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20. Understanding Backdoor Roths and Their Role in Retirement Planning · Dime After Dime

• 0:00
  SPEAKER_00: This podcast is produced by Moran Wealth Management, an SEC registered investment advisor.
• 0:04
  SPEAKER_00: Nothing in this episode constitutes his personalized investment advice.
• 0:08
  SPEAKER_01: You can have too much 401k or IRA money in the pre-tax.
• 0:13
  SPEAKER_01: Okay.
• 0:13
  SPEAKER_01: We want to do as much as we can to save, do all that.
• 0:16
  SPEAKER_01: But just piling money blindly into pre-tax accounts is going to cause tax nightmares down the road.
• 0:25
  SPEAKER_00: You're listening to Dime After Dime, a Moran wealth management podcast.
• 0:29
  SPEAKER_00: Every episode, your host, Tony Steak, brings in financial professionals to discuss strategies and insights for investors who want to grow and protect their wealth.
• 0:37
  SPEAKER_00: With that, here's Tony.
• 0:41
  SPEAKER_02: Welcome back to Dime After Dime.
• 0:44
  SPEAKER_02: Here we are in a new studio.
• 0:46
  SPEAKER_02: It's kind of built.
• 0:47
  SPEAKER_02: It's not fully built yet.
• 0:48
  SPEAKER_02: Um we have some stuff to do on the back wall.
• 0:50
  SPEAKER_02: We're missing the neon graphic, but here we are.
• 0:54
  SPEAKER_02: It's kind of like a season two, and I get to kick it off with Aaron Simpson.
• 0:59
  SPEAKER_01: Aaron, how are you?
• 1:00
  SPEAKER_01: Good.
• 1:01
  SPEAKER_01: I'm doing good.
• 1:01
  SPEAKER_01: Good morning.
• 1:02
  SPEAKER_02: Good morning.
• 1:03
  SPEAKER_02: Remind my listeners, our listeners, of who Aaron is.
• 1:07
  SPEAKER_01: I'm one of the senior advisors here on the team.
• 1:10
  SPEAKER_01: Uh do a lot of work with clients in the financial planning space, retirement income planning.
• 1:16
  SPEAKER_01: That's a lot where my focus is on.
• 1:18
  SPEAKER_01: And I know we'll be talking about that today with the Roth IRAs.
• 1:22
  SPEAKER_01: Um, so yeah, there's a lot of good techniques, and hopefully we'll get into that.
• 1:27
  SPEAKER_02: I don't think there's anyone better suited to talk about uh this topic backdoor Roth IRAs.
• 1:32
  SPEAKER_02: Now tell me, and I'll this is a bit of a curveball, but what's up with the title?
• 1:37
  SPEAKER_02: Backdoor, it sounds almost like like nefarious or clandestine.
• 1:42
  SPEAKER_01: Yeah, I d I don't know.
• 1:43
  SPEAKER_01: The IRS has some weird rules around this.
• 1:46
  SPEAKER_01: I wish that the government would change it and just allow Roth IRAs open to everybody, uh despite how much income they make.
• 1:54
  SPEAKER_01: But backdoor Roth conversions or contributions, I should say, these are really for those high income earners.
• 2:02
  SPEAKER_01: So the government's gonna say, hey, you make too much.
• 2:04
  SPEAKER_01: We're not gonna allow you to participate in that.
• 2:06
  SPEAKER_01: So we got to sneak through the backdoor.
• 2:08
  SPEAKER_02: Okay.
• 2:09
  SPEAKER_02: I like that.
• 2:10
  SPEAKER_02: So I there might be a segment in the future, not today, where it'll be explain this to me like I'm five years old.
• 2:17
  SPEAKER_02: I use that a lot actually in AI.
• 2:19
  SPEAKER_02: Um, but tell me more, like in plain English, like Roth IRA, what is this kind of like?
• 2:25
  SPEAKER_02: Uh don't go into the steps yet.
• 2:26
  SPEAKER_02: We have a we have a segment on just kind of the steps, but just plain English, what is this?
• 2:31
  SPEAKER_01: Well, if you like I said, if you make too much money, you're not allowed to make a direct contribution.
• 2:36
  SPEAKER_01: So ultimately what has to happen is we make a contribution to the IRA and then immediately convert that over to the Roth.
• 2:44
  SPEAKER_01: So I mean that's about as simple as it gets, but there's a lot of complexity around how we do that and some rules we got to follow.
• 2:50
  SPEAKER_01: But it allows us high-income earners to get sneak that money in.
• 2:53
  SPEAKER_01: They just got to go through the IRA to get into the Roth.
• 2:57
  SPEAKER_02: Got it.
• 2:58
  SPEAKER_02: So, and thinking again about our listeners, you know, most of which are Gen X are kind of in that 40s to 60s range of age, right?
• 3:06
  SPEAKER_02: They had got a 401k, maybe a brokerage account, you know, maybe just an H HSA.
