Teaching Tax Flow: The Podcast

Welcome to episode 185 of the Teaching Tax Flow podcast, where hosts John Tripolsky and Chris Picciurro jump into the complexities of backdoor Roth IRA conversions. This episode is designed to guide high-income taxpayers, especially those familiar with Teaching Tax Flow's "red diagnosis" category, towards effectively contributing to tax-free vehicles like Roth IRAs despite income limitations. Through this focused session, listeners will explore the strategic advantages of implementing these contributions and be advised on common pitfalls to avoid.

In the discussion, Chris provides an in-depth overview of the backdoor Roth IRA conversion process. He clarifies how higher-income individuals can still leverage Roth IRAs for tax-free growth and distribution despite seeming ineligibility based on their income brackets. Chris emphasizes the importance of having zero pre-tax dollars in one's traditional IRA before conversion and highlights potential errors, such as triggering unintended taxable events. With a step-by-step guide on implementing this strategy, the hosts stress the significance of consulting licensed professionals to avoid costly mistakes.

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  • (00:00) - Introduction
  • (00:32) - Overview of Roth IRAs and Backdoor Conversions
  • (01:33) - Strategy for High-Income Taxpayers
  • (02:51) - Importance of Tax Planning and Strategy
  • (04:00) - Steps for Backdoor Roth Contribution
  • (06:19) - Common Mistakes and Pitfalls
  • (09:16) - Real-Life Case Study
  • (11:25) - Filing Status and Tax Implications
  • (13:35) - Final Thoughts and Mega Backdoor Roth Introduction
  • (16:57) - Conclusion and Community Engagement

Creators and Guests

Host
Chris Picciurro
Founder, Teaching Tax Flow
Host
John Tripolsky
VP of Marketing, Teaching Tax Flow

What is Teaching Tax Flow: The Podcast?

Welcome to “Teaching Tax Flow: The Podcast”, the show that’s all about demystifying taxes and helping you keep more of your hard-earned income in your pocket.

Hosted by tax experts from the Teaching Tax Flow team, this unfiltered (but clean) podcast is designed to empower you with the knowledge and tools you need to confidently navigate the world of taxes. We’ll cover everything from understanding tax laws and regulations to maximizing deductions and credits.

In each episode, we’ll break down a specific tax-related topic in a clear and accessible way, providing practical tips and strategies you can use to optimize your tax situation. We’ll also answer listener questions, share the mic with amazing guests, and share real-world examples to help illustrate key concepts.

Whether you’re a freelancer, small business owner, real estate investor, or just looking to understand your taxes better, this podcast is for you. So tune in, take notes, and start building your confidence in taxes today.

Produced and hosted by Teaching Tax Flow.
www.TeachingTaxFlow.com

John Tripolsky:

Welcome back to the Teaching Tax Flow Podcast today, episode 185. We are not just looking at some Roth IRAs, but some Backdoor Roth IRA conversions. So we're taking it to a whole another level here. We're gonna talk exactly what this is and why we're even talking about this when it comes to taxes. Obviously, it's a big question we're gonna answer with this.

John Tripolsky:

And of course, you don't wanna hear from me, you definitely want to hear it from my cohost, Chris Picciurro. Welcome back, man. Let's dive into this one.

Chris Picciurro, CPA:

Thank you very much. On today's podcast, we're going to talk about a strategy that many taxpayers that are in a red diagnosis in the teaching tax flow community, that means a high marginal tax rate, utilize to contribute money into a tax free vehicle, meaning a Roth IRA, gold diagnosis, which is tax free income and growth. And we talk a lot about traditional and Roth IRA contributions, and what happens is taxpayers that have a higher amount of income, and that when I say higher amount of income, that depends on your filing status. If you are covered by a retirement plan with your, by your employer, if you're married, as your spouse, but ultimately covered if you're a taxpayer, that their income is too high to contribute to a Roth IRA and too high to make a tax deductible contribution into their traditional IRA, one of the strategies that we often hear about is called the Backdoor Roth contribution. And part of the Backdoor Roth contribution is a conversion.

