A CPA’s Worst Nightmare: When it Makes Sense for Affluent Clients to Use Roth

Welcome to EWA’s Finlyt podcast. EWA is a fee -only RIA based at Pittsburgh, Pennsylvania. We hope all listeners of this podcast will benefit as we deep dive into complex financial topics that we will make simplified for you.

And we hope that this really serves as a catalyst so that you can make the best financial planning decisions for your family and also save time. Hey, everybody, welcome to EWA’s Finlyt podcast. We’re excited to talk today about a very common question we have.

Should I do Roth or pre -tax? And this question is similar for 401k planning, 403b planning, even IRA planning. So just a really quick overview. An IRA just stands for an individual retirement account.

And a 401k means you’re working in a for -profit company, and a 403b means you’re working in a non -for -profit or governmental. But in general, the 401k and 403b, which are through your work, it’s your money, but through your work, it generally is a vesting schedule for any employer money that goes into it.

And then IRA, it’s an individual retirement account, so that’s your account. And these are two separate universes, so meaning you can have both. You can have a 401k and an IRA. And you can actually have multiple 401ks.

And an IRA on the side as well. So James and I are going to be talking about this widely debated topic. What’s better, pre -tax or Roth? Obviously very pertinent to someone’s individual situation and financial plan, but today we’re going to create a lot of just knowledge and education around the differences, pros and cons, etc.

So before we go into debating which one’s better, we’re just going to go to high level overview. So Jamison, do you want to cover generally how a pre -tax account works and why some of the other things are better?

someone would typically say, I should do a pre -taxing out? Yeah, so a pre -tax will use a 401K, for example, if you put your deferral, if you’re under the age of 50 at 22 ,500 into the 401K, pre -tax means you’re taking a tax deduction on that.

So if you’re in the highest tax bracket, you’re saving federally 37% on that deduction. You’re not paying income tax on that money. Versus putting money into a Roth account, it’s after tax. You’re paying taxes on it, but then obviously there’s benefits to Roth.

So 401K, you can take the deduction, 43B, 401K. In IRA, however, if you’re of an income limit, it has to be an after tax contribution. You can’t take that deduction, which we can get into in a second.

But high -level overview of pre -tax is taking the tax deduction before the money goes out. So real quick, if you and I were two physicians at a hospital sitting at lunch talking about this, and let’s say we both were making, I’ll just make this up, half a million bucks.

And so probably, directionally, our net take -home would be like 23 ,000 a month, if you’re in Pennsylvania. If you were doing pre -tax in your 401k, and I was doing Roth, really the only difference, if we were maxing out the 22 ,500, what’s called an elective deferral, if I was doing Roth, my paycheck would be about $700 a month less than yours, or 350 per pay if I’m paid twice per month less than yours.

So all that I’m gonna notice, different is $700 a month, but when you fast forward 30 years of compounded interest on this money, if you had done pre -tax and saved that, you know, just doing quick math, $7 ,000 to $8 ,000 a year in federal tax every year along the way times 30 years, let’s just say $240 ,000, if you had $2 million at the end of that, your career in that 401k, all of that money is gonna be taxed, whereas if I had taken, accepted that lower paycheck of $700 a month, and I also had the same returns as you did and had $2 million, all of my money would be tax -free.

So, you know, a lot of debates we hear is, well, Matt, Jameson, like I’m in a high tax bracket now, when I go to retire, I’m gonna be in a lower tax bracket. So I should be doing pre -tax, because at this point my school loans are gonna be paid, my house will be paid, my kids will be gone, and life will all be figured out.

So that’s the most common, is just tax bracket management, are you gonna be in a lower tax bracket now, higher later or higher now, lower later? And I think this is an important part of the conversation, I think it’s like, I would say 10% of the conversation, but it’s definitely like public facing.

This is what we’ve seen is how people decide between pre -tax and Roth. So let’s first just talk about Jameson, in your experience, because you work personally with about 100 physicians. So what’s your experience with the retired ones?

