Week 35: Save More, Tactic 9

What can you do this week?

• Review your annual retirement savings goal amount.

• If Roth IRA or 401k contributions are not a part of the mix or you earn too much for a Roth IRA, consider non-deductible contributions to a Traditional IRA, then convert that amount to a Roth IRA.

• This is easiest done in a lump sum contribution before April 2025 for this tax year. The contribution basis needs to be recorded in IRS Form 8606.

Why More Roth Dollars Matter

• Having some tax free dollars accessible in retirement can help provide some tax control.

• When taking withdrawals from different account types, you can blend and choose how much to pull from which type, depending on your needs and income sources.

• Very few people will withdraw their whole account value at once but you will owe tax on distributions as they are taken with an IRA so conceptually, the IRS already has a claim on a portion of that account.

  
  

  If the above retiree was near a higher tax bracket, the IRA withdrawal may put them over while the Roth distribution would not.

  It’s Not Been Available To All

• Roth accounts require you have earned income and your modified adjusted gross income needs to be below a limit.

• This has meant high income earners were excluded from contributing to a Roth IRA.

• The Roth 401k does allow for these same tax advantaged distributions in retirement if your employer provides it.

  

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Another Option Is Through The Back Door

• In addition to the Roth 401k, another way to contribute more for retirement with potentially tax free distributions is the Back Door Roth IRA.

• Non-deductible contributions to a Traditional IRA can be converted to Roth IRA as a work around.

Why Save This Way?

• The Back Door Roth IRA can top off your retirement savings efforts as a high income earner.

• The simple top off tactic could mean as much as $300k+ in retirement assets in 20 years if you max contribute and earn 7% rate of return.

• There is another Mega Backdoor Roth that we will cover in the future that (as you can guess by the name) really levels up this tactic.

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