Roll Overs, Horse Races and Backdoor Roth IRA Strategy’s

Yeah, backdoor Roth IRA sounds pretty badass – badass but complicated.  Many of us have tossed around the idea of having a traditions IRA or a Roth but what if you can have the best of both worlds? There are not many times in life that allow us to have our cake and also to eat it, but this is one of those times.

 Quick IRA Re-Cap

 We could do a year of shows devoted to all things IRA and there would still be questions. They are confusing so here is a bit of a refresher on the basics.

 IRA stands for an individual retirement account. It’s a tax-advantaged investment vehicle to save for retirement. There are several kinds, including SIMPLE, SEP, Traditional, and Roth. The last two are the ones we will be talking about today and the two that are most commonly used.

Traditional IRA

A traditional IRA lets you invest pre-tax income into an account that will grow tax-deferred. The money is not taxed until you withdraw it. You can withdraw funds after age 59.5.

Putting money into a Traditional IRA lowers the amount of taxable income for the year you made the contribution. Not only does it lower you adjusted gross income, doing so can help you qualify for other tax breaks like student loan interest deductions or child tax credits.

Roth IRA

A Roth IRA is similar to a Traditional, but the money is taxed up front and not upon withdrawal after age 59.5. Roth contributions (but not earnings) can be withdrawn without penalty and tax-free at any time.

After five years have elapsed after the first contribution, you are allowed to withdrawal up as much as $10,000 of the earnings penalty-free to pay for certain qualified expenses.

Contribution Limits

Both Traditional and Roth’s have the same contribution limits, $5,500 per year for 2016 ($6,500 if you’re aged 50 or older.) But there are income limits for high earners. If you’re single and earn over $129,000 or file jointly as a married couple and earn over than $191,000 you are forbidden to contribute to a Roth IRA entirely!

Penalties

Withdrawals from a Traditional are considered regular income, and if you are younger than 59.5 when you make the withdrawal, the amount you take out will be hit with an early withdrawal penalty of 10%.

You can pull contributions to a Roth anytime without tax or penalty. The rules for earnings are different. If it has been less than five years since your first contribution, you may be taxed on earnings even if the funds are used for one of the exceptions described below.

Exceptions

The thought of locking up your money for so long puts many people off the idea of an IRA, but there are exceptions:

You can use up to $10,000 from your Traditional or Roth IRA toward the purchase of your first home. You can use IRA money to pay for higher education expenses not only for yourself but also for immediate family members (your spouse, children, and grandchildren). There is no dollar limit.

You can make withdrawals to pay for unreimbursed medical expenses if those expenses are more than 10% of your adjusted gross income, or to pay for health insurance premiums for you, your spouse or children during a period of unemployment.

Which is Right for You?

If you expect your tax rate to be the same in retirement or higher than it is now, the Roth IRA is a stronger choice. A traditional IRA makes more sense if you expect your tax rate to be lower in retirement.

But what if you could have the best of both worlds? There are not many scenarios in life that allow us to have our cake and also to eat it, but the MF has figured one out when it comes to IRA’s.

Why rollover 401K?

The best reason to roll an old 401K into an IRA is that there are a lot of hidden fees in some 401k’s and the investment options a...

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