153: Backdoor Roth, Mega Backdoor & Roth Conversions Explained

Why Roth Terms Feel Confusing

Jessica 0:00

If you've Googled backdoor Roth at midnight and closed the tab confused before going to bed, then today's episode is for you. We're getting into the nitty-gritty of the backdoor, the mega backdoor, and the conversions in Roth IRAs. Because the internet is telling everybody that Roth IRAs is where you should be putting your money. But what does that actually mean? And what are the rules? Stay tuned.

SPEAKER_02 0:23

Sugar Daddy Podcast, yo. Learn how to make the pockets grow. Findings of freedom where we go. Smart investments, money flow.

Jessica 0:34

Welcome back, everybody, to the Sugar Daddy Podcast, where we help you build a clear financial plan so you can feel confident and in control of your money. Not sure how confident I'm going to be feeling today with all of these terms you're about to throw at us, but hey, babe, what are we talking about today?

Brandon 0:50

So today we are going to take it one step further than just simply the Roth IRA. We're going to talk about the backdoor Roth contribution to an IRA, talk about mega backdoor, and also explain what conversions are in regards to a Roth IRA.

Jessica 1:04

I don't know about you, but a mega backdoor. I don't know if that's for me. We're going to find out. Yeah, that's what they say. All right. So why don't we set the scene? Because what is a Roth

Roth IRA Basics And Rules

Jessica 1:22

IRA?

Brandon 1:22

All right.

Jessica 1:23

Let's go back.

Brandon 1:24

A Roth IRA is a type of tax-qualified account where the money that you're contributing to it you've already paid taxes on.

Jessica 1:32

Okay.

Brandon 1:33

All right. So while the money's in the account, after you've contributed it and you're investing and it's growing in the account, you're not paying any taxes on it.

Jessica 1:40

Love that.

Brandon 1:40

And then when you pull it out in retirement properly, you don't pay any taxes on the growth.

Jessica 1:45

So this is a retirement account.

Brandon 1:47

Correct.

Jessica 1:48

So you have to be a certain age to access the money.

Brandon 1:50

Correct. There are limitations to access. So in order to access the tax-free growth, you do have to be 59 and a half years old.

Jessica 1:57

All right. So this is a long-term play. Yes. For anybody that's listening that's, you know, millennial, elder, millennial age, or even younger. You're gonna have to wait on this one.

Brandon 2:06

And for most people, you do need some type of earned income. However, you do have like the spousal IRA where if you're um a non-working spouse, then you can still contribute. But you know, this is the idea behind how this account functions as a whole.

Jessica 2:20

Okay. And why is the internet so obsessed with Roth IRAs? Like everybody's like, put your $7,500 in, put your $7,500 in. But like why?

Brandon 2:28

Because of the number one benefit of not paying taxes on the growth.

Jessica 2:32

Okay. So that is why we love a Roth IRA.

Brandon 2:35

That is the number one benefit of a Roth IRA because if you put in $1,000 and it grows to $10,000, you have $9,000 worth of tax-free growth. Yeah. You don't have to pay taxes off.

Jessica 2:45

Huge. Okay. So that is number one benefit.

Brandon 2:48

Okay. So you know the contribution limits for a Roth IRA for 2026 for most of our audience that's under 50 years old is $7,500.

Jessica 2:56

Okay. Does that also lower your taxable income?

Brandon 2:59

It does not because you are not taking any type of tax deduction on the money that's going into the account.

Jessica 3:04

Got it.

Brandon 3:05

So remember, if you contribute $7,500 into the account, you've already paid taxes on the $7,500.

Jessica 3:10

Okay. And can everybody just put the $7,500 in?

Brandon 3:13

No, because there are income limitations to doing a traditional contribution to a Roth IRA.

Jessica 3:22

Okay. And so that's what this conversation is about, right?

Brandon 3:24

Because the way that you normally contribute to a Roth IRA is that you open up a Roth IRA, you connect your bank account to the Roth IRA account, and you contribute the money.

