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Update: Tax Planning Techniques & the Rise of the Backdoor Roth IRA

Mark Zaifman   |    Tue, Mar 21, 2017 @ 02:59 PM

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I wrote this blogpost, Tax Planning Techniques & the Rise of the Backdoor Roth IRA a couple years back due to the intense interest from many clients about the Backdoor Roth IRA tax planning technique. It’s a bit surprising this savvy technique has not been shut down. It’s of course entirely legal and perhaps could be called a tax loophole. That said, as long as this option is available, why not take advantage of it? Tax planning at its core is about deferring taxes to a later date and or minimizing your current tax liabilities.

Using a Roth IRA means investing with money that has already been taxed, (post-tax income), whereas investing using a Traditional IRA means using money that has not been subject to income taxes, (pre-tax) which is why a Traditional IRA lowers your current taxable income, which leads to lower income taxes being paid that year. Yet as you’ll read below, of the many benefits a Roth IRA offers besides allowing your money to grow tax sheltered year after year after year, one of the sweetest of all is not needing to make any required minimum distributions at age 70 ½.

That may not sound like a big deal if retirement is years or decades away, but consider this. All that money you have saved up in your 401k, 403b or Traditional IRA comes with a catch when you begin to withdraw. You have a silent partner called the IRS, and most likely another silent partner - your State, if they impose a tax on income. Many times that combined tax could be as high as 40%. So say you withdraw $50,000 one year, you could very well end up owing 40%, or $20,000 to the taxman, leaving you with a net of $30,000. Ouch! With a well-funded Roth IRA, you have eliminated your silent partners when making withdrawals in retirement and all it takes to achieve that goal is smart and strategic retirement income planning.

You can read the original post here Tax Planning Techniques & the Rise of the Backdoor Roth IRA