In this episode of Smarter Money Matters, Jeff Camarda, CFP®, joins Super CFPs Lou and Anna to unpack how to use Roth conversions before year-end — and why timing, tax brackets, and careful planning can make all the difference.
Learn how to help:
✅ Lower future taxes on retirement income
✅ Protect your spouse from higher single-filer rates
✅ Reduce required minimum distributions (RMDs)
✅ Leave more tax-free wealth to your heirs
✅ Avoid hidden traps like Medicare premium hikes
Get the inside scoop on how high-net-worth families use this “Rothalyze™” approach to optimize conversions year after year.
Video Chapters & Transcript:
[Music] Hey folks. Well, welcome uh to yet another edition of Smarter Money Matters, your exclusive ticket to advanced wealth wisdom that really is hard to find elsewhere. Uh we’re talking about family office secrets and the keys to intergenerational wealth from retirement asset protection and smart money strategy to um ways to pay less in taxes, expert trust and estate planning input, investments to insurance, and even real estate and business financial planning. We are your passport to more wealth with less hassle and friction. We try to make it entertaining, clear, and to the point. We really try hard to make it fun to get richer with less work and stress. And today’s topic is everybody’s favorite, the old backdoor Roth contribution, which super CFP Lou is going to lead us through with the assistance of Anna and me, uh, the wealth doctor Jeff Camarda. And with no further ado, Lou, what exactly is a backdoor Roth conver? It sounds kind of dirty, but you know, it’s actually, uh, it’s okay, right? It’s not that dirty. Um it’s a it’s a smooth trick that uh oh it’s a smooth trick trick that a lot of higher you know higher income individuals uh implement if they’re not you know you have to be a certain income level to qualify for a Roth contribution and if you go over that income level um you’re not allowed to put money into a Roth. So if you make too much money, you’re not allowed to contribute to a Roth IRA which is taxfree which kind of thwarts you know our objective of being social workers for the affluent. Right. Correct. Correct. Correct. So this is again this is a this is a way to go kind of you know beyond be behind that and and you know transfer money into your Roth account. So how do you do it if it’s not if it’s not allowed if you make too much money? How do you actually get it in there? So I know some of you know the answer but believe. So, so I mean, you know, you basically, you know, the basis of it is you put money into your you you put into your traditional IRA account, but you want to make sure that you’re putting after tax money and not claiming. So, I make a non-deductible IRA contribution. Correct. And what about how much can I put in there? Seven grand. Seven grand. Seven grand if you’re under 50 years old. Or you can you can get an additional $1,000 catchup if you’re over 50. And that’s regardless of my level of income or the fact that I participate in a qualified plan on work. So again, you Yes. But you you have to make you have in order to put 7,000 in there, you have to make 7,000 in income, right? So So if I So at least Yeah. Sure. So So I’ve I’ve got earned income, you know, of at least $8,000 if I’m over 50, and sadly I am. Yeah. You know, then regardless of it could be a million dollars of earned income. Yes. and I could have a 401k and a pension and all kinds of stuff. I can still make a non-deductible IRA contribution, right? So far so good. Okay, good. Then what happens? Well, then you take that money and and you move it over. You you journal it over, you convert it over into your uh Roth account. So, you have to have both accounts and and you basically again you put the money. So, I open a a Roth account with zero. Correct. Correct. Yeah. And you can, you know, you can have if you have an existing Roth, you can use that account to move the journal money into it. You just have to have to be two separate accounts to start with. Right. So, it can be existing Roth. It doesn’t matter, but I’ve got to have a separate account. I can’t use the one that that I made the contribution. Correct. Okay. Now, the big catch, keeping up with the software. It’s complicated stuff. Okay. Yeah. Now, the catch the big the big catch is that if this is not for everyone, and here’s why. uh if you have an existing IRA account um you know especially if it’s an IRA with pre-tax money in it right so you if you already took deduction against this uh this money then you may not get the full benefit of of this of this conversion so what even if I’m making a fresh contribution to non-deductible segregated IRA correct it’s called pro prorated pro it’s prrated right so it gets um you know it kind of gets co-mingled the after tax money gets co-mingled with the pre-tax money even if there’s separate accounts. Corre Well, yes, they the IRS looks at your IAS no matter you can have as kind of like an on the bus account, correct? You know, so it’s it’s a unit. Even if you have se IAS, simple or regular IAS, they’re all in the breaking down. Say I’ve got $100,000 in my regular IRA and I make just to round up the even number, $10,000 non-deductible. Um, well, let’s use a simple example. Let’s say you have 93,000 in your regular IRA and you add 7,000 right to get it up to 100,000. So if you move that entire balance into into a into a Roth in that case 93% because it’s pre-tax would be taxable. But am I forced to do the whole 100,000? Can I select I can just do the 7,000? You could, but then the 93 but 93% of the 7,000 conversionable