• I was glad to hear this wasn’t an anti-roth rant at the end.

    My three favorite features of a Roth IRA are the following:
    1) the ability to use it in early retirement (if desired) in the way you described.
    2) no RMD in retirement after age 70.5 unlike regular IRA money.
    3) giving it to heirs as a stretch Roth IRA.

    As a stretch Roth IRA, your heirs will be forced to take RMDs but they will be tax free and the money will continue to grow tax free. So, it’s basically a tax free gift to your heirs for as long as it lasts. That’s a huge advantage if you plan to leave money to those you love.

    I do agree that it is extra work, but wanted to highlight some of the other reasons it may be “worth it” for people.


    • Those are great advantages that Roth has over traditional IRA dollars, but that’s not what we’re talking about today. I’m looking at taking $5,500 that would be invested in taxable and instead investing it in Roth via the Backdoor.

      Similar and in some ways better than the Roth account, the taxable account can also be accessed at any age with no stipulations, is passed down to heirs at a stepped-up cost basis (no tax due if sold for cash) and without RMDs. The biggest downside to taxable is the potential for future capital gains taxes, which may or may not be an issue for us.

      I think converting traditional, tax-deferred investments to Roth between retirement and age 70.5 is an excellent idea for the reasons you outlined.


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  • I’ve written my opinion on the dollar value of a Roth IRA. Using relatively conservative assumptions, I came up with $2,750 in capital gains tax savings over 30 years, or about $90 per year. I only included the capital gains tax benefit, which you assumed would be zero in your analysis because of methods to avoid paying the capital gains taxes. I did not include dividend tax drag in my analysis.

    I think you are minimizing the power of compound interest on the tax drag of the dividends. While 0.5% a year may not seem like a lot, you are cutting 0.5% on your after-tax returns. It would never be acceptable to the index fund investor community to pay 0.55% for their index funds instead of 0.05%, but that’s essentially what you are doing by choosing to invest your index funds in taxable instead of a Roth.

    The ability to stretch your Roth IRA should be noted, which extends the tax benefits of the Roth to potentially over 100 years.

    Finally, in my opinion, you need absolutely optimal investment management in order to render the benefits of Roth IRA just “marginal.” As you describe, you need to completely avoid capital gains tax in the taxable account and never sell your investments for decades through index fund investing. This may not be possible for the typical investor, who may have difficulty staying the course during down markets or avoiding the new trendy investment.


    • I hadn’t considered the behavioral aspect of leaving the money alone once it’s in the Roth IRA. There are some psychological benefits of illiquidity, I suppose. Of course, the money is available to withdraw five years after the conversion.

      Regarding the 0.5% tax drag, if it were on the whole portfolio, that would be a huge problem. But in the case where you’re already maxing out other tax-advantaged space, the $5,500 we’re talking about should represent a small portion of your annual investments — under 10% for most and less than 5% for many.

      Good things to think about, nonetheless.


      • Trent McBride

        I agree that the backdoor is not a huge game-changer, but over an appropriate time period (and Roth accounts should be the last one you tap, so we are talking several decades here), the compounding growth is real money. I think you are low-balling it at 5-10%, I think more like 10-30%; I value it around 20% for myself. Not enough to justify pro rata taxes, but definitely worth the trouble to clean out tIRA into SE401k, regardless of whether you are high- or low- income in retirement (but for different reasons). I think it is misleading to just say it’s “$28” a year, and it’s misleading to compare it to other saving strategies (why not both? there is no real trade-off here).

        Same applies to HSA; even if you find tracking your spending a pain, you can a) just wait and use it to fund your (higher) expenditures when you are old and gray , and b) withdraw the balance (if any) like an IRA after 65 per the rules. I doubt many people’s balance with outstrip their spending later in life (especially FIREers). I have a big envelope full of receipts, but if it burns up, no big deal (except for the fire that may have just burned down my house). I just don’t see any real reason to eschew tax deferred/exempt growth. Over time it’s real money.

        • The 5% to 10% I was referring to is the $5,500 you can contribute to Backdoor Roth compared to your annual investments — we’ve been doing $11,000 as a couple with one income (hooray for the spousal IRA), which in recent years, has been about 5% of our annual investments.