Their kids are gone, their stuff’s paid off, like are they actually in a lower tax bracket? No, never. Break us, like walk us through why. So yeah, number of reasons is really interesting. So social security is always there.

Let’s just say combined of two high end commodity positions, that’s 100 ,000. And then if there’s a pension, generally there’s, there’s aren’t as popular anymore. So let’s say there’s no pension, you have, a lot of times people don’t actually stop working.

So there’s some sort of income still coming in. And then if we have dividends from a non -qualified account, that’s income, any capital gains realize, sometimes there’s real estate or private equity sales, other things that are coming in as income that you’re never actually as low as an income bracket as you think.

Okay, so hypothetically, someone is worth five million bucks when they retire. And they have, between the two spouses, let’s say social security is like 70 grand, they have. Let’s just fast forward when RMDs start in a pre -tax count.

So 75, let’s say they have $4 million in a pre -tax account, and RMDs are like 200 at that point. So you take the 200 plus the 70 in the Social Security. The cutoff, because the federal tax brackets work 10, 12, 22, 24, and the cutoff from 24 to 32 is right about 340.

So that person saying they’d be in a lower tax bracket, most likely they’re going to be right back up into that mid -tax bracket. And historically, we’re going to talk about tax brackets later, are lower now than they have been historically.

So I think that’s a common myth. You may be in a lower tax bracket on part of your money when you retire, but generally, if you are someone that’s saving a lot and hiring that worth client, taxes will still be an issue, especially if you’ve over accumulated wealth based upon what you think your lifestyle is going to be.

If you have $5 million to $10 million and you’re used to spending $10 ,000 a month, it doesn’t matter if you spend $10 ,000 a month. IRS, based upon what account types you have, are still going to make you show an income higher than that because of requirement of distributions, et cetera.

So let’s just talk about some mechanics of the 401k. So pre -tax, a couple of things. It’s great on the way in because you get that tax benefit on the way in. It’s great as it grows because it’s growing tax deferred.

But then when you take it out, there’s four problems I have with the pre -tax IRA. And I use analogy of retirement plan as like climbing a mountain. Climbing the mountain requires a certain set of tools, but then getting down from the mountain requires a totally different set of tools.

And getting down is when most of the accidents happen. And so if you are climbing the mountain and you only have certain tools in your backpack, you’re not going to have a high success rate getting down.

So you need to think about what tools you need when you’re at the bottom to not only get up, but also to get down. So a pre -tax 401k presents a couple problems when you’re getting down. One, it’s taxed, and we don’t know what tax rates are.

So James, just give us a high level on that number one of taxes. Just not we’ve talked, we’ve addressed the lifestyle, will you be in a higher tax bracket or not? But let’s talk about historically federal rates.

Where are we now and where have they been historically? Yeah, so right now the highest federal tax bracket is 37%. That’s over, I think, $6 .93 is the income limit of a married filing couple for 2023.

And if we look back, and we can put this in the show notes, we have a nice chart that shows this historic tax rate. So in 2018, sorry, the tax cuts that were put in place until 2020. So in 2026, we know that the 37% tax bracket is going to increase to 39 .6.

That’s what the old tax rate was. So we know if nothing else, no legislation has changed, we’re already going to see a 2 .6% increase in the highest tax bracket. However, there is a lot of, obviously, Social Security, Medicare, there’s a lot of stimulus printed with COVID, national debt, all of these things are indicating that taxes will go up in the future.

And if we look back at historic tax rates from the, you see this in the chart, from the 1930s up until the 1970s, 80s -ish, the highest marginal tax bracket was actually generally between 70% to 90%.

I think average 70%. Yeah. And very few people were paying that, but that again was the highest rate. The highest rate right now is almost half of that. And so one interesting thing is, I actually think you told me, the Social Security, it in the 1940s, there were 40 workers to one person claiming Social Security, and today there are three people working to one.

It’s less than two, something per one. And so the reality is the trust fund, if you just Google this, of Social Security is set to run out, but I think a little bit over 75% of the Social Security payments right now are being funded from current taxation.

