Most people aren’t proactive in their tax planning, either during their professional careers or in retirement, and the consequences can be grave. Tax law is constantly changing, the IRS is harder than ever to work with, and a missed opportunity or a stone left unturned can make a massive difference when it comes to your bottom line.
This is why we work with people like Peter Roache. Peter is a CPA from Donellon, Orcutt, Patch, & Stallard, specializing in handling tax returns, financial statements, and management consulting for companies with annual revenue between $100,000 and $100 million. He’s a fantastic tax planner and someone we love to work with.
Today, Peter joins us to talk about how to manage tax risk, diversify your taxes in retirement, and what the future of taxation may look like across legacies and generations.
In this podcast discussion, you’ll learn:
- Why tax codes are getting more and more complex.
- How Peter uses today’s tax rates to determine the value of Roth conversions for the future.
- Why so many people end up in a higher tax bracket after retiring.
- How the “backdoor mega Roth conversion” can work within a 401(k) to move nondeductible money and get many years worth of contributions in one.
- What you need to know about tax loss harvesting.
Donellon, Orcutt, Patch, & Stallard
Read the Transcript
Matthew Peck: Welcome everyone to another edition of the SHP Retirement Road Map podcast. I’m here as always with Derek Gregoire, Keith Ellis. And today, we are joined by Peter Roache, a CPA from Donellon, Orcutt, Patch, & Stallard. He has been a partner since 2004, and they’ve specialized in preparing tax returns, financial statements and managing consulting for companies with annual revenues of 100,000 up to 100 million. They typically work with business owners and their families, but they’re always open to referrals from guys like us, I guess, altogether. But all in all, Peter has been fantastic when it comes to doing the tax planning, which is a pillar of what we do when we develop the Retirement Road Map for our clients, knowing that tax planning is something that you can be very proactive about, that you don’t have to speculate on, that can really make sure that you are leaving no stone unturned for every single one of our SHP clients.
Matthew Peck: So, Peter, thank you so much for joining us and for all that you’ve done for SHP.
Peter Roache: Thanks for having me.
Derek Gregoire: Hey, Peter, I have a quick question right off the bat here is that in the financial world, this isn’t patting us on the back, but do a lot of people that come to you that have financial planners, financial advisors, are they doing extensive tax planning? Or are they more just managing clients’ portfolios and saying, talk to your CPA about taxes? Or are most people proactive in doing active tax planning within a retirement plan?
Peter Roache: No, I would say the latter, they’re not very proactive, whether it be about a retirement plan or any other investments that the people have. For the most part, I would say that, yeah, it’s more after the fact.
Derek Gregoire: Like reactionary.
Peter Roache: Reactionary as opposed to, in dealing with you guys, it’s more proactive.
Derek Gregoire: Well, when we started in 2003, I think everyone should know that it wasn’t normal to do anything but managed a client’s portfolio. However, if you look back to talking to clients over the years, this back in 2003, 2004, or 2005, we weren’t having these conversations either about taxes because we didn’t know much about it. And then all of a sudden, over the years, people would come to us with all these concerns. And it wasn’t always around investments. It was about taxes and what’s going to happen in taxes. And then, you’ve seen all these tax changes. We saw a few years ago, taxes got pulled back, the rates got pulled back a little bit from their previous highs. And we know in the future, in 2026, I think it is, they’re going at least back up to where they were, but there’s so much legislation that most people think it’s going to be higher. So, now, the concern we hear all the time is around, we’re concerned about the markets, we’re concerned about having enough income, but a lot of that’s going to be predicated on what happens with taxes.
Matthew Peck: Well, yeah, and even without sort of, I know Peter, about to hop into it, but have you seen the tax code just get more and more complex? And has your work gotten harder and harder as they continue to pass more and more laws which like thousand pages per and whatnot?
Peter Roache: Yeah, any time that you hear the government say paperwork reduction, it usually means three times more. This past year was the worst where we got into March and they’re still passing tax law for 2020. So, the IRS software was rewritten around three times last year.
Matthew Peck: And I can’t imagine they have the best coders.
Peter Roache: No.
Matthew Peck: In the IRS either, I mean, I don’t know. You tell me.
Peter Roache: No, from what I hear, their IT is supposed to be four or five generations behind most businesses.
Derek Gregoire: That makes sense. So, basically a lot of times, like throughout this year, at least each year is a different year for the last two or three years. One of the biggest tax planning opportunities that we’ve seen is around Roth conversions. And we’re going to get into some other neat strategies later on, but from a Roth conversion standpoint, what are your overall thoughts? I guess, Keith, maybe take us through the process and maybe Peter can comment just overall thoughts if it’s appropriate and when it’s appropriate for certain individuals.