• 3:10
  SPEAKER_02: They have all like kind of the basics and they found some success.
• 3:14
  SPEAKER_02: Like now they're gonna be running into this issue.
• 3:17
  SPEAKER_02: What does that look like?
• 3:18
  SPEAKER_02: It again, think about that compilation of investment vehicles, 401k, a brokerage account, etc.
• 3:25
  SPEAKER_02: Where do these limits start to hit them?
• 3:28
  SPEAKER_01: Well, they're gonna be in their peak earning years, you know.
• 3:31
  SPEAKER_01: If you're talking in that 40s and 60s, we're starting to make some money.
• 3:35
  SPEAKER_01: Um, so again, when when they're wanting to save but have run out of options, you know, they've maxed out their 401k, they're looking for additional places to put the money, they want to get it into uh Roth IRA for that tax-free growth.
• 3:52
  SPEAKER_01: And most importantly, when they get to retirement, they can take it out tax-free.
• 3:56
  SPEAKER_01: Um, they're just gonna run into limits, they can't make those direct contributions.
• 4:00
  SPEAKER_02: Okay.
• 4:01
  SPEAKER_01: Um, so we're gonna have to get a little creative with how we get the money put away.
• 4:06
  SPEAKER_02: So I'm thinking about objections, right?
• 4:08
  SPEAKER_02: Let's just say I'm 52 years old.
• 4:10
  SPEAKER_02: Like, I don't what does tax-free growth mean to me?
• 4:13
  SPEAKER_02: Like, isn't that something that a 25-year-old would be more concerned about?
• 4:17
  SPEAKER_02: Why why at 52 or 55 does that matter?
• 4:20
  SPEAKER_01: Well, it doesn't necessarily matter at 52, it matters at 72.
• 4:24
  SPEAKER_01: Okay, go on.
• 4:26
  SPEAKER_01: So, you know, you you could be contributing all this money into your IRA or 401k, it's all pre-taxed, which is great.
• 4:32
  SPEAKER_01: We get the tax deduction today.
• 4:35
  SPEAKER_01: It's just that later on in the in the years, when we get to retirement, when we take those withdrawals out, you're gonna be taxed on every single dollar that comes out of that account.
• 4:44
  SPEAKER_01: So if that 401k grows or IRA grows to$5 million, it's not really$5 million sitting there.
• 4:50
  SPEAKER_01: It's that's gross.
• 4:52
  SPEAKER_01: We got to take out taxes for that.
• 4:55
  SPEAKER_01: And so um I think it's it's important to that everybody, and I really mean that, like everybody should have a tax-free bucket in retirement, and that's where the Roth comes in, because then in retirement, we could start to take that money out tax-free.
• 5:12
  SPEAKER_01: Now we got to pay the taxes today on it, but it's gonna give us a lot of flexibility down the road.
• 5:18
  SPEAKER_02: Okay, I like that.
• 5:19
  SPEAKER_02: And I want to punctuate the flexibility in just a moment, but before I get there, I mean, think about the again, our audience, kind of the Gen Xers, they're accumulating.
• 5:29
  SPEAKER_02: They're really not, they don't have options for IRAs at this point, right?
• 5:32
  SPEAKER_02: And that's really what's what you're saying is we need to diversify when you get to retirement, the vehicles from which you can divest.
• 5:42
  SPEAKER_01: Um, yeah, you know, well, most if you're employed and you're not self-employed, maybe have uh your own CEP IRA or simple IRA or something like that.
• 5:53
  SPEAKER_01: But if you have just a traditional W-2 employment job and you've got a 401k through your um work, a lot of times I'll see um people that I work with and they're like, well, I'm gonna make my 401k contributions and I'm gonna contribute to my IRA, which sounds great, but there's limits.
• 6:14
  SPEAKER_01: So again, if you're making too much money and you have a 401k that you're participating in, you can make a contribution to the IRA.
• 6:21
  SPEAKER_01: You just may not get the deduction that you think you're getting.
• 6:24
  SPEAKER_01: And I see that happen a lot where they're just putting away in their IRA and they have no idea that they're not actually getting credit for that tax deduction on making that IRA contribution because they're already participating in their 401k.
• 6:39
  SPEAKER_02: I see.
• 6:39
  SPEAKER_02: So, but it's it's more nuanced than that, right?
• 6:42
  SPEAKER_02: Like it might not necessarily be a max 401k contribution that you're not getting that deduction, or am I thinking about this wrong?
• 6:50
  SPEAKER_02: Or is it income related?
• 6:52
  SPEAKER_01: Yeah, it's income related.
• 6:53
  SPEAKER_01: So if you're making too much money, single or married filing jointly, and you're making contributions to your 401k, those IRA contributions would not be tax deductible.
• 7:06
  SPEAKER_01: Thus, if we're gonna put the money into the IRA, it makes all the sense in the world to make that immediate conversion to the Roth.
• 7:13
  SPEAKER_01: Because now we've got money that you didn't get credit for and get the tax deduction on.