Income Limits And The Backdoor Idea

Brandon 3:33

This goes directly into the Roth IRA from your bank account and you can invest it there.

Jessica 3:37

So that's pretty simple.

Brandon 3:38

Yes. Okay. However, there are income limitations.

Jessica 3:41

So this is not through my employer.

Brandon 3:42

This is not through your employer because the I and IRA stands for individual retirement account.

Jessica 3:47

Got it. So your employer is not going to give this to you.

Brandon 3:50

Correct.

Jessica 3:50

Okay, cool.

Brandon 3:51

And the thing is here is as I said before, that there are income limitations to contributing that way. Once you make a certain amount of money, you cannot do a regular contribution to a Roth IRA, and you have to take additional steps in order to utilize a Roth IRA.

Jessica 4:06

Okay. So that's what we're talking about today. These additional steps.

Brandon 4:10

Yes. All right. So the next one is getting into what's called a backdoor Roth.

Jessica 4:14

Okay.

Brandon 4:15

And the backdoor Roth is the IRS legal way to contribute to an IRA when you make above the income limitation.

Jessica 4:24

Like, why do they have to make it so complicated? If they're gonna like let you kind of bend or break, I mean you're not bending the rules, but like if there's gonna be a loophole or like a workaround, why not just standardize it? Like why?

Brandon 4:37

I don't have a good answer for you.

Jessica 4:39

Okay. Because it is dumb, right?

Brandon 4:41

Like I I personally think it's dumb. I I could be honest with you. I've never actually looked up for in further detail to see is there a legitimate reason the IRS does this? Because more than likely it's the IRS, and there's probably not a legitimate reason. So I don't want to waste my time.

Jessica 4:54

Yeah.

Brandon 4:54

But there is a way to contribute once you make above that income limitation.

Jessica 5:00

Okay.

Brandon 5:00

And it's can be simple, but there are a few things that I always want to point out to people. All right. So the process is that previously, take a step back. So previously you opened up a Roth IRA, uh connected to your bank account, and went from straight from your bank account to the Roth IRA.

SPEAKER_02 5:16

Yeah.

Brandon 5:16

Now you have an you have a couple of additional steps. So now instead of just a Roth IRA, you also have to have open a traditional IRA.

SPEAKER_02 5:23

All right. Okay.

Brandon 5:23

Now with a traditional IRA, to explain that, a traditional IRA works this way: the money that you put into the traditional IRA, you um you don't pay taxes on.

Jessica 5:32

Okay.

Brandon 5:33

And it's while it's growing, you don't pay taxes on it while it's in the account invested and growing. But then in retirement, when you pull it out, you are going to be taxed on based upon you know current income tax rates on the amount that you pull out.

Jessica 5:48

Okay.

Brandon 5:48

All right.

Jessica 5:49

All right.

Brandon 5:49

But what we do now is that we have the traditional IRA. So we are going to connect our bank account to the traditional IRA. And we're going to contribute, let's just say we're going to do the max, $7,500 to the traditional IRA.

Jessica 6:01

Okay.

Brandon 6:02

So it goes into the traditional IRA and it stays there as cash. You don't

Step By Step Backdoor Roth

Brandon 6:05

want to invest it in the traditional IRA.

Jessica 6:06

Okay.

Brandon 6:07

It's just cash. And then immediately what you do is you do what's called a conversion. You are going to convert the $7,500 to the Roth IRA.

Jessica 6:17

This feels like such a pointless stat.

Brandon 6:19

Now the thing is here is that we are not taking the deduction of the traditional IRA.

Jessica 6:23

Okay.

Brandon 6:23

So we're not, you know, with the traditional IRA, normally if you contribute the $7,500 to it, at the end of the year, you have a $1099 showing that you know what you contributed, and that's going to lower your taxable income for that year.

Jessica 6:33

Okay.

Brandon 6:34

But in this scenario, we're not going to take that deduction.

