Learn some strategies to build tax-free wealth for Railroad Retirement
Welcome everyone to another edition of the Highball Advisors, railroad retirement whiteboard, my name's John McNamara, Highball Advisors. And today we're going to talk about, techniques to create a tax-free retirement income for people with higher incomes. Right? So what we're really talking about here is backdoor Roth. So I'll just walk through a high level process on how you can move some money into the Roth IRAs. If you're not eligible, on a straightforward way, then they, they call it the backdoor Roth. All right. So write the objective bill tax-free okay. And using after-tax contributions, right? Tax-Free retirement incomes. So who does this apply to? Right. I'm filming in the year 2021. So if you're married, filing jointly, if your income's over $280,000, you can do a backdoor Roth. If you're single with income over $140,000, you can look to do a backdoor Roth, right?
So why you want to do that? Right? Why you want to put money into Roth IRAs because you've paid the tax on it once. Now that my will never be taxed again. So it's really a great it's a great vehicle to to take advantage of now, if your income is less than these, just open up a Roth IRA and fund that. So there you go. That's pretty straight forward. You don't want me, me to explain that to you, right? Just do that. So there's an easy way and a hard way to do the Roth IRA or the backdoor Roth IRA. So let me, I'll do the easy way first. Okay. So you just opened a traditional IRA. All right. And you can contribute $6,000 if you're under 50 and in $7,000 over 50. All right. So you can contribute that into your traditional IRA.
However, that's a non-deductible contribution into your IRA. So you won't get the tax break off of that, right? You're saying I'm making a non, a deductible contribution very important. Right? You then can take that money, convert that contribution, make a conversion into a Roth IRA, right. Because you've paid the tax on it already. Cause that's an after-tax contribution and you can roll it right into a Roth IRA. Right. You have to open up the Roth IRA also to, however, what do you want to be careful of is what they call the step transaction doctrine. And basically is the IRS doesn't want to say, see that you've Oh, what you've done is you opened up an IRA. I mean, a Roth IRA when you're not allowed to, because you know, at noon you did this and at one o'clock you did this conversion on a single day.
And they're like, well, you know, all you did was open up a Roth IRA. So you want to separate these things. So advisors recommend, you know one statement, rule type of thing on one, you know, one statement you make the contribution. And then on the next statement you do the the conversion. So that's the one way to look at it. Now that's assuming you opened up the traditional IRA. You have no other IRAs, right. And it's a nice clean transaction. Now, what happens if you say, well, I already have an IRA and you know, this is where it gets a little bit hairy. So what I'm going to do is I'm just going to work through her example because otherwise it's very confusing with formulas and all that. So it's you get factored in by the pro-rata rule. Right?
So what, what the IRS wants to do is say, add up all of your IRA assets, right? Tell me everything you've got. So maybe you might already have an existing IRA and there might be, you know, a hundred thousand dollars or $200,000 in there. So they're going to take that when they, when you take out the tax free amount. So I'll just walk you through an example, explain it. So let's say you have an existing IRA of $60,000. All right. And you make a non-deductible contribution, which we talked about of $6,000. So then you're taking the 6,000 and divided by 60,000, 10%. All right. So that means that 10% of your, a, of a, the amount can be converted, right? If you move, this is going to be tax-free all right. However, 90% is going to be taxable right. Of that $6,000. Right. You're moving that $6,000 over.
So they're going to S they're saying basically, Hey, $600. Yeah. You can move that over. You already paid the taxes on it, but you know what, we're going to need the other fifth, we're going to need the taxes on the $5,400. So that's not really that great of a deal. So this isn't a really great strategy. You can do it. There's other more sophisticated ways. You could do it by cleaning out your IRA, throwing everything into your 401k and moving everything back. But I don't know if anybody's dealt with a lot of those transfers back and forth with the 401k companies. I'm not sure I'm really going to be doing that strategy. I won't be recommending it. That's for sure. So hope you found this helpful. This is how you can do a you know, build up that tax free retirement account. There's a way to do it. So I hope you found this helpful reach out to me. If you have any questions, leave some comments, please subscribe to my YouTube channel. It's growing. I really enjoyed the comments. And like I said, feel free to reach out to me if you need any help. In the meantime, everyone, please stay safe, stay on track and take care so long everybody.
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