How to Backdoor Your Roth IRA - Alex Szarka

How to Backdoor Your Roth IRA

Roth IRAs are an excellent way of diversifying your retirement savings. Most people have the vast majority of their retirement savings in some form of employee sponsored defined contribution plan such as a 401(k) or 403(b). These plans are often a savings of pre-tax money automatically deducted from an employee’s paycheck.

Once that employee decides to retire, they can start drawing from their nest egg and pay applicable federal and state taxes. Some 401(k)’s and 403(b)’s offer a Roth option where the employee’s defined contribution (or just a portion of it) can be first taxed then contributed.

The invested savings will appreciate tax free and when the employee is ready to retire, they can make withdrawals federal and state tax free. You can even withdraw your principal amount before you’re 59 ½ without the IRA’s 10% early withdrawal penalty, as long as you don’t withdraw any earnings (interest) within five years of your first contribution. Once five years have passed since your first contribution, you are then allowed to withdraw earnings (interest) tax free as well.

In order to contribute to IRAs (traditional and Roth), you must have earned income. One downside to Roth IRAs is that there
are income limitations on who can contribute to them.

In 2017, if your modified/adjusted gross income (MAGI) is $133,000 (single) or $196,000 (married; filing jointly), you are ineligible to contribute to a Roth IRA. If you are eligible, you may contribute only $5,500 ($6,500 if you are age 50 or over) to a Roth IRA. If your income is beyond these limits or if you would like to contribute more than $5,500 ($6,500 if you are age 50 or over) to a Roth IRA in a year, a Backdoor Roth IRA is your only option.


What is a Backdoor Roth IRA?

A Backdoor Roth is a conversion of Traditional IRA money to a Roth IRA.

You can make this conversion no matter how much income you earn and you can also roll as much money as you’d like from an existing Traditional IRA. If you are considering converting a substantial amount or all of your IRA, you should consult a financial advisor to see whether or not this makes sense.

There could be severe tax implications if you are converting
an IRA with a large balance due to the fact that the taxable amount that is converted is added to your taxable income and the regular income rate is applied to your total income. If the amount is large enough, it could raise your tax bracket for the year in which you do the conversion.

If you are currently over the IRS threshold to contribute to a Roth IRA and don’t own any other IRA’s, one useful loophole is opening and contributing to a non-deductible (no tax deduction) IRA and immediately converting it over to a Roth IRA.

By doing so, you are avoiding the IRA income limitations. You are still bound by the $5,500 ($6,500 if you are age 50 or over) annual contribution limits but it still allows you to start building a nest egg of post-tax retirement savings.

This strategy could be used if you don’t have access to an employer-sponsored retirement plan such as a 401(k) or 403(b) or if you do, but the plan doesn’t offer a Roth option.

Converting your retirement savings from pre-tax to post-tax can be tricky and could have significant tax implications. Your best bet is to see a financial advisor to explore all your options and to see what makes the most sense for your unique financial situation.

Why Women Need More Money in Retirement Than Men - Rick Martin

Why Women Need to Save More for Retirement Than Men



FACT: The number of wealthy women in the United States is rising twice as fast as the number of wealthy men. Experts estimate that by 2030, women will control as much as two-thirds of the nation’s wealth.1

That is good news for women – in the future! For now, it appears that the accumulation of wealth by women in the past lags their male counterparts for several reasons, as I describe in this article. I work with a lot of single women, whether they are unmarried, divorced, or widowed.

I believe it is critical for women to consider their own financial future, even if they are currently married or in a relationship. Because, as you read this article, there is a strong likelihood that many women will become single again before they die. Here’s why women need more money than men in retirement, and why they may want to think about how they are going to cover the potential cost of long-term care toward the end of their lives.


FACT: In 2015, women earned just 80% of what men were paid.1

Women have been long fighting this injustice. Women work hard for their money and the pay gap is shrinking, but for now, it has made it more difficult for women to save as much as men have for retirement. They have to work more hours than their male counterpart just to earn
the same income.

Couple that with the fact that many women take time at some point in their lives to be a caregiver, whether it’s a young child, parent, sibling or even a close friend, it all makes it more challenging to save the funds that they may need later in their life.