• 7:19
  SPEAKER_01: It's growing tax-free every year, but then you're gonna pay taxes on it when you pull it out.
• 7:25
  SPEAKER_01: So you get like that double whammy uh of taxes.
• 7:28
  SPEAKER_01: You don't want to be taxed twice on money, so we want to make that conversion over to the Roth.
• 7:32
  SPEAKER_02: Got it.
• 7:33
  SPEAKER_02: Okay, that makes a lot more sense.
• 7:34
  SPEAKER_02: So when I was doing my research on this episode, um I stumbled across a mega backdoor Roth, right?
• 7:42
  SPEAKER_02: And now that's different than a backdoor Roth.
• 7:44
  SPEAKER_02: Can you explain?
• 7:46
  SPEAKER_01: Uh, yeah.
• 7:47
  SPEAKER_01: I mean, it's well, 401k plans now.
• 7:50
  SPEAKER_01: Hopefully, your employer is offering you the ability to do an after-tax contribution to your 401k.
• 7:58
  SPEAKER_01: So rather than making contributions all pre-tax, you can make them all after tax.
• 8:02
  SPEAKER_01: Again, it's just like a super Roth that we get much higher limits.
• 8:06
  SPEAKER_01: We can put that money away, grow tax-free, comes out tax-free.
• 8:10
  SPEAKER_01: So you're gonna pay the taxes going in or coming out.
• 8:14
  SPEAKER_01: Um, but you know, one of the big big things down the road in retirement is these required minimum distributions and the force out of that money.
• 8:24
  SPEAKER_01: And that's oftentimes when we're working with retirees, like the biggest hang up because it's forcing out more money than they need to live off of.
• 8:32
  SPEAKER_01: And so it's just pushing their tax rates through the roof, it's cost them a lot more Medicare premiums.
• 8:40
  SPEAKER_01: And a lot of times I'm working with those retirees.
• 8:44
  SPEAKER_01: So, you know, we're talking today about those ones planning for retirement.
• 8:47
  SPEAKER_01: So if I could take them out into the future and see what they're gonna face, it's those conversations I have with retirees all the time.
• 8:55
  SPEAKER_01: It's I'm getting crushed on taxes.
• 8:57
  SPEAKER_01: Can I do a Roth conversion?
• 8:59
  SPEAKER_01: Like, how do I get more money in a Roth?
• 9:02
  SPEAKER_01: That's what people in their 60s, 70s, and even 80s are asking all the time.
• 9:07
  SPEAKER_01: How do I I'm getting crushed on taxes?
• 9:10
  SPEAKER_01: Get the money into Roth.
• 9:11
  SPEAKER_01: Well, the time to do that is now, not wait till you're 65, retire, and then go, well, how do I make this happen?
• 9:19
  SPEAKER_01: You know, you want to start planning today for that.
• 9:21
  SPEAKER_01: The Roth IRA or that super Roth through the 401k is a great solution to that.
• 9:28
  SPEAKER_02: I mean, it it makes you kind of like your head spin just a little bit, right?
• 9:33
  SPEAKER_02: Because you think you're doing everything correctly.
• 9:35
  SPEAKER_02: You're saving, putting away cash, manage your expenses, right?
• 9:38
  SPEAKER_02: And then all of a sudden you begin to realize that it's gonna hurt in your 70s.
• 9:44
  SPEAKER_02: Now, just to be clear, you'd mentioned RMDs, right?
• 9:48
  SPEAKER_02: So required minimum distributions.
• 9:49
  SPEAKER_02: It's a the government says you must take out, you must liquidate this much from your retirement accounts.
• 9:55
  SPEAKER_02: Right.
• 9:55
  SPEAKER_02: And that functions as income, right?
• 9:57
  SPEAKER_02: So that that that that puts you in a tax bracket.
• 10:01
  SPEAKER_01: Right.
• 10:01
  SPEAKER_01: The highest effective marginal tax rate.
• 10:04
  SPEAKER_01: So you're gonna pay the most in taxes on that income when it comes out.
• 10:08
  SPEAKER_01: So the governments never tax the money.
• 10:11
  SPEAKER_01: So they put those required minimum distributions on it because they want to force the money out so they can tax it.
• 10:18
  SPEAKER_01: I mean, I'm not a tax expert uh or like have a crystal ball into the future, but we just top$40 trillion in debt here in this country.
• 10:28
  SPEAKER_01: I would, if I was a betting man, I'd bet at some point tax rates are gonna have to go up to kind of offset some of the debt we've taken on.
• 10:35
  SPEAKER_01: And if you got a big giant 401k IRA sitting out there that's never been taxed, I mean that's like a sitting target for them to be able to come out in the future and go, well, we're gonna tax that even more when that comes out.
• 10:48
  SPEAKER_02: So we can mitigate that now.
• 10:49
  SPEAKER_01: We've got to mitigate it now.
