Speaker 2 (00:02.264)
Welcome to the Physician Family Financial Advisors Podcast, where physician moms and dads turn today's worries about taxes, investing, and extra money into a comfortable feeling of financial security. I'm Ben Utley.
Speaker 2 (00:36.28)
Yeah, it's important. It's not vital. Like if you don't have a backdoor Roth, you're not going to die or fail to retire or anything like that. But it is a great tax move. And the reason for that is with a Roth IRA, whether it's a backdoor Roth or any other IRA, with a Roth IRA, the money that's in that account can grow tax deferred, and then you can take it out without paying federal or state income taxes. So it's what I like to call tax free forever.
But the trick is getting the money into the raw thyroid array because many physicians are not able to for some tax constraints. And I figure we'll talk about that here in just a minute.
Speaker 2 (01:19.406)
Yeah, bless me.
Speaker 2 (01:42.318)
Like everything in life, there are three easy steps, right? And like everything in life, there are some exceptions to these three easy steps. the first step is to open up a traditional IRA and a Roth IRA. The second step is wait, wait.
Speaker 2 (02:04.632)
You're not gonna let me get the three steps out. Let me get the three steps out first before we throw in the exceptions. This is complicated enough. As I was saying, open up the traditional IRA, then the Roth IRA, then contribute to the traditional IRA, and then do the conversion, and you're done. Okay, now, what annoying questions you have.
Speaker 2 (02:27.884)
Yeah, okay, so the two IRA thing. So if you look in the IRS tax code, because like there's not another tax code, right? If you look in the tax code for the words backdoor Roth IRA, you will find that those words don't exist. The backdoor Roth is not an account type, it is a strategy, right? So in order to do that, you have to have a traditional IRA to receive the contribution.
and you have to have a Roth IRA to receive the conversion because it's a two-step process.
Speaker 2 (03:19.628)
Yeah, so this is a misconception. And quite honestly, I think the misconception is propagated by well-meaning certified public accountants, right? So what a CPA will tell you is, no, you can't do a traditional IRA, which means no, you can't contribute to a traditional IRA and get a tax deduction.
because physicians are phased out. People who earn as a married filing jointly, which is most of our clients, if they earn more than about $120,000, then that traditional IRA contribution is non-deductible.
assured, be assured that anyone who has earned income above six or seven thousand dollars can contribute to a traditional IRA. And that's because the maximum contribution per person is six thousand dollars or seven thousand dollars if you're H50+. So if you are a physician and you are fogging a mirror, you can contribute to a traditional IRA. You probably cannot deduct it.
Speaker 2 (04:31.32)
Yeah, you can't benefit from the tax break on the contribution, right? You don't get a tax deduction. So you're making what becomes a non-deductible contribution. Once that contribution goes into traditional IRA, that money grows tax-deferred, and when you take the money out at retirement, then you pay taxes on the growth, which is the difference between the traditional IRA and the Roth IRA. With the Roth IRA, you don't pay taxes on the growth. And that's why it's a good idea
to get that money into the Roth. So there's another little rule here. It's like, why go through all the rigmarole of contributing to a traditional IRA, doing this magic conversion thing, and then getting the money into the Roth IRA? Why not just make the direct contribution? Go through the front door Roth IRA, right? Well, there's a special wrinkle in the tax code that says if you're married filing jointly and you make more than a couple hundred thousand dollars, which
and almost all of our clients do, then you're prohibited from making a direct contribution to a Roth IRA.
Yeah, so that that gives us to the to the next step. Okay, so first step is opening the accounts. Second is funding. So you open your traditional IRA, you open your Roth IRA. These are empty accounts. All right. Then you write a check for six or $7,000 to your traditional IRA and the money goes into the account. All right. now your account is funded. Okay. And then the next step is the conversion. All right. So
The way conversion happens is you get a form from the brokerage or the mutual fund company where you're doing business. Like let's say it's Vanguard or Fidelity or TD Ameritrade. You get a form. It's usually a really simple form. And that form basically says, dear TD Ameritrade Fidelity brokerage gods, please take the money out of my traditional IRA and move it over to my Roth IRA. That's basically what it says. The form basically identifies you as an account holder.
Speaker 2 (06:38.826)
It identifies your traditional IRA account. It identifies your Roth IRA account. And it has instructions for the amount of money to move over. And usually there's a box to check to move all the money over. And so when you do this, the whole sequence is contribute to the traditional IRA. Don't get a tax deduction. Okay. Convert to the Roth IRA. And then the money comes back out of the traditional IRA, which triggers a taxable event, but no taxes will be due.
Okay. Then the brokerage will magically sprinkle that money over into your Roth IRA. And there it sits in the Roth IRA where you can invest it. You can hold cash. You can do whatever you want to. But if you invest and you get good returns and that money will grow tax deferred. And then when you hit retirement, you can take it out tax free.