Of the 63 million wage-earning and salaried women age 21 to 64 working in the United States, they have 50% less in their retirement savings accounts than men.1 This is in spite of the fact that women tend to be better at saving money than men.


FACT: In 2014, the average annual Social Security income received by women 65 years and older was $13,150, compared to $17,106 for men.2

Social Security is gender-neutral – individuals with identical earnings histories are treated the same in terms of benefits. And the Social Security system is friendlier to lower-wage earners as they do receive a higher percentage benefit than higher-wage earners do. However, a woman making only 80% of what her male counterpart earns is, they are paying that much less into the Social Security system. Bottom line: when most women get to retirement, they have lower Social Security benefits than men.


FACT: Women outlive their male counterparts by an average of 2.6 years, according to the U.S. Department of Health and Human Services.3

We have established that, in most cases, women have made less in their working years than men leading up to retirement. Combine that with the fact that women live longer, and that they have higher rates of disability and chronic health problems, many women will need some form of long-term care at the end of their life. Women also tend to need that care more than men.

The AARP Institute reports that more than 70% of skilled nursing facility residents are women and that their average age at admission was 80.3 Among people age 75 or older, women are 60% more likely than men to need help with one or more activities of daily living (referred to as ADLs), which is a qualification for some form of long-term care.5 Another reason that there are more women than men is that, in many cases, women were the caregivers for their husbands or other family members in her home.

When the time comes that the caregiver needs assistance, the person to whom she was caring for may have passed away or be physically unable to help. According to the Assisted Living Foundation of America, assisted living communities have a 7:1 ratio of women to men and, at skilled nursing facilities, the ratio is closer to 10:1.4 They attribute the absence of males in long-term facilities to a combination of genetic and lifestyle factors (particularly men’s propensity to risk-taking behavior and aggression). Under the assumption that a woman will end up in a skilled nursing facility at some point in her life, the costs for such care can be staggering.

Statistically, women who reached the age of 65 in 2012 were expected to live, on average, an additional 20.5 years and widows accounted for 34% of all older women in 2015.1 In terms of the impact on her financial status, let’s assume that a woman spends 2.5 years in a skilled nursing facility at the end of her life. That could cost her upwards of $215,000. A lot of single women don’t have that amount of resources left at age 80.


How does that affect your planning process?


Everyone’s situation is unique, so we gather all of the facts, discuss long-term goals, review potential threats to the plan, which includes long-term care, and put a plan together. It is critical to at least discuss how to handle the potential threats to avoid surprises. Plan for the worst, hope for the best! In many cases, I begin working with the primary breadwinner. Typically, that has been the man, but over the last several years, I have seen an increase in the number of women that are in that position.

When I work with couples, I encourage both of them to be involved in the process and to discuss the various options, so that when one of those events takes place, it isn’t the first time we have discussed it, we’ve actually planned for it.

Planning is a critical part of the retirement process. You wouldn’t build a house or even take a vacation without a plan of some sort. Retirement shouldn’t be any different.

In fact, when you realize that you are going to manage the family business (i.e. retirement assets) over the next 20-30 years to support your desired lifestyle, it’s somewhat irresponsible to just let it happen.

Women should be an active participant in the planning process. Whether they are single or in a relationship, working with a financial planner ought to be a collaborative process. With all parties being active in the discussion, I think it’s important for women to discuss what would happen if they became single again, whether it’s through death or divorce.

It happens and when it does, it’s an emotional event. Think how much better it can be handled if you have already discussed the impact of such an event. It doesn’t take the pain away, but it makes it easier to objectively address the next steps. Just like in any relationship, business or pleasure, communication is critical and being on the same page increases the probability of success.

Whether you want to review your current plan and get a second opinion or build your plan, we are here to help you work on a better retirement. Give us a call.




1 Matt Sommer, For women, retirement can be a serious challenge,

2 “Social Security Is Important to Women,” Social Security, (September 2016)

3 “Health, United States, 2016,” U.S. Department of Health and Human Services,

4 Jeff Anderson, A Place for Dad: Does Gender Matter in Senior Care?, (June 13 2017)

5 Ari Houser, Women & Long-Term Care, (April 2007)

6 “Compare Long Term Care Costs Across the United States.” GenWorth, (August 14 2017)

Divorce: Diving Retirement Assets

There are certain times in life when you are faced with a lot of important financial decisions over a short period of time, with which you may have never previously dealt. During a divorce is one of those times.