          I do like Roth money — it is the most valuable money a person can own, and there are a number of ways to invest or convert in Roth, most of which give you a lot more than $5,500 a year. I converted hundreds of thousands of tax-deferred SEP IRA money to Roth in 2010 when it was supposedly going to be a one-time opportunity.

          And you’re probably right about the HSA. One risk is the possibility of single payer or universal health care becoming the law of the land. Our out-of-pocket expenses might look a lot different in that scenario, and I’m 23 years away from Medicare eligibility.


        • Trent McBride

          Ah, gotcha.

          I imagine if some version of single payer come to pass, there will still be a large amount of cost sharing – there has to be, or it will be a fiscal disaster.

        • Regarding HSA’s, are you only contributing $4000 a year, and not the $6900 that you are allowed to contribute?

          Not contributing those extra $2900, would translate into paying around $1000 more in taxes (assuming a marginal tax rate of 35%).

          In the case of universal health care, you could still withdraw the money after age 65, hopefully at a much lower marginal tax rate. For example, withdrawing $2900 after 65 at a marginal tax rate of 17.5% would save you $500 a year.

        • Disregard my comment above. I read below that you do contribute the max to the HSA. Thanks

        • Good question (and good points). In the post, I’m only talking about how you choose to draw down an HSA. I would never turn down a tax deduction like that, especially when there’s a very high likelihood we’ll also withdraw the money tax-free, too. The HSA is triple tax-free, as they say.

          I’ve added a line to make it clear I always recommend maxing out an HSA account.


  • I think this is a clearly explained review of the complex retirement fund laws. I don’t disagree with any of it.

    I love having money in ROTH personally. I see the value as much more than a few dollars of credit card points.

    The ROTH allows tax-free growth and tax-free withdrawals. If I don’t spend it all then my kids will get it without paying a tax or penalty.

    It is also much more flexible than a 401k or traditional IRA especially since there is NO RMD on ROTH. My parents an in-laws are over 70.5 years old and are required to take money out of retirement funds and pay the tax. It is a big issue for them. ROTH wouldn’t require that.

    • I’m going to push back against the “few dollars of credit card points” remark, but agree with the rest. Roth has numerous advantages as compared to tax-deferred money. My preferred method is to defer tax with traditional contributions in peak earning years and converting to Roth in low-income, low-tax years (retirement).

      Regarding the credit card points, last year my wife and I each picked up one card and spent the $3,000 minimum on each. That gave us enough Aadvantage Miles to fly our family of four to Honduras and back. By spending $6,000, we got over $3,000 in free flights. That’s a 50% return in a couple months.


      • Just curious how many cards do you open each year? I think I went to fast and opened 3 cards in just 3-4 months and Chase denied the 4th credit card. I am trying to find out what the right “pace” is for opening cards, thanks

        • Chase has a 5/24 rule. If you’ve been approved for 5 cards from any bank in the last 24 months, they will likely deny you. That’s why I strongly suggest you start with Chase cards and then consider other banks’ cards once you’ve racked up a bunch of Ultimate Rewards points.

          Note: Some business cards won’t count against you in the 5/25 rule. Citi and AmEx for example, but I’ve heard Capital One business cards do.

          I usually get a new card every few months, but will have to slow that pace to go back to Chase cards (or alternate between personal and business cards).


        • I was denied on my 4th Chase credit card (3 were approved, 4th was denied). Before these cards, the last time I applied for a credit card was 4 years ago. The Recon Chase associate I spoke to, cited too many cards in just a few months as the reason for the denial.

          I am bringing this up because despite listening to 100% of Choose FI episodes and taking the tavelmiles101 email course, the only rule I remember ever hearing is the 5/24 rule.

          Based on my experience I would wait at least 4 months in between cards. I asked the Recon Chase associated about the rules and she acted like there were no rules, just case by case considerations.


  • I’ve been doing the backdoor Roth since it started and I agree with you, it’s too much hassle if you have a regular IRA. Good for me, I don’t 🙂

    And every year I restrained from starting a regular IRA for just that reason, because it would make the BDR too cumbersome.

    The good news for me is that now that I half-FIRE’d and went part time I don’t have to do the BDR. I’m doing a front door Roth 😉

    • When the front door is open, there’s no need to sneak around to the back.

