How to Use a Backdoor Roth IRA for Retirement Savings
Have you written off Roth IRAs because of income limits? There's a legal way to max it out every year - the Backdoor Roth IRA.
Get tax-free retirement growth and income with the Backdoor Roth IRA. Learn exactly how to do it (it's easier than you think) in this solo episode. We'll break down the benefits, legality, and even explore the Mega Backdoor Roth option.
Listen now and discover how a Backdoor Roth IRA can boost your retirement savings.
Time Stamps
01:01 Understanding Roth IRA Basics
01:32 What is a Backdoor Roth IRA?
02:31 How to Implement a Backdoor Roth IRA
03:35 Benefits of a Backdoor Roth IRA
04:00 Planning for Retirement Expenses
04:23 Diversifying Your Retirement Accounts
04:42 Living on Passive Income
05:28 Mega Backdoor Roth IRA Explained
06:18 Pros and Cons of Mega Backdoor Roth IRA
07:03 How to Execute a Backdoor Roth IRA
08:13 Final Thoughts and Recommendations
08:33 Closing Remarks and Listener Engagement
-
Introduction to Me Financial Podcast
Welcome to Me Financial, the podcast designed to inspire your financial life. Hi everyone
and welcome to the podcast. I am Michelle Moses, your host, and today we are going to be talking about a backdoor Roth IRA. And I think these are really confusing for people. The most, the majority of people that I talk to about backdoor Roth IRA they've heard about them, but they think that they're not for them, or it's maybe just a little bit too complicated and they don't know how to implement it or if it really just goes with their life and what their finances are.
So I want to talk about them because I would say over the years they've become so simple for me that I really don't want them to be such a big deal in your head because if you were going to be able to contribute to a Roth IRA, you know how to do that, right? You would, you're like, okay, I'm going to contribute to my Roth or I'm going to contribute to my regular IRA.
Understanding Roth IRA Basics
And for those of you that don't know, a Roth IRA is an IRA that you contribute to where you do not get the tax deduction. So you have a regular IRA where you do get the tax deduction and then you don't have to pay taxes on that money. But then when you pull the money out, you have to pay taxes on it.
But with a Roth IRA, you put the money in and it grows tax deferred. But you do not get the tax. So you always got to pay. Taxes on your money one time. Otherwise, it's not yours. That's kind of how you got to think about it.
What is a Backdoor Roth IRA?
So a Roth IRA Back to a Roth IRA is something where you have income that is too high To actually get it into a regular Roth IRA.
You're you know, you're you're CPA, or your tax preparer has said, no, you make too much money. You cannot put your money in into a Roth IRA every year. And then most people just go, okay, well, I'll just contribute to my 401k or my simple IRA or whatever you might have set up for your business. And I think when you have enough money, extra.
So if after you are putting money away and you need the tax deduction, you're putting money away into your 401k or your simple IRA, whatever you might be using. if you have money left over, I think a backdoor Roth IRA would be really great tool to use because you do not have the upper limits on your income.
And essentially all you're doing is filling out another piece of paperwork. That's really all you're doing.
How to Implement a Backdoor Roth IRA
Because, but to do a backdoor Roth IRA, you're going to take your money, let's say it's this year, you're going to take 7, 000. You're going to deposit it into an IRA and then you're going to immediately fill out a form and say, Hey, convert this over to a Roth IRA.
And then it goes into your Roth. A backdoor Roth IRA is literally that. It's just that you can't directly deposit it into your Roth. It's that you have to go in through the regular IRA and then move it over. I have seen this on Reddit a lot on like the Henry website. Threads. I know I'm not, that's not what they call them, but, on the Henry threads, which is high earners, not rich yet.
And so I read a lot of these personal finance things on there and people are always wondering what to do when they max out, you know, Hey, I've already saved a ton of my, 401k. I've been saving in my kids five 20 nines. I'm saving in my HSA, you know, all these things. They don't know what to do with their money next.
And a backdoor Roth IRA is a great way to do it.