Keith Ellis, Jr.: Yeah, I mean, the idea of a Roth conversion is taking a look at your income, again, like Derek said, to make sure it’s right for you as an individual, but what you’re doing is you’re voluntarily taking money out of your IRA or “a distribution” from your IRA, paying taxes, what we call a controlled tax rate because you’re doing it in a way that you know what you’re going to be paying ahead of time and then putting it into a Roth IRA. And we believe that is an important strategy for people to be looking at or consider an unlock in their retirement future. So, I don’t know if you have anything else to add to that, the importance of that, or some thoughts around that.
Peter Roache: Yeah, I guess one of the things that we try and do with the Roth conversions is look at what the tax rates are today. We know what they are today. We don’t know what they’re going to be tomorrow.
Keith Ellis, Jr.: Correct.
Peter Roache: Exactly. And tomorrow could be a change for all of 21, it could be a change for January 1, 2022, but go with what we know. And I mean, we’re fairly certain that rates are not going to go down. So, we look at a rate where someone’s comfortable at paying, and it makes sense to move some money tax-free over.
Keith Ellis, Jr.: Yeah, I mean, and it’s funny because we have this conversation all the time with the families we work with, and a lot of folks will come in, they’ll be concerned specifically about one risk and that’s market risk. And then we kind of educate them through our process about what we believe is a real big risk, which is tax risk. Like you said, we’ll be in a room with people and we’ll ask how many people think tax rates are going to stay the same or rather go up in the future. I think every hand goes up in the room because they believe that obviously like, you just said, tax rates are probably going to go up. Then the question is, well, how many of you are proactively planning against that? And not many people, you kind of get some crazy looks and like, hey, they don’t know what we’re talking about, and then we get into it, and then one of the strategies we just talked about is that Roth IRA conversion. And like you said, if you believe taxes are going up in the future, and we do the analysis and we think it’s the right move, we’re going to walk you through that process and how it works.
Derek Gregoire: Yeah, think about like once you go through that Roth conversion process, you’re renting the taxes on that money. And a lot of people think, well, if I do that, I have less money in that account in the Roth IRA, but you have to realize, whatever percentage the government owns today, let’s say, you have $1 million IRA, and let’s say you own 700 and they own 300, hypothetically, well, their 300 portion still grows while the rest of your 700 grows just as well, but they might want more of it down the road. So, we always say if we can– Keith made a great point, the tax risk is so important because that’s something, I forget the quote, but like the investments in the markets, it’s our best guess. We do the planning, we allocate, we plan smart, we invest accordingly, but we don’t know what’s going to happen day to day.
The tax codes are literally we know where they are. So, we have knowledge exactly what we’re dealing with. We can make educated decisions because if we can have someone pay 12% today as opposed to 25% down the road, it makes sense. And we’ve probably done guessing over 100 conversions in 2021 alone. And Peter and our team work with so many mutual clients. So, a lot of times, if we take you through the tax code, so based on your income, I think the first $20,000 or so is 10%, then from $20,000 to $80,000, it goes to 12%, then from $80,000 to $170,000, it goes to 22%.
Matthew Peck: Do you have all these memorized?
Derek Gregoire: I do not. So the non-CPA over here is giving the CPA…
Peter Roache: He’s giving me the tax brackets.
Derek Gregoire: But a lot of times like, if you know, let’s say a client, if they’re going to be over $100,000, $120,000 in retirement with Social Security, dividends, rental, pension, minimum distributions, if you’re going to be in that lane anyways, which today is 22%, most likely that 22% is going to be higher. We can’t say for sure. So, if we can pay 22% now where we know where the taxes are and just be done with it, move it to that tax-free bucket. Number 1, you’re paying less taxes on that money in that scenario. Number 2, though, in the future, you have more flexibility because now you have some pretax accounts, some tax-free accounts, so you can almost in the future say, okay, I’m going to get to this level of income in 10 years from now with my IRA, Social Security, but the additional amount, I’m not going to go into the next tax bracket because the rest of my income is going to come from Roth. Does that make sense?
Keith Ellis, Jr.: Right.