The situation is made even more complicated due to the fact that most people have the bulk of their financial wealth (aside from their home) tied up in their retirement assets – i.e., their 401(k) and IRA’s, both of which are subject to a slew of their own particular technical rules.

This can create a minefield of traps for the unwary.

Regarding your 401(k) plan, it is typically held by an administrator such as Vanguard, Fidelity, etc. Each of the divorcing spouses will be entitled to half of the 401(k) value that accumulated during the time of marriage.
The 401(k) is split by using what’s called a QDRO, or “Qualified Domestic Relations Order.”

This is an order issued by the court that is sent to the plan administrator, ordering the 401(k) to be split according to the interests of each spouse. The calculation of each spouse’s share can be quite complex and it’s absolutely critical to consult with a specialist in these situations. After the split is complete, the non-401(k) owner spouse will typically move their share to their own IRA account, at which point each spouse can begin making their own separate financial planning decisions.

Note that this is typically a tax-free transaction, with the accounts remaining tax-deferred until the spouses take distributions in the future; typically many years later when they are retired.

There is a special tax “loophole” that can potentially be extremely valuable in this situation. Normally, any distribution taken from a retirement account before age 59-1/2 is subject not only to tax, but also a 10% premature distribution penalty.

However, in cases where a spouse moves money from their ex’s 401(k) to their own IRA, they have the option of rolling only a portion of it into their IRA, and taking a penalty-free distribution for the rest. Let’s say they need some extra cash in order to pay attorney’s fees, or to make a down payment on a new residence; this loophole allows them to access some money from the retirement funds without paying any penalty.

The distribution will still be subject to ordinary tax, but in many cases they will be in a lower tax bracket in the year of divorce, especially if they are the lower-earning spouse. So, this particular tax loophole could come
in very handy indeed.

When it comes to IRAs, there are still more rules to keep in mind.
An IRA is split in accordance with the divorce decree, which is different from a QDRO. The IRA owner typically will instruct their IRA custodian to make the split in accordance with the divorce decree. One critical mistake made by many IRA owners in this situation is to just ask for a check from their IRA custodian, which they deposit into the bank, and then they write a separate check to their spouse for his or her share of the IRA.

If it’s done this way the IRS will treat it as a distribution, which will be taxable to the IRA owner, along with a 10% penalty if they are under age 59-1/2. This has happened over and over again and tax court cases have consistently held in favor of the IRS in these situations.

The better solution is to do what’s called a trustee-to-trustee transfer. This means that the non-IRA owner finds their own custodian to hold their IRA, sets up their account, and then the funds are transferred directly from one IRA custodian to the other. If it’s done this way there is no immediate tax to either spouse, and the funds remain tax deferred until a distribution is taken in the future.

These are just a few of the complex rules that govern how to split retirement assets in divorce–as you can see, it’s certainly not something
to take lightly.

If you know anyone facing this situation, it’s critically important that they get accurate and fair advice on how to proceed. Feel free to contact me if you would like any further details or have any questions.

Planning For Your Later Years

“When he was younger, our Senior Financial Planner, Chuck Conrad, was a member of an elite Army Ranger unit, and back then proper planning could make the difference between life and death for himself and the others in his squad. His instructors were adamant about teaching these soldiers the Army’s “5 P’s,” which were: “Proper Planning Prevents Poor Performance.”

While financial planning may not necessarily be a life or death proposition, it certainly could be the difference between a comfortable retirement, and having to move in with your kids because you ran out of money.

The art of proper planning entails three important components: identifying potential risks, assessing their probability, and then having a realistic plan to deal with them. Since everyone’s situation can be different, the role of a Financial Advisor is to help each client develop a personalized and unique strategy to deal with his/her own potential risks. One of the most comforting things a person can hear who is going through a crisis is, “Relax, we’ve planned for this.”

In previous articles we have discussed how to develop a plan that addresses the concerns of being able to maintain a current standard of living, and not running out of money in retirement.

In this article I would like to address the issues of aging and dealing with potential changes in your health.

