Category Archives: Investing

Mega Back Door Roth: This Supersized Option is Good for your Health

This topic has come up for me twice in the last week, so as is often the case, I’ve made it the topic for my newsletter this month.

I often get asked about the best strategies for saving outside of one’s 401(k).

My first caveat is that one size does not fit all, so what is a great solution for your neighbor may not be the best strategy for your situation.

I’ve highlighted in past newsletters the benefits of saving into an HSA, if you have one.

There’s also the option to contribute to an IRA, but regardless of which type of IRA you are to contributing to (deductible, non-deductible, ROTH, backdoor Roth), you are limited to how much you can contribute each year ($6,000 for 2020, $7,000 if you are over 50).

But what if you are in the fortunate position to be able to save more than this?

Introducing the Mega Backdoor Roth

There’s a little known strategy that I’m seeing as an option with more employers as of late. It’s the option to make after-tax contributions to your 401(k).

This strategy can offer tax diversification in retirement, but there are certain criteria that make it most effective.

It’s known in my industry as a  “Mega Backdoor Roth”, but you will not see it described that way in your benefits guide. It allows you to sock away more into retirement than the annual limits on a 401(k) or IRA.

Here’s how it works:

  1. Your 401(k) plan (your employer) allows after-tax contributions. If they don’t, game over.
     
  2. Your employer offers in-service distributions of these after-tax contributions to a Roth IRA while you are still employed or allows you to move the after-tax potion of your 401(k) to the Roth 401(k) part of the employer plan (if they offer one).

    If not allowed, game might be over, but not necessarily. It depends.

    I know, you hate when I say that. 
     
  3. You convert the after-tax contributions to one of the above as soon as allowed in order that the growth on your contributions is tax-free. You will now have a Roth IRA in retirement where there are no RMD requirements and distributions are tax free. Game changer.

When MIGHT this strategy be an effective strategy for you?

  • You already max out on your 401(k) contributions.
  • You max out on your HSA, if your employer offers one.
  • You make too much money for traditional IRA contributions to be deductible.
  • You max out a Roth IRA or backdoor Roth ($6,000 for 2020, $7,000 if you are over 50).

As with most financial planning and tax strategies, there are a lot of ins and outs and I try to stick to top level highlights to educate and make you aware of possible options available to you.  Consulting with your financial advisor or CPA is always prudent to determine which strategies are your best fit.

Financial Fitness Tip

Speaking of 401(k)’s, we are quickly approaching the end of 2020 (thank goodness). It’s a good time to check where you are with your 401(k) contributions for the year. You may have dialed back the % you contribute when things got a little coo coo in the markets or you had a temporary need for increased cash flow.

If things are looking brighter in your financial world, increase your % for these last few paychecks of the year and into 2021. And if there was never a hardship yet you are not maxing out, consider increasing it a percent or two now.

Little steps carry us a long way over time.

Things I Love

I will be pulling out my mom’s tattered and stained copy of her mom’s recipe to try to match what my grandmother used to create – a true masterpiece! I can never quite match it (my mother always said the same thing when she made it), but I can try.

And besides, it’s simply the tradition of making it and remembering them both that is my true Favorite Thing!

Happy Thanksgiving!

Wowzer, What a Week

A fun meme was going around on Facebook last weekend that said:

“Just a Warning, this week is starting by changing the clocks, has a full moon and ends with Friday the 13th. Good Luck People.

P.S. Don’t forget to wash your hands”.

As it turns out, that warning did not do the week justice as far as the stock market and our investment portfolios are concerned.

It happened whiplash fast.  A week where the biggest warning for the coronavirus was to wash your hands and stay home if you feel sick ended with many of us feeling quite sick, but not because we had the virus.

This past week ended a record breaking 11 year bull run as the major market indices officially entered bear territory, defined as falling 20% or more below their all-time highs.

Because in this life none of us can predict the future, we rely on what we know and have learned from the past. But there is always that underlying itch that says, “but is this time different”?  In talking with my friend and colleague Michelle this past week, also a financial advisor (a phenomenal one I will add), she remarked, “‘this time’ is always different, but also not different”. Meaning, it’s a new catalyst that pushed our markets into bear territory this week, but not different because we’ve been here before, and each time, the market eventually recovers and investors continue to make money in their portfolios.

So, following this crazy week, I thought I would share with you a compelling video by Loring Ward that depicts the value of $1 invested in the Total US Stock Market in 1927 and if left untouched, the value that single dollar would be today.

It gives a great perspective on the long term effects of “bad news” and “bear markets” on the overall stock market.

It covers over 90 years in about 3 minutes, so stick with it to the end for an inspiring quote from legendary investor Warren Buffet.

This clip will eventually be updated to reflect this past week and whatever the weeks and  months ahead will bring, but I remain confident that history will again repeat.

None of this is to say it’s easy to watch our portfolios take a hit.  It’s a punch in the gut and it takes resilience to stay the course.  But when we ride the wave, history shows us that staying in the market is the best place to be for the long game.