• 10:51
  SPEAKER_01: And and one of the biggest things that I see is that when you're working towards retirement, you know, you're trained to put as much away into the 401k as possible, right?
• 11:00
  SPEAKER_01: Max it out every year, max it out, max it out, max it out.
• 11:03
  SPEAKER_01: And if we're doing it all pre-tax, there will be a point where you need to or really should stop making pre-tax contributions because that bucket's gonna get so big, like I said, in retirement that those RMDs are gonna be so large, it's just gonna be crushing.
• 11:21
  SPEAKER_01: So, I mean, I know personally for myself, I split it 50% of the contributions pre-tax, 50% of the contributions after tax.
• 11:30
  SPEAKER_01: Again, I don't know where tax rates are gonna be in retirement.
• 11:33
  SPEAKER_01: I just know that when I work with retirees every day, this is the number one pain point is taxes in retirement.
• 11:41
  SPEAKER_01: And so I want to get ahead of that and have that flexibility in retirement.
• 11:45
  SPEAKER_02: So I feel like we hear that all the time.
• 11:47
  SPEAKER_02: We hear that all the time.
• 11:48
  SPEAKER_02: Like people come to us or any advisor for that matter, and they say, Man, this stinks.
• 11:54
  SPEAKER_02: Like I'm paying out a lot.
• 11:55
  SPEAKER_02: Like, how can I fix this?
• 11:56
  SPEAKER_02: And it's just you're 20 years too late.
• 12:00
  SPEAKER_01: Right.
• 12:01
  SPEAKER_01: Yeah.
• 12:02
  SPEAKER_01: Now, the pain point though, today is if you do the Roth, it's more taxes that you gotta pay today.
• 12:08
  SPEAKER_02: But I mean, again, I don't have a crystal ball either, but when's the last time taxes went down?
• 12:14
  SPEAKER_01: Well, I mean, I guess Trump lowered the taxes.
• 12:17
  SPEAKER_02: Okay, but my point being is like we can assume that in the future taxes will be higher.
• 12:23
  SPEAKER_02: I would guess.
• 12:24
  SPEAKER_02: Yeah.
• 12:25
  SPEAKER_01: I would guess.
• 12:26
  SPEAKER_02: Yeah.
• 12:26
  SPEAKER_02: But the dilemma is for some of these situations is if they're in the highest income tax bracket today, should they make those deposits into the Roth, right?
• 12:36
  SPEAKER_02: They they might be paying more in taxes.
• 12:38
  SPEAKER_02: Is that one of their is that why they don't do it?
• 12:41
  SPEAKER_01: Yeah, I mean, if you're in the highest tax bracket, you may enjoy that tax break today with the assumption of I'm going to retire in a lower tax bracket.
• 12:52
  SPEAKER_01: And that can be true for a few years, right?
• 12:56
  SPEAKER_01: So let's say you retire at 65, you stop working, income goes down.
• 13:01
  SPEAKER_01: All right.
• 13:02
  SPEAKER_01: Maybe, maybe you're taking from you're drawing down from taxable investment accounts.
• 13:08
  SPEAKER_01: Um, but eventually you hit RMD age.
• 13:12
  SPEAKER_01: And so you've been deferring that.
• 13:14
  SPEAKER_01: So there's a little window, you go like 65 to 75, and then RMDs kick in and boom, right back up through the tax brackets.
• 13:22
  SPEAKER_01: And I see it all the time when we run out financial planning, uh do a financial planning analysis and they're run their taxes out over their lifetime, you know, they push immediately back up into the highest tax bracket.
• 13:34
  SPEAKER_01: So you either gotta do Roth conversions now or backdoor Roths now, or you're gonna have a little window between you know when you retire and when RMDs kick in to start doing those conversions then.
• 13:48
  SPEAKER_01: So it's it's simple to say, yeah, I'm gonna retire in a lower tax bracket, but until you really run those numbers out, it you don't really know.
• 14:01
  SPEAKER_02: You had mentioned something before in the episode, which I want to bring up because not everyone thinks about this, and that's Irma, not the hurricane, right?
• 14:10
  SPEAKER_02: Tell us more about Irma and how people aren't thinking about that, and maybe they should be, especially now, with the opportunity to kind of convert into a Roth.
• 14:19
  SPEAKER_02: Because what is Irma and how does that operate?
• 14:22
  SPEAKER_01: Right.
• 14:22
  SPEAKER_01: So Irma is going to be if you're making again, too.
• 14:27
  SPEAKER_01: I don't say making you have too much income in retirement, and they're gonna look at all the sources dividend income, interest, um, pension, uh, IRA distributions, but as your income creeps up, the government's gonna look at you and say, Well, you make too much money, and because you make too much money, we're gonna increase your premiums in Medicare.
• 14:49
  SPEAKER_01: And so you get these surcharges.
• 14:51
  SPEAKER_01: It's not just for you, it's for you and your spouse, and so you could end up being paying thousands of dollars more in Medicare premiums just because you're showing a high income.