Jessica 6:36

Okay. We just want a place to park our money.

Brandon 6:38

Correct. So it goes from bank account to traditional IRA and leave it's going to be in cash and then immediately over to the Roth IRA.

Jessica 6:45

Okay.

Brandon 6:45

And once it hits the Roth IRA, then we're going to invest it there.

Jessica 6:50

Okay. So what I'm hearing is the reason it's a back door is because you're not going into the Roth IRA. You're actually going into the regular IRA and then converting it into the Roth IRA.

Brandon 7:03

Correct.

Jessica 7:04

So you're taking that extra step.

Brandon 7:05

Correct.

Jessica 7:06

What a silly thing.

Brandon 7:07

And you also have to like with that, there's a form called 8606 that you file with that as well. Is this when you're doing your task?

Jessica 7:14

Is this easy enough to do?

Brandon 7:15

Like So I say, like so the this is For a regular nonfinance person. If you are up to date on all the information and you're paying attention to what you're doing, I think it can be easily done. Now, the one issue that I think most people run into and it's not spoken about enough on social media is what's called the pro rata

Pro Rata Rule And Hidden Penalties

Brandon 7:36

rule.

Jessica 7:36

Okay, let's get into it.

Brandon 7:38

All right. So the prorata rule, and kind of the easiest to understand terms, is like, let's just say that you were, you know, you have an old 401k plan from a previous employer. Let's say you had $15,000 in it.

Jessica 7:48

Okay.

Brandon 7:49

And you rolled that $15,000 into, you left that employer, you have employment elsewhere. So you have opened up a traditional IRA and you rolled that $15,000 into a traditional IRA.

Jessica 7:58

Yep. Oh, I think I know where you're going with this.

Brandon 8:01

What ends up happening is that people are like, oh, well, I make too much money. I can't contribute directly to a Roth IRA, but I still want to do a Roth IRA. I'm going to do a backdoor Roth IRA. And they do these steps while they have a traditional IRA with $15,000 in it. So part of being able to do the backdoor Roth is that the IRS states that prior to being able to make those new contributions via a backdoor Roth, you have to convert that $15,000 in your traditional IRA before you can do the backdoor Roth of new contributions.

Jessica 8:33

So everything in that account needs to be converted.

Brandon 8:35

Correct.

Jessica 8:36

Okay. So if we have the $15,000 from our old employer through the $401K that we put into an IRA, that on top of the $7,500 that we want to contribute all has to be converted.

Brandon 8:49

Yes. So the $15,000 in the traditional IRA would be converted. However, there is a way to work around that so that because the idea here is that if you convert that $15,000, you have to pay taxes on it.

Jessica 9:00

Oh.

Brandon 9:00

And most people don't want to because it's a taxable event. And most people don't want to do that.

Jessica 9:04

Right.

Brandon 9:05

So there is a workaround on that. And the work and the workaround for that is instead of keeping that $15,000 in the traditional IRA, if you have employment elsewhere with a new 401k plan, you could potentially roll that $15,000 into your current 401k plan. Uh and now you no longer have an IRA to worry about in regards to the pro rata rule.

Jessica 9:26

Got it.

Brandon 9:26

So I've done that numerous times with clients where like they had a large traditional IRA. We didn't want to convert it all because it didn't make sense from a tax standpoint in a given year. Yeah, yeah. So we rolled it into their current employer's plan. And that's the number one rule that people will miss. They do not know the pro rattle rule exists. And even if they see it, they don't necessarily thoroughly understand it.

Jessica 9:46

And what happens?

Brandon 9:48

Penalties. If you don't if you don't do it, lots of penalties.

Jessica 9:51

Like what are we talking? Like a slap on the wrist penalty for like They're going to start charging you money.

Brandon 9:55

Like for example, like think about like the 10% early withdrawal penalty.

Jessica 9:59

Okay.

Brandon 9:59

On like an IRA. Penalties like that, only more.