Peter Roache: Right. So, you’re in essence taking that million dollars and if you rolled over 20% of it, you’re locking that tax cost then at the $60,000, and that’s it. You’ve paid your bill to the IRS, and the rest of it’s going to grow for the rest of the time that you have it in there, tax-free. So, you’ve got that growth, and then it gives you that planning opportunity down the road when you are drawing on the accounts to adjust your taxable income in different years based on different things that are happening in your life. Maybe you sold some real estate in a year and you had a big capital gain. So, I don’t need the money out of my Roth, or I can keep my minimum distributions down as low as possible or some years, I’m not going to have as much income, I need some of that tax-free money.
Keith Ellis, Jr.: Yeah, so it’s basically creating tax diversification, right? And that’s the idea, and also, I think it’s important, too, if you’re a married couple, the idea of creating the Roth IRA for the future because at some point, unless you both pass away at the exact same time, there’s going to be a time where they go from a joint filer to a single filer, and then the tax rates become or the taxes can become a little bit more aggressive as a single filer. So, that’s where that tax-free money could be more important, too.
Peter Roache: Right, right. So, then as a single person, then having that flexibility is probably even more important because like you said, Keith, the rates jump as a single person versus the married.
Matthew Peck: I guess, what do you guys think? Like where do you think it all started? Remember how there was the myth that, okay, hey, no, no, no, defer your taxes now because your income is going to be lower in the future. And so, the whole IRA and 401(k) business, the whole thing was predicated on, take your write-off now because in the future, your income is going to be lower and tax brackets are going to be lower, and it just doesn’t seem to be the case. And so, I’m not sure if it was true way back then.
Derek Gregoire: Was it a setup, Peter? Was it an IRS setup?
Peter Roache: I would have to say that conversation probably started right around the time when you defined benefit plans, moved over to– pretty much everybody went to the defined contribution plans.
Derek Gregoire: That’s basically the pensions went away, the 401(k)’s.
Matthew Peck: Yeah, exactly, what would Derek decide, yeah. For all of our listeners because he’s saying DVCs, defined benefit, but pensions to 401(k)’s are what for?
Peter Roache: Traditional pensions went away, and it was all on the employee. How do we get people to contribute to these plans because this is going to be their retirement savings while we’ll give them a tax break?
Derek Gregoire: Yeah, exactly. And then, basically, most of the clients that we see, there’s some that can stay in a pretty reasonable tax bracket in retirement, but a lot of times that they’ve saved up a lot of money pretax, that minimum distribution that they have to take out at 72, combined with Social Security and other income usually pushes them up to that level, which is going to be hard to plan around as you’re going to be in a high tax bracket.
Matthew Peck: Well, that’s the thing, too, Derek. And I’m not sure if you’ve seen it, and I wish I had more scientific numbers, but I feel like this is about maybe 20% or 2 out of 10 where we would do the Roth conversion calculations, and it doesn’t make sense, but at least 80%, I mean, again, nonscientific small sample size, but a heavy, heavy majority of the people that we crunched numbers for does work out better, where very few end up staying in a smaller bracket without taking proactive steps.
Keith Ellis, Jr.: I actually think it’s an interesting time right now because if you think about it, when a lot of the families we work with were working, tax rates were higher, so they got the benefit of the contribution. Now, tax rates have come down, and they get the benefit of the conversion, they’re almost winning on both ends.
Matthew Peck: That’s a good point.
Keith Ellis, Jr.: Yeah, and absolutely, historically speaking.
Derek Gregoire: And Peter, also, when you when you’re retired, right, when you’re 65 or older, now, your income is also changing based on Medicare premiums, Social Security tax. So, there are additional taxes that come into play the more income that you have.
Peter Roache: The only catch to that, the Medicare premiums, they do take into account Roth distributions as well, for your modified adjusted gross income.
Derek Gregoire: Got it. So, you have to take the fact, but if you do a conversion, this is going to be a technical– I’m already sorry about this. If you do a conversion in your 60s and you have less money to take out of the 401(k) IRA because you converted it to Roth before you’re 72. So, let’s say, instead of having a million in IRA at 72, now, you have half a million in IRA because the rest is all Roth and you don’t need the distributions, then your tax bracket is going to be lower because there’s less to draft, I mean…
Peter Roache: Right. So, it’s a double benefit there that you’ve lowered your required minimum distributions and you’ve got this money that’s there for you if you need it.
Derek Gregoire: Exactly. So, you can play around with it. With a Roth IRA, you’re not forced to take minimum distributions at age 72.
Peter Roache: Ever.
Derek Gregoire: Wherever. So, with an IRA 401(k), at that point, you’re forced basically with a few situations if you’re working and you’re on a 401(k) plan, but mostly, you’re going to have to take a distribution at age 72.