      One of the downsides of starting a self-directed IRA would be the loss of the Backdoor Roth ability. But now I see it wouldn’t be that big of a deal.


  • I am glad you laid this out and quantified it. I think the original writing was for people who needed money to bridge their early retirement to when they could access traditional Roth and 401(k) money. Though FIRE is a popular concept compared to several years ago, most people will not retire early at all or early enough to need that bridge.

    The conversion advice has gotten mixed up in the basic personal finance advice and this post provides clarity on the real dollar value and by doing so emphasizes that it is really for the early retirement folks who need that bridge.


    • Thanks for the comment, Drew.

      That’s not exactly how I view the backdoor Roth — I see it more as a way to squeeze a little more money into a tax-advantaged account. And if you can easily do it, I still think it’s worthwhile. Just as not as valuable to me as I had assumed it was.

      I think a Roth Ladder is a great tool for those who retire early without much of a taxable account to make some of their tax-deferred money available to them without penalty at an early age.

      The terms are confusing and they’re mostly made up using household objects (back door, ladder).


  • Roth Iras offer a great way for your heirs to get the option for a stretch Roth Ira which allows them to continue to have a tax protected account grow while only subject to the RMD (which if given to someone young like a grandchild can extend the tax favored compounding by decades).

    As an heir I would much rather inherit Roth funds for that reason.

    I procrastinated for a long time before finally doing a backdoor roth (thanks for your guide that finally helped me to do it) mainly because I had so many other accounts that would have been subject to the pro rata rule and I was lazy to roll them into my 401k. I finally did and last year was the first year I did a backdoor roth (to demonstrate how long I had put it off, I had over $65k basis that was converted).

    I honestly think you don’t need to save receipts for HSA use. Most studies show that a couple who is 65 will spend $250k in out of pocket expenses which would deplete pretty much even the most heavily funded HSA accounts. So even if you don’t keep a single receipt I think it would be easy to just use it from day the first day you are 65 and figure I would have enough qualified ongoing expenses (medication, co-pay, Medicare premiums, etc) to use it all up without digging for decades old receipts.

    • Good points, particularly on the HSA bit. I’d hate to run the risk of having to pay tax on any HSA money, though. While scanning and spreadsheeting the receipts may be overkill, maybe a shoebox or file folder would be adequate. You do run the risk of losing them to flood or fire in that case, but you probably won’t need them, anyway.

      It’s true that a Roth IRA is a great account to inherit, but so is a taxable account, as the cost basis is stepped up to current cost when inherited.


  • For families with children growing up making under ~250k but more than the traditional limit, the backdoor Roth is a good way to hide wealth from college financial aid calculations. You can do the same with a no tax benefit traditional IRA, but once you have the IRA set up in Vanguard, converting it is literally the press of a button.

    • Good point, gals. The Roth IRA is ignored on the FAFSA.

      I tend to assume that if you make too much to make a direct Roth contribution, you’re not likely to qualify for any need-based financial aid, but there will always be outliers.

      Thanks for sharing the tip!

      • The range between “not Roth eligible” and ~250K+ (this upper number has probably increased since we last checked) per year is the prime “your wealth matters” territory for financial aid at private schools (Forbes has a really good series of articles on this topic). A good percent of the upper-middle-class is in this category (including us for most of our working lives– though I see the “not Roth eligible” limit has increased along with our income), which is probably why there’s a whole series of Forbes articles on how to legally hide wealth from private colleges.

  • ReFinDoc

    The loss of recharacterization has made Roth conversions far less valuable. An early investment loss in a Roth account “stays on the books.”
    A loss in a taxable account can be used to offset up to 3k of regular income if no other cap gains. LT gains in a taxable account can be gifted and have a step up basis at death. Give away your money with warm hands rather than cold.
    If you understand tax loss harvesting, a taxable account beats a Roth account every time. The amounts that can be put into a Roth are really quite trivial.

  • This is a great write-up of a complex topic, so thanks for putting this together. Investigating the backdoor Roth has been on my to-do list for a while and I can now confidently cross it off!

    I have a huge balance in a traditional IRA from a 401k I previously rolled-over. That plus the marginal benefit means no backdoor Roth for me! On to my next to do…

    • Yeah, I wouldn’t worry too much about it. Honestly, if you’re in a position to consider it, and you know why it may or may not be the best idea, you’re likely going to be just fine no matter what choice you make.