Jessica 10:03

And then on like what the balance on which is a continuing basis till you fix it.

Brandon 10:07

So it's not a one.

Jessica 10:08

So if you don't know, okay, so wait. So if you don't know about the rule and you maybe you're doing this thing, and then it's not like most people aren't logging into their IRA or their Roth IRA on a daily basis.

Brandon 10:19

They're not going to pull the money out of your account. Like that's not what that's going to happen. Okay. It's going to be assessed like a it's a tax penalty. So for example, say like you can just end up with like a say, for example, you know, you don't pay your taxes. Yeah, yeah. And it's a it keeps building and building, and then maybe you might have then they might get to a point where they start to, you know.

Jessica 10:34

Okay. So it could like be compounding.

Brandon 10:37

Oh yes. It's not a like, oh, it's a one you did it one time. It's like, no, it it's a penalty discontinued until you fix it.

Jessica 10:44

So if you don't even know that this rule exists, you're probably for sure getting the penalty. Oh, yeah.

Brandon 10:49

And then And that's the number one thing where I say, like in theory, as far as steps, it is an easy process, but I can see a lot of people easily messing it up.

Jessica 10:58

Yeah. Okay. Wow. Now what about I mean, A, wouldn't you s wouldn't you agree that if you have left your employer, you should either move your old 401k into your new 401k and or roll it into an IRA instead of collecting all these depends.

Brandon 11:16

So what I'm saying, the reason it depends is depends on your age.

Jessica 11:19

Okay. Because remember is that there is Yeah, but if we're I mean, I'm talking to people our age. So like they're in their 40s.

Brandon 11:26

I'm still going to say it depends because it depends on the account where it's at. Because for example, say that you have a retirement account through state employment.

SPEAKER_00 11:32

Okay.

Brandon 11:33

And you've left working for the state. But if you keep the money there and you go back, it still continues your time period towards retirement.

Jessica 11:40

So know your rules. So know your rules.

Brandon 11:41

But then also, but if you're 50, then you might want to keep it there because if I'm going to retire in the next few years, access it early, you know, at 55. Okay. No.

Jessica 11:52

Okay. All right.

Brandon 11:53

So there is some determination there. Now, if you're like 40,

Cleaning Up Old 401k Rollovers

Brandon 11:57

more than likely, the best action outside of that state example is to either roll it into an IRA or into your new employer plan. So it's easy to keep up with.

Jessica 12:09

Yeah, because I mean we know people who've had four or five, six 401k plans, and then it's like, you're gonna forget where those are.

Brandon 12:16

Well, also the bigger, the bigger issue there is is well, obviously forgetting where it's at is a huge issue. But what normally ends up happening is that if you leave a former employer and you keep your money there in that 401k plan, at some point in time, you're since they you're no longer employed there, they're going to probably roll that over to an IRA. So if you have a Fidelity 401k plan with a previous employer and you left two or three years ago, they might have already rolled that over. Since you're no longer employed there and you didn't make an election on what to do with it, they open up a Fidelity IRA for you and roll it over. Now, the issue in that is that the funds that you invest in within a 401k plan don't transfer over to an IRA. So they cash out the money in the 401k plan and roll it over as cash. So they're not invested. You're not invested. So you've been sitting there for a few years of just cash sitting in an IRA.

Jessica 13:05

I remember a friend telling me that that actually happened.

Brandon 13:08

You have a friend that that did happen to. And it was several years of just sitting in cash.

Jessica 13:11

Yeah. Oh, what a bummer. These are those things, right? Where like you hear this so much online. You can do this on your own. You don't need a financial advisor. You got this. And it's like, but do I got this? Because it's there's so much nuance.