Speaker 2 (07:34.954)
So it's tricky. So when the money goes from the traditional IRA to the Roth IRA in the conversion, that is a taxable event. Taxable, which means that taxes may be due. However, when you made your contribution to the traditional IRA, you did not get a tax deduction. so having that money in your traditional IRA means that you have now established what's known as basis in the traditional IRA. And when you do the conversion, basis is not taxable.
Okay. So it's a taxable event with no tax due. And here's the trick. Here's the trick. So near the, uh, near the beginning of the year, let's say that you did this in 2021 and now we're in February of 2022, even though recording this later, okay, you would be getting a 1099 form from the brokerage. In fact, you'd be getting a 1099 R form. R stands for retirement. You know, like what I do with this. Okay.
If you just give it to your CPA, if you just give it to your tax preparer, you might pay taxes on that because they don't know that you have basis, right? They don't know you have basis. And if you fail to report that you did this, then the CPA will be clueless about this because your job to communicate with them what happens in your personal finances, right? So you get this 1099R, it probably says that there was a $6,000 distribution from your traditional IRA. And when that distribution happens, often that's a taxable event unless you have basis.
You have to know to convey on your tax return that you have basis and any decent CPA worth their salt can do this. I mean, it's not, we're talking about all the power that's on the tip of a CPA's pinky finger. It's easy stuff, right? But you do have to communicate, hey, we did this. Hey, you know, we've made the contribution this year and here's our 1099R and please don't count all six or $7,000 of this dollars as taxable income because, you know, we're going to pay two or 3000 bucks in taxes. And we've seen this. We've seen.
CPAs, good CPAs, make a mistake because there wasn't communication between the client and the certified public accountant.
Speaker 2 (09:44.142)
well is the shallow end of the pool this is this is water wings standing in six inches of water i mean you know this is the easy
Speaker 2 (10:06.562)
and tell your accountant.
Speaker 2 (10:23.096)
Then we move toward the deeper end of the pool where you're going to need those water wings and they might not be well inflated and you might start to be up to your eyebrows in water because it gets complicated really fast. So the one, two, three scenario that we've presented is for IRA newbies, which means you don't have a traditional IRA, you've never had a traditional IRA. You might have a Roth. It's okay to already have a Roth that does not complicate things.
But you're starting off with basically a clean slate. Okay. if you already have a traditional IRA, it could be in several different conditions. One is it could be like the IRA we described where it has basis. Two, it could be where it has no basis, which would mean that either you deducted all your contributions as you went along, or maybe the money came from a rollover, like you were in training and you rolled over your four or three B to a traditional IRA and
There's no basis in the account, but there's money in the account. It's all taxable. Okay. And then there's a third scenario in between where you can have both of those kinds of money. And when that happens, you have to go back and reference your form 8606 and cross your fingers that you or your tax preparer has diligently filled out the form 8606 every year to track your basis on those contributions. Most of the time. And when I say most of the time, 90 % of the time,
The form 8606 has not been completed or been completed poorly because we failed to tell our CPAs everything that we do. Sometimes the way that we fail to tell our financial advisors everything we do.
Speaker 2 (12:31.022)
You can do a backdoor Roth if you earn above a certain amount of money. Everybody can do a traditional IRA.
Speaker 2 (12:46.087)
Nicely said, Nate. We avoid the gender stereotyping with that statement, spouse. love it.
Yeah, if you're married and your spouse is working and earning enough money to be able to qualify for the strategy, which would be at least $120,000, more than $200,000, right? Then as long as they have earned income, then you can make the full traditional IRA contribution. You can do the full conversion and you too can have a backdoor Roth.
Speaker 2 (13:24.086)
As a married filing jointly couple,
Speaker 2 (13:38.862)
Yeah, I think so. I think so, especially if you start earlier, the earlier you start your backdoor Roth, the more valuable it is because what we're looking for here is tax free growth, right? So, mean, if you're going to retire when you're 65 and you start the backdoor Roth when you're 64, you got a whole year of tax deferred growth, which is really like no tax deferred growth, right? But you know, most of the clients that we serve find us that are in their mid thirties, sometimes mid forties and
If you start then, then you've got 30 or 40 years of tax free growth. In fact, you've got tax free growth from the time that you contribute until the end of your life, because unlike a traditional IRA, you're not required to make distributions as soon as you would be with those. So, let's say that you put in 6,000 tax free dollars to this strategy and you've got, let's say that we get a return that causes the money to double every decade.