Chris Picciurro, CPA:

So you just like we talk about in the Teaching Tax Flow private Facebook group, it's called Defeating Taxes, and we talk about in the Defeating Taxes book, in all of our community, ideas are cheap and implementation's valuable. So before you implement the strategy, I'm going to talk through the steps of it, which is a little couple little pitfalls, but make sure you're talking to a licensed tax professional and a licensed financial advisor before you start doing this. I see a lot of people screw this up when they're doing it on their own and trigger the exact opposite of what you want. They actually trigger a taxable event on top of an already high marginal tax rate for a red diagnosis. So, yeah, so this Backdoor Roth contribution allows people that are otherwise ineligible to put money into a Roth because of their income, the ability to contribute to it.

Chris Picciurro, CPA:

And we've heard, you know, in different election cycles that that this, I guess, you can call a loophole is gonna get is gonna get filled, but ultimately it's available, it's popular, and let's jump into it.

John Tripolsky:

Yeah. And and Chris, I love as always, I say I love, I love, I love, I love certain things about it. Right? And I always look at these, again, not being the tax professional. You know, I learned through severe osmosis is what I say with everybody here.

John Tripolsky:

But somebody might be listening to say, oh, well, I clearly I don't make enough to to have to worry about this. Right? I mean, I thought that, I mean, most people think that at one point, like, oh, don't, this doesn't apply to me right now. But it's great to understand the full cycle of this and what is gonna, you know, what could potentially come up, because really it goes back to everything we talk about. Right?

John Tripolsky:

Everything the core of teaching tax flow, TTF is sometimes referred to it. It's all about tax planning and strategy. You can't plan afterwards. You have to plan before, right? So when you're walking us through this, I almost visualize this and want everybody to view this as you're looking at a GPS, right?

John Tripolsky:

I would say a map if we were twenty years ago. Looking at a GPS, it's showing you where you're going, right? And things are gonna happen along the way until you get there. So this is a great thing to know, right? There's limitations obviously, and there's a strategy, and there's a lot to it.

John Tripolsky:

So this is great that there's something that's beyond the yield sign or the stop sign when you can max it out. Right?

Chris Picciurro, CPA:

Absolutely. So you can either make a Roth contribution based on your filing status income, or if you were nil ineligible, this is where this particular tax planning implementation, which was a behavioral implementation, makes sense. So how do we do this the right way? And this is why, you know, a lot of times people will say, well, I'm not sure if I'm eligible. Remember, you have until April 15 to make an IRA contribution that's Roth or traditional for the previous year.

Chris Picciurro, CPA:

And that's why you have that extra time to determine where your income lands. So let's assume you're ineligible put money into a Roth IRA. You want to, and we know that a Roth IRA is an amazing type of account. They provide you with tax free income and growth and tax free distributions if those distributions are qualified with the right planning, that's easy to meet those qualifications. So let's say you can't contribute to that Roth.

Chris Picciurro, CPA:

So here's what you do. You make a contribution to a traditional IRA. You ensure that that traditional IRA has no pretax dollars in it. So ultimately, it's an IRA you have with no balance. You make a contribution to that.

Chris Picciurro, CPA:

Those contributions are limited based on your age and your, and, and what, what tax year you're in. So let's just make an example. Let's say you put $7,000 into this traditional IRA because your income is higher. You get zero tax deduction for that contribution. So you've actually contributed, funds to a traditional IRA that are nondeductible.

Chris Picciurro, CPA:

So really that doesn't do you much good, right? This is where the magic happens. You immediately, let's say within one business day, take those after tax or non deductible contributions from your traditional IRA account and you convert that over to a Roth account. That Roth conversion, usually that's taxable, but you converted all nondeductible dollars into the Roth. And now you've essentially contributed to that Roth, and that's gonna grow tax free the rest of your life and hopefully tax free distributions and bam.

Chris Picciurro, CPA:

That's it. That is a

John Tripolsky:

beautiful thing.

Chris Picciurro, CPA:

Backdoor Roth contribution, and it uses a Roth conversion.

John Tripolsky:

And the way you said that. Right? So some people are probably thinking, oh, yeah. That's simple to do. I do and this is a a question that just to make sure that I understood what you're saying.

John Tripolsky:

When you say an account that basically has a zero balance, is this a a new account or or something, but it literally has to have a zero balance in it. Right? Can't have anything in it. This is a a fresh baby, basically.

Chris Picciurro, CPA:

Have any deductible IRA any Like, funds in it. Traditional IRA can't have any pretax funds in it. So it's easier to just have this account that you utilize to do the Backdoor Roth contributions each year and just keep nothing in it. Correct. It doesn't now, this is where it gets very sticky.