And so, but this is a problem that’s going to be fixed, is that generally, the media net worth, if you just Google media net worth for someone America under the age of 65 is under 300 ,000. So if you take Social Security away for retirees, the majority, a good portion of the population will be homeless.

So Social Security is not going anywhere. But if it’s not going anywhere, how does it get funded? That’s our taxes. Taxes, yeah. Right. And so I think it is, the government obviously has control, and typically the tax legislation works moving forward.

It can affect like, so if you have an Roth account, you’re right. Well, what if they change the rules? It’ll be moving forward. forward, send you Roth the plan that you do now or pre -tax. It’s gonna be grandfathered on the current tax law based on history.

But I think taxes are a strong consideration. So I don’t view the problem number one we have with pre -tax accounts. I don’t see taxes as a, hey, am I gonna be in a higher rate personally now or personally in the future?

I view it just more as a general state of the union in America. Do I think taxes will be higher? Yes. 10, 20, 30, 40 years from now. And I have no idea. But if I were to put a bet on it, I would definitely say they’re gonna be higher for all the reasons you said.

So thanks for sharing. So number two, the number two issue we have, and this is a hidden one, is when you have a pre -tax account and you have requirement of distributions, Medicare. So Medicare rates, and so just a quick review of Medicare, there’s part A, B, C, and D.

And we’re talking about B and D, primarily B, because B is what, A, if you’re invested in the social security system is free. C is optional, metagat. B, though, is what’s going to get based upon your income.

So married, filing, joint, and do you have these charts in front of you? I think it’s like 190 is the cutoff. It works two years prior. You’re going to pay the lowest rate. And that’s per month, per spouse.

If you go $1 above that on your adjusted gross income, it gets surcharged like 50%. And it can go up 3X, even 4X. So we’re talking thousands of dollars per year, higher cost per spouse if your income is too high.

And so a pre -tax account is going to force your income to be too high because with a SCURAC 2 .0, RMDAs are getting pushed from 72 and beyond. But even so, this account is going to create that Medicare issue where your Medicare costs are going to pay an extra maybe $250 ,000 per spouse if you’re a high net worth person, extra in health care cost.

So that is another reason why to consider how much you put in a pre -tax account is Medicare rates. So I promise four problems. So one was taxes, two is Medicare. Three is what’s called sequence of returns.

And then the fourth is what we call the widow penalty. So Jameson, talk us through sequence of returns. And let’s use that analogy of climbing the mountain and getting down from the mountain again. What is sequence of returns just on a super quick high level?

And why does this matter in a pre -tax account? And why does it not enter off? Yeah, and we have a chart that maps us out. We can put this in the show notes too. Basically, when you’re on the accumulation phase, so let’s say you’re from age 40 to 65, you’re working, you have an income coming in, a paycheck.

You don’t need to take any distributions from your investment account. So there is no risk of, yes, you want high returns with your investments, but it doesn’t matter what year, if one year is up 20 and then you’re not.

next year is down 20, it doesn’t matter. It’s not taking any distributions. As long as you get that average rate of return every year, you’ll get to the same end result. However, when we’re going down the mountain and we’re starting to take distributions, like for example, you have a 20, let’s say for 20 years you’re gonna take distributions, if the first three years the stock market’s down and you’re selling at a loss, that’s gonna dramatically impact the longevity of your portfolio because you’re taking losses those early years versus at a game.

So high level sequence of return risk is basically the risk in retirement of being forced to sell or selling equities at a loss because you need income coming in. And obviously there’s ways to insulate this, but in a pre -tax IRA with the Secure Act 2 .0 that was just passed, age 73, the government mandates that you have to start taking distributions from this account because they want their taxes.

None of that money’s been taxed yet and they don’t want you to just leave it in there and never pay taxes on it. So at age 73 you have to start taking a distribution and it doesn’t matter if the market’s up or down, they’re gonna say you have to take a percentage of this account out, pay taxes on it, and even if the market’s down, you still have to take the distribution, which is basically the sequence of return risk.