Okay. So, let's say you're in your thirties and you retire when you're in your sixties. So that's three decades of doubling. So that's two to the third, which is eight times. So now you'd have 48,000 tax free dollars to spend in retirement. Right. And if you do that next year, you'd have another 48,000 tax free dollars. So, and of course, if you and your spouse both do this and you can double all those numbers, that's a hundred thousand tax free dollars in the future. So it's, there's real power in compounding.
And tax-free compounding, that's my favorite kind of compounding.
Speaker 2 (15:29.58)
Yeah.
Yeah, because so the backdoor Roth IRA will not save you any taxes today. Sorry, it's kind of like your 529 plan. Sometimes you get a tax break, sometimes you don't on those. Well, with a backdoor Roth, you don't get any tax break today. It's all in the future and all of our clients or physician families, you're used to the deferred gratification, right? So this is another one of those.
you know, do the work now, get paid later kind of things, unfortunately, but it is a great thing to do because, know, we do have people that are retired and they are able to take those Roth distributions or, or leave them, leave them in there if they want to. Yeah.
Speaker 2 (16:14.52)
You know, I will say that I am stunned by the number of people who come to us that don't have a semblance of this. Most people have heard of it. They've heard of Backdoor Roth. Probably about half of them are doing something about Backdoor Roth, but I'm really stunned by the number that come to us from another advisor where, like, let's say that the client heard about it from...
a podcast, like maybe like our podcast, or they read about it in a blog or something like that. They read about the backdoor Roth. They go to their advisor and the advisor is like, backdoor what? Like they don't have a clue, right? And so the client winds up doing all the research and figuring this out. It's not the case here. We processed over 100 backdoor Roths last year. It's a...
big strategy that we do with a lot of physicians. So you want to go with someone who has experience with this so doesn't get screwed up. And I still find sometimes that I'm, I'm tutoring even certified public accountants and how this works, despite the fact that the strategy appears in the journal of accountancy, you know, so there's nothing hinky about it, nothing illegal. There's nothing, you know, you think back door, like, you know, not good, but this is very much in the public eye and as a
It's a time-tested thing, but I'm still surprised by the number of people who have been with an advisor for a decade and they've not been doing this. And so they've missed out on, you know, like basically an entire decade of doubling in a tax-free way.
Speaker 2 (18:26.734)
So I'm gonna tell you a story that'll blow your doors. Okay, so about 12 years ago had a guy come to me who was a cardiologist. And he came and he had three different kinds of accounts. He had taxable account, you know, this regular old brokerage joint account. He had traditional IRA and he had a Roth IRA. And this guy is like me, he's a big fan of Apple, okay? But unlike me, he wanted individual stocks. And...
So he came to me and he said, I have one condition of working with you. And I said, what? And he said that you'll never sell my Apple stock. And I looked and I was like, yeah, okay. I can live with that. Right. So I looked into his accounts and he had Apple in all three of those accounts. And so, probably about three, four months into the relationship, I called this guy up and I said, Hey,
you know, I know that I promised I wouldn't sell your Apple, but I said, I have a really good reason to sell your Apple. And said, there's no good reason to sell Apple. said, well, actually in this case, there is. said, I'd to sell it out of your taxable account. I'd like to sell it out of your traditional IRA. And I'd like to load up your Roth IRA with the Apple shares, same number of shares. we'll, we'll, we'll sell out of those two accounts and we'll buy into this third account on the same day. And so what we did is we loaded up his Roth IRA. Now this has been about a decade. Anybody who's followed
anything with stocks knows that Apple has shot up during that time period. And so that growth that would have happened in his taxable account and been taxable or happened in his traditional IRA and the taxes got ordinary income, right? Is all tax free growth. And so tell me that didn't move the needle.
Speaker 2 (20:12.461)
Yeah.
Speaker 2 (20:15.918)
You know what that is? It's a way of saying, $6,000 is not worth my time. That's what they're saying with that. It's not worth my time. me six figures. But I'm thinking, you know, if you can't do good with $6,000, like, why should I trust you with six figures? Or, God help us, seven. Yeah. I like to say, if it's a client's money, you know, everything counts. Yeah. There's no small amount of money. As a guy who started off saving by putting change in a coffee can, that's where I started.
You know, I treat all the dollars as if they're special. Yeah. So I think I'll take us out. Is that cool? Yeah. Okay. So if you have questions and you have questions about retirement or college or taxes, we love those kinds of questions. We don't, we don't do specific investment advice kind of questions, but strategy, we love talk strategy. you can call us and leave a question on the physician family answer line. That number is 503-308-8733.
You can email us at it's podcast at physician family.com. can visit us at physician family.com slash podcast or Once again, you can call us in the answer line. Love to hear your voice on the answer line 503-308-8733. Thanks guys
Speaker 2 (21:38.232)
show go to Phys.
Speaker 2 (21:48.553)
investing in extra into a lot