• 15:02
  SPEAKER_01: Roths are gonna help reduce that.
• 15:05
  SPEAKER_01: You draw the same amount of money as a Roth, but it's not gonna show up on your tax return as income.
• 15:10
  SPEAKER_02: I don't think people think about that ever.
• 15:12
  SPEAKER_01: No, I mean why at 40 years older you're thinking about Medicare premiums.
• 15:16
  SPEAKER_02: Right.
• 15:16
  SPEAKER_01: You're just not.
• 15:17
  SPEAKER_02: But the ramifications, we're talking potentially thousands of dollars a year in surcharges.
• 15:22
  SPEAKER_01: Thousands.
• 15:24
  SPEAKER_01: Over decades.
• 15:25
  SPEAKER_02: And at that point, and at that point, you're limited in the amount of income and rev like income you have.
• 15:30
  SPEAKER_01: Like it right.
• 15:32
  SPEAKER_01: So it's like a double whammy.
• 15:33
  SPEAKER_01: It's like, oh, my my Medicare premiums are going up, so I gotta draw more out of my IRA, pay more in taxes, to pay more in premiums.
• 15:42
  SPEAKER_01: So it's it just it's it's it gets out of control.
• 15:46
  SPEAKER_01: Um, and especially so you don't want every dollar pre-tax, just doesn't make any sense.
• 15:53
  SPEAKER_02: So brass tax, and perhaps this is an unfair question, but and you feel free to provide a hypothetical persona.
• 16:02
  SPEAKER_02: Like, give me the step-by-step.
• 16:04
  SPEAKER_02: Like, how do we do the backdoor?
• 16:06
  SPEAKER_02: Like, and I know again, I know it's unfair because like we're you know, I'm asking you to like without a financial plan and without income and all that stuff, but like what are the basics?
• 16:15
  SPEAKER_02: Just give me the basics, like the step by step um to convert into a backdoor world.
• 16:20
  SPEAKER_01: Okay, simple as we make the contribution to the IRA a non-deductible contribution.
• 16:25
  SPEAKER_01: So we've got to make sure we do it right, it's coded right, so it's done right.
• 16:30
  SPEAKER_01: And then we immediately flip it.
• 16:32
  SPEAKER_01: I stress immediately flip that to a Roth.
• 16:36
  SPEAKER_01: So I know when we're working with folks, we'll do it the same day.
• 16:39
  SPEAKER_01: Money in, flip it right to a Roth.
• 16:42
  SPEAKER_01: Why?
• 16:43
  SPEAKER_01: Because if you let's say you take uh you put in your$7,500 for the max contribution, and you sit and you forget about doing the conversion and it goes six months, and now that$7,500's turned into$8,000.
• 16:59
  SPEAKER_01: We're gonna pay tax on that growth when we convert it.
• 17:03
  SPEAKER_02: Yeah, so there's a lot of uh let's call it internet folklore.
• 17:07
  SPEAKER_02: Uh you you can Google it, it's on Reddit, it's everywhere.
• 17:10
  SPEAKER_02: It's like, when do you do the conversion itself, right?
• 17:14
  SPEAKER_02: And you're saying immediate.
• 17:16
  SPEAKER_01: Immediate.
• 17:17
  SPEAKER_01: Because you want you don't want any growth because they need the growth to pay tax on.
• 17:20
  SPEAKER_02: Even if you put it into a cash balance, like even if it's not invested, right?
• 17:24
  unknown: Right.
• 17:24
  SPEAKER_01: I mean, even cash is gonna earn some interest, but immediately like if you flip it right away and you're saying, Well, I don't want growth.
• 17:30
  SPEAKER_01: Well, that you want the growth in the Roth.
• 17:32
  SPEAKER_01: So you want to get it in, get it right back out.
• 17:34
  SPEAKER_01: Now, here's the catch.
• 17:36
  SPEAKER_01: This is where people mess up all the time.
• 17:39
  SPEAKER_01: They may have an IRA account with an existing balance in it.
• 17:44
  SPEAKER_01: Okay, so let's for easy math, we've got$93,000 in an IRA account, and you make a$7,000 contribution to the IRA, and you think, I'm gonna convert this through a backdoor Roth.
• 18:01
  SPEAKER_01: So I make my contribution and I want to immediately flip it.
• 18:05
  SPEAKER_01: Well, there's a pro rata rule.
• 18:06
  SPEAKER_02: Ah, thank you.
• 18:07
  SPEAKER_02: That was my next question.
• 18:08
  SPEAKER_02: So here we are.
• 18:10
  SPEAKER_01: I knew you were going.
• 18:11
  SPEAKER_01: So now we have$100,000 in this account and we're gonna convert$7,000 of it.
• 18:16
  SPEAKER_01: Well, you think, well, I want to just cherry pick the$7,000 that I've already paid tax on and flip that.
• 18:21
  SPEAKER_01: Oh no.