You’re forced to lock in losses if the market’s down. So with this, it’s incredible and like, I think one of the biggest, definitely one of the biggest, most important topics. This affects everybody when they retire or even college planning when you actually go to withdraw the money.

So this chart that we’re gonna put in basically shows three investors all starting the million dollars on the beginning of the mountain and all three of them got a 7% average return. So the first one got great returns and then not so good at the end.

The first, the second person got the exact reverse order, bad at the start, good at the end, and then the third person just got 7% every year. So every, all three of these went from like a million to over 5 million.

No changes in outcome, even though the sequences were totally different. So they basically climbed the mountain, different pathways, but all got to the top, all got the same result. And then what you’re saying on the top, getting down, they all got those 7% returns.

But in this instance, it was, you know, a million dollars taking 60 ,000 a year every year adjusting it for inflation. With the first person that got good returns at the start, bad at the end, they got their 60 a year adjusted for inflation every year and still have their million dollars at the end.

The second person, like you said, million dollars took out 60, the market also went down. So now the next year they’re taking out of lower amount. They didn’t even last, you know, till 90, their money was gone.

Same returns though, same amount of money they’re taking out, same returns. Instead of having their million left, they had nothing left. And then the third person had, you know, like about 40% of their money left when they just had that 7%.

So sequence of returns is like, I want to say one of the biggest risks by foreign financial planning, because market going up and down is irrelevant if you have a good financial plan. But if you have all of your money, you’re going to have to pay for it.

in the count where you’re forced to take it out, it’s hard to have a good financial plan because someone else has control of that, you don’t. Right? And so that’s the biggest issue of pre -tax. Who cares about taxes?

It’s like, okay, do I have the control and autonomy of my money? So the fourth thing is this widow penalty. And this comes into play in two aspects, number one and number two. This affects taxes and this affects Medicare premiums.

So hypothetically, we have a client that is spending 250 years of married couple, 70 ,000 in social security. The rest is, let’s say pre -tax RMD. RMD is coming out. So 180 is coming out. God forbid one spouse passes.

What changes? Well, the answer is just one thing. The one thing is one social security drops off. So the higher of the social security if you’ve been married for 10 years stays no matter what. So if one spouse was getting 40 in social security, the second spouse was 30, it doesn’t matter which one passed.

The 40 is going to stay. So out of that 250 of adjusted gross income that we just described, it’s going to drop to 220. The RMDs are still the same because, you know, it’s an inherent IRA now, assuming they’re over, let’s say they’re 75, and the amount of money’s going to stay the same.

So even if that spouse didn’t require that much money to live, their income’s still going to show the same amount, less than 30 ,000. However, the government has it written into Medicare code and tax codes that rates the runway gets cut in half.

So the surviving spouse’s Medicare rates, instead of having 190 of income before the rates get surcharge, that gets cut in half. So that spouse, their Medicare rates are like tripling minimum, and we’ll put the Medicare rates, the tables in the show notes here.

But then the tax runway, so from 10 to 12, 12 to 22, 22 to 24 gets cut in half as well. So can you pull up the tax table? Let’s see if you have your computer here. You’re well prepared. I’m not. So as the married filing jointly couple, nothing was getting taxed at a 32% tax price.

They were eating up to 10, the 12, the 22, and the 24. But now that it’s just one spouse and the runway’s got cut in half, a significant portion of the income is now getting taxed at 32. So 2023 rates, married filing jointly, 24% rate is from 190 to 364.

So about 60 ,000 of that 250 was at the 24. And now suddenly if you’re a single person, the 24% stops is from 80 ,000 to 170 ,050. So the surviving spouse that was never paying that 32% tax bracket or even 30% tax, they 35 is now paying a 32% that 24 paying 32 is 8% higher on every dollar between 170 to 215 and then 35% on everything from 215 951 up to 323.

So on a good portion of income there has been an immediate 8% increase on some and an 11% increase on some as well plus Medicare plus Medicare I but either way we’ll put those in the show notes. Okay, so those are the four problems with with with the pre -tax stuff.