Peter Roache: Right.
Keith Ellis, Jr.: Some of the families that you work with, a lot of the goals, at least that we work with as well, their goals legacy, right? And then the SECURE Act passed at the end of 2019. Have you had a lot of people ask you about that, the impact planning strategies? Or is that kind of something that you think was more or less, I don’t want to say, swept under the rug because then COVID followed, and the SECURE Act kind of everyone forgot about, but there is a massive impact to retirees, and it’s huge, in my opinion, maybe I’m wrong, you can correct me. I think it’s a massive tax grab by the government.
Peter Roache: I agree in both cases that it was a little bit swept under the rug, and COVID helped push it under there. It wasn’t really on people’s radar, but yeah, it definitely does change.
Keith Ellis, Jr.: Well, it’s a great Christmas present because…
Derek Gregoire: Yeah, it’s right around there, right?
Peter Roache: Definitely changes some legacy planning, like you said, Keith.
Derek Gregoire: Well, before everyone’s like, oh, I declined in last week. They said they thought I’m 70, I have to take a minimum distribution out. And I said, no, you don’t actually, yet it’s now 72, and they had no idea. I said, “Wow, this actually worked in our favor.” And I said, well, when you pass away, this is the tradeoff as your heirs, let’s say you had a million-dollar IRA, they could take it over their entire lifetime so they could take little distributions each year, not a big tax impact and so forth. Well, they gave you two extra years before you have to withdraw, which means it can grow more, which means more taxes, but then when you pass away, now as part of the SECURE Act, your heirs have to take all that pretax money out over 10 years. And if you look at the baby boomers when a lot of them pass away based on life expectancy, their kids are probably going to be in that 55 to 60 high income-earning years, will they have to take now another million dollars over 10 years of taxable income?
Matthew Peck: And then just to add to that, just to clarify, too, Peter, remind yourself of the funky spiral of the Secure Act as Derek has mentioned for the whole 10-year thing, is that you can actually delay it for 10 years and then take it all out in one year if you really wanted, too.
Peter Roache: If you really wanted to. Here’s what that meant.
Keith Ellis, Jr.: For the Roth, that worked.
Matthew Peck: Yes, 100% for the Roth, that’s where it makes sense.
Derek Gregoire: Because if you pass away with a Roth, again, your heirs usually could stretch that out over their lifetime. Now, they have to take it over 10 years, where the Roth is tax free, you might want to not touch it for 10 years, then on nine years, 364 days, cash that baby in, and you get the tax-free distribution at the highest amount.
Peter Roache: Yeah, it is really a double whammy because, like you said, if you’re passing away in your 80s, your kids are probably in their 50s. So, they’re in the highest tax bracket that they’re probably going to be in. And now, you’ve got this extra money that you have to take out.
Keith Ellis, Jr.: Yep, in a weird way, it almost forced retirement within 10 years because if you knew that, then the IRA, maybe you retire eight years into that last two years, you take that as your income. There’s a lot of planning that can go into that.
Matthew Peck: And that’s what I say, Peter, like how often– I mean, because Derek was just saying it was the last week or whenever that client was coming in that they didn’t even realize or they still forget about the seven and a half, much less the 10-year thing, have you seen people come into your office and just be like, Wait, what? I have to take out this money, I mean, have you seen that start to come across your board?
Peter Roache: I think more in line with Derek’s client and that people don’t really realize yet that they’ve got the extra two years. They still, oh, I turned seven and a half this year. I’ve got to take money out.
Derek Gregoire: Yeah, well, that’s the thing. I think the main thing we always try to convey is the ripple effect of this type of planning between– here at SHP, and this show isn’t about us, it’s trying to help you, the listener, but it’s really looking at your entire picture. And you can tell from the last few podcasts, right? We’ve had Attorney McManus talking about estate planning. We’ve had Scott Hokinson talking about health insurance and Medicare planning, and now we have Peter talking about tax planning. So, the days of just having a portfolio on the go, I can retire, I have a portfolio. This should wake you up just to show you how many things you have to think about when you’re building a true retirement plan beyond just hey, I can use Vanguard or Fidelity or Schwab and just put some money in the ETF and call it a day, or maybe you can, but make sure you’re still getting help in all these other areas besides just the investment piece.
Peter Roache: Yeah, or at least make sure your heirs are following up on all of that because they’re going to have to deal with the issues.
Derek Gregoire: Exactly.
