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The Greatest Tax Hack Ever? (backdoor Roth IRA explained) - YouTube
Channel: Wealth Hacker - Jeff Rose
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let's face it if you could screw the IRS
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and get away with it chances are you
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would take full advantage now I'm all
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about paying the right amount of tax the
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appropriate amount of tax but I don't
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want to pay more taxes and I have to and
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if I can legally pay less then I'm going
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to take full advantage of it well today
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I'm going to share with you a strategy
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that allows you to legally I repeat
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legally to screw the IRS where to find
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out what that all is right now what's
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going to y'all welcome back to the
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channel wealth hacker labs as you can
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see we have another edition of the
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wealth board and we are talking about
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the backdoor Roth IRA one of my most
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favorite ways that you can legally screw
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the IRS and we'll talk why that is how
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you do that first if you do not know
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what the Roth IRA is I highly encourage
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you to check out the video where I talk
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about how to become a Roth IRA
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millionaire I'll have the link in the
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description you get all up to speed on
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the Roth IRA I also have link to my blog
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where I share about the Roth IRA rules
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so that you get how it works once you
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get how it works this will make so much
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more sense and you'll see why you should
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be excited to watch it alright so if you
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don't know about the Roth IRA it is one
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of the greatest tools for building
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wealth most reason why is because you
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get tax free money that's right the are
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the Roth IRA allows you to accumulate
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tax-free money but there are certain
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situations where you can't take
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advantage of it and I know this this is
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what we call rich people problems but if
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you make too much money then you can't
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contribute to the Roth what are your
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super powers again I'm rich now I am one
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of those people that suffer from rich
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people problems I haven't been able to
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do take advantage of the Roth IRA for
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several years now explain why that is
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actually us the debt right now alright
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so first off you can put only in a
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certain amount each year into the Roth
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IRA and this is as of 2020 if you were
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under the age of 50 you're allowed up to
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$6,000 if you are over the age of 50 go
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ahead and add
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extra $1000 that you can put in so
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that's how much you can put in each year
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now if you are married you can't have a
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joint Roth IRA you can open up one for
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yourself and you can open one up for
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your spouse and combined you can put in
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up to 12,000 but once again if you are
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rich and you can't take advantage of it
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you're just kind of sitting on the
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sidelines you know feeling sorry for
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yourself so what does that mean what
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what is the IRS defined as being rich so
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if you are single and you make less than
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one hundred and twenty four thousand
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dollars this is a modified adjusted
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gross income so basically you're
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deducting all your expenses so if you
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take apart expenses and it is less than
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one hundred twenty four thousand
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congratulations you still get to take
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advantage of the Roth then we begin this
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phase what's called a or a stage what's
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called phase out so in between a hundred
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twenty four thousand to a hundred and
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thirty eight point nine thousand is when
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you start losing that ability to put
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into the Roth so if six thousand is the
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max that you can put in it starts let's
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say you're making about 130 thousand now
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you can only put in about three thousand
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I'm just rounding about there but you
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can go the IRS go find the calculator to
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find out how much you can put in and if
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you are rich according to the IRS that
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means if you're filing single that means
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you are making more than a hundred and
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thirty nine thousand dollars that means
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boo-hoo-hoo you can't do the raw
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now if you're like myself you're married
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once again I can do six thousand for me
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or six thousand for my wife or other
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both if we didn't exceed these limits
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but married filing joint the income
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modify just modified adjusted gross
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income is a hundred and ninety six
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thousand dollars that's where it starts
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and then we start phasing out between
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196 to 205 and nine and then if you are
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making more than two hundred and six
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thousand dollars join the fun party of
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being able not to take advantage of the
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Roth IRA so here you are sad because you
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can't do the Roth but guess what there
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is what's called the back door approach
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there's a way that you can get in
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through the back door now how this works
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is so you can't do the Roth you can
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still do your 401k if you haven't your
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job if you have a simple or a SEP IRA
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through your employer you can do that
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but what you can also do is open up
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what's called a well you know the
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traditional IRA and we'll have another
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video we can talk about the differences
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but essentially the same thing with the
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traditional IRA is that if you make over
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a certain amount and you're putting away
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into your 401k at some point time the
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IRS is going to say ok you can put into
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a traditional IRA but we're not going to
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give you the tax deduction so what it is
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called then is a non-deductible IRA just
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another way of what is referred to as
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the traditional traditional IRA so
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non-deductible means exactly that you
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cannot deduct it from your expenses when
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you compare the two the Roth first of
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the traditional the Roth you're going to
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get tax free growth don't have to pay
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any taxes when you take it out but with
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the traditional you get that tax-free
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deduction at the beginning just like you
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would a 401 K so that's the attraction
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so if you are putting into a traditional
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IRA and you don't get the tax to duck
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yes you get the tax deferral protection
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button that like that's not really that
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exciting except if you want to take
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advantage of the backdoor Roth IRA so
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how would that work so you would open up
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a traditional IRA you would put let's
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say the full amount six thousand dollars
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into that and then you immediately turn
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around and then you would convert it to
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a Roth IRA and is that a lengthy
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involved process no it's actually just
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filling out a simple form you file with
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the IRS just says hey I want to do a
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conversion from a traditional IRA to a
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Roth IRA and then boom that's it is
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there a catch yeah I'm glad that you
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asked us so if you already have some
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pre-tax money how much you paying taxes
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on this conversion can be a big deal and
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is one of the reasons why I haven't
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taken advantage of this strategy just so
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much because ever since I've been in the
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highest tax bracket so how this looks as
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let's say you've got sixty thousand
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dollars in your 401k it's all been