So why Jameson why are these not an issue if you have a Roth account? Yeah, so Roth essentially can help solve these four issues. The fundamentally Roth is again after tax money going in so you don’t get a deduction but once it’s inside the Roth account it grows tax -free It distributes tax free and it passes to beneficiaries tax free.

So, um… And real quick, that’s assuming that you’ve had the account. If you’ve converted on a backdoor offer, we’re going to go through some crazy strategies here. Five years from conversion on basis and then everything’s tax free.

If it’s five years after the conversion plus you’ve reached the age of 59 and a half. Yeah. And what you’ve said is just magical. Growth is tax free and everything then is comes out tax free. What you put in plus all the growth plus that pass to your kids tax free as well.

Um… So, when it distributes in retirement, it doesn’t show as income. So, you can avoid… If this is done… If you have a strategic distribution plan, you have income filling up the low tax brackets through Social Security, um…

You know, any income coming in and then anything to avoid the high tax brackets you distribute from Roth accounts because you’re not showing income. So, one, you’re avoiding the high tax brackets. Two, you can standard those Medicare surcharges because you’re not showing income.

Um… And then there are no required distribution with a Roth IRA. A Roth 401k there are with a Roth IRA there’s not. So, if you hit age 73 and that money’s in the Roth IRA, government doesn’t tell you you have to take it out.

So, if the market’s up or down, you can leave it in there and selectively pull it out whenever you want to. So, much more autonomy and control. And then the fourth… The fourth issue was the widow tax.

If you have majority of your money in Roth, you can distribute and avoid those high tax brackets when that gets cut down. So, high level overview Roth is, again, get it in there, never pay taxes again on it, grows tax -free, distributes tax -free, can solve a lot of these problems.

Anything to add? And then we can dive into how to actually get money into the… No, that’s great. I would say so. You know, generally, we’re not providing specific advice on a podcast because, you know, there’s going to be so many variety of listeners in different income brackets, different net worth brackets.

But you know, the general advice I would say, if you have a net worth… If you’re gonna have a net worth over 5 million in retirement of liquid money, not including like your real estate or business interest or anything like that.

$5 million of liquid, we’d recommend at least have a third of that tax -free. And the reason that we’d have a third of it tax -free, because we’ve run thousands of financial plans over the last 10 years, you’re too young, I have.

And you’ve probably run thousands as well in the last four or five years that you’ve done this. The reality is all of the issues we just discussed are addressed. They’re not like, absolved, but the big gaping like planning holes are typically addressed if you just have a third of your money.

If you have a net worth above 5 million, a third of your money being tax -free. And it could be tax -free through Roth, that’s our favorite place. It could be tax -free through the basis of a taxable account.

It could be tax -free in a cash value inside of life insurance policy. Not saying Roth is the only place you can have tax -free money, but generally having a third of your money tax -free, it addresses tax concern.

It addresses Medicare concerns. It gives you an optionality to control your modified adjusted gross income. It addresses sequence of return risk because the tax -free money has one thing in common. You control what the government doesn’t because the government doesn’t care when you use it because they don’t get their pause on it.

They pay the cost. The taxable accounts are no RMDs. There’s no, you don’t have to take distributions, cash, fine life insurance, and Roth. It completely solves the sequence of return like the climbing versus descending mountain scenario, which is the biggest scenario by far.

The fourth thing, which was the widow penalty, it completely addresses that as well because then the surviving spouse has the optionality to where to distribute the money from. Again, that’s where it’s, I don’t want to say it’s fixed because it’s just addressed because in that surviving spouse example, if the surviving spouse still has an example, let’s say three and a half million dollars of pre -tax money, their RMDs are going to be too high for Medicare, for the widow penalty on taxes, et cetera.

So we just recommend if you’re projecting out a net worth over five million, a third of your money being tax -free. That’s just the starting point of the conversation. Like if you don’t ever want to work with a financial advisor, project it out and just make sure you’re putting the right money in place.