  • Drop it into MD

    I like Roth because it is another goal to force my savings. I do not budget in the traditional sense but I just make sure my savings are high enough and not feel back about spending the rest. Filling the roth helps me keep that goal up there and avoid lifestyle creep. If I plop 11k down in january I cannot spend it later. If I plan to put 1K a month into my brokerage I would be more likely to tap that if needed funds. It is also easier to get that money out to spend. Now myself and most people on this site would not think about spending money designated for retirement but it is nice to decrease the temptation.
    I also like Having roth as a place to re-balance without penalty. My 403b and 457 are limited and I do not want to move much around in taxable so that leaves the roth. It i puny now but it will give me a place to put a tilt on my AA or some not tax friendly alternative investments.

  • Thank you very much for sharing, I learned something new today!

    Figuring out how to become as tax efficient as possible in retirement is something I and my advisor are constantly mulling over. I appreciate your thoughts and the math around this topic.

    Keep it up!

    • I’m here to teach, my friend. Every day is a schoolday.

      It’s true that if you’re not invested in a tax-efficient manner in taxable, the cost difference can be much greater, making the Roth contributions much more attractive.


  • VagabondMD

    Great article. I had never done the math, but it is interesting to know that the incremental benefit of the back door Roth is relatively low.

    It is worth having a solo 401(k), however if you have a significant side gig. That will help you deferred tax and accrue more assets for retirement.

    • Great point. I opened up a solo 401(k) in 2016 — not to shelter IRA money (I rolled some over into my employer’s 401(k) several years earlier) but to make more tax-deferred space for the income from this site.


  • David

    I started investing for retirement with an SEP IRA a few years ago. Recently I’ve been debating whether or not I should clear a path to make backdoor Roth contributions. I didn’t really want to go through the hassle. This article makes me feel better about not doing it. Thanks!

  • This is such a great post that clearly explains the benefits of “taxable” account as well as the marginal added benefits of the back door Roth (after maximizing other tax-advantaged accounts of course).

    I think another “marginal” benefit (and I say marginal because it’s not really a hard benefit) is that Roth money is a little bit less liquid. Psychologically, people think of money in a Roth IRA as money that shouldn’t be touched, thus giving it a better chance to grow into something substantial. Whereas money is a taxable account has the perception of being liquid so… people might be thinking “I can withdrawal money from this whenever I want”. This could be to their detriment as they could be selling at a loss without tax loss harvesting or selling at a gain and incurring taxes on those capital gains. Like I said, it’s a soft/marginal benefit, but I think human psychological behavior is powerful so I do think it’s still a “benefit”.

    Hopefully I explained my thoughts somewhat clearly ;P

  • Side Hustle Scrubs

    Heresy! Somewhere an angry mob of personal finance enthusiasts is lighting their torches and sharpening their pitchforks.

    I think the backdoor Roth is worth the minimal effort I exert 5 minutes a year to contribute. I like knowing that by age 60 we’ll have a million dollars in tax free money at our disposal.

    Most of all I like that between taxable accounts, Roth and 401(k) I will essentially be able to pick and choose my marginal tax rate based on how I make withdrawals.

    Having a dollar figure the Roth is worth ($50-$100/year) really puts into perspective how lucky physicians are to have their earning power. You have readers who would never dare to skip on their Backdoor Roth but would never consider working a physician side gig making $1,000-$3,000 a day. A little hustle goes a long way to fueling a fatFIRE.

  • Appreciate the in depth article on the pros and cons of the Backdoor Roth. I think sometimes the FIRE community is a little overzealous in doing something just because they can, without questioning if it’s really worth the time and anxiety.

  • Good post. Yes, the initial benefit may not be that much per year. But when you’ve done it for 10 years, it’s now $500 per year and growing. The hassle is so tiny most of the time (MAYBE one IRA rollover, plus a contribution and conversion each year) I think it’s worth it for most.

    Of course, there’s more than just a tax benefit there compared to a taxable account. There’s also an estate planning benefit and an asset protection benefit.

