On Your Money, Your Wealth® podcast #295 with Joe Anderson, CFP® and Big Al Clopine, CPA: whether you call it the barn door, the garage door, or the Roth two-step, you asked for more about the tax saving Backdoor Roth IRA conversion strategy, and Big Al and, reluctantly, Joe, are here to serve. For now at least! Should you wait until retirement to do a backdoor Roth IRA conversion? Plus, the pro-rata rule, self-employed modified adjusted gross income (MAGI) vs. AGI, and how capital gains work with Roth conversions. Also, strategizing for if and when the estate planning step up in basis tax laws change, whether a high yield savings account is good for investing $25K in cash, and listener comments on the show and the FIRE movement.

00:50 – Should We Wait Until Retirement to Do a Backdoor Roth Conversion?
08:31 – Capital Gains “Sit On Top” of Income? What About When Doing Roth Conversions?
15:44 – The Pro-Rata Rule: Are There Times When a Backdoor Roth Conversion Isn’t Worth It?
22:06 – Can You Use Backdoor Roths to Exceed the $7K Contribution Limit?
25:15 – Self-Employed MAGI vs. AGI for a Definitely non-Backdoor Roth IRA Question
32:04 – Advance Planning for Biden’s Estate Planning Step Up in Basis Tax Changes
38:07 – Should I Invest $25K in a High Yield Savings Account?
39:33 – YMYW Comments: the Show, East Islip and FIRE (Financial Independence, Retire Early)

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• Investment Advisory and Financial Planning Services are offered through Pure Financial Advisors, Inc. A Registered Investment Advisor.
• Pure Financial Advisors Inc. does not offer tax or legal advice. Consult with their tax advisor or attorney regarding specific situations.
• Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance.
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In a recent episode of the Your Money, Your Wealth® podcast, hosts Joe Anderson, CFP®, and Big Al Clopine, CPA, introduced listeners to the Backdoor Roth IRA strategy.

But first, let’s back up and explain what a Roth IRA is and how it differs from a Traditional IRA. A Roth IRA is a retirement account where you invest post-tax dollars and allow the funds to grow tax-free. In retirement, when you withdraw funds, you don’t have to pay taxes on the money you withdraw. In contrast, a Traditional IRA is where you invest pre-tax dollars, and when you withdraw funds in retirement, you pay taxes on what you withdraw.

However, not everyone is eligible to contribute to a Roth IRA. There’s an income limit that precludes high earners from contributing directly to a Roth IRA. Currently, if you’re single and make over $140,000, or if you’re married and make over $208,000, you can’t contribute directly to a Roth IRA.

That’s where the Backdoor Roth IRA strategy comes in. Here’s how it works:

1. Contribute to a Traditional IRA – Since the income limits don’t apply to Traditional IRAs, anyone can contribute to a Traditional IRA, up to the annual limit of $6,000 (or $7,000 if you’re 50 or older).

2. Convert the Traditional IRA to a Roth IRA – Since the funds in a Traditional IRA haven’t been taxed, you’ll have to pay taxes on the conversion. But once the funds are in a Roth IRA, they’ll grow tax-free, and you won’t have to pay taxes on withdrawals in retirement.

The Backdoor Roth IRA strategy allows high-income earners to take advantage of the benefits of a Roth IRA, even if they wouldn’t have been eligible to contribute directly.

But there are a few things to keep in mind if you’re considering this strategy:

– Make sure you don’t have any other Traditional IRAs – If you do, the conversion will be subject to the pro-rata rule, which can complicate things and make the conversion less beneficial.
– Be aware of the tax implications – You’ll have to pay taxes on the conversion, so if you’re in a high tax bracket, this strategy might not make sense for you.
– Make the conversion as soon as possible – Once the funds are in a Roth IRA, they’ll be able to grow tax-free, so the sooner you can make the conversion, the better it will be for you in the long run.

Ultimately, the Backdoor Roth IRA is a smart strategy for high-income earners who want to take advantage of the tax-free growth potential of a Roth IRA. But like with any investment strategy, it’s essential to do your research and consult with a financial advisor before making any moves.