Matthew Peck: Well, then also, Peter has a point. So, okay, current legislation, we know proposed legislation is different from enacted legislation, but can you give our listeners any updates on what they’re talking about, specific highlights that people should be talking?
Keith Ellis, Jr.: Or lowlights.
Derek Gregoire: Yeah, I was going to say highlights.
Matthew Peck: Great point.
Peter Roache: Well, I mean, I guess just in a word, what they’re looking at is everything. They’re looking at taxing, a wealth tax, an annual wealth tax. They’re looking at increasing the tax rates themselves back to…
Derek Gregoire: What’s the annual wealth tax?
Peter Roache: So, if your wealth, if your overall net worth is over…
Keith Ellis, Jr.: $5 million, right, is how it is?
Peter Roache: I’ve seen a million. I’ve seen $5 million.
Derek Gregoire: This is net worth or investable assets?
Peter Roache: Net worth. So, everything that you own, no discounts if it’s a family limited partnership or anything.
Keith Ellis, Jr.: Wow!
Derek Gregoire: Wow! So, what if you own a business, you’d have to get that appraised, like every year?
Peter Roache: It’s technically.
Derek Gregoire: So, basically, there’s going to be just because…
Keith Ellis, Jr.: Apparently, this is your and Derek’s consultation.
Derek Gregoire: No, it’s not easy. So, if you had a certain net worth…
Peter Roache: 2%, I’d say, yeah.
Derek Gregoire: So, if you have $5 million or $10 million, there’d be an extra $200,000 taxed.
Peter Roache: Yeah, right.
Derek Gregoire: Just because you have that money.
Peter Roache: Right, because you’ve accumulated that.
Keith Ellis, Jr.: They don’t want you to use that money to hire an employee or something like that. That could be a nice incentive. Why don’t they do that?
Derek Gregoire: You’re going to work hard and save money, so.
Keith Ellis, Jr.: It’s almost like how they did the PPP loan. If you hire someone and kept them, that would be a nice– I don’t know, maybe I can make that suggestion to the IRS.
Matthew Peck: And that’s all pretty much…
Derek Gregoire: Senator Warren, she’ll take your call about the after-tax dollars.
Peter Roache: The majority, I mean, granted, a chunk of that, of your net worth is going to be your IRA and pretax money, but I would assume the majority of it’s still going to be after.
Derek Gregoire: And sorry, and you just said one, and I already lost this. I’ve lost it a little bit.
Keith Ellis, Jr.: Yeah. What are some other lowlights?
Matthew Peck: Yeah, let’s break that one down.
Peter Roache: Yeah. Income tax rates going back up to the pre-2017 changes.
Keith Ellis, Jr.: Okay, yep.
Matthew Peck: Is that across the board? I thought I saw like only 400k and above for the higher bracket, or we’ve also seen anything like…
Peter Roache: So, the old rates, $600,000 of income got you in the top rate. At $400,000, now, you’d be at the 39.6%.
Matthew Peck: Got it, okay.
Keith Ellis, Jr.: Okay.
Matthew Peck: Alright. So, it’s raising it and then lowering– so expanding that, expand the base, right, expanding the net.
Keith Ellis, Jr.: Yeah, it’s $200,000 net.
Derek Gregoire: Continue with this amazing news.
Peter Roache: Capital gains.
Matthew Peck: It’s like I think we lost all these listeners.
Derek Gregoire: Yeah, like, I’m done planning.
Peter Roache: Capital gains rates.
Keith Ellis, Jr.: Depression.
Peter Roache: Between 25% and 28%.
Keith Ellis, Jr.: I heard that, actually, yeah. So, now, like if you have a stock that’s appreciated, you sell it, instead of the 15%, you get another 10% on that.
Derek Gregoire: Right now, it’s 0%, 15%, or 20%.
Peter Roache: Right, 0%, 15%– there’s a 10% in there, too, but the majority of people are paying 15% or 20%. So, now it would go up to somewhere between 25% and 28%.
Keith Ellis, Jr.: Wow!
Derek Gregoire: How about capital gains in the next generation?
Matthew Peck: Yeah, step-up in basis.
Peter Roache: So, it’s step-up they’re talking about.
Keith Ellis, Jr.: Getting rid of it.
Peter Roache: Reducing the exemption. So, right now, you could pass away with $11 million worth of assets and not pay any federal tax, estate tax. They want to reduce that. I haven’t seen the number on where they want to reduce it to, but also then do away with the step-up in basis. So, if you’ve got an estate worth $5 million and we’ll say they reduce it back to the million it used to be, you’re going to pay a tax on the $4 million difference. At the current rate, 40%, so $1.6 million, and your heirs’ basis in it is still whatever your basis was, so they no longer get that step-up.
