Categories: Investments

Stuffing Your Retirement: The Backdoor IRA Powerpunch

The Score

In the last few years, something amazing has happened for savers regarding their IRA. Did you feel it? That sensation when you see a deal what seems too good to be true, and isn’t? It used to be that super-savers lived in ambiguity by taking money from their after-tax 401ks and rolling over those contributions onto their Roth IRAs to maximize your investment returns.

The IRS

When the IRS made a clarification in to retirement savings rules around this process, they essentially have enabled savers a means of putting in up to $18,500 a year (as of 2018) into their after-tax 401k accounts and then roll that into a Roth IRA, whose normal contribution limit is normally capped by both income and flat contribution caps. The contribution cap for IRAs is, relative to 401ks measly, only $6,500 a year. With the backdoor IRA, it is now possible to plug an additive $12.5k of salary per year into your Roth 401k and you’re able to roll that over into your Roth IRA, plus any interest, at the time od your rollover.

The Potential Pitfalls

Because the IRS never makes things to simple we need to be aware that there are some ‘gotchas’ up their sleeves. The IRS will look at various aggregation factors across your income and IRA accounts. This may end up with you not getting the full benefit of your rollover unscathed. Additionally, maximizing these savings in addition to saving in traditional 401k accounts could put you in a pinch.  You’d be saving close to $37k per year toward a potentially far off retirement plan.

Lifetime Value Implications

The power punch of this approach needs to be quantified for you to truly see the long-term benefits this added savings can deliver to your long-term portfolio. An additive $12.5k over 20 years in an after-tax retirement account at 5% real-returns (5% above inflation) will compound to roughly $433k. More aggressive returns of 7.5% and 10% above inflation will deliver an additive $581k and $787k. Those returns are on a 20-year scale and balloon the longer that money can work for you.

The Editorial Staff

The Editorial staff are financial enthusiasts and analysts from across America. Their profession expertise extends to corporate consulting, accounting, and financial strategy.

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