    • EnjoyIt

      This exactly.
      It isn’t just $20-$50 per year. It is compounded in itself with growth.
      Year 1 $20-$50
      Year 2 $40-$100
      Year 3 $60-$150

      After 20 years of investing this number becomes more substantial substantial. $400-$1000 per year every year. And, that doesn’t even include a reasonable 5% growth on that money.

      POF, I really believe you need to amend your article to include such data because it is a big deal. Who wouldn’t want an extra $1k+ of tax free spending money in their retirement.

      • That’s true. But any money you set aside by spending a tiny bit less or earning a tiny bit more also benefits from addition and compounding. The only difference is the tax drag.

        I do plan a follow-up in which I dive deeper into the numbers. I wanted to do that here, but at 3,300 words, it’s plenty long. There’s enough material in the math for a separate post, particularly when trying to factor in capital gains taxes for those that expect to pay full fare.


  • Luis

    Please read this and learn from a fool(being the fool myself). We (my wife and me) have being doing Backdoor Roth since 2012, although we have an idea about taxes, we use the services of an accountant and trust him. So, being busy as I was until my retirement , mostly accepted for being good what my tax preparer did , I rarely questioned his job, except a couple of time. So far so good: Recently I received from the IRS a note saying that we owed almost $ 5000 in past taxes and penalties!!!!!!!! How this happened? In all this years, from 2012 to 2017 never a form 8606 was produced. No only this back taxes were due, also I discovered that $780 was paid for “excess contribution to Roth Ira”!!!!!!!!. every year: $ 780 time 6 years equal to $ 4680( I am the one that “discovered the imbroglio). We share the responsibility with the accountant, for not supervising his job, but he was supposed to be the expert after all. Right now we are in the middle of trying to somehow fix this mess, but my guess is I going to bite the bullet anyway. Two observations:
    – when in doubt in how to follow the proper procedure do not do a Backdoor Roth, a taxable account is perfectly fine.
    -be very weary of the qualifications of your tax preparer: could be giving the wrong advice.
    I really appreciated if anybody had’ve been in the same situation how the problem was solved.I hope some fixing will happen, but otherwise the contribution of Backdoor Ira for six years(13,000 x6) it would cost almost $ 10k,totally ridiculous!!!!!!!!

    • Is your accountant a CPA? I don’t believe a CPA would make that mistake. Don’t use a non-CPA to handle your money. And if you gave the accountant information regarding your Roth, there is some professional liability there.

      • EnjoyIt

        Actually many CPAs have no idea what a Backdoor Roth is or that a idividual 401k is so much better than a SEPP IRA.

        It’s a shame but I have went through a few accountants over the years. I have a few friends who have found the same lack of knowledge in their own accountants as well.

    • It’s headaches like this that are rare but demonstrate the risk of not getting it right. I’ll bet you wish you could go back in time and forget you ever heard about this trick we call the Backdoor Roth. I’m sorry for your troubles.


    • Mr. Couch

      I went through something similar. My accountant didn’t include an 8606 even though I expressly told them to. Shame on me for not double-checking. The IRS came calling several months later, looking for their cut. I made my accountant draft up the letter explaining the mistake and had them take care of submitting an amended return with all the proper documentation proving that this was indeed AFTER tax money that was part of a BD Roth conversion. In the end the IRS accepted the explanation and all was forgiven, but the hassle was not worth the very marginal gains that PoF points out!!

  • Dentist In Debt

    Can you elaborate more about what you mean with saving receipts for the HSA? I was considering switching to an HSA next year to lower my taxable income, but just using it as an investment vehicle to allow more money to grow tax free and just pay my medical bills with regular credit card money for points as you said. If I just wanted to let the money grow for 30 years tax free before either spending the money on future bills, or taking it out and paying the income tax after age 65 for a non-medical expense, why would I need to save 30 years of receipts?

    Also, I’m starting to believe in your mind reading skills, PoF. I was also getting ready to get my ducks in a row for a backdoor Roth conversion and you put out a great write up for both the HSA and backdoor Roth. Perfect timing for me!

    • “If I just wanted to let the money grow for 30 years tax free before either spending the money on future bills, or taking it out and paying the income tax after age 65 for a non-medical expense, why would I need to save 30 years of receipts?”

