Turbo-Charge your Roth!

I’ve spoken before about the potential benefits of having some tax diversification within your portfolio. There can be a distinct advantage to having both pre-tax accounts, and holding assets in post-tax brokerage accounts which may qualify for special capital gains tax treatment when sold. But maybe the greatest advantage of all could come from post-tax monies invested in Roth IRAs and Roth 401(k)s which can produce tax-free withdrawals and tax free income in retirement. By blending the tax treatment on distributions from different types of retirement accounts, wealthy and even not-so-wealthy retirees and their heirs, could enjoy significant benefits from having a Roth.

The problem for many high-income people is the $194,000 income limit which takes away their ability to contribute to a Roth IRA. That’s where the little-known Backdoor Roth IRA is quite a clever strategy.

It goes like this: Anyone who is under RMD age and has earned income can contribute to a non-deductible IRA, then convert it to a Roth. The contribution limit, though, is relatively small –  $5,500 for those under age 50 and $6,500 for those 50 or older. Plus, if you have any post-tax monies in an existing IRA or IRA Rollover from prior 401(k)s and want to convert it into a Roth, you can’t simply slice off the post-tax money and convert it… the after-tax and pre-tax money would have to be accounted for on a pro-rata basis.

But there’s a little-known way to potentially skirt these pro-rata rules. Some employers allow participants in their 401(k) plans to make after-tax contributions, only the limits are much higher –  $54,000 of total contributions in 2017. So let’s say you’re a highly-compensated 45-year-old, working for a company that has a 401(k) offering a 50% match on the first $6,000 in contributions, AND allows post-tax 401(k) deposits up to the maximum. If you really wanted to turbo-charge your retirement, you could not only max out your deferral limit of $18,000 into the 401(k) and take the company match of $3,000, but you could also go “all in” by contributing an additional $33,000 after-tax into the 401(k) plan as well.

If you could do this for the next 10 years, you would’ve contributed a total of $330,000 in after-tax payments to the 401(k). All of the account’s earnings would be tax deferred and eventually taxed when withdrawn, but once you retire or sever employment with that company, you could do a direct rollover of the $330,000 in after-tax contributions to a Roth IRA and then roll all of the pre-tax contributions and earnings into a traditional IRA. Just like that, you’ve super-funded your Roth.

The Roth 2-Step and Mega Backdoor Roth strategies are certainly not for everyone, nor is any sophisticated retirement approach for that matter. But these and many other retirement secrets can make for an interesting conversation with qualified advisors in the area of financial and retirement planning, as well as tax diversification both before and after retirement. This is exactly why you need to contact us here at Lucia Capital Group. These are the kinds of strategies we think about and implement every single day. Give us a call – we’re here to help.

Information presented should not be considered specific tax, legal, or investment advice. You should always seek counsel of the appropriate advisor prior to making any investment decision. All investments are subject to risk including the loss of principal.

The information provided is based on current laws, which are subject to change at any time. Lucia Capital Group is not affiliated with or endorsed by the Social Security Administration or any government agency.

IRA withdrawals will be taxed at ordinary income rates. Withdrawals prior to age 59½ may also be subject to a 10% penalty tax. Roth IRA distributions of principal from a Roth IRA are tax-free; however, any earnings will be taxed at ordinary income rates and a 10% penalty tax will apply if withdrawn prior to age 59½ or within five years of the date the Roth IRA was established, whichever is longer.

There is no guarantee that any investment or financial planning strategy will meet its stated objectives.

No client or prospective client should assume that the information contained herein (or any component thereof) serves as the receipt of, or a substitute for, personalized advice from Lucia Capital Group, its investment adviser representatives, affiliates or any other investment professional.

Raymond J. Lucia Jr. is chairman of Lucia Capital Group, and CEO of its affiliated broker/dealer, Lucia Securities, LLC, member FINRA/SIPC, which is a subsidiary of Lucia Capital Group, a registered investment advisor. Registration with the SEC does not imply a certain level of skill or training. Advisory services offered through Lucia Capital Group. Securities offered through Lucia Securities, LLC. CAA-10867 (02/17)

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