Is a Backdoor Roth IRA Conversion Right For You?
A “Backdoor Roth IRA” is a strategy that allows IRA owners to convert a traditional IRA to a Roth IRA and pay current taxes to lock in future Roth IRA benefits, even if your income is too high to open a traditional Roth IRA account.
‘Got nowhere to run to baby, nowhere to hide’, Martha and the Vendellas, 1965
Unfortunately, the title track from Gordy Records that made Martha and the Vendellas very popular with Motown is now the theme song for the 2021 IRS. Let’s talk about “Back Door Roth IRA Conversions.” This is a tax strategy that was most recently recognized because of Peter Thiel’s $5 Billion Roth IRA. Of course, the discovery of such financial wizardry was met with Congressional leaders up in arms and vowing to clamp down on future IRA savings accounts. The simple fact is that our spendthrift federal government has landed us in a pool of debt. There is now more debt than most of our grandchildren could pay back in a lifetime; yet, they begrudge the fiscal ingenuity of Peter Thiel.
Peter Thiel, an early investor in Paypal, acquired his shares at a low cost. He had his Roth IRA purchase some of the shares. The value of the shares increased an enormous amount and are worth far more than Mr. Thiel’s original cost. According to Forbes Magazine, members of Congress are currently saying that “IRA’s and other tax favored savings accounts were intended only to help the middle class save for retirement.” Two questions: first, did you ever hear that? I certainly didn’t know that tax savings accounts were really for the middle class? Second, did Peter Thiel break the law? No, and the money grubbers are angry. They were beaten at their own game.
Some Roth IRA Conversion points to take home:
1. Back Door Roth IRA Conversions are legal.
Be sure to set up any conversion properly. There are specific steps to setting them up, and an advisor’s advice is critical.
2. Be careful of unintended tax consequences.
Be sure to review the impact on your adjusted gross income and subsequent tax before enacting such a strategy.
3. The Backdoor Roth IRA Conversion should by no means be the entire plan.
Other tax strategies should be considered such as charitable contributions, using your estate tax exemption, investing Opportunity Zones, income deferral through funding health savings accounts, and harvest unrealized losses on your investments.
A.G. Campbell Advisory, LLC
A.G. Campbell Advisory, LLC is an independent investment advisory firm in Baltimore, Maryland offering individuals and institutions custom investment advice, financial planning and family office services. A.G. Campbell was founded in 2012 by veteran industry professionals to address the need for a high-quality firm where clients have access to the resources of a large firm, without the inflexibility and conflicts of interest inherent in a larger financial institution. The principal objective of A.G. Campbell is to advise our clients on how to grow and preserve their wealth for themselves and for their families. Our client’s best interests are of paramount importance and the foundation of our work.
Please consult your Tax Advisor in coordination with your Financial Advisor, on any matters related to IRAs and Roth conversions.