Transcript:
What is a backdoor Roth? And what are the steps to do it? I can grab this question. Okay, so a backdoor Roth is the idea is that you have an IRA account, and you add, it’s an empty IRA account, and you add non deductible funds into it. And then a later time, you then converted into a Roth. And so that’s kind of like you do these multiple steps. And you can, in a sense, backdoor it. And it’s kind of a gray area of doing this. You also hear things about a mega backdoor Roth, which is doing after tax contributions to a 401k. That, and then doing a similar kind of conversion on Mega backdoor is a little bit more troublesome because your company has to be able to do it, you have to be able to do in plan distributions. Depending on how your company accounts for the 401k, it may get, you may have a portion of being taxable. So you have to check with your company. But for a backdoor Roth is you want to have no money in IRAs. So if you have monies in IRAs, one way to get rid of it is either converted, or you can transfer into your 401k. And so you kind of need to start with a blank slate, otherwise, you’re gonna be paying taxes, because there’s this coffee and cream principle. And so that principle means that you have to combine all the assets into one kind of block, and then you China, you can’t just pick and choose what assets you’re taking out and converting. So that would be the first step. And then after that, you invest it, and you’d wait a year. If you’re more aggressive.
Some people say one statement, but usually you have to use kind of a step transaction. Because if the, if the IRS sees that, you put money into an IRA, and then you convert it instantly, they thinking this is considered one transaction, instead of and so you have to make it. So it seems like multiple transactions. And so that’s why there’s this one year rule. And so you’re in that one year, you want to invest it, and you’ll have some gains, but you’re only going to pay on the gains, you’re not going to pay on that whatever amount that you contribute after tax. And so that’d be funneled into your IRA or Roth IRA. And then over time, you just keep repeating these steps. So, you know, after you’ve converted the next year, you’d wait a couple weeks, and then you add more money to your IRA again, and so then you’d wait another year to do the Roth conversion. And so you keep doing this. And one thing is never put a note that you’re talking about this. It’s kind of this gray area. And so you don’t want a thing and Rick right in to talk about that.
Yeah, we’ve been asked several times about backdoor Ross, you know, around this time of the year that comes up, where clients will come in. And so you know, I’ve heard about backdoor Roth, I’m going to do backdoor Roth. And really what breaks it down almost every single time is that they have 300 or $500,000 in an existing IRA. And so if they put $7,000 with a catch up basis, you know, into that IRA, they can’t move that exact 7000 out. So they can only take a proportional bit. And so some of its going to be taxable. It’s a mess. So you’re right. I mean, the big issue is having no IRA. And you know, we don’t see that very often, honestly, people generally have it, although it does happen with somebody that has everything in their 401k they can do a backdoor Roth that way. So anyway, it’s it’s a really interesting area altogether. Yeah. It gets asked about a fair amount. So a little bit hard to execute.
Yeah, it’s weird, because it’s a bit of a gray area. So like, you never know, when the IRS was gonna decide. times times are changing, and we’re not gonna allow this anymore. So yeah. So you all do, you’re always wary of that.
Yeah. Yeah, that’s right. It’s a fairly small dollar amounts to for, you know, what we’re dealing with, you know, you’re capped at six to $7,000 a year, in that backdoor, Roth, mega, backdoor IRA, mega, backdoor rasa different thing that’s really to 401k can be a lot more money. But just the backdoor Roth is just dealing with an IRA, is it’s somewhat limited into what you can actually do with it too, but definitely worth looking at if you’re in the right situation.
Yeah, and you this is always when you’ve, you know, exhausted all your other methods, right. So like, say, I make too much money to contribute to a Roth IRA. Right, Max, my 401k I don’t have a Roth 401k. So this is where you kind of have to think about now I’m starting to get into more complex and kind of more niche conversions.
Yeah, yep, that makes sense.