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Description
The natural appeal of a Roth-style retirement account is the potential for tax-free growth for life. However, the reality is that creating a Roth account has a “cost” – the upfront tax liability of contributing to (or converting into) the account, which is avoided with a traditional pre-tax IRA or 401(k). As a result, optimal Roth strategies involve not merely contributing to or converting into Roths, but managing the timing and leveraging the available tax law to maximize the strategy. In this session, we explore techniques to maximize Roth contributions, including so-called “Backdoor Roth” IRAs and “Mega Backdoor Roth” 401(k) strategies, and leveraging the Roth recharacterization rules to optimally fill lower tax brackets, and be able to ensure that an investment in a Roth has a positive return before being required to commit to it!
Learning Objectives
Compare and contrast the basics of a Traditional versus Roth IRA.
- LO #2: Explain the tax equivalency principal and calculate the amount of after-tax contributions needed to equal the same amount of pre-tax contributions given various tax rates and pre-tax contribution amounts.
- LO #3: Identify the “Backdoor” Roth IRA strategy and the considerations for using it.
- LO #4: Identify the Mega “Backdoor” Roth IRA Strategy and the rules for successfully implementing the strategy.
- LO #5: Explain partial Roth conversion strategies and the additional tax planning flexibility they provide.