Keith Ellis, Jr.: So, the easiest planning solution is to move?
Derek Gregoire: No, that’s federal, that’s for the country.
Keith Ellis, Jr.: That’s what I mean.
Derek Gregoire: No, it’s crazy. And I know I’m on the– Keith’s going to hate me for saying this, but obviously, I’m against raising taxes and all that stuff, but the step-up in basis, to me, that’s like a fair thing if they wanted to– because if you put a million dollars in Apple stock 20 years ago, and it’s worth $20 million or whatever, and you pass away, your kids inherit that at no tax. To me, that’s a fair thing to tax. If they’re going to tax something, at least like, alright, you put an X, it grew to Y, a capital gain tax on that, even at death, it’s a fair thing. Then, other than just saying, “Alright, you have this much money, we’re going to tax you 2% because your net worth is over $5 million.” That’s just arbitrary. To me, that would be like, I don’t want it to happen, but I could reason with it. Am I crazy?
Peter Roache: I would say, 15 years ago, it would be crazy to say, we’re not going to do step-up in basis. Now, at least with the reporting requirements where Fidelity, Schwab, everybody’s got to keep the basis, at least the documents, the records would be there so we would know versus…
Derek Gregoire: Oh, from years ago.
Peter Roache: Right, trying to figure out what somebody paid in 1995 for that Apple stock.
Derek Gregoire: Yeah, that’s true.
Matthew Peck: Yeah. And that’s one thing, a topic for another show is that whole idea of the reporting requirements. And we see that, I see that a lot where clients who come in with this old AT&T stock that their grandmother gave them, and it’s like, oh my gosh, we had to do this forensic accounting to figure out when the dividends, the splits, and all of that stuff.
Derek Gregoire: There’s like 20 hours of work going into that. As soon as you have this old stock, I’m not sure the cost basis, I say, “Well, Pete is going to have about 20 hours. My team is going to have about 20 hours. So, I guess we’ll get working on this.”
Matthew Peck: But I see your point, though, Derek. I mean, it’s funny, whether it’s like the step-up in basis or the estate tax, I don’t think it should be a million or anything like that, but anything that doesn’t get people from working hard, you know what I mean?
Derek Gregoire: Correct.
Matthew Peck: It’s like taxing income is one thing, but taxing the Rockefellers, I’m all right with certain ones up to a point. Or the Gregoires and the Rockefellers and the Kennedys.
Derek Gregoire: Yeah, they’re all in the same land, definitely. So, moving to a brighter topic, I think, is a cool opportunity for people that have 401(k) plans and have the ability to fund it. And they call it like the mega backdoor Roth conversion, right? And we had a client just this week, we would be emailing back and forth, Peter, that’s working on doing this exact same thing. So, if you can explain just a little background of what is the backdoor mega Roth conversion within a 401(k) plan?
Matthew Peck: And even back up, do a backdoor Roth conversion, explain that, and then explain a mega backdoor for all of our clients or all listeners, sorry.
Peter Roache: So, the regular backdoor Roth is just a matter of you’ve exceeded or you don’t qualify to put money into a Roth, the traditional way of just writing the check and moving it in. The back door, you need to move the money into an IRA first, the traditional IRA, not have other IRA assets, roll that money, then immediately over to the Roth.
Derek Gregoire: Into nondeductible.
Peter Roache: Nondeductible.
Derek Gregoire: IRA.
Peter Roache: So, you’re moving nondeductible money over to the Roth. So, there are no tax consequences, just a two-step process.
Keith Ellis, Jr.: And clarify why you can’t have another Roth.
Peter Roache: An IRA?
Keith Ellis, Jr.: Yeah, another IRA, I’m sorry.
Peter Roache: If you have another IRA, then the percentage to move that $6,000 or $7,000 over, it would be $6,000 as a percentage of your total IRA. So, if you had $100,000 or $94,000 of IRA, now you put another 6 in, you move the 6 over, only 6% percent of it is going to be tax free.
Derek Gregoire: $360 basically, or whatever that number…
Peter Roache: Yeah, the majority of it would end up being a taxable distribution.
Keith Ellis, Jr.: Okay.
