On Your Money, Your Wealth® podcast #314 with Joe Anderson, CFP® and Big Al Clopine, CPA: Are you eligible to make a backdoor Roth IRA conversion? Is it allowed? Is it taxed? How does a Roth 401(k) different from a Roth IRA? Can you buy a family member’s condo for below market value then rent it back to them? Can you max out a family member’s Roth each year? Can you file 2020 taxes even though you haven’t received IRS form 1098 yet? How can you diversify your portfolio into more international investments? How do capital gains “ride on top” of ordinary income again? And finally, a correction regarding Social Security deeming rules. Access the transcript and financial resources, ask your money questions:

00:00 – Intro
01:00 – Can I Do a Backdoor Roth Conversion? (Nick, Huntington Beach, CA)
09:11 – Is a Backdoor Roth Conversion Taxed? (René)
12:56 – We Make too Much to Contribute to Roth. Are Backdoor and Mega Backdoor Roth Strategies Allowed? (Jane, Michigan)
19:17 – Can I Buy a Family Member’s Home and Rent it Back to Them? Can I Give Dad Roth IRA Money? (Jay, Chicago, IL)
24:23 – Roth 401(k) vs Roth IRA: What’s the Difference? (Helen, San Diego)
27:46 – OK to File Taxes Before Receiving Form 1098? (Clint)
31:34 – How to Diversify Into International Stocks? (Brian, Albany, NY)
33:59 – What Does “Capital Gains Ride on Top” Mean? (Jim, Santa Cruz, CA)
36:16 – CORRECTION: Social Security Deeming Rules from Episode 310 (Mark, Longmont, CO)

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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.
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In episode 314 of the Your Money, Your Wealth® podcast, the hosts discussed the Backdoor Roth IRA as a potential strategy for individuals looking to maximize their retirement savings. But is this strategy a good fit for everyone? Let’s take a closer look.

First off, what is a Backdoor Roth IRA? Essentially, it’s a way for high-income earners to contribute to a Roth IRA even if they exceed the income limits. The process involves making a non-deductible contribution to a traditional IRA, then converting that amount to a Roth IRA. Because the contribution was made with after-tax dollars, the conversion is tax-free.

So, who might benefit from this strategy? As mentioned, high-income earners who are ineligible to contribute directly to a Roth IRA could potentially benefit from this approach. It’s also worth noting that the Backdoor Roth IRA can be a useful tool for individuals who want to diversify their tax treatment in retirement. By contributing to both traditional and Roth IRAs, retirees can have a mix of taxable and tax-free income streams, which can be beneficial for tax planning purposes.

That being said, there are some potential downsides to consider. For one thing, the Backdoor Roth IRA process can be tricky and potentially costly if not done correctly. Individuals must be careful not to trigger the pro-rata rule, which could result in unexpected taxes owed. Additionally, the Backdoor Roth IRA may not be a great option for individuals who have a high balance in their traditional IRA, as the conversion could trigger a large tax bill.

Another potential drawback is that there’s no guarantee that Roth IRA rules won’t change in the future. While it’s unlikely, it’s possible that Congress could eliminate the Backdoor Roth IRA strategy altogether, rendering any contributions made useless.

Ultimately, whether or not the Backdoor Roth IRA is a good strategy for you depends on your individual circumstances. If you’re a high-income earner who wants to diversify your retirement income streams and is willing to navigate the potential pitfalls of the conversion process, the Backdoor Roth IRA could be a great fit. However, if you have a high balance in your traditional IRA or don’t want to risk potential rule changes down the line, you may want to explore other retirement savings strategies.

As always, it’s a good idea to consult with a financial advisor or tax professional before making any big retirement savings decisions. They can help you evaluate the pros and cons of the Backdoor Roth IRA strategy and determine whether it’s the best fit for your unique situation.