Episode 30. Backdoor ROTH IRA Tax Strategy

Discover how the Backdoor Roth IRA strategy can help high-income earners enjoy tax-free growth and withdrawals in retirement. In this podcast, we’ll break down how the Backdoor Roth IRA works, why it’s a powerful tax planning tool, and how it benefits business owners and self-employed individuals. Whether you’re focused on tax-free growth, long-term savings, or advanced retirement planning, this approach is a game-changer for entrepreneurs and high-income professionals alike.

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*Disclaimer This material & presentation content is for informational and educational purposes only. This material and presentation content is designed to provide general information regarding the subject matter covered. It is not intended to serve as legal, tax, or other financial advice related to individual situations. Because each individual’s legal, tax, and financial situation is different, specific advice should be tailored to the particular circumstances. For this reason, ...

Chapters

• 0:00 Backdoor Roth IRA for Tax-Free Income
• 9:53 Tax-Advantaged Retirement Account Strategies

Transcript

Speaker 1: 0:00

I'm going to show you how you can have $792,000 in tax-free income using a backdoor Roth IRA conversion. If you're a business owner or not a business owner, this will work for you. So stay tuned and the best thing, you can actually start implementing this strategy right away in your life. Ready, let's get going.

Speaker 2: 0:24

Welcome to the Tax Reduction Podcast for Money-Making Entrepreneurs with Boris Mushaev strategy right away in your life. Ready, let's get going. Owner can save money on taxes is by using proactive tax strategies, and this podcast is all about saving you money on taxes. Boris will share with you in-depth and easy to understand tax reduction strategies that you can implement in your business within 30 days or less. Let's jump into today's episode.

Speaker 1: 0:58

All right, awesome, let's get started on this tax strategy. By the way, my name is Boris Moshe, I'm a CPA and a tax strategist, and I help business owners save tons of money in taxes, but not only I help them find ways to have tax-free income in the future. This is one of those tax strategies, so to speak, so let's dive right into it. So, before we get into it, how can you build tax-free income? In this example, we're going to use how you can build $792,000 in tax-free income having a backdoor Roth IRA. We really need to understand what is a Roth IRA and how does the backdoor work. Okay, now we're going to focus on two types of individual retirement accounts. This has nothing to do with your business, okay Traditional IRA and Roth IRA. If you are a business owner and you have a 401k, a solo 401k, a SEP IRA, simple IRA, doesn't matter. If you've got some retirement account for the business, phenomenal, continue using it. You can still use the backdoor Roth IRA to grow tax-free income. Now let's understand what is backdoor Roth IRA. Before we understand backdoor Roth IRA, let's break it down into two individual retirement accounts. We've got traditional IRA and we've got Roth IRA. There are some differences between them and it's really, really important to understand them.

Speaker 1: 2:16

Traditional IRA you put money into an individual retirement account and you get a tax deduction Because you get a tax deduction. Irs says when you retire, you're gonna. Because you get a tax deduction, irs says when you retire, you're going to pay us income tax on it, okay. Roth IRA it's after tax dollars. You don't get a tax deduction for contributing to Roth IRA. So when you do retire, whatever money was earned in that account is completely tax-free. So again, traditional you traditionally put the money in, you get a tax deduction. You pay tax on it when you retire. Rough IRA non-traditional put the money in no tax deduction and tax-free income when you retire. Now to put money into traditional IRA generally there are no income limits, meaning to say you can put the money into traditional IRA anytime, regardless of how much money you earn. Now there are some limitations if you've got money of excuse me retirement account from your business or whatever that is.

Speaker 1: 3:13

But the point that I'm trying to make, whether you have retirement account or not, you're not prohibited for putting money into traditional IRA Whether you're going to get a tax deduction or not. That's a different story. But the point is you're not prohibited to opening traditional IRA account, regardless of how much money you make and putting money into that account With the Roth IRA. You're actually prohibited to directly contributing money to Roth IRA if your income limits exceed threshold. So if you're a single individual, your income is more than $161,000, you're prohibited from putting money directly into Roth IRA. Or if you're married individual with $243,000, you're prohibited from putting money directly into the Roth IRA. That's why we have a backdoor Roth conversion. That means we are prohibited directly putting money into the Roth IRA because we exceed our income limit, but we're not prohibited from putting money into a traditional IRA, doesn't matter what the income limit is, because with traditional IRA you can put the money in. And then we have this amazing tax law and the code that says you can do what's called backdoor Roth conversion. From the backdoor, you can go ahead and convert it to Roth IRA because that conversion has no income limits. It doesn't matter how much money you make and you're contributing it to a Roth IRA.

