In this episode of the Doctor’s Eyes Only Podcast, brought to you by Vestia Personal Wealth Advisors, Partner and CEO Lauren Oschman talks about the benefits, drawbacks, and qualifications for a Backdoor Roth IRA.

Lauren Oschman – I always go back to a story, so I actually work with a father and a daughter. The father is a retired physician, his daughter is currently a practicing physician who’s working on accumulating her wealth and saving for her own retirement. So I started working with her father when he was on the precipice of retirement. He came to me, referred by his daughter, who had been a client of mine for a long time, and he said, Lauren, I’ve always done my investments myself and I would just love for you to be able to tell me, can I retire?

So I started getting into all of his account, he sent me all of his account statements, I started going through all of his accounts, and he had done a really really great job saving. He had a lot of money, he had been in a private practice, he had a lot of money put away in pre -taxed vehicles, so money that had never been taxed. And then anything he couldn’t get into a pre -tax vehicle that wasn’t a part of his spending plan, he was putting into a brokerage account. He never funded anything in the Roth bucket, right?

So we can kind of think about money in three buckets from a tax perspective, pre -tax, taxable, that would be your brokerage, and then tax -free, which would be your Roth IRA, under all of the current tax laws. He didn’t have anything in the Roth bucket. He had saved really really well, so I was able to tell him that based on all of the calculations that I ran, it looked like he was in a good position to be able to retire. The big question mark, the thing that I could not assure him .. was that pre -tax money.. I don’t know what’s going to happen to tax rates over the next 20 years. Tax rates are not fixed. We could end up with new people making decisions in Congress. We could have new tax laws passed, and tax rates could actually go up. So he had the vast majority, probably 80% of his money, was in accounts that were subject to taxes as he takes his withdrawals.

Contrast that with his daughter, who started working with me fresh out of her residency, and so we started a funding strategy. She’s been doing the Backdoor Roth IRA every single year, both she and her husband. She has money going into her brokerage account, she’s maximizing her 403B through her hospital as is her husband, he’s also a physician. And for her, where things currently sit, she’s actually, based on all the projections that we’ve run in our financial planning software, she’s on track to retire earlier than her father was able to retire, despite having pretty similar financial circumstances. Because I have this bucket of money that’s growing for her, obviously markets can be volatile, so some years it’s up, some years it’s down, but we have this bucket of money that is invested for her in the Roth IRA, and there’s not gonna be any sort of tax haircut on that portion of her money when she gets to retirement.

A lot of these conversations about IRAs, Roth IRAs, the sequence of transactions to do the Backdoor Roth IRA does involve tax strategy and tax reporting. I am not an Accountant, I am a Financial Advisor, so please, any decision that you’re going to make that is going to involve tax reporting, please run these things by your accountant to make sure that you have all of the information before you make decisions based on what makes sense for your situation.

The information covered and posted represents the views and opinions of the guest and does not necessarily represent the views or opinions of Vestia Advisors, LLC. The Content has been made available for informational and educational purposes only. It should not be construed as legal or tax advice and is not intended to replace the advice of a qualified attorney or tax advisor. This information is not an offer or a solicitation to buy or sell securities.

Investing involves risk; including risk of loss. Before investing, you should consider the investment objectives, risks, charges and expenses associated investment products. Investment decisions should be based on an individual’s own goals, time horizon and tolerance for risk. Past performance is no guarantee of future results. Diversification and asset allocation do not insure a profit or guarantee against loss. Consult your financial professional before making any investments.

Investment advisory services offered through Vestia Personal Wealth Advisors, Vestia Retirement Plan Consultants, and Vestia Advisors, LLC. Securities offered through Ausdal Financial Partners, Inc., 5187 Utica Ridge Rd, Davenport, IA. 52807 (563)326-2064. Member FINRA/SIPC. Vestia Personal Wealth Advisors, Vestia Retirement Plan Consultants, Vestia Advisors, LLC, and Ausdal Financial Partners, Inc. are independently owned and operated….(read more)

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A Backdoor Roth IRA is a tax-efficient retirement savings strategy that allows high earners to contribute to a Roth IRA, even if their income exceeds the annual limits set by the IRS.

Traditional Roth IRAs have income limits that prevent individuals who earn above a certain threshold from directly contributing to them. As of 2021, the income limits for single filers are $140,000 and for married couples filing jointly, it is $208,000.

However, the Backdoor Roth IRA loophole allows high-income earners to get around these restrictions by utilizing a two-step process. First, the individual makes a nondeductible contribution to a traditional IRA. This contribution is not tax-deductible, but it can still grow tax-free within the account. Then, the individual converts the traditional IRA to a Roth IRA. This conversion is allowed by the IRS regardless of income level.

By utilizing the Backdoor Roth IRA strategy, high-income earners can take advantage of the tax benefits offered by Roth IRAs, such as tax-free withdrawals in retirement and no required minimum distributions. This strategy is particularly beneficial for individuals who expect their tax bracket to be higher in retirement or for those who want to diversify their tax exposure in retirement.

It is important to note that individuals who have pre-tax money in traditional IRAs may incur taxes on the conversion to a Roth IRA. This is because the IRS considers all of an individual’s traditional IRA balances when calculating the tax liability on a conversion.

Overall, a Backdoor Roth IRA can be a valuable tool for high-income earners looking to maximize their retirement savings and take advantage of the tax benefits offered by Roth IRAs. It is important to consult with a financial advisor or tax professional to ensure that this strategy is appropriate for your individual financial situation.