Based upon goals, spending habits, where your net worth is, et cetera, sometimes we have clients that have over half of their net worth tax -free in Roth or taxable brokerage accounts, et cetera. It’s very case by case, but just in general, we do want to provide financial literacies.

So that’s just a starting point. I know you’re big on this. I would say a lot of that. Even if it isn’t more tax beneficial to get more money in the Roth, meaning that if you are paying a lot of taxes up front to get it in, and like let’s say you are gonna be in a lower tax bracket, the autonomy and control a lot of people like would pay the tax to have control over when they can take the money out.

There’s no question. I mean, because there’s million dollar mistakes when you’re forced to take out of something or you don’t have the backup to keep something alive or being opportunistic is very important as an investor as well.

Especially if you’re high net worth, having optionality is key. Yeah, so. Okay, so taxes, autonomy, those are the big things. Now let’s talk about how we can actually get money into Roth. So a couple of ways, I think one of the biggest misconceptions, I would say probably new clients that I talk to, I don’t wanna make, probably at least over half of them tell me they make too much money to put fund to Roth IRA, which is like a big misconception into technically is true, but they think they can’t get money into Roth at all.

And we have high income earners that are getting over $100 ,000 a year. between two spouses into Roth accounts. So let’s talk about how to actually do that. Three ways, three main ways. One would be through your Roth 401k, Roth 403b, if it’s available.

Two would be Roth IRA or backdoor Roth IRA, and three would be a Roth conversion. So taking your pre -tax money, paying the taxes on it, and getting into the Roth. Let’s start with the first one, Roth 401k, Roth 403b.

Matt, you wanna dive into that? Yeah, I will go through just an actual case now. I’m just thinking of a couple clients we have so that do all three of these. So I’m just thinking of a client, let’s just, you know, not gonna say obviously every name’s confidentiality, but 600th physician, works in non -for -profit, would just say makes half million dollars a year.

Also has $100 ,000 of 1099 income through consulting, like legal work that he does. And so we have three mechanisms that we’re funding a Roth for him. And then also the fourth mechanism, we’re getting a huge tax deduction on.

So we’ll just talk through this high level. So the first thing he’s doing is a backdoor Roth IRA. What a backdoor Roth IRA is, it’s 6 ,500 into an after -tax IRA, because like you said before, he can’t deduct his incomes too high.

So he can’t put money directly into Roth IRA because he’s way above the income limit cut off. However, anyone regardless of income can put money into a traditional IRA. Not necessarily you can’t take the tax deduction because again his income’s too high, but you can take, put money into an after -tax traditional IRA, and then the next day convert it to Roth.

This is called a backdoor Roth IRA strategy. So that’s the first thing he’s doing, it’s 6 ,500 dollars. His wife is not working, you know, they’ve got three kids at home. So the wife, because she’s married to him, can do what’s called a spousal backdoor Roth IRA.

So he is doing the 6 ,500, the wife is also doing 6 ,500 as well. So really quick before I go, I go to number two and three ways we’re doing the Roths. James, can you tell, just give us a high level, what needs to be in place to avoid mistakes when doing a backdoor Roth, specifically around aggregation, things like that?

Yeah, I know exactly what client you’re thinking of. So they had a $100 ,000 IRA when we first met them. And so there’s basically what needs to happen just from a super high level without getting too nerdy and technical.

The entire pre -tax IRA balance needs converted to Roth first, and then you can do the backdoor Roth mechanism. If you don’t do that and you try to fund the after -tax and then convert it to Roth while they’re still in IRA balance, it aggregates a portion, a percentage of the Roth conversion and makes it taxable, essentially.

So the way to avoid that, convert all pre -tax IRAs first and then you can fund the backdoor Roth. So yeah, absolutely. In this case, because of the step two strategy. or the second strategy of getting the Roth.

So to get rid of aggregation, the most simplest way is to convert all existing pre -tax money into a Roth. Pay the tax one time, then forever that money’s in that tax -free environment. Assuming you wait five years and you’re 59 and 1 half.