Brandon 13:24

Well, part of the problem too is that they probably send you, they send you information. Make a determination by this date. But yeah, but if you don't know what that's people don't they don't know what it means and they don't read through it. Yeah. So you'll get the information in the mail, glance over it, not really read through it and not understand what that means. Because like I said, they're going to be like, when you leave an employer, they normally give you a time period, like, oh, you know, within the next 60, within the next 90 days, you need to make a determination of are you going to roll open up an IRA to roll it over? Yeah. Are you going to roll it over into your new employer plan? Or sometimes if it's below a certain balance. So for example, there are plans where they'll cash it out and send you a k a check. Yeah. And so you have to pay taxes on that, and that's maybe not what you intended to do.

Jessica 14:02

Right.

Brandon 14:02

And you also have early withdrawal penalties, possibly.

Jessica 14:04

So then now you're losing money on top of owing money. Correct. Yeah, no thanks. Okay. All

When Retirement Accounts Become Cash

Jessica 14:10

right. So that was the backdoor Roth and the conversion.

Brandon 14:14

No, that was just backdoor Roth contribution.

Jessica 14:16

Backdoor Roth contribution. What's after that?

Brandon 14:20

So after that, you have a mega backdoor Roth. And only the the thing with the mega backdoor Roth is that it occurs within your employer's retirement plan. So you do have to have a couple aspects available to you within that employer plan.

Jessica 14:35

Okay.

Brandon 14:36

So for this example, let's just say that, you know, you have the ability to contribute, you know, um, the maximum of $24,500. You know, that's your the max you can contribute and your plan. However, these of all the other sources of money that can come in, including like your employer match, and then you also have additional ways that you contribute, you might have you have around like $72,000 you can contribute. All right.

Jessica 15:00

Whoa, that's a lot of money.

Brandon 15:01

Most people don't realize that, but you have to have these other aspects of the plan in order to maximize this. Okay. So what you can do, let's say in this example, you contributed, you maxed out your 401k plan to $24,500, and then you have um $10,000 of match from your employer.

SPEAKER_02 15:17

Oh.

Brandon 15:17

So that leaves you an additional $37,500 that you could potentially contribute to your retirement account if you have the after-tax option. Remember how we said before that after tax is different than Roth?

Jessica 15:30

Yes. We have a full episode on that.

Brandon 15:32

And essentially, what this is allowing you to do is essentially taking the concept of contributing to an after-tax account and being able to convert that to Roth within your retirement plan through your employer.

Jessica 15:45

Do I need my employer's help to do this? How does that work?

Brandon 15:48

Well, you don't need necessarily need their help to do it. You need the features of the various sources and the ability to do an end-plan conversion.

Jessica 15:57

End plan conversion.

Brandon 15:58

Yeah, so this is not available to everyone because there's numerous times where I've had clients where I'm like, oh, this would be amazing. And then we look at their plan, and the plan doesn't allow you to do that. So this is going to be really big for high earners. Okay. Because you have the 24,500 that you already maxed out there, and you're looking to guess more money, and this gives you an option to be able to invest more money and also be able to maybe get more into the Roth.

Jessica 16:20

Got it. What else do we need to know about the mega back door?

Brandon 16:24

I mean, that's the main thing. It's a limited amount of people that would probably have access to because I said it's not in every single plan. Yeah. But the biggest thing is making sure that, you know, within your plan, your plan must allow one after tax contributions and then also allow in-plan Roth conversions or or what's also referred to sometimes as in-service withdrawals in order to convert that money to the Roth.

Jessica 16:46

Okay. So those two things you have to know before you do anything else.

Mega Backdoor Roth Through Work

Jessica 16:50

Okay. Got it. All right. So then now there's Roth conversion. So we've had backdoor, mega backdoor.

Brandon 16:58

And these were all contribution. So you have the regular Roth IRA, the contribution way, the backdoor Roth contribution, and you have the mega backdoor Roth contribution. Okay. And now we're just simply talking about the concept of a Roth conversion.

Jessica 17:10

All right. Hit me.

unknown 17:12

All right.

Brandon 17:12

So a Roth conversion is, for example, you have a traditional IRA that has $15,000 in it.

