There’s good and bad “Backdoor Roths”, but most of them are BAD.
Yesterday I gave you the simple math you need to understand a common “financial gotcha“…
…taxing the principal now, but never taxing the gains will give you the same amount as taxing all of the
principal and all of the gains later.
(Go back and read yesterday’s email first if you missed it.)
THE BAD KIND OF BACKDOOR ROTH
The reason almost all Backdoor Roths are a bad idea is that you are most likely paying a higher tax rate
NOW than you will in retirement.
Think about it.
Right now you’re earning a ton of money. So much so that you’re hopefully saving 20%-ish of it.
Plus since you’re making all that money you’re paying a ton in taxes now.
But once you retire (within 9 years), you’ll only pay taxes on a the passive income you need which only
needs to cover your living expenses.
If you make $300,000 today, you pay taxes on $300,0000 regardless of your living expenses.
In retirement if your living expenses are $150,000, then you’ll only pay taxes on $150,000
(Keep in mind you have much more control over you taxes in retirement than you do when you’re
working.)
THE GOOD KIND OF BACKDOOR ROTH
If you have an unusually low tax year, then it makes sense to do a Backdoor Roth.
If you start a business or take a sabbatical or go back to school, then a Backdoor Roth is probably a good
idea.
Why?
Because you can pay taxes now while your tax rate is super low.
But Backdoor Roths outside of that scenario are almost always a bad idea.
P.S. I’m publishing on YouTube again, so if you missed my latest video, follow this link –