• 18:22
  SPEAKER_01: So the IRS they figured this one out.
• 18:24
  SPEAKER_01: They slap a pro rata rule on it, and then well, that's$7,000, only 7% of that IRA account.
• 18:30
  SPEAKER_01: So therefore, 93% of that conversion is gonna be taxed.
• 18:35
  SPEAKER_01: So you don't get to cherry pick the dollars, like the last dollars in or the first dollars out that I convert, it doesn't work like that.
• 18:41
  SPEAKER_01: So, in order for this backdoor Roth to work, we have to do it in an IRA account that has a zero dollar balance.
• 18:49
  SPEAKER_01: Well, what most people forget about is they may have another IRA.
• 18:53
  SPEAKER_01: You can have as many IRAs as you want.
• 18:55
  SPEAKER_01: So you can't just go, well, I'll get cute with this, I'll open an IRA that has no imbalance in it, I'll make my$7,000 contribution and then convert it into the backdoor Roth because the IRS doesn't go, oh, but yeah, you got a hundred thousand dollar or a five hundred thousand dollar IRA that you rolled over.
• 19:11
  SPEAKER_01: So that's gonna count all towards it.
• 19:13
  SPEAKER_01: And if you're not doing that calculation, again, you're gonna get taxed twice.
• 19:17
  SPEAKER_01: So we got to be careful.
• 19:20
  SPEAKER_01: You got to know the rules.
• 19:21
  SPEAKER_01: A lot of people are gonna forget it's not just IRAs, it's a SEP IRA or a simple IRA that all gets calculated in.
• 19:30
  SPEAKER_01: So we have to understand really a clear picture of what all accounts folks have.
• 19:36
  SPEAKER_01: Or maybe maybe we can get creative and go, well, my spouse doesn't have an IRA, so we'll do it for her.
• 19:42
  SPEAKER_01: You know, that that's another way around it.
• 19:45
  SPEAKER_01: Um, so these are just those planning rules that most people are gonna get tripped up on.
• 19:50
  SPEAKER_01: They're gonna think I can do it, and they just do it and press a button, and then file taxes later and realize, uh, and then once it's done, it's done.
• 19:59
  SPEAKER_01: You know, you can't go back and undo it.
• 20:01
  SPEAKER_02: So uh maybe another unfair question for you, but I was let's just say I was employed at a job.
• 20:08
  SPEAKER_02: I left it in the year I left in the year 2011, and I got 400 grand in my IRA.
• 20:15
  SPEAKER_02: Yes.
• 20:16
  SPEAKER_02: Am I just SOL?
• 20:17
  SPEAKER_02: Am I out of luck here?
• 20:18
  SPEAKER_01: Um, well, you're out of luck for the to do in the contribution immediately, flipping.
• 20:23
  SPEAKER_01: The government allow you to convert your IRA money at any time.
• 20:27
  SPEAKER_01: You just have to pay the taxes on it.
• 20:30
  SPEAKER_01: So it can make sense if you're in your working years.
• 20:33
  SPEAKER_01: If you have a down year in income, great opportunity.
• 20:36
  SPEAKER_01: Incomes down, we'll do a conversion, we'll get it from IRA to Roth.
• 20:41
  SPEAKER_01: Um, so that can work.
• 20:44
  SPEAKER_01: I think it can work in years where you get a bad year in the stock market.
• 20:49
  SPEAKER_01: So let's use 2022 as an example, it's probably the last bad year in the stock market we've had.
• 20:55
  SPEAKER_01: I don't know, the SP was let's call it down 18% on the year.
• 21:00
  SPEAKER_01: Well, if you own call it Microsoft stock and it's in your IRA and it's beat up 20, 25%, we can convert that to the Roth.
• 21:11
  SPEAKER_01: And then if Microsoft recovers, all that growth and appreciation is now tax-free.
• 21:17
  SPEAKER_01: So we paid the tax on it and we let the thing grow.
• 21:20
  SPEAKER_01: So it works well too to do those conversions and down years in the market.
• 21:25
  SPEAKER_01: Um Key's gotta have the money to pay the taxes.
• 21:28
  SPEAKER_01: So if we do a big conversion in one year, we gotta pay the tax on that.
• 21:32
  SPEAKER_01: Um, but there are some planning opportunities in there to do that, but that's where the super backdoor Roth comes into play.
• 21:39
  SPEAKER_02: Got it.
• 21:40
  SPEAKER_01: With the 401k.
• 21:41
  SPEAKER_01: Okay, well, I might not be able to contribute to it or do this conversion because I've got so much IRA money already.
• 21:49
  SPEAKER_01: That's when you want to then flip your contributions in your 401k from pre-tax to after tax.
• 21:55
  SPEAKER_01: Take advantage of it there.
• 21:56
  SPEAKER_01: And if you're self employed, consider opening up solo 401k.
• 22:00
  SPEAKER_01: With that option.
• 22:02
  SPEAKER_02: I like for as much as uh my brain is not on your level, there's a few light bulbs going off.