Matthew Peck: And I think just one more clarification, which I think people, like the whole idea of a nondeductible IRA, I think there’s a lot of sort of confusion out there because people think, like, Oh, Aaron, too much. I can’t put it into an IRA. It’s like, Yes, you can, you just can’t deduct it. And you go from a nondeductible. So, it’s an IRA to a normal IRA, you’re just not deducting it from your taxes and then you do the flip, assuming that we don’t have the…
Keith Ellis, Jr.: Other IRA assets.
Derek Gregoire: And so, that’s the small one.
Matthew Peck: Yeah, that is your normal…
Derek Gregoire: The mega.
Matthew Peck: Yeah. That’s like, not your mega man. That’s like your…
Derek Gregoire: You’re into space.
Matthew Peck: Yeah, just a standard, not a strong one.
Peter Roache: Well, more of a side door.
Matthew Peck: A week Roth.
Derek Gregoire: The next one’s like a back French door Roth.
Peter Roache: Like a slider.
Derek Gregoire: Yeah.
Peter Roache: So, with a 401(k) plan that you have an opt– well, as long as the 401(k) plan itself has the option, you can put after-tax money into a plan. So, for people under 50, you get the $19,500 that you can put into 401(k), then the company is typically going to match a portion of it, say, it’s $10,000, $10,000, $5,000 to make it easy. So, you’ve got a total contribution to your plan of $30,000. The IRS allows you to put this year up to $58,000 total into a plan.
Derek Gregoire: $64,000 if you’re over 50, right?
Peter Roache: Right, yeah. So, you could put another $28,000 into the after-tax bucket of a 401(k). From there, you can take that money and roll it into a Roth.
Derek Gregoire: So, yeah, just think about, if you put that after-tax money in anything else, you’re going to pay all the future growth on capital gains, dividends, interests, and all that.
Keith Ellis, Jr.: Well, especially as we were just talking about, if they do change the capital gains rate, that’s even more powerful than strategy.
Derek Gregoire: Oh, it’s amazing. And if you do this, so my client, and I think it depends on like– doesn’t it depend on how your 401(k) is more top heavy?
Peter Roache: Yeah, it does. There are a lot of…
Derek Gregoire: The ownership, you might not be able to.
Matthew Peck: Yeah, there’s a lot to it.
Peter Roache: There’s a lot to it depending on the plan itself, right?
Matthew Peck: Yeah.
Peter Roache: So, typically, the larger the company you work for, the more options you’re going to have.
Matthew Peck: Correct.
Peter Roache: Versus a small company, but definitely, I would suggest, anybody, look into whether or not their plan allows for after-tax contributions because it can be a huge…
Keith Ellis, Jr.: To win.
Derek Gregoire: We were doing a review a few weeks ago. The client and Peter and I were going back and forth on this, but just basically, they are over 50, so they made their $24,000 or $25,000 for the year contribution. The company matched like $10,000, $5,000, say, there were about $34,000 or $35,000 of total contributions between the pretax or whatever that went in. It doesn’t matter if it was Roth or pretax, but then the company matched. Let’s say, $34,000 to make it easy math that they had put in. And I said, “Why don’t you call your employer and just see if they have this after-tax option?” Well, it turns out, so now he’s put in $34,000 for the year. Most people think they’re done. Well, if he has additional funds, he can contribute another $30,000 and change, which is 64, and changes the limit at that age.
Peter Roache: Right.
Derek Gregoire: In that end, the plan has an automatic feature where every six months, it takes any money in the pretax accounts and converts it to the Roth.
Matthew Peck: Automatically?
Derek Gregoire: I’m sorry, after, yeah.
Matthew Peck: But still happens automatically?
Derek Gregoire: In the after-tax, yes.
Matthew Peck: But it happens…
Derek Gregoire: Because if it goes on for too long, now, you’re going to pay on the interest.
Peter Roache: You’re right.
Derek Gregoire: So the quicker you can make the contribution to the after-tax bucket and convert it, the quicker it goes into tax-free status. So, think about that. He’s in his 50s, $30,000 a year for five years. It’s not 150-plus gains that after-tax money goes to the Roth, where this client or some people, they make $700,000 or $800,000 a year combined. They would never be able to do a Roth contribution, and the conversion would be very expensive. So, this is a good way to just get some more, build up more tax-free money because a few years ago, when they signed on to work with us, they have a lot of assets and buildings and properties, and they make good money in boats and whatnot. And the goal was like, hey, as we get close to retirement, let’s build more tax flexibility, tax diversification that everything you have is in pretax, right? And this is another way to chip away at that.