converted is going to be taxable. Correct. Okay, you got it. Which is not a whole lot different than just converting. Can I just convert the 93 and pay the tax on it to Roth? You could, but if you don’t want to pay taxes on it. So, so what’s the advantage of the of the back door rough? It’s really going to be selective. That doesn’t apply to 401ks and qualified money, just IRA balance. Correct. So, so you know the workaround is if you do have an existing IRA and again if you’re in the situation that this makes sense for you um to to do you can transfer the the you know the current balance of your IRA you know thinking if you still have a 401k you know active 401k you can transfer the IRA into the 401k and then do a new contribution for this year for plans not permitted there’s a lot of shells moving around the table now and you may want to have because you expert guidance to make sure you don’t screw it up and get some monorous tax penalties. But the basic premise, if I’m employed, I have a 401k and my plan permits me to move IRA balance into the 401k. Basically, you want to zero out the taxable component of the IRA. So, all that’s left is the non-deductible contribution. Correct? And if you do that, then the magic happens. I get the $93,000 goes into my 401k for a little while, for a long while, whatever. All that’s left is a $7,000 non-deductible contribution which will not be taxable if I convert it and now I can convert that into the Roth IRA. Right. You got it. Is there any seasoning period? How long before I snatch out the money back out of the 401k? Well, it’s again it’s Oh, there there isn’t. You can I mean I would you know probably wait a couple days for you know just just to make sure that’s a it’s you know uh notify that transaction takes place but there’s no there’s no waiting period on that. They they sure make you jump through a lot of hoops to get the right tax result, don’t they? But again, it’s really, you know, an example of understanding the tax code, which is incredibly complicated and conflicted. But if you have enough knowledge to really be able to navigate the hurdles, you can get some pretty remarkable results. Sure. Which is why I call tax the master wealth skill because if you figure it out, you can literally convert. We can pull money out of the air. Yeah. And 7,000 doesn’t seem like a lot of money, you know, but once if you do this year after year after year, you know, it adds up over time. Now, Anna hasn’t said very much about this. Is this something that, you know, you’re you’re just kind of in principle, you know, against, Anna, or No, I think it’s a a great opportunity. And I’ll piggyback on what Lou was saying. 7,000 a year doesn’t seem like a lot. Well, what if we’re talking about spouses, right? Then that’s another 14,000. It’s a good way to make sure that you’re making those contributions into a Roth, especially if it’s a year where you make too much money to make it directly. And again, the whole point of a Roth IRA is that future growth is tax-free. So again, it does it seems like we’re jumping through a lot of hoops, but if in a client scenario where it makes a lot of sense, it can be a huge huge impact later down the road. And we’re having some fun with this, but it really isn’t complicated. the steps. So long as you know what you’re doing, you do it properly, you know, it’s uh it’s it’s straightforward. Um and don’t try this at home. Just kidding. Um and also, you know, if you’re young professional, you know, such as Anna is to a lesser extent Lou, you know, and have a long series of of seven or $14,000 contributions, it can add up to millions really plus the growth. Yeah. Taxfree. It’s a good place to be. Absolutely. Any parting thoughts there? Super CFPS? Yeah. No, again, it’s it’s not it’s not for everyone. It doesn’t match everyone’s situation. Talk to us, talk to your financial advisors if this is something that uh you know may be beneficial for your situation. And um but you know, if if you do if you do qualify, then it’s it’s a great tool. Good. Last word, Anna. Yeah, I mean again m the more money that we can get for our clients into those Roth accounts um again that’s future compounding growth that’s taxfree so I think that’s you know the most important point of emphasis there too yeah which is our prime mission here at Camarda remember always striving to stay richer and live freer which we actually feel so strongly about we had it trademarked with us patent office that’s it for this week next week we’ll be really dialing probably the next few weeks talking about the mechanics of Roth conversions. Uh because back to your example with the 93% sometimes it makes sense to do that. If you’re able to get that money at cheap, you know, at a low enough tax rate, you probably want to do it all day long. And we’ll talk about how you can make structure your taxes to give you a better chance of uh of of tax orbits and cheap Roth conversions. And it’s different. I’m sorry I got you, but it’s different Roth back to a Roth contribution versus a Roth conversion. It’s two different strategies. AB put that out there. So that day now just go back and watch us again if that’s not clear in your mind. Next week we will talk about strictly uh Roth conversions on which you will pay some tax and the objective is to pay at a zero or very low tax bracket and get out of a taxable environment into a no tax environment. Well that the waters are muddy enough for this week. So with that we’ll bid you all goodbye and catch up next week. Thanks so much for watching. Share this with your friends. Hope you like it. Bye-bye. [Music]