As we age, concerns about health and cognitive issues can become a significant concern. A major or lingering health issue can not only drain a retiree’s finances, but could also set up a situation where someone else may have to step in and either assist, or completely take over making financial and health related decisions on that person’s behalf.

Proper planning can help avoid a potential crisis situation and ease the transfer of decision making to the person with whom you feel the most comfortable.


Housing Issues
Housing is a common issue that has to be dealt with in the event of a long term illness, injury, or some cognitive impairment. Many times a person has to move into a more suitable residence or an assisted living facility, as a result of such situations.

By planning ahead, and anticipating these issues years ahead of time, it may prevent the anxiety of having to find and move into new housing, at a time when you may be already stressed with your medical issues. For example, if you currently live in a two story or split level house, or your laundry facilities are in the basement, you may consider moving into a ranch home or condo where everything is on the same level.

Many times moving into an apartment may also make sense since there are no maintenance issues, and if need be you could move without the hassle of having to sell your property. Making this change before an event happens may prevent a lot of stress and heartache for
you and your family.

Financial Decisions
The second major issue to address is who is going to potentially make your financial and health decisions.

At some point in our lives most of us will have to rely on someone else to make decisions for us. Either because of medical or cognitive issues, someone may need to step in and pay our bills, file our taxes and handle our investments.

It is important that you feel very comfortable with who that person may be. In the absence of naming a specific person or persons, the court may have to step in and appoint someone.
That person may or may not be who
you would have chosen.

This can be simply avoided by naming a financial power-of-attorney and a health power-of-attorney (POA). This would assure that, if the need arises, the person with whom you feel most comfortable will be making those decisions.


Who Should I pick?
How well do you trust the person? This person may have complete control over your finances, so you want to make sure they will be acting solely in your best interest, and not possibly succumbing to outside influences from other family members or friends.

How far away do they live? All things being equal, you may want to choose someone who is nearby if possible.

How hectic is this person’s life already? Being a POA is a big responsibility. Thus, consider such issues as you choose the person who could more easily handle these additional duties.

How organized are they? It may be better to select someone who tends to be more detail-oriented/analytical to handle these important responsibilities. Remember that the results of the actions taken/decisions made by your designated POA(s) will have a direct impact on your healthcare and financial well-being.

As difficult as it may be, it is important to have these conversations with your family well in advance. It is also important to have these conversations with the people you are asking to be your power-of-attorney, to make certain that they have a very clear understanding of the duties and responsibilities associated with a POA and are willing and able to serve in that capacity.

Typically you will also want to name a back-up person in the event the primary person can’t assume or continue his/her duties as POA.


Tying It All Together
With a qualified advisor, proper planning doesn’t have to be difficult or complicated.

The key takeaways here are:

  • Realistically assess your current situation and what your unique future risks may be.
  • Be very clear about who you wish to be making your healthcare and financial decisions. Keep in mind they don’t have to be the same person.
  • Have a discussion with these individuals well ahead of time and be transparent about the responsibilities involved.


And remember, “Proper planning prevents poor performance.”

Smart Financial Moves if You Decide to Work Later or Part-Time After Retirement


Who would this apply to? How do people go about deciding if this is an option they would even want to consider? What are the advantages of making this move? Watch Szarka Financial’s CEO Les Szarka, CFP®, ChFC®, discuss these issues with Fox 8 News Anchors Stefani Schaefer and Gabe Spiegel.

I Just Inherited an IRA; What Should I Do?


What should people do if they find out they inherited an IRA? What if you’re not the spouse of the IRA owner? What is a stretch IRA? So what are the most important points to remember? Watch Szarka Financial’s Senior Financial Planner Alex Menassa, MT, CPA, JD discuss these issues News Anchor Roosevelt Leftwich.

A Huge but Little Known Retirement Risk: Sequence of Returns


Are there any retirement risks that most investors don’t know about? Who should be worried about sequence of returns risk? What exactly does it mean? What can you do to reduce the potential harm of sequence of return risk? Watch Szarka Financial’s Senior Financial Planner Alex Menassa, MT, CPA, JD discuss these issues News Anchors Stefani Schaefer and Gabe Spiegel.

The US Stock Market is at an All-Time High – Are You on Target for Your Retirement?