      Good question. The reason is that if you use it for non-medical expenses after age 65, you’ll pay ordinary income taxes on the withdrawals. You want to avoid that scenario (although it makes the HSA equivalent to an IRA or 401(k) which is not terrible). But you really want to use every dollar for medical expenses to avoid paying taxes on the back end.

      You will probably have those medical expenses later on, but what if you die prematurely or the US adopts some form of universal health care?


  • I started investing before Roth and way before the backdoor Roth was possible. I never changed anything when they came up. I have no Roth products at all. I was FI at age 50 and retired from medicine at age 54. The Roth is another tool in the quiver. Whether you use it or not, will not really make much difference, as was pointed out. Your savings rate is what will be the defining factor. I sometimes think I missed the boat by not doing Roth or making Roth conversions, but then this article comes out and I don’t feel so bad now. The internet Roth police will be held at bay. There are many roads to Rome, don’t get hung up on which one you use. Just get to Rome.

    Dr. Cory S. Fawcett
    Prescription for Financial Success

    • Toby

      The internet Roth police


      There are many roads to Rome, don’t get hung up on which one you use. Just get to Rome.

      I love this.

  • Toby

    If my HSA-reimbursable out-of-pocket health care expenses average $4,000 a year, I gain $20 per year

    This line confused me a bit. $20 on $4,000 is 0.5% tax drag, but with the HSA, isn’t there a further tax savings by not paying FICA?

    Great post to put this all in perspective.

    • I’m still putting in all $6,950 in the HSA annually. The difference is whether I leave all the money in the HSA or take out the $4,000 to cover medical expenses now.

      By using money from the HSA, I lose the tax-free growth on the $4,000 and will instead have that money invested in a taxable account. The 0.5% tax drag is $20 that first year. Over time, it does add up, but there are other risks to waiting as outlined above.


  • Gasem

    I never thought very much of backdoor Roth because of the tax drag. Color me not impressed, but Back door Roth is not Front door Roth conversion. If you plan correctly and don’t have a ton of ordinary income close to RMD you can do yourself a favor by converting IMHO. My initial thought was to convert to the top of the 24% bracket and convert over a period of time sufficient to virtually clean out my IRA. This over time results in the greatest tax saving far in the future, and an increase in end of life portfolio value. In m case my end of life value is 1M more, 30 years in the future with Roth conversion than without and letting RMD eat up the taxes. My chances of living 30 years is small but my younger wife has a 30% of being around then, and an extra million bucks may buy a nice chunk of assisted living. My feeling now after starting conversion is to convert only stocks and leave the bonds to RMD. A smaller IRA RMD’s less and a bond IRA RMD’s less, so you can tune the RMD to keep your income in the 12% bracket for quite a while. I wrote an article here .

    HSA has a distinct advantage. You can pay for Medicare parts A B and D with it. Some HMO plans can also be paid out of HSA funds, indemnified plans can not. You and your wife can expect to spend $300K on medical care in your dotage sohaving a pile of tax free money available that is 50% compounded from years of growing isn’t a bad deal. In my case I have enough HSA to cover 16 years of tax free medicare expense and it doesn’t defray my cash flow. Better than a sharp stick in the eye.

    One thing to worry about is when you pull a BoJangles dog trick and up and die, your spouses tax bill sky rockets. If you’re RMDing 150k/yr and your SS is say 50K/yr your tax bill is 30K/yr just touching 24%. If your wife becomes single her tax bill becomes about 35K per year. She loses your SS, loses one deduction, and advances one tax bracket. Good ol Uncle Sam has a plan for her. Since it’s RMD money there isn’t anything you can do about it, so by having taxable account, tax loss harvest, Roth, and a small RMD you retain some control over how to optimize taxes. I’ve spent a lot of time understanding how to optimize this and it requires optimization and a plan planned and implemented a long time before age 70. FIRE planning is different than Retire planning. This is another earlier article I wrote as I was working through this

    • Making Roth conversions of a couple hundred thousand dollars a year in the 24% federal income tax bracket will have a much more powerful impact than shifting $5,500 from one good account type to another. No doubt about it. That’s part of my plan if I find myself in a position to do so before the current rates sunset (and are likely replaced with substantially higher tax rates).

      Good point about the tax rates going up substantially on a widow or widower. I hadn’t thought much about it, but that will be a drastic change if my wife and I don’t pass together or in short succession.


