Your Questions, Answered: Backdoor Roth IRA Conversion

December 17, 2020

On this week’s episode of Your Questions, Answered Meredith Rice and Brian Leitner discuss Roth IRA planning, and answer the following question:

“Is a backdoor Roth IRA conversion right for me?”

Do you have questions you’d like answered? Email them to [email protected], and we’ll provide answers.


Brian Leitner: You have questions? We have answers back with another quick clip. So, the question today is, I’ve heard of a Roth IRA, and I kind of understand that, but I just learned about a backdoor Roth IRA conversion and what that might look like. Is it right for me? So, Meredith, maybe you could start with, where do we go from here? What is this transaction? And maybe even back up a bit, just so folks understand what a Roth IRA actually is? 

Meredith Rice: Great. Let’s start with high level: What is a Roth IRA? A Roth IRA is an account that allows assets to grow completely tax free. It is a retirement account that has income limitations. Not everybody can actually contribute to it. That’s where the backdoor Roth conversion comes into play, and there are a couple of different ways that that can happen. The way that I would like to focus on today is something that a lot of people don’t know about, which is utilizing this backdoor Roth conversion through your 401(k) plan. So, there are options within your 401(k) plan. I think everybody is probably very familiar with the basic pre-tax opportunity that you have to contribute to a 401(k), which is, in 2020, $19,500. If you are over the age of 50, you get to contribute an extra $6,500 to that. There are also 401(k) plans that allow for you to make after-tax contributions. Now, unfortunately not every 401(k) plan does allow this, but for those 401(k) plans that do, you have an additional opportunity. Within some 401(k) plans, you have your pre-tax option, your Roth option and an additional after-tax option. When you are looking at making contributions to your 401(k), and you want to maximize, truly maximize what can go in there, then you can contribute your $19,500 and another, depending on your company match, up to a total of $57,000. The total amount that can go into a 401(k) in 2020 is $57,000, and a lot of people don’t know that. Once you take the $57,000, you back out what your company may match, you back out your basic pre-tax contributions. You can then contribute that difference in after-tax contributions. 

Brian: So that’s terrific. That’s a lot of money that you can sock away. Depending upon how you do it, a lot of that money could be on an after-tax basis. It gives folks the ability to manipulate their taxes to some degree in retirement, right? 

MeredithThat’s exactly right. Because then what you have the opportunity to do, if you are contributing after-tax dollars to your 401(k), is, if your plan allows for general withdrawals, you can then take that money out every single year and move it directly into a Roth IRA. And when you do that, all of those dollars take on the characteristics of a Roth IRA and grow 100% tax free once they’re inside of that account. 

Brian: It’s a terrific strategy for those who are looking to sock as much money away as they can and ultimately understand that it’s for the long term. So again, if they have the excess cash flow, if the expenses inside of that 401(k) and options inside of that 401(k) makes sense, it may be a great opportunity, and I love what you said. I know a lot of folks; they need to check with their human resources department to make sure that their plan allows for it. And if it doesn’t, they may be able to advocate for a change inside of that 401(k). 

MeredithThat’s right. And this is such a great opportunity, because our current laws allow for us to do that. I know it almost seems like it’s cheating, because it’s too good to be true, but it’s not. And I encourage people to do this if they’re able for as long as they can, because I don’t think this will last forever. 

Brian: It’s a great point. Most tax law doesn’t. Thank you very much for being here Meredith, and I greatly appreciate your time. 

MeredithThanks for having me, Brian. 

Brian: And if you or anyone else has questions they’d like answers to, they can feel free to email us at [email protected]. Thanks for watching. 

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