Question: Jon, VA – Hi Joe and Big Al, love your show and listen regularly. I am 53, I have no debt and recently retired. I was a franchisee of one fast food restaurant that I sold in December for $5.3 million dollars!! I have that money invested but my question is about my 401k money. Due to the sale of the business I recently had to close down my company 401k plan. I transferred my 401k money to an IRA with a local investment company. I had $733,811 in my 401k when I moved it to an IRA. I met with my advisor today and that due to my age I may want to consider doing a backdoor Roth conversion. Tax free growth and no required minimum distribution (RMD) sounds GREAT but I am having trouble swallowing the tax that would be due if I did this. Taxes would be somewhere in the $330,000 range. Is this a smart thing to do or should I do it in smaller amounts so I could stay in a lower tax bracket. I am not sure what my income will be in the years ahead other than I do have a couple rental properties that will bring in roughly $35,000 in income. What is your opinion on this backdoor ROTH, does it make sense for me?

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The concept of the “Backdoor Roth” has been gaining popularity among savers who want to take advantage of tax-free retirement savings options. But what is it exactly, and is it worth it? In this article, we’ll explore the Backdoor Roth strategy and whether it’s a good fit for you.

First, let’s define what a Backdoor Roth is. It’s a way to contribute to a Roth IRA (which grows tax-free and withdrawals are tax-free in retirement) when you’ve exceeded the income limits to contribute directly. The Backdoor Roth is achieved by contributing after-tax dollars to a traditional IRA and then converting that money to a Roth IRA.

So, is it worth it? The short answer is: it depends on your individual situation. If you’re already in a high tax bracket and have maxed out your other tax-deferred savings options, then the Backdoor Roth can be a great way to save for retirement tax-free. But if you’re in a lower tax bracket, it may not be as beneficial.

One key factor to consider is future tax rates. If you expect to be in a higher tax bracket in retirement than you are currently, then a Backdoor Roth can be a strategic move to pay taxes now at a lower rate. On the other hand, if you expect your future tax rate to be lower, it may be more advantageous to stick with a traditional IRA and defer taxes until retirement.

Another consideration is how the Backdoor Roth may affect your current tax situation. If you have a lot of pre-tax money in traditional IRAs, the conversion to a Roth may trigger a large tax bill. It’s important to consult with a financial advisor or tax professional to understand the potential tax implications before making a decision.

In summary, the Backdoor Roth can be a valuable tool for high-income earners looking to save for retirement tax-free. However, it’s important to weigh the potential benefits against your individual tax situation and future expectations. As with any financial decision, it’s best to consult with a trusted professional to determine what’s right for you.