  • Henry Swoboda

    This seems ridiculously misleading to me. You pretend dividends are the only thing you get taxed on. I’m not aware of any data on it, but I expect most physicians pay capita gains taxes in retirement. Those taxes matter.

    • Taxes do matter, which is why I like to get my readers to think outside the box and perhaps find a way to set themselves up to be in a position to pay a lot less. It would be misleading if I didn’t address capital gains taxes or mention several ways in which they can be avoided or minimized.

      If you assume you’ll just pay taxes anyway, I believe you’re more likely to prove yourself right.

      There are benefits that a Roth account has that a taxable account does not, and there are some very real advantages to the taxable account. My recommendation is to have money in both buckets, but not to beat yourself up if you can’t find a way to do the Backdoor Roth annually.

      As you can see in the comments above, potentially serious harm can come from a fouled up transaction if the 8606 isn’t properly filled out or not filed at all.


      • MikeG

        I think it’s more than just “assuming you’ll pay taxes anyway”.

        While you lay out scenario’s where capital gains taxes can be avoided, I would submit that it is much more likely than not that capital gains will be taxed for someone who has to use the backdoor for Roth contributions in the first place (because their income exceeeds the cutoff). After all, we are talking about high(er) wage earners here.

        Think about, for example, what will happen when these folks begin drawing RMD’s and taking SS (assume that happens when they turn 70). Between those to things alone, they may well be at or above the income cutoff for zero capital gains. Under current tax rules, this means their capital gains will be taxed at 15% (and if capital gains push their ordinary taxable income from the 12% to 22% tax brackets, that could well push their marginal tax rate on their capital gains to 25%).

        I early retired at 53. Based upon my portfolio and using current tax rules, I fully expect this will happen to me when I turn 70. And I don’t think I am an outlier in the higher earner community.

        I used the backdoor for Roth contributions for both me and my wife every year that the backdoor was open. Now I am doing partial systematic Roth conversions from my tIRA to the top of the 12% tax bracket (trying and shift as much of my tIRA to my Roth as possible).

        The title to this article probably should have been more nuanced – something like “In some cases, the marginal value of the Backdoor Roth may not be worth the trouble”. Because in some/many (perhaps even most) cases it clearly is.

      • MikeG

        Unable to edit my recent post so calling out the error here.

        When I said, “and if capital gains push their ordinary taxable income from the 12% to 22% tax brackets, that could well push their marginal tax rate on their capital gains to 25%” I misspoke. That only happens if incremental “ordinary income” causes more of your capital gains to be taxed.

        The rest of my comment still stands though.

      • If I were in your shoes, MikeG, I would look at whether or not it makes sense to reduce or eliminate future RMDs by making Roth conversions of your tax-deferred 401(k) / IRA balance in the 12% to 24% federal income tax brackets.

        If married, you can have up to $315,000 (and nearly $320,000 in 2019) in taxable income which means you may be able to convert >$200,000 a year at a historically attractive rate between now and 2025 when the TCJA brackets sunset.

        Thank you for your comments.

  • Joel Ziebarth

    I think many here are wasting time discussing the bare financial implications of the Roth IRA while neglecting the equally important psychological concept of money held for retirement vs money sitting in your brokerage account. One of the greatest risks to the future financial security of high income individuals is overspending and “keeping up with the Jones” during the peak earning years. Moving even a small amount of money out of taxable accounts that make you feel flush and into retirement accounts for use later in life can have a positive impact on spending habits.
    It should be easy for a couple to accumulate mid six figure balances in a Roth by retirement increasing your ability to diversify sources of income to avoid tax liabilities, control the costs you pay for Medicare part B, and broaden your ability to gift money tax free to heirs.
    This seems to be worth the investment of five minutes or so annually.

  • I think there’s a real psychological aspect that the Roth money is retirement money while the taxable accounts can be accessed. It seems like a lot of the barriers to wealth are discipline so having the backdoor roth provides that even if the pure dollar gains are minimal.

  • Diane

    Dear Physician on Fire, Have you ever thought of teaching a class in all of this? If not please consider, many of us would sign up.

  • Phillip

    What about QRPs? Do they cause the pro rata tax to trigger for converstions to a back door roth?

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