However, the other workaround of this, if you don’t want to pay any taxes, is you can move your IRA money to a different universe of 401k. So you can take a pre -tax IRA and do a tax -free rollover to a pre -tax 401k.

And a 401k is viewed as a different universe from the IRS. So when you go do a back -to -arrow IRA, you have to fill out what’s called a Form 86 and 6, which you put in the money into an after -tax IRA.

Did you convert it? If you convert it, was there growth and just the growth gets taxed? But in this case, we actually rolled the money out to his 401k that we set up, and that completely eliminated the aggregation issues.

And so it gave him and his spouse the runway to then do 6 ,500, 6 ,500, and 2023 as a limit, because he’s under the age of 50, into back -to -arrow Roths, which is awesome. So the second thing is, he has a 403b through his income, his W2 income, half a million dollars.

So in a 401k, if you’re under the age of 50 and 2023, you can fund up to $66 ,000 a year into it. And he’s in a weird setup where he actually doesn’t get a match. So the Roth limit is 22 ,500, but that leaves a difference of, you do the quick math for me, what is that, 44 ,000, no, 43 ,500, that you can do what’s called the 415c limit.

So the government and the 403b or 401k, the total that can go in, imagine your 401k is just one giant bucket. If you’re under 50, it’s 66 ,000 a year you can put in. If you’re over 50, it’s 73 ,500. Most people only think you can put in what’s called the 402g limit, which is elective referral, which is the 22 ,500.

The 22 ,500 is where you can put in. You get a side, do I want to do pre -tax, or do I want to do Roth? So we recommended, even though you’re going to high income, do the Roth. For all the reasons we’ve already talked about being in this podcast.

So the 22 ,500 he does Roth. The 43 ,500 could be accomplished through a match, which his employer does not do. It could be accomplished through a profit sharing from his employer, which would be pre -tax.

His employer does not do. Or it could be accomplished if what’s called an after -tax contribution is allowed. In this case, it is. So he can put up the other additional 43 ,500 into an after -tax 403B.

And this plan allows for an in -plan conversion to Roth. So what he does is we do the 22 ,500 Roth. We do the 43 ,500 after -tax. And then we immediately convert that. We front -load it in the beginning of the year, and we immediately convert that to the Roth as well.

So he gets 6 ,500 in the back door Roth. for him, 6 ,500 backdoor Roth for his life, 66 ,000 through what’s called the mega backdoor Roth, which I just described through his 401k B. And then he also had through his 1099 income, we have another 401k set up.

So another misconception is you can only have 141k. You can only have 142g limit in a 401k, so that Roth deferral of the 22 ,500, only one Social Security can have one of those. But the second 401k through his 1099 income, we’re able to fund another 66 ,000 and go straight shot into the after tax 401k that’s running through his legal consulting practice and then immediately convert that to Roth as well.

So in this case, 13 backdoor Roth IRAs for him and his wife, 66 mega backdoor Roth for 3B, 66 mega backdoor Roth 401k. So what is that? I can’t do the math. 13 plus 66 plus 66, that’s 132 plus 13, that’s 145.

Can you check that? So 145 is in the Roth, I believe. And that’s without any conversions. Yeah, 145. Yeah, 145 a year in a Roth. He’s just a W2 physician, not just, I mean he’s an incredible dude. Him and his spouse is even smarter.

So 145, all Roth and no conversions. So common misconception, like my income’s too high, I can’t do Roth. And now you can do a backdoor Roth, mega backdoor Roth. You can do multiple 401ks if you have other income.

Another cool thing too is we also have a cash balance pension plan on him, which isn’t the purpose of this podcast. We’ll have a podcast just on that. But that’s another way we can layer. Cause again, we don’t want him ending up at retirement being in the highest tax bracket, his old career and then just having a lot of Roth.

So the cash balance pension plan is also a way, it doesn’t get aggregated, doesn’t get in the way. It’s another plan you can save for retirement, asset protected in Pennsylvania. All tax deductible this year.