Speaker 1: 4:35

We're going to talk about an example over here, but that is really what backdoor Roth is and the reason why it's called backdoor and why it works because, again, you're prohibited putting money into traditional, but you're not prohibited. Excuse me, vice versa. You're not prohibited into traditional, but prohibited into Roth. So we put the money into traditional and convert it to Roth IRA. How much can you put away annually? $7,000. And if you are over the age of 50, you can put away $8,000 and do what's called a catch-up contribution. So these limits are for both traditional and Roth IRA. Let's talk about a practical example how to do this, how to do it in a financial institution that you're working with. How it's going to example how to do this. How to do it in a financial institution that you're working with. How it's going to work, how it's going to grow tax-free income right after this break.

Speaker 2: 5:21

If you have a tax preparer and you do not have a tax advisor, the only way you can save money on taxes is by using proactive tax planning strategies that only a tax advisor can give you. Bora's put together a free PDF for you, the business owner Seven tax write-offs every S corporation business owner must know. In this PDF you can find seven tax strategies that you can start using in your business to instantly start saving money on taxes. Click on the link in the description below for a free download.

Speaker 1: 5:52

All right, awesome, let's get started. By the way, if you have not been using this strategy, which is backdoor Roth IRA, up until this point, please definitely speak to your tax advisor. Be like hey, I just want to make sure I'm doing it right. There's no tax implications. Even though Boris said this is good to go, I want to confirm with you can we do this? Definitely implement this. And if you've got a tax preparer that just puts the right numbers in the right boxes, you don't have a real tax advisor. Please do yourself a favor, do your financials a favor. Get yourself a tax advisor Now.

Speaker 1: 6:23

Let's go into this example right here. So how does this work? You're like all right, boris, great, I want to use this strategy. I'm definitely over the income thresholds. What do I need to do next? Now, what you need to do next is open up two accounts. You need to open a traditional IRA and you need to open a Roth IRA. Now, there's a lot of financial institutions that let you do that. You can open both. Some financial institutions charge you money, some of them don't. It's up to you who you choose, but all financial institutions have an option in their app, on the phone or on the online platform to open both and do a Roth conversion. It's a very famous thing. This is not like something that was just created yesterday. Okay, open traditional account. Let's say you are within the income limits or over the income limits, excuse me. Go ahead and put the money into traditional IRA and then convert that traditional IRA, do a Roth IRA conversion and transfer it $7,000 to Roth.

Speaker 1: 7:24

You might say, boris, am I going to pay tax on that conversion? Because a lot of people ask me that, Boris, aren't I going to pay tax? The answer is no Because, let's say, right now, in a year 2025,. The answer is no because, let's say, right now, in a year 2025, you put $7,000 in, you don't get a tax deduction. Okay, because you didn't even file your taxes yet and you're converting it right away. So you never paid taxes on it, so you're not going to pay taxes on the conversion. You're doing it with the same year.

Speaker 1: 7:50

Now, in the situations where you are going to pay tax, is that, let's say, you had traditional IRA all these years. You have $100,000 in there and you're like you know what? I want to have a tax-free income in the future from this $100,000. I am going to convert what I already had before this year into a Roth IRA. On that conversion you're going to pay tax. Why? Because when you were putting the money into the traditional IRA originally in the past, you were getting a tax deduction. So that's why you would pay tax on that. But in our scenario we're doing it for the same tax year $7,000 to traditional backdoor Roth conversion to a Roth IRA.

Speaker 1: 8:29

Now if we go through an example, let's say you do this for 30 years. So 30 year old business owner, you do it for the next 30 years until your age of 60, $7,000 for yourself Okay, and $7,000 for your spouse if your spouse works in the business Okay. So we're just going to use one individual, in this case 30 years, $7,000 a year. Assume 8% earnings annually. Now that has been like the average market rate, I think right, like on a very conservative side. So we're just going to use eight percent compounded annually in 30 years it's going to turn into 792 000.

Speaker 1: 9:07

Now, whether you are a non-business owner or business owner, if you do backdoor, don't do backdoor roth, but just contributing money into roth ira for the next 30 years, seven thousand dollars a year. It's going to turn at 8%, $792,000. Out of the 792,. Only 210,000 was your original contribution from your own money and $582,000 was earned tax-free. Now if you do this for yourself $582,000 in tax-free plus the 210, of course then you can do this for your spouse. That's another $792,000. You can do it also for your children that's another tax-free income. You can absolutely use Roth IRA to your advantage. Make sure that you're speaking to your tax advisor, looking at wide variety of options putting money away into retirement, getting a tax deduction but at the same time, having a retirement account for which you will not pay taxes on when the money that you pull out at retirement. Definitely speak to your tax advisor. Thank you so much and I hope this was helpful.

Speaker 2: 10:14

That's it for today's episode. Be sure to check out the description below for some free tax reduction resources that Boris put together for you. If you're ready to work with a tax advisor on your tax planning, be sure to schedule your call by heading over to wwwtaxplanningcallcom. That's wwwtaxplanningcallcom. And be sure to subscribe to our podcast to be notified when the next strategy is released.