SPEAKER_02 17:17

Okay.

Brandon 17:18

It's all pre-tax. All right. If you want to do what's called a Roth conversion, what that's doing is taking that pre-tax $15,000. We're just going to say we're going to convert the entire amount. You're taking that $15,000, paying the taxes on it to then convert it over to the Roth IRA. So taking that pre-tax money, paying the taxes on it. So now moving forward, any growth on that money is now going to be tax-free because now it's in the Roth.

Jessica 17:45

Oh.

Brandon 17:45

Because if you lift it in the traditional, if you lift in the traditional, that $15,000 is going to continue to grow, but also the amount that you're going to have to be taxed on as far as the growth is still continuing to grow, also.

Jessica 17:56

I see. So then the benefit is pay the taxes early because it's on the lower amount. Let it grow, let it grow. And then when you pull it out, you're not paying additional taxes on all of that growth that you hopefully had.

SPEAKER_00 18:11

Yeah. And the thing that makes total sense.

Jessica 18:13

That's like the most logical thing you've said in this entire episode.

Brandon 18:17

And the thing is that there's there's two different ways to do it, and one is more beneficial than the other. And I'll tell you, explain that why. So normally if you have the $15,000 and you're converting it, sometimes they allow you to pay the taxes out of the amount that you're converting.

Jessica 18:31

Oh, so you're not having to like fork over your own.

Brandon 18:33

So you're not coming out of you're not, you know, you're not paying any other additional money out of your own pocket. So for example, let's just say, you know, $15,000 converting, take $3,000 out of that to pay the taxes, and now you have $12,000 in the Roth IRA.

Jessica 18:45

Got it. Versus writing a check for $12,000 for $3,000.

Brandon 18:48

The difference is that I think the better way to do it if you have the money is to pay the taxes on it outside of the account. So the entire $15,000 goes into the Roth. So now you have a larger balance in the Roth for compound interest to work.

Jessica 19:03

Okay.

Brandon 19:04

I mean And that's where the planning comes. And that's where the planning comes into place because the Roth conversions aren't just something you're just gonna be doing willy-nilly.

Jessica 19:11

Yeah, none of this sounds willy-nilly.

Brandon 19:13

This is where we're looking at your your situation. Yeah. And we're looking at like, hey, you know, does it make sense to do the Roth conversion here? Do we have enough money in a savings account in order to handle the taxes on that rather than taking um the taxes paid out of the balance being paid? Yeah.

Jessica 19:28

Well, because I mean again, $3,000 over X amount of years adds up. Yes. Right? Makes makes total sense.

Brandon 19:35

And the thing is here is that one step further is when you're doing the Roth conversions, is that you want to look at where your income tax is at. Like how much money did you make for the year? And what does that put you in for a tax bracket for the idea here is that the S E T word again. Because when you're doing can when you're doing a Roth

Roth Conversions And Paying Taxes

Brandon 19:55

conversion, when you're paying taxes, essentially it's increasing how much you made for the year. So if we're doing a conversion of 50, the entire $15,000, what it looks like is that on top of what you made as your salary, you have an additional $15,000 worth of income. So if that additional $15,000 of the conversion pushes you into the next tax bracket, that doesn't make sense because now you're paying more in order to convert it. So you do want to be well aware of what the current tax brackets are. Yeah. Like what amount pushes you to the next tax bracket? And the idea here is when you're looking at Roth's conversions, you don't want to go to the next tax bracket for most scenarios. You kind of want to fill the current tax bracket that you're in.

Jessica 20:34

Without going over.

Brandon 20:35

Correct.

Jessica 20:36

Is does it make sense to do this towards the end of the year? Like is this or does it does the timing not matter?

