The Stealth Roth IRA

By Charles Sizemore  |  February 10, 2020

I hate the be the bearer of bad news, but taxes will be going up…

Not this year though. Probably not over the next five years either, especially if Donald Trump is reelected. Trump won’t allow his signature legislative accomplishment to get reversed.

But the tax cuts enacted in 2017 under the Tax Cuts and Jobs Act are scheduled to sunset at the end of 2025. That is, unless they’re renewed by Congress and whoever is sitting in the White House at that time.

That’s not likely to happen.

The economy today is the hottest it’s been in 20 years, yet the Federal Government is running deficits of over $1 trillion per year — in a time of peace, I might add.

If we’re running trillion-dollar deficits now, when times are good, while corporate profits are near all-time highs and the unemployment rate is at record lows, what’s it going to look like next time a recession hits?

It’s hard to see much political support for tax cuts with deficits that high.

What the Eventual Tax Hike Means for You

If you’re looking to retire in the next few years and planning to take taxable IRA distributions, it’s in your best interests to stuff as much cash as you can into a Roth IRA. You get no current-year deduction, but the distributions in retirement are tax free — regardless of income.

The biggest problem with a Roth is that you lose the ability to invest in one if you make too much money. As a single taxpayer, your ability to contribute to a Roth starts get phased out at a modified adjusted gross income of $124,000. For married taxpayers filing jointly, the phase out starts at $196,000.

You know me… I hate paying taxes. I do everything legally possible to keep my tax bill low. For me, that generally means stuffing every cent I possibly can into my 401(k) and my wife’s 401(k).

But I also have a trick for you to get some of your hard-earned cash safely absconded away into a Roth IRA and avoid those annoying income phase outs.

Step 1: Open and Fund a Traditional IRA

If you or your spouse have access to a workplace retirement plan like a 401(k), you generally can’t deduct a contribution to a traditional IRA.

But that’s ok. We don’t want to deduct it. We want to convert it. I’ll have more on that later. For now, let’s stay focused on how to get to that point…

You open what is called a non-deductible traditional IRA — that’s an accounting term. You won’t find it in the application at your broker. You’ll just sign up for a good old-fashioned traditional IRA and be done.

In 2020, you can contribute up to $6,000 to an IRA or $7,000 if you’re 50 or older. If you’re married, you can do the same for your spouse.

Step 2: Convert It to a Roth

Now for the fun part.

You instruct your broker to convert your traditional IRA to a Roth IRA. It’s a standard process, and they’ll have a form for it. Fill it out, return it to your broker, and voila! You have a backdoor Roth IRA, irrespective of your income.

Way to stick it to the man!

You also have the ability to convert your existing traditional IRA balance to a Roth, but doing so can leave you with a massive tax bill when you file your taxes next year. You know my shtick… I hate paying taxes, so that’s not something I’d generally recommend.

The beauty of the backdoor Roth approach is that you don’t have to pay a cent. You didn’t take a deduction on the contribution, so no taxes are due on conversion.

There are a couple things to remember though.

It’s cleaner if you open a new traditional IRA for the purposes of conversion rather than adding funds to an existing IRA. Also, any funds you convert to a Roth should stay in the account for at least five years. You could end up paying penalties if you took distributions within that window.

Also, keep in mind that the deadline for a Roth conversion is December 31. It’s too late for the 2019 tax year. Taking this route as we move into 2020 isn’t such a bad idea…

Tricks like these — ones that provide tax breaks through legal loopholes — are a specialty of mine. The more money you can hold on to, the better off you’ll be moving forward. Not to mention that you’ll have more disposable income to invest with so that you can build your nest egg for a comfortable retirement.

Given the amount of volatility in the markets, and the flux of political malarkey and infighting, it’s hard to say what’s going to happen a month from now, let alone years down the road.

But none of that matters if you focus on the now and prepare the best way you can.

In my income newsletter, Peak Profits, my aim is to provide investment opportunities that will generate a steady income, despite what happens in the markets. The strategies can benefit those who are planning ahead, socking away as much as possible for retirement, and for those who are already retired but are looking for ways to make retirement more comfortable.

To learn more how you can start — or continue — building your nest egg, click here.



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Charles Sizemore

Income and Retirement Strategist, Charles Sizemore, CFA specializes on dividend-focused portfolios and building alternative allocations by finding value opportunities outside of the mainstream stock market.

Charles is the executive editor and portfolio manager for Dent Research's premium newsletters, Peak Income and Peak Profits.

He is also a frequent guest on CNBC, Bloomberg TV, Fox Business News and Straight Talk Money Radio, and has been quoted in Barron’s Magazine, The Wall Street Journal, and The Washington Post. He is a frequent contributor to Forbes, GuruFocus, MarketWatch and

Charles holds a master’s degree in Finance and Accounting from the London School of Economics in the United Kingdom and a Bachelor of Business Administration in Finance with an International Emphasis from Texas Christian University in Fort Worth, Texas, where he graduated Magna Cum Laude and as a Phi Beta Kappa scholar. MORE FROM AUTHOR