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pre-tax you can put money away take
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advantage of that free match and then
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you want to do the six thousand dollars
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into the non deductible IRA so now what
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the IRS is going to look at is what is
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the percentage of how much you're going
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to put in compared to what you already
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have pre-tax so this is a simple math
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formula that's why I chose it didn't
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have pulled my phone and break out the
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calculator but we are looking at 10% of
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our non deductible IRA that we are
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converting that we have to pay tax on so
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we're paying tax on 10% of that 6,000 so
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now we're looking about $600 of that
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which now it depends on what is our tax
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bracket so we are just adding the $600
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to whatever income that you
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for the year and then whatever tax
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bracket you fall into is how much tax
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you pay on that amount so let's say
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you're in the 28 percent tax bracket as
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an example take 20 percent times the 600
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and you get a sense of how much tax
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you're going to have to pay but as your
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401k contributions grow as your accounts
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grow it came a point for me we're doing
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the non-deductible IRA and then
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converting it I was paying 40% off the
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entire balance I can still probably
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justify it to do it that way it just
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didn't really make sense because what I
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did what I was able to do is preload
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the Roth IRA utilizing this strategy but
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in a slightly different way so this is
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one way that you can do it a few things
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to take note is that just here recently
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2020 if you did this and you changed
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your mind you could do a Roth IRA
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conversion take back IRS took that away
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screw you IRS screw you so now if you do
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it
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you ain't no going back like you've made
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that decision you got to stick with it
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so let me give you a personal example
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how I was able to take advantage of the
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Roth IRA conversion this was a way to
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get a big chunk into the Roth IRA at one
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time we've been talking about doing the
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non-deductible IRA and converting that
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into the Roth IRA but if you have let's
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say a old 401k if you have an old SEP
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IRA simple IRA or even a 403 B so these
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are old retirement accounts that means
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that you are no longer working for this
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company or this employer so they're just
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sitting there with the plan you have the
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ability to convert all of this just like
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you would a non-deductible IRA into a
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Roth IRA what did I just say that yeah
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so I'm actually this one will give you a
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real-life example I left my
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first brokerage firm company I started
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with was there for five years I was able
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to save up at the time I believe it was
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around $40,000 into my 401k I left and I
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had to decide if I was going to convert
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that into a Roth IRA now if you are
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going to convert anything especially
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this large amount you gotta ask yourself
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two questions one can you afford to pay
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the tax and then to do you want to do
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you actually want to pay the tax so what
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I mean is if you are converting all of
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this so in my situation there were no
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other pre-tax retirement contributions
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so this is all I had so I had to claim
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all of this as income so I would have
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had to add forty thousand dollars of
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income on top of what I'd already made
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for the year that could have put me up
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in the higher tax bracket etc and then I
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would have to pay that out-of-pocket if
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I didn't then I would be taxed and
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penalized for that tax amount so you got
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to make sure that one can you afford it
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into do want to now here is the
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situation where it worked out really
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well for me is that whenever I left this
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is back in about 2008 and for those that
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don't know this don't remember maybe you
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just weren't investing this is when the
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market that year was down 37%
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ouch now for me I was invested a little
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bit more aggressively then I guess I
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don't see the market but just a little
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bit more aggressively so my account was
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down about I want to say $24,000 so I
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was then able to convert the $24,000
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into the Roth and then only pay tax on
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the 24,000 instead the 40,000 and
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because I know that markets come around
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and the the investments that I own would
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recover like I knew is like I'm
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basically able to
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by low again and then take advantage of
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the tax-free growth this all this
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account my Roth IRA primarily holds
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individual stocks right now I should
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check the balance I think it's somewhere
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between a hundred to a hundred and fifty
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K right now and I haven't added any more
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money to that so this is going back to
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2009 when I converted it into the Roth
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IRA and the twenty four thousand now has
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grown to be a hundred hundred fifty
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depending on how well the markets doing
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how well those stocks are doing and that
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gain that gain is all tax-free when I
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decide to take it out and that is an
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example of how I got to legally screw
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the IRS and how you can legally screw
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the IRS as you can see there are some
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moving parts here right so if you want
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to do if you are one of these high-wage
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earners where you are phased out you
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cannot do the Roth guess what you still
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can that's what's called the backdoor
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Roth IRA the other options this there
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are no income restrictions on this like
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if you want to convert an old 401 K an
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old SEP IRA some other traditional IRAs
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into that like it doesn't matter how
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much you make you can do it just know
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that whatever you do you are going to
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have you you're gonna have to pay some
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sort of tax on that so make sure that
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you got the cash handy you know for me I
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just basically added that twenty four
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thousand to my income took care of it
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whenever I filed my tax in the year my
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CPA let me know how much that was going
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to be and it was a no-brainer and I was
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able to take advantage of that and say
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screw you
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IRS so is this something that you think
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you need to know more on do you need to
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do more research do you have some stuff
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that you want to convert so that you can
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get some more tax free growth because
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there is there anything better then tax
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free money I don't know if there is or
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not I don't know I don't think there is
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personally but you let me know if you
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enjoyed this video if you found any
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value whatsoever be sure to like
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subscribe share
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with people that need to know how this
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works take advantage these are the
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things that are available to you to
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anyone as long as you do the research
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take take the time to educate yourself
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make your mind wealthy art Joe until
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next time this is jeff rose from wealth
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hacker labs with mining you is your life
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it's your money and only you can make it
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awesome until next time
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