The US stock market is at an all-time high. Should we expect the current market returns to continue? So what should our listeners expect going forward? What does this do to someone’s retirement plan? Watch Szarka Financial’s Senior Financial Planner Rick Martin, CFP® discuss these issues with Fox 8 News Anchors Autumn Ziemba and Roosevelt Leftwich.

4 Common 401(k) Pitfalls


If you are saving for retirement, like many Americans, your main vehicle to do so is probably some form of defined contribution plan such as a 401(k) or 403(b) plan. The problem is the average American is not saving enough and many are making common and basic mistakes with their employer sponsored retirement accounts.¹ Here are some tips that will help prevent you from derailing your retirement.


The first and obvious pitfall to avoid is simply not participating in your company’s defined contribution plan. Four out of five American workers are employed by a company that offers a defined contribution retirement plan, but only 32% or workers are utilizing them.² Not only are they not taking advantage of the tax benefits, they are walking away from free money. Many employees offer an employee match (generally on average) of 50 cents on the dollar on up to 6% of contributions. To save an adequate amount for retirement, you should be contributing at least 15%. For those who cannot afford that much, make elective contribution deferrals to at least the employer match so you’re not missing out on the free retirement savings.


When faced with unexpected financial crisis, it’s tempting to tap into your 401(k), but doing so could put your retirement at risk by missing out on the compounded interest you would earn over years. Not to mention you would have to pay the IRS a 10% premature withdrawal penalty if you are under 59½ years old. The alternative, but not much better option, is taking a loan from your 401(k). Some plans offer a loan provision, which allows you to borrow from your fully vested funds. The loan is repaid to yourself/your 401(k) plan, with interest. Approximately one in five workers who participate in an employer-sponsored defined contribution plan has taken a loan from the plan’s balance. The pitfall participants can run into when taking a 401(k) loan, is leaving or getting fired before paying back the entire loan balance. If that happens, the full amount of the loan comes due and if not paid back, the remaining amount becomes a taxable distribution.


401(k)/403(b) vesting is when an employer makes a matching contribution on your behalf into a defined contribution plan, but does not give you complete ownership of those funds until you have met certain requirements. For example; the typical vesting schedule is 25% vested after one year, 50% vested after two years, and 100% vested after three years. Vesting schedules can vary based on the respective employer’s plan. Retirement savings plan vesting schedules are a common way for employers to provide a motivation for employees to stay with the company for at least a few years.

If you are thinking about leaving your job, first find out:

  • How much of your 401(k)/403(b) is vested?
  • How much time is left for it to be fully vested?

If you’re only a few months away from being vested, perhaps you should stick it out a bit longer until you are. You could be walking away from free money.


If you automatically get enrolled into your company’s 401(k), by default, you will most likely be enrolled in a traditional plan. One common mistake that 401(k) investors make is not learning if the plan has a Roth 401(k) option. A Roth 401(k) is exactly like a Roth IRA in the sense that you can take a portion of your taxed income and invest it so it grows tax free and can be withdrawn tax free, only with a much higher contribution limit. The IRS allows for up to $5500 a year contribution ($6500 if you are 50 years old or more) to Roth IRAs and up to $18,000 ($24,000 if you are 50 years old or more) for Roth 401(k)’s.


A better approach might be utilizing both the traditional 401(k) and Roth 401(k), so during retirement you have access to one bucket of savings that will be taxed when withdrawn and another bucket of savings that will not be taxed.

The only down side to the Roth 401(k) is that it does not reduce your taxable income like the traditional 401(k) does, so ask a financial advisor which situation might suit you the best.



1. Steverman, Ben. “Two-Thirds of Americans Aren’t Putting Money in Their 401(k).”, Bloomberg, 21 Feb. 2017,
2. According to research conducted by AonHewitt in 2012. Powell, Robert. “7 Worst 401(k) Mistakes by Retirement Savers.” 8 Mar. 2014,



Age Related Retirement Milestones That Could Even Have You Looking Forward to Your Next Birthday


For most of us, our attitude towards our next birthday can change dramatically as we go through life. Early on, we may greatly look forward to certain birthdays.

