Your browser does not support JavaScript
 

Blog & News

High Income Professionals Can Still Enjoy a Tax Free Roth IRA to Help With Tax Efficiency in Retirement
Posted By:  Chris Allen, CFP
Tuesday, April 28, 2020

Backdoor Roth IRA

During the past 25 years of providing financial guidance, I continue to be surprised by how many intelligent young professionals we see leaving money and opportunity on the table when planning for their futures. Many have Carpe Diem focus and subsequent inaction across many industries, but the most common company we see this is at Proctor & Gamble. If I can enhance at least one family's retirement with this post, I would be happy.

As background, P&G has rewarded previous generations of employees with generous contributions to the PST plan. The stock has grown and allowed for a very prosperous retirement for those loyal P&G'ers. It's reasonable to expect the current generation of employees will not share the same financial independence and prosperity unless they take action outside the PST plan. If you can relate with having a great salary, and are unsure if you are doing all the right things to make your financial goals much easier to attain, please read on.

The largest overlooked opportunity I see is the ability to make annual Roth IRA contributions (maximum of $6,000 in 2020).   Additionally, if you’re blessed with high income (i.e. $124,000 for single; $196,000 for joint taxpayers) and the correct mix of existing investment accounts, you may still be allowed to make Roth IRA contributions using the backdoor Roth strategy (insert link).  Most people have heard of a Roth and likely understand the tax-free benefits, but perhaps haven’t felt the urgency to incorporate into their distant retirement plan.  I like to say “Your not-to-distant future requires your immediate attention.“  My firm has helped families late in their lives who hope to retire with only their 401k.  Many P&G retirees fit this profile unfortunately.  While it can work, it is not ideal since you will have limited ability to create a tax-efficient retirement distribution strategy.

For reference, here’s how the backdoor Roth strategy works.   If you are employed and earn at least the annual contribution limit, you can make a non-deductible contribution to a Traditional IRA regardless of income.  When you make a non-deductible contribution, it is important to file IRS form 8606 with your tax return to avoid paying taxes on the money twice.   After the contribution is complete, you can convert the traditional IRA to a Roth IRA.  This strategy works optimally when you do not have another pre-tax IRA account (inherited IRAs and 401k’s are ok) because existing pre-tax money that is converted from a traditional IRA to a Roth IRA is taxable in the year of the conversion and cannot be reversed under current law.  However, any post-tax money that you convert from a traditional IRA to a Roth is not taxed when converted.  Finally, once funds are in your Roth IRA, any future growth and withdrawals are not taxed to you or to your beneficiaries.

If you can relate and want to take advantage of investment opportunities beyond your 401k plan, I would encourage you to discuss this with your financial advisor.  If you do not have one, I invite you to have a conversation with a Certified Financial Planner on my team or a fee-only Fiduciary found at www.NAPFA.org.



 
 
Subscribe To Our Blog

Blog Categories

  • In the News
  • Business Owners
  • Charitable Planning
  • Client Experience
  • College Planning
  • Estate Planning
  • Executive Compensation
  • Firm Updates
  • Investments & Market Updates
  • Retirement Planning
  • Security & Privacy
  • Taxes
    • 04/28/2020 - High Income Professionals Can
    • 03/26/2020 - Coronavirus Stimulus Package -
    • 01/24/2020 - 2020 Major Tax Law Changes
    • 12/23/2019 - 2019 Year End Tax Planning Str
    • 10/16/2019 - Ohio Homestead Exemption
    • 05/30/2019 - Increasing Taxable Income as a
    • 04/18/2019 - Why You Should Provide Your Ta
    • 02/12/2019 - Reducing Your Real Estate Taxe
    • 12/04/2018 - Payments to the IRS through "D
    • 08/01/2018 - Value of Roth Conversions
    • 06/18/2018 - Charitable Gifts from your IRA
    • 04/27/2018 - The Tax Saving Power of a Heal
    • 12/21/2017 - Tax Cuts and Jobs Act of 2017
    • 11/03/2017 - 2017 Year End Tax Planning Str
    • 10/19/2017 - Tax Preparation is not Tax Pla
    • 09/17/2014 - 2013 Obamacare Taxes for High
    • 09/17/2014 - American Taxpayer Relief Act o
  • Financial Planning
 

INVESTMENT
MANAGEMENT

Your investment philosophy should be grounded in academic research and financial science. Our team will build you an investment portfolio that aims to give you the highest probability of achieving your goals with the least amount of risk.

Learn More
 

RETIREMENT AND
TAX PLANNING

Figuring out how to recreate your paycheck or developing a spending policy should not be an overwhelming exercise. Our team has the expertise to help with retirement portfolio, tax strategies, distribution planning, social security maximization strategies and more.

Learn More
 

HOLISTIC/COMPREHENSIVE
PLANNING

We’ll have discovery conversations, gather and organize your data, then craft comprehensive plans to achieve your life and financial goals. As our ongoing commitment, we consistently monitor and tweak your plan to ensure you’re on track and surprises are minimized.

Learn More

WE'VE BEEN LISTENING
FOR OVER 30 YEARS

Life brings many transitions. Find the right advisor to fit your needs on a fee-only basis, and take the first step in the journey. Total Wealth Planning's team of Certified Financial Planners® guides Cincinnati families and associates through transition.


Total Wealth Planning Associations
WE ARE PROUDLY ASSOCIATED WITH

CONTACT INFO


 

WHAT'S NEW AT TWP


       
CORPORATE EXECUTIVES

WEALTH-BUILDING FAMILIES

RETIREES

BUSINESS OWNERS
ECONOMIC OUTLOOK

BLOG & NEWS

VIDEO LIBRARY

FORM CRS
   
4665 Cornell Rd. Suite 160, Cincinnati, OH 45241 4665 Cornell Rd. Suite 160, Cincinnati, OH 45241
513-984-6696 513-984-6696
info@twpteam.com info@twpteam.com
The Potential Hazard of Investing in the S&P 500 Index
Thursday, July 30, 2020


SEE MORE >

Follow us on Google+
Blog & News
Follow us on Twitter
Find us on Facebook
DISCLOSURES | COPYRIGHT © 2020. TOTAL WEALTH PLANNING. ALL RIGHTS RESERVED.
GET STARTED
READY TO
GET STARTED?