Chris Picciurro, CPA:

And this is where I've seen this screw up a lot. Okay. Imagine you want to put money into the Roth. You make too much money, so you're already in a high marginal tax rate. You have a traditional IRA and with a $100,000 of pretax money in it.

Chris Picciurro, CPA:

You make a Roth a a nondeductible contribution, and then you try to convert that nondeductible contribution into a Roth. Well, guess what? It doesn't work that way. Now you have attribution rules and only a sliver. So let's say you put in $7,000 only about 7% of that conversion is tax free.

Chris Picciurro, CPA:

So you don't want to muddy the waters. The best way I could describe it to a client is imagine, John, you are mixing paint, right? And you have red and you have blue and you want to make purple my favorite color. Hey, I'm wearing that today. And you mix these paints together.

Chris Picciurro, CPA:

After the paint is mixed, I can't go into the paint and now say, you know what? Actually, I want that red paint back. I want to extract it. It doesn't work that way. So once you put nondeductible money into an IRA that has pretax dollars in it, everything gets messy, and you have a lot more reporting to do on your tax return, and you and you have to allocate, you know, Roth conversions based on those balances.

Chris Picciurro, CPA:

So the bottom line is this, work, that's why I'm telling you, implementation is valuable. Implementation is most important. Ideas, hey, this is a great idea. And we provide a lot of great education, but ideas ultimately are cheap and they could backfire. You know, if you do this the wrong way, I had a real case study that came through.

Chris Picciurro, CPA:

Luckily, were not involved with this client at the time it happened, but it completely, completely backfired where they had a, you know, a $100,000 example in a pretax account. They contributed, I think it was like $7,500 and then they converted the $7,500 into the Roth, and they only were able to they had to pay tax on 97.5% of that contribution. It's disaster. So you want to make sure that that paint can, right, is empty before you put the paint in it. So you want to execute this properly.

Chris Picciurro, CPA:

You want a traditional IRA with no pretax dollars in it. You wanna make a nondeductible IRA contribution into that specific account, and then you wanna immediately convert that to a Roth. Now married taxpayers, you can do this for both spouses, by the way, but it's the same process for both spouses. So if a married couple, we we're seeing, you know, 15 to 16, $17,000 depending on their age and and etcetera of ultimately raws contributions every year even though they were not eligible.

John Tripolsky:

And I'm sure somebody's thinking this question now. Right? Like, oh, well, me and my spouse can both do it, but we file jointly. Doesn't matter. Right?

Chris Picciurro, CPA:

Doesn't matter. Yeah. Your filing status really don't I mean, filing status has something to do with your IRA, your deductible IRA contribution. So that the other thing you have to remember is this works when you're ineligible to make traditional IRA contributions that are deductible.

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Chris Picciurro, CPA:

Because if you're eligible to make a if your income was in a situation or filing status was in a situation where you could contribute to the Roth IRA, then just contribute to it. You don't have to do the backdoor. The backdoor is when you wanna go to a concert or a sporting event and the tickets are sold out, and you gotta find another you gotta find another way to get in.

John Tripolsky:

I appreciate you coming up with that analogy. However, sir, I give it six months, maybe a year until you can actually beat that one that you gave about the paint can. That goes up there in the in the record books for one of the best analogies I think you've ever come up with, and I've never heard you say that in twenty something years. So that's awesome. And with

Chris Picciurro, CPA:

this I'm gonna come up with it now because I've I've looked at myself and said, hey. I'm wearing purple today.

John Tripolsky:

We honestly, that may be one of the best one. That really might be. Because I'm sure people are thinking like, oh, I could put tooth. It's not like soup. You can't separate it.

John Tripolsky:

But I would I'd be curious. Right? And and this is me again, kind of my personal interest in this because this is something that I didn't know about for a while. Anybody that's listening watching this, you have a very powerful tool whether you know

Chris Picciurro, CPA:

it or not. I'm going

John Tripolsky:

to sound like a used car salesman. Nothing against used car salesman. But there's that little feature. If you're watching on YouTube right below us here, like, literally, I'm I'm pointing to it. I can't mess this up.

John Tripolsky:

It's not a left and right reversal thing here. It's a comment section. I would be extremely, extremely curious how many people actually knew this existed, but then also the questions that people have around it. Right? Like, I brought up that one about, oh, can, you know, can you do it, you know, independently, but you file jointly?

John Tripolsky:

Right? This could get pretty complicated. Right? Because everybody's situation's different. So I'm sure every single person that has ever thought about this has a question.

