there at cardinalguide.com, and we are really indeed so grateful that you would spend the time to listen to us today, and you guys are available in all 50 states, right?

All 50 states, and then here in North Carolina we have an office in Columbia, excuse me, in Charlotte, in Greensboro, and our home office is in Durham, or the Triangle. Well, thanks for listening. Thank you. The opinions expressed by Hans Scheil and guests on this show are their own and do not reflect the opinions of this radio station. All statements and opinions expressed are based upon information considered reliable, although it should not be relied upon as such.

Any statements or opinions are subject to change without notice. Investments involve risk, and unless otherwise stated are not guaranteed. Past performance cannot be used as an indicator to determine future results. Any strategies mentioned may not be suitable for everyone. Information expressed does not take into account your specific situation or objectives, and is not intended as recommendations appropriate for you. Before acting on any information mentioned, please consult with a qualified tax or investment advisor to determine if it's suitable for your specific situation.

Finishing Whale is designed to provide accurate and authoritative information with regard to the subject covered. Investment Advisory Services offered through Brookstone Capital Management LLC, abbreviated BCM, a registered investment advisor. BCM and Cardinal Advisors are independent of each other.

Insurance products and services are not offered through BCM, but are offered and sold through individually licensed and appointed agents. Cardinal Advisors is not affiliated with or endorsed by the Social Security Administration or any other government agency. We hope you enjoyed Finishing Whale, brought to you by cardinalguide.com. Visit cardinalguide.com for free downloads of this show or previous shows on topics such as Social Security, Medicare, IRAs, long-term care, life insurance, investments, and taxes, as well as Hans' best-selling book, The Complete Cardinal Guide to Planning for and Living in Retirement, and The Workbook. Once again, for dozens of free resources, past shows, or to get Hans' book, go to cardinalguide.com. If you have a question, comment, or suggestion for future shows, click on the Finishing Whale radio show on the website and send us a word. Once again, that's cardinalguide.com. Cardinalguide.com. This is the Truth Network.