TRANSCRIPT: 
Knocking before entering isn’t just polite, it’s essential when navigating the backdoor to a Roth IRA. Forget to knock, you might find yourself facing a hefty tax penalty. So, let’s ensure we’re properly reporting our tax strategies to the IRS. The form of knocking in this case is properly reporting your tax strategies to the IRS. Hi, I’m Hunter Brockway, founder of Boca Retirement Strategies, here to guide you to a successful, stress-free retirement while spending more and avoiding being killed in taxes. No matter how savvy your tax strategies are, improper reporting can nullify their benefits. Today, I’m here to demystify the process of executing a backdoor Roth. As of the time of this recording, at least, the backdoor Roths are still a legal practice by the IRS, although they have been on the proverbial trobbing block many times. Despite its name, a backdoor Roth isn’t some clandestine tax evasion scheme. It’s a legal method recognized by the IRS.

But failing to notify the IRS about this move can turn it into a taxable event. Before diving into the nuts and bolts, let’s recap. A backdoor Roth involves contributing after-tax dollars to a traditional IRA and then converting them into a Roth IRA. This strategy is particularly useful for high-income earners who are barred from the direct Roth contributions. Someone somewhere put a clicky headline on it and that everyone else had to simply follow suit. I like to consider myself a simple man, an easygoing person, so just a small rave for those of you out there like me. Of course, you still need to make sure that this strategy is the right one for you and you’re looking to level out of your lifetime tax bill. This strategy is not for you if you are solely doing it to sound cool at the gala. Personally, I think it’s even cooler to say you’ve evaluated a strategy and decided it’s not for you due to potentially higher Medicare bills or changes in tax rates or fluctuations in income or affecting Social Security income or legacies left to charity or other reasons which we dove into in previous videos titled Why Not Convert to Roth?

If you’re still with me here at Hold On To A Rollercoaster of Rants and Disclaimers, now we can get into some of the meat and potatoes. The first key to successfully completing any backdoor Roth, again, Roth conversion, period, is making sure you don’t have any pre-tax dollars in any IRAs. Not just from the IRA you are converting from. If you do, the IRS implements a pro-rata rule. This pro-rata rule says if 80% of your tax-deferred IRA has pre-tax dollars, and 20% has post-tax, we consider 80% of your conversion taxable. It doesn’t matter if you’ve contributed $20,000 post-tax and you’re converting $10,000 of it. If you do have pre-tax dollars in your IRA, there are some ways you can separate the cream from the coffee, as we call it. The most effective way to do that involves moving money from a traditional IRA to a workplace
retirement plan, then ideally back again.

That itself could be an instructional video, so we are going to continue moving forward assuming you have no pre-tax dollars inside of any traditional IRS. The first key number you want to remember in this process is 8606, that’s IRS form 8606. This form is the lifeblood of ensuring your strategy is recorded correctly. Form 8606 records your basis to the IRS so you don’t make a conversion, you aren’t double taxed on your dollars. The first step is making a contribution to a traditional IRA with after-tax dollars, minding IRA contribution limits. We are not discussing the mega backboard Roth today, which involves you contributing after-tax dollars to your 401k. The small contribution limits of an IRA may not seem worth it right now, but when you consider the compound interest and potential for large one-time distributions in retirement, the math can make sense. So you’ve made your contribution. You wait.

Although backdoor Roths are legal, there is some language in gray area that says along the lines of the transactions should be separate. But there’s real clear language that says you need to wait one month or six months apart between contributing and converting. So keep track of these dates. Step 3. Make a Roth conversion from your traditional IRA to your Roth account with your custodian. Step 4. Properly file Form 8606. Step 5. Review your tax return. Ensure the conversion was not reported as taxable income. This will show online four of your Form 1040 on your tax return. But there’s more that can go wrong. Key items to watch out for in backdoor Roths include not minding the five-year rule or Roth distributions. Again, as previously mentioned, the pro rata rule. When separating cream from the coffee, sending money back to the traditional, IRA cares about is the balance of the IRA on 1231.

Complete a rollover of an employer retirement account into your IRA in the same year you made a conversion, therefore creating basis, as I mentioned in the last point. Making sure there are no forgotten IRAs with pre-tax dollars. Again, you can’t have any pre-tax dollars in any IRAs anywhere, not for someone you’re converting from. Any growth inside of the IRA, if you contribute after-tax dollars, then invest the money, then convert that money, the growth is taxable at income tax rates. Continue to track IRA basis. Remembering that form 8606 is filed per person, not as a married couple. The list of pitfalls rather than making their backdoor Roth are more work to look out for than the converted self-actuators. Maintain basis via form 8606. Ensure the tax strategy you select is best for your lifetime tax bill.

Pay an extra hour of your CPA’s time because it doesn’t matter how many tax strategies you implement if they’re not reported properly. And last, subscribe to our YouTube channel. If you’d like to learn how we handle tax strategies for our clients so they can remove stress from their financial lives, let’s have a simple 15-minute chat. You can book that on our website at bogupretirement.com or email us at contact at bogupretirement.com. Enjoy your successful retirement and thank you for watching. Bye.