John Tripolsky:

So drop it in there.

Chris Picciurro, CPA:

Yeah. This is this is and that's why I I would air on the side of caution when doing this and waiting till you know what your final income numbers are. Unless you're in a situation where you have w two wages that are that are way beyond the the threshold for making a a Roth contribution, IRA contribution. So absolutely, this is a very powerful tool. We have clients in our private CPA practice.

Chris Picciurro, CPA:

They utilize this on an annual basis. It's just part of the tax plan. These conversions, our Backdoor contributions, they're the same thing. In this case can add up. What are the pitfalls, right?

Chris Picciurro, CPA:

Eligibility, having pretax dollars in your traditional IRA that muddy the waters, and also potentially having earnings in your IRA. So that's why it's important to immediately do the conversion. So for instance, John, let's say you put 7,500 into a traditional IRA and you didn't get a deduction for it. Because you're a genius investor, you forget about it and that $7,500 goes up to $8,000 And then all of a sudden you're like, oh wait, I gotta do the Roth conversion and you convert $8,000 You have to pay tax on the $500 So now the $500 is growing tax free, but the whole point was you're in a high marginal tax bracket. So why why are we you know, that's you don't wanna add income to that.

Chris Picciurro, CPA:

So, yep, that this this backdoor Roth contribution using a properly executed Roth conversion is super powerful. The final thing I'm gonna mention, and we're we're gonna do a we'll do a separate podcast episode on this down the road. There is something I feel like I'm now you mentioned the used car salesman. I feel like I'm a used car salesman. There's something called a mega Backdoor Roth contribution and that is for that is utilized by people that are in an employee situation and it's typically utilized by people that are in a much in a in a pretty high w two wage earning base.

Chris Picciurro, CPA:

So we don't wanna go mega, you know, all this. But there's a mega Roth, Backdoor Roth. Again, we'll do a separate episode on there. We do have some content in the teaching tax flow community, but this is the the the Roth IRA, the Backdoor Roth IRA contribution. Again, common.

Chris Picciurro, CPA:

You don't have to do the max amount. And the bottom line is it allows people that are would be ineligible for making a Roth IRA contribution now provide them with the superpower that they can get money in there legally and ethically. And I agree, John. I'd love to hear from the teaching tax flow community. Is this something you have done?

Chris Picciurro, CPA:

Hey. Are you a financial adviser and you recommend this to your clients? Tell us your stories. Give us your questions.

John Tripolsky:

Heck, even even if somebody's a tax professional, I'd love to see how many people have had a client come in the door like, hey. Look what I did last year. They're so excited about it, and then they look and say, well, as my daughter would say, you made a ouchie, And she'd hit you with a Band Aid. But

Chris Picciurro, CPA:

You don't wanna make a financial ouchie, and that's exactly what it is.

John Tripolsky:

I'm gonna tell her that. She'd be so happy you said that. But, yes, everybody check that out. Check out defeatingtaxes.com. That'll actually drive you to the the Facebook group Chris mentioned a little bit earlier.

John Tripolsky:

There's book. There's resources. There's everything on there. But, again, you are already empowered. Exact like I said, the comment section below, that's a direct line, to somebody who knows what they're talking about.

John Tripolsky:

And, again, it's not. Let's let's be honest here. It's this guy, and everybody else in that community. So check it out. Don't be lazy.

John Tripolsky:

And I'm glad you guys joined us with this one. This was obvious or for this one, I should say. This was something, again, I didn't know about for a while. Chris had mentioned it, and it intrigued me, so I'm glad we had it on the, the roster for the podcast. As always, we'll see everybody back here again next week on the Teaching Flow podcast every week, everybody.

Disclosure:

The information in this podcast is educational and general in nature. It reflects the opinions of teaching tax flow and does not take into consideration the viewer's personal circumstances. It is not intended to be a substitute for individualized financial, legal, or tax advice. Consult the appropriate qualified professional prior to making any decisions. Securities are offered and supervised through Cabin Securities Inc member, FINRA SIPC.

Disclosure:

Investment advisory services are offered and supervised through Cabin Advisors LLC, an SEC registered investment adviser. Chris Picciurro is a registered representative of Cabin Securities and an investment adviser representative with Cabin Advisors LLC, Teaching Tax Flow is an independent entity and is not affiliated with Cabin Securities or Cabin Advisors.