• 22:09
  SPEAKER_02: Um, so if someone were to do this themselves, for instance, if the light bulbs are are shining and they're saying, Man, I gotta get I gotta get this going, like what is that paper, like how do we keep track?
• 22:20
  SPEAKER_02: Like, how does the paperwork trail?
• 22:21
  SPEAKER_02: Are there forms you've got to fill out?
• 22:23
  SPEAKER_02: Like, what do we have to have ready for it during taxes?
• 22:26
  SPEAKER_02: I mean, we probably have to provide all the evidence when we do these kind of rollovers and conversions.
• 22:31
  SPEAKER_02: What does that look like in terms of just keeping track of documentation?
• 22:35
  SPEAKER_02: And I'm not asking you to remember Form 8608, right?
• 22:39
  SPEAKER_02: But like thank you.
• 22:40
  SPEAKER_01: That was one of them, right?
• 22:41
  SPEAKER_01: I don't I think so.
• 22:43
  SPEAKER_01: I think so.
• 22:44
  SPEAKER_01: Um, no, I mean that's all auto-generated.
• 22:46
  SPEAKER_01: So if we do it the right way, you're you I know for us we generate those tax forms and send them out, so you've got everything ready to go to handy the CPA, you know, at the end of the year when you're doing it.
• 22:57
  SPEAKER_02: Yeah, but I don't have a CPA, I use HR block.
• 23:00
  SPEAKER_01: Upload the tax documents to HR block.
• 23:02
  SPEAKER_01: All right, you know what I mean?
• 23:03
  SPEAKER_01: You're you're gonna get provided with the proper documentation that you did it correctly.
• 23:08
  SPEAKER_01: But that's where I think most people they think they're doing it correctly, and when the tax documents come out, they realize wait a second, I I thought I did this right.
• 23:17
  SPEAKER_02: That was actually my next question was like, so and I'm glad you answered it kind of, but I want you to punctuate it.
• 23:23
  SPEAKER_02: Uh what what mistakes do you see when you have do-it-yourselfers kind of trying to you know get a little cutesy with backdoor Roths and all that?
• 23:30
  SPEAKER_02: Like, what what what are the big mistakes you see?
• 23:33
  SPEAKER_02: And are they unwindable, if you will?
• 23:37
  SPEAKER_01: I mean, no, they're not unwindable.
• 23:39
  SPEAKER_02: Okay.
• 23:40
  SPEAKER_01: But um that I mean that's the big one.
• 23:43
  SPEAKER_01: That's the big one.
• 23:43
  SPEAKER_01: The other one is like the they're not they're not count, they're not remembering that they've got these rules around the pro rata rule.
• 23:50
  SPEAKER_01: That's a big one.
• 23:51
  SPEAKER_01: Or forgetting that the simple or SUP IRA counts as one of those IRAs that would be used in that calculation.
• 23:59
  SPEAKER_01: Now, there's some ways that you I guess you could get around it.
• 24:02
  SPEAKER_01: Let's say you've got a hundred thousand dollar IRA and you want to uh um do a backdoor Roth conversion, you could, in theory, take that IRA, and if your 401k plan provider allows, roll the IRA into the 401k with your employer, thus pretty much zeroing out your IRA.
• 24:28
  SPEAKER_01: And then we can do that.
• 24:30
  SPEAKER_01: But that's like a lot of work.
• 24:33
  SPEAKER_01: Well, I mean, there's a lot of things to consider.
• 24:34
  SPEAKER_01: One is your 401k plan really any good?
• 24:37
  SPEAKER_01: What are the fees?
• 24:37
  SPEAKER_01: What are the investment choices?
• 24:39
  SPEAKER_01: Because once we roll it in there, you're not rolling it back out.
• 24:42
  SPEAKER_01: Um and that it's a probably a cute way of doing it, but it may not be the best way to do it.
• 24:49
  SPEAKER_01: And it makes no sense if your four if your um plan provider already allows for after tax contributions, it's a lot of work for nothing.
• 24:57
  SPEAKER_01: Just go to your employer, switch the contributions, and then just start pumping money into the after tax.
• 25:04
  SPEAKER_02: I'm one of those people that want to have all my accounts in one spot, right?
• 25:09
  SPEAKER_02: I want to kind of consolidate when possible.
• 25:12
  SPEAKER_02: That's not wise in situations like this, so you're saying I don't think so.
• 25:18
  SPEAKER_01: I mean, I've seen a lot of 401k plans that I use my wife's for example.
• 25:24
  SPEAKER_01: I because I look through and help with the investment selection there.
• 25:29
  SPEAKER_01: Big company, and then you're looking at the investment choices, they're basic, subpar, not great funds to choose from, maybe high expenses.
• 25:40
  SPEAKER_01: You know, the 401k plans, I feel like they want to they just give you enough choices so that they can check a box, but not really give you the whole suite of everything that you could be doing.