Matthew Peck: That’s fantastic.
Derek Gregoire: It is.
Peter Roache: So, you’re getting $30,000 into a Roth IRA. So, you’re four to five years’ worth of Roth contributions in one year.
Matthew Peck: Yeah, that’s right.
Peter Roache: Derek said, do that over five years.
Derek Gregoire: It’s a big number. So, that’s what we’re saying. There are so many areas of tax planning, right? You’re combining what we just talked about there with maybe some Roth contributions, with Roth conversions, right? And we haven’t even talked about tax laws.
Matthew Peck: 1031 exchange.
Derek Gregoire: 1031 exchanges and really, so much. So, there are so many tax planning opportunities that, again, you might be out there and maybe, these won’t work for you, but you should really explore as many options as you can because we always say we don’t want to leave any stone unturned, and that’s why we work with all these professionals to make sure, hey, Peter’s team is great. Again, a lot of times, we kind of have an idea what we’re doing, but I’ll reach out to Peter. Hey, just to make sure we’re doing this right, 64 and changes the limit, you’re always right back. And yep, that’s what it is. You’re on the same track. So, I just don’t want to miss anything, but this is important to kind of cover all these areas from a planning standpoint.
Peter Roache: There’s one way to make sure a plan won’t work is to not ask the question.
Derek Gregoire: Yeah, know the best way to make it is just to do nothing.
Peter Roache: Right.
Derek Gregoire: You do nothing, you know there’s no chance. If you look under every rock and every stone and say, “Is there an option here? Is there an option here?” There are so many things to check off that you can– and every time you do a little thing like that, it adds so much value to someone’s plan, and you just want to keep stacking the deck in the client’s favor. The things are out of our control, but as many things as we can control, it adds huge value over time.
Matthew Peck: And that’s exactly why we want to thank you so much for coming out. I mean, the landscape is going to constantly shift and change. And so, I don’t know…
Derek Gregoire: Is there anything else, Peter, that we…
Peter Roache: Yeah.
Derek Gregoire: Is there anything else from a planning standpoint or from a tax standpoint that we can– anything else that we missed that we should know about?
Peter Roache: I mean, you touched on tax-loss harvesting, and it’s something that I mean, the three of us always talk about.
Derek Gregoire: You want to just do a quick rundown on that?
Peter Roache: Sure. Sure. We’re looking at when you’ve got taxable gains during the year, realized capital gains offsetting any losses that you have, not buying the security back within the 30 days so this is a wash sale, but to be able to offset the gains and also, in different times with different of your clients, when they’ve got a building sale or some other sale where they’ve got a large capital gain, we’re not so much worried about security gains, then we’re looking to offset that gain so there are ways to offset other income other than just security gains and losses.
Derek Gregoire: Exactly. Yep, that’s another big one.
Matthew Peck: And that’s great, I was going to say, I mean, there’s going to be so much. And as we’re seeing with that current legislation, the ground is shifting. So, once we know more, we’d love to have you back, but just again, I want to thank you, Peter Roache, of Donellon, Orcutt, Patch, & Stallard. Thank you so much for what you do for us personally, for the clients of SHP, and for all the listeners.
Keith Ellis, Jr.: Thanks, Peter.
Peter Roache: Thanks for having me.
Derek Gregoire: Thanks.
No statements made during the Retirement Road Map® podcast shall constitute tax, legal, or accounting advice. You should consult your own legal or tax professional on any such matters. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk, and unless otherwise stated are not guaranteed. Our Investment Advisory Services are offered through SHP Wealth Management LLC., an SEC registered investment advisor. Insurance sales are offered through SHP Financial, LLC. Our advisors and insurance reps may offer clients advice and/or products from each entity. No client is under any obligation to purchase any insurance product.
Investment Advisory Services are offered through SHP Wealth Management LLC., an SEC registered investment advisor. Insurance sales are offered through SHP Financial, LLC. These are separate entities, Matthew Chapman Peck, CFP®, CIMA®, Derek Louis Gregoire, and Keith Winslow Ellis Jr. are independent licensed insurance agents, and Owners/Partners of an insurance agency, SHP Financial, LLC.. In addition, other supervised persons of SHP Wealth Management, LLC. are independent licensed insurance agents of SHP Financial, LLC. No statements made shall constitute tax, legal or accounting advice. You should consult your own legal or tax professional before investing. Both SHP Wealth Management, LLC. and SHP Financial, LLC. will offer clients advice and/or products from each entity. No client is under any obligation to purchase any insurance product.