And he’s able to pile money into that on top of everything. anything else we’d just subscribe through 1099 income as well. One question I’ve gotten many times is can I put too much money into Roth? Not like, basically just like from a financial planning standpoint, can you over accumulate in Roth?

So what’s your opinion? Yeah, it depends on how you view your play. If you imagine like your play to money is like you and your kids, then there’s no such thing, right? Because like then, like yeah, like you may be in a higher lower tax bracket now, but then when it goes to your kids, they’re getting a tax free.

So if you want to get technical, there’s a lot of factors we wouldn’t know until it’s too late, right? So what are your, what if your kids are in high tax brackets and they’re great to get Roth money.

If they’re in a low tax brackets, you actually would be better off to have given them pre -tax money. Also, we do recommend you always want to fill those low tax brackets. So you do not want everything under Roth.

You definitely want to show income to pay the 10, 22. the 10, 12, 22, and 24% rates in our opinion. Like those are low rates. And if you look at history from like 1920 to now, Republican, Democrat doesn’t matter.

Like they all like totally disagree on what taxes should be for the wealthy. But for the lower tax brackets, they always agree. They always should be low. So like even if you’re a high net worth person, when you gotta retire, tax rates are graded.

So you should absolutely have some pre -tax money where you can rip out every year in retirement and fill those low tax brackets. If you have everything in Roth and you just fund it, it cost you maybe an arm and a leg to get it in, and then now you’re taking it out and avoiding low rates.

So ideally we want you to show taxes, like pay taxes, to fill the low rates, all in a balancing act between looking at Medicare rates and are you married or you’re not married, et cetera. But then also we really just want the Roth for generally speaking, the surcharges on Medicare, the surcharges in taxes for spousal planning, and then for inheritance binding as well.

I would say too, we know taxes, like we talked about at the beginning, historically are low right now. So it’s like if we think they’re going to get, no matter what your specific plan of distribution is in retirement, if we think that they’re going to be higher in the future, and even just in 2026, it’s gonna go up 2 .6% for the highest tax brackets, like okay, then you really can’t over accumulate into Roth now because you’re paying a higher rate in the future, so.

A lot of factors here. So for then leaving money, a couple other quick hitters with Roth, leaving money to either beneficiaries or a charity. So you had touched on if kids are in higher tax bracket, so let’s think of a lot of physicians, at least that we work with, a lot of times their kids end up being physicians, and they’re just like their parents are physicians, I would say that’s common.

And so if your kids are gonna be in a high tax bracket, no brain are gonna get into Roth, inherited tax free, they don’t pay any taxes on it. Flipside if they not the point of interest. of this podcast for charitable contributions, we can do a whole another episode on that.

But if the goal is to donate a bunch of money to charity, Roth would not be the best option. We’d rather have that. It’d be the worst. Yeah. We’d rather have something that’s not been taxed, like a pre -tax IRA, go to the charity because then they don’t pay any taxes on it.

You can gift, like if I were to gift a million dollars to a charity over to Roth, and you gift a million dollars to a charity through a pre -tax, I get the same result, right? But it cost me a lot more money to get in the Roth.

So if you’re charitable, that’s a great point, or kids with low tax brackets, then pre -tax should be considered more than Roth. But there’s so many factors that come into play, how important is control and autonomy to you?

When is your retirement date, risk tolerance, et cetera. But generally speaking, for the takeaways, is don’t just think about the one factor of taxes. You should have a plan that involves pre -tax in Roth, and both.

And generally speaking, right now, we’re in a tax rate environment, where Roth makes a whole lot of sense regardless of what tax bracket you’re in. And most people are behind on Roth planning. So even if you’re in a highest tax bracket and all of your net worth right now is pre -tax, it’s probably time to start considering how to some advanced strategies like back to Roth, like Roth conversions, like mega back to Roths.

If you have 1099 income, structuring that mega back to Roth on top of maybe a cash balance plan, all of those things should really be heavily considered. Thanks for tuning in to our podcast. Hopefully you found this helpful.

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