Brandon 20:42

The timing doesn't necessarily matter in the sense of if you are a salary employee and you know that you have, you know, you're not if you have commissions or bonuses. That's what I'm saying. You have to know what your income structure is. So have a good idea of how much you're gonna make for the year. Yeah. Okay. So if you have a very good idea of how much you're gonna make for the year, it does benefit to do it earlier in the year because you have now converted the amount over. Because for example, if you left the $15,000 in there to grow for the year, it's gonna grow more than likely. More than likely, it's gonna grow. So therefore, you just now have a bigger tax bill that you're gonna have.

unknown 21:15

Okay.

Brandon 21:15

If you're doing the conversion, as to where you do the beginning of the year, the balance is lower, and now you've gotten it over to the rod side. You've already started to build in some tax-free growth.

Jessica 21:23

Can you do this multiple times a year?

Brandon 21:25

Yeah, you can do it anytime you want to.

Jessica 21:27

Okay. So it's not you don't have to do like one big lump sum. You can do smaller things or okay. All right.

Brandon 21:34

Well the biggest thing is you want to really make sure you understand your tax situation. Sure, sure. Because like I said, you don't want to convert uh too much money and it pushes you into the next tax bracket. Right. And you're paying more on that amount that you're converting.

Jessica 21:46

Yeah, because the whole point is to pay the least amount on the money that you're putting in.

Brandon 21:49

Because like one of the ideals, and this like this this is a more advanced scenario because normally where you're gonna see a lot of this happening is is like maybe for someone. Who has gotten into retirement?

Jessica 22:02

Oh, okay.

Brandon 22:03

And their first beginning years were like their income is now lower. So for example, like, you know, say that somebody was making $150,000 a year and now they've finally hit retirement. They're like, I don't need the $150,000. Maybe I'm bringing in like, you know, $80,000, $90,000, $70,000. Now you're in a lower tax bracket. You might want to do some of these Roth conversions because if you leave the money in the traditional account, not only are you worried about the eventual tax bill you're going to have because it keeps growing, is that traditional IRAs are also subject to required minimum distributions, RMDs. So at some point in time, even if you don't need the money at that moment in the future, you are going to have to start taking money out of that account. The IRS requires it. Whereas with the Roth IRA, they are not subject to RMDs. So you can literally leave the money there if you don't want to.

Jessica 22:47

Or like forcing you to take your money at a certain time.

Brandon 22:50

Yeah, the government's like, you've had the money in this account long enough. I want my money. Oh and the Roth IRA, you've already paid your taxes on it. So they're not worried about that. You already gave us your taxes. Okay. The traditional is like, hey, you got a you got $200,000 in a year and you haven't paid us anything. We need our money.

Jessica 23:04

Is there a schedule or like how do you know when they're going to ask for their money? Like how does that

Tax Brackets Timing And RMDs

Jessica 23:10

work?

Brandon 23:10

How RMDs work?

Jessica 23:11

Yeah.

Brandon 23:12

Well, um, once you're um 72.

Jessica 23:16

You have to, it's like once a year.

Brandon 23:18

Or they might have increased it to 73 now. I gotta look it back up.

Jessica 23:20

Okay. I mean, we're far from that.

Brandon 23:22

But like initially it was so interesting though. They're gonna force you to take your money. But once you reach that age, um you have you are required to take out a certain amount. And there's a certain calculation based upon how much you have in the account and they'll let you know. But you have to take it. And if you don't take it. Yes. If you don't take it, honestly, a lot of the financial companies will automatically do the uh math for you and you know, do all that do a lot of stuff for you. But if you don't make the contribution, then you are gonna be penalized heavily.

Jessica 23:56

This is all so interesting. So this is, I mean, we've been talking a lot about the basics and budgeting and foundational things and the order of operations and you know, but this is like uh you have all of that stuff taken care of, and now you're really trying to like hyper maximize your investment, right?

Brandon 24:16

There's also one additional thing I do want to point out too is that remember how we talked about before with a Roth IRA? When you're doing like just a regular contribution to a Roth IRA, that um you have you can access the principal. Yeah, so anything you've put in access without limitations when you do a Roth conversion, that rule changes. You have a five-year waiting period before you