Benefits of a Backdoor Roth IRA
The other reason I really love a backdoor Roth, IRA, and this is kind of the kicker and why I push people to do it, is because when you get to retirement, you do not want all of your eggs in one basket. You don't want that all in a regular IRA or a 401k and things that have not been taxed yet.
you want some money either in a Roth IRA or life insurance or somewhere else that is like cash that you can get ahold of
Planning for Retirement Expenses
Because as you retire, you're going to need extra things, right? I need to buy a car. We need to update our kitchen, things like that. Whereas you're taking out your normal amount, but then every single time you take out extra money, it's going to be taxable.
And you, it does, weigh on you a little bit, you know, like you don't want to take out too much every single year.
Diversifying Your Retirement Accounts
And so every, I want people to kind of diversify their Roth IRA and their regular IRAs and have money in both of those when they retire. And the other thing you want to do, and this is also from a previous, episode in my episode of, wearing black socks with sandals and living your life.
Living on Passive Income
So one of my favorite titles, is where we talk about living on passive income. And a lot of times what I try to get people to do is get that Roth IRA up because What you can do is put an investment in there and then you're going to live on the proceeds of that investment and By living on that it's tax free So you've got some money coming out of your Roth IRA that you're making on that investment You've got some money coming out of your IRA and then you've got your social security or pensions or whatever else that you have making up the bulk of your money.
And so this is why I really want people to get their Roth IRAs to a large enough amount that it could kick off some income in retirement.
Mega Backdoor Roth IRA Explained
Another thing that is popular right now is doing what's called a mega backdoor Roth IRA. And so a mega backdoor Roth IRA is not just doing the 7, 000, but it is, So it's funding your 401k and then actually overfunding it.
So let's say you put in 24,000 into your 401k. and then you put in another 20, 000 and it's not eligible to be taxed to get the tax deduction. You would take that 20,000 and you could convert it into a Roth IRA. It depends on the plan. So you cannot do this with everything, but if you do some research online, there are plans out there where you can do a mega backdoor Roth IRA, and that will allow you to use your extra money to get it into a Roth IRA.
Pros and Cons of Mega Backdoor Roth IRA
And this is good because then it can grow tax deferred. The only downside that I would see for that would be that you just don't have cash. You know, like, there is a reason that the term cash is king, because it really is. I mean, when there's down times and there's a recession, or people need loans, you know, stuff like that, if it's not in an IRA, it makes it a lot easier to do the investment.
Whereas when you have these IRAs, it's just, it's a lot more paperwork. It's just a lot more cumbersome. There's certain things that you can't invest in. But you know, for someone that, it really is trying to supercharge that Roth IRA and get some money in there, I think a mega backdoor Roth IRA, or at least go for a Roth IRA.
How to Execute a Backdoor Roth IRA
Just commit to doing a regular backdoor Roth IRA every year of the seven or eight thousand dollars depending on How old you are it just depends on what year it is You can easily do a Google search and see what the maximum amount is or don't do the max if you can't afford it Just do some But it really is just a simple piece of paperwork where you're going to deposit into a regular IRA And then you're gonna do a what's called a conversion.
You're gonna You Submit a piece of paperwork to do a conversion to a Roth IRA and just try to do it, you know, within the week of each other so that you don't forget is my, is one of my, pieces of advice. And then you can fund that every single year. And it is the same as, you know, you've got your taxes.
When you are, you have to file by April 15th. It's the same thing you have until April 15th to do this one also. So, I really think it's a great tool that can be used that people think is cumbersome, but it's really not. It just needs to be explained in a way that I think is easier for you to understand.
And you also just need to really have the income to be able to do it.
Final Thoughts and Recommendations
I mean, if you don't have the money, extra after you're saving into your retirement, I totally get that, but if you do have the extra money and you're looking for a place to put it, instead of putting it into just like another brokerage account that's an individual or a joint account, I would really recommend doing a backdoor Roth IRA instead.
some way, shape or form.
Closing Remarks and Listener Engagement
You guys, thank you for so much for listening. If you have any questions about this, feel free to reach out. Let me know if you have any other topics and please leave me a review. If you scroll down to the bottom of my show, just leave me a starred review or even write a review if you want.
I would really appreciate it. It helps the algorithm a lot. Thank you so much for listening.
Disclaimer: The information provided in this podcast is for general informational purposes only and should not be construed as professional financial advice. Always consult with a qualified financial advisor or professional before making any financial decisions. The hosts and guests of this podcast are not responsible for any actions taken based on the information presented.