• 25:56
  SPEAKER_01: And it, you know, it the the investment choices really are aren't always the greatest.
• 26:01
  SPEAKER_01: And I so I'm more of a fan of I want control of that IRA, I want to be able to invest it in whatever I want.
• 26:06
  SPEAKER_01: If I want to do individual stocks, maybe you want to buy crypto.
• 26:11
  SPEAKER_01: You know, you can do that in an IRA.
• 26:12
  SPEAKER_01: Your 401k plan provider's not gonna allow you to do it.
• 26:15
  SPEAKER_01: Not saying crypto is the best.
• 26:16
  SPEAKER_02: I'm just you can make direct investments too, right?
• 26:18
  SPEAKER_02: From your IRA.
• 26:19
  SPEAKER_02: Right.
• 26:19
  SPEAKER_01: I mean you could do real estate.
• 26:21
  SPEAKER_02: Yeah.
• 26:21
  SPEAKER_02: I had a friend that invested in a software company using his IRA.
• 26:24
  SPEAKER_02: I know I didn't know that was a thing.
• 26:26
  SPEAKER_01: Yeah.
• 26:26
  SPEAKER_01: So but when you pile if you were to try to pile it all back into your 401k or leave it there, uh it you know, a lot of a lot of folks leave 401ks with their old company for years.
• 26:38
  SPEAKER_01: Um and they just kind of forget about them and you know it's just easy.
• 26:45
  SPEAKER_01: But you no one's tracking it, no one's helping you with investment selection, no one's telling you, hey, that international fund you got's no good.
• 26:54
  SPEAKER_01: You know, so there's all that kind of stuff that goes on in there.
• 26:56
  SPEAKER_01: Sure, sure.
• 26:57
  SPEAKER_02: All right, last question.
• 26:59
  SPEAKER_02: This is I think the most important question, though.
• 27:03
  SPEAKER_02: So we all are we're busy, right?
• 27:07
  SPEAKER_02: And we are we're trying to do this right.
• 27:10
  SPEAKER_02: Um, you know, we're working, raising family, whatever it is.
• 27:14
  SPEAKER_02: Like, for whom is this a priority in the year 2026, right?
• 27:19
  SPEAKER_02: In this year, if you're listening to this episode, who should be the ones that prioritize this above many other things, right?
• 27:26
  SPEAKER_02: So give us the the demographics, like the financial financial demographics of who should be thinking about this right now.
• 27:35
  SPEAKER_01: It's cliche, I'm gonna put everybody.
• 27:38
  SPEAKER_01: Okay, everybody, all right.
• 27:39
  SPEAKER_02: I think so it's getting a little tighter.
• 27:41
  SPEAKER_02: Is it like a high earner?
• 27:43
  SPEAKER_02: Is it someone with a huge 401k balance?
• 27:45
  SPEAKER_01: I think the one year's retirement?
• 27:47
  SPEAKER_01: The big, big 401k balance.
• 27:48
  SPEAKER_01: Okay, big IRA balance.
• 27:51
  SPEAKER_01: Uh I mean, I'll stress this again.
• 27:53
  SPEAKER_01: You can have too much 401k or IRA money in the pre-tax.
• 27:58
  SPEAKER_01: Okay, we want to do as much as we can to save, do all that.
• 28:03
  SPEAKER_01: But just piling money blindly into pre-tax accounts is gonna cause tax nightmares down the road.
• 28:10
  SPEAKER_01: Just see it all the time.
• 28:12
  SPEAKER_01: It's I ne listen in 22 years of doing this, never once have I had a client complain about too much tax-free money in retirement.
• 28:22
  SPEAKER_01: Never once.
• 28:24
  SPEAKER_02: I would think that's the best way to wrap the episode.
• 28:26
  SPEAKER_02: You talk about tax nightmares and never complaining about tax-free money.
• 28:31
  SPEAKER_02: Aaron, this was very informative.
• 28:34
  SPEAKER_02: I try my best.
• 28:35
  SPEAKER_02: I appreciate it.
• 28:36
  SPEAKER_02: It's because of all those design, you have so many designations behind your name.
• 28:39
  SPEAKER_02: Hopefully, folks, you enjoyed this episode too on backdoor Roths, mega backdoor Roth's tax nightmares, and everything else in between.
• 28:48
  SPEAKER_02: If you did enjoy this episode, um make sure you give us a like, a subscribe, and share this with a family or friend that might be looking at converting uh into a backdoor Roth.
• 29:00
  SPEAKER_02: I'm your host, Tony Stick, joined by Aaron Simpson on this episode of Dime After Dime.
• 29:05
  SPEAKER_02: Until next time.
• 29:09
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• 29:11
  SPEAKER_00: To hear more episodes, follow us on your favorite podcast app and visit MoranWealth.com.
• 29:18
  SPEAKER_00: Moran Wealth Management LLC is an SEC registered investment advisor.
• 29:22
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• 29:26
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• 29:37
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• 29:51
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