For example, many people look forward to their 18th birthday because in most states, that marks the “age of majority” when they are legally considered an adult and can take control of many aspects of their lives. And the 21st birthday may be the most highly anticipated of all, for reasons that we will leave up to the imagination. Unfortunately, birthdays after that tend to generate increasingly less enthusiasm. However, you may not be aware that in the realm of retirement planning, you may have some birthdays coming up that you should actually be looking forward to! That’s because as the years pass, certain age milestones give you more options when it comes to building wealth and saving for retirement. The following is a list of some of the more important age milestones with regard to retirement planning.


AGE 50
Once people reach their 50th birthday, they often realize that they’ve been too focused on things like getting that next job promotion, raising the kids and paying for the big new house. Unfortunately for many, they find themselves behind when it comes to building up their retirement nest egg. Luckily, the IRS allows for certain “catch-up” contributions to allow them to put their retirement savings on a fast track. One of the most important is that in the calendar year you turn 50 and thereafter, you can contribute an extra $6,000/yr. as a salary deferral into your company 401(k) plan, thus raising the maximum contribution limit from $18,000 to $24,000. In addition, you can add an extra $1,000/yr. into your Traditional or ROTH IRA, thus raising that maximum contribution limit from $5,500 to $6,500. Both of these amounts are as of the calendar year 2017, and are likely to go even higher in the future.


AGE 55
If you leave your job in any calendar year when you turn 55 or older, there is a little known loophole in the tax law that allows you to take distributions from your company 401(k) plan with no premature 10% penalty. The money will still be taxable, but relief from the penalty can yield a big savings. This rule can come in handy especially if, for example, you are unexpectedly laid off from your job and need to tap into some of that money to pay bills.

NOTE: This rule applies only to distributions from 401(k) plans and NOT from IRAs, so you want to be particularly careful not to hastily roll over the entire 401(k) into an IRA before analyzing whether you might need to take some of that money out, because once the money is rolled to an IRA, the opportunity to take advantage of this rule is lost.


AGE 59½
This is the age at which you can take distributions from any tax qualified retirement plan, such as your 401(k) and/or IRA, without paying the 10% premature distribution penalty. This rule can often come into play if you are retiring early, say in your early 60s, and need some of that money for living expenses.

NOTE: There is a strange quirk in this rule; the distribution actually has to take place at least six months to the day after your 59th birthday in order to avoid the penalty. So you have to carefully count out 183 days past your birthday and make sure not to take the money before that date.


AGE 62
This is the age at which you can elect to take early Social Security.

NOTE: The benefit will be reduced for every year you are younger than the “Normal Retirement Age” (NRA), which is generally age 66, so if you take your benefit at age 62, it will be reduced by about one third, and will stay that way for life. So, it is important to think carefully before deciding to go ahead with this. Still, statistics show that well over half of recipients start taking their benefit at some point before their NRA.


Age 66
For most people, this is the age at which they qualify for their full “Normal Retirement Benefit” from Social Security. One thing to keep in mind is that there is no requirement that you start taking your benefit at this time. In fact, if you decide to wait, your benefit will increase by about 8% per year all the way until age 70, at which point it will max out. So if you don’t need the money right away, you may want to wait and let the benefit keep growing. When you do start taking your benefit past age 66, the increased amount will continue for life.

For most of us, our attitude towards our next birthday can change dramatically as we go through life. Early on, we may greatly look forward to certain birthdays.


AGE 70½
Since distributions from your 401(k) and/or IRAs must be included as taxable income on your return, many people wait as long as possible before doing this and choose to live on other money instead. Well, the IRS won’t let you wait forever. Starting in the year you turn 70½, the IRS forces you to begin taking a certain amount out of your 401(k)s and IRAs. These mandatory withdrawals are called “Required Minimum Distributions” (RMDs). They are based on a calculation taking into account your life expectancy. You can always take out more than your RMD, but if you take less you will be subject to a stiff 50% penalty, so it’s critically important to do the proper planning in advance for this particular issue.


As you can see, there are numerous age related milestones on the road towards good retirement planning, and it’s critically important to be aware of them and take advantage of them in order to maximize your retirement income. And who knows, depending on your situation, some of these rules could help you actually look forward to one of your upcoming birthdays for a change—or at least take a little bit of the sting out of it!

Everyone’s situation is slightly different, so feel free to give us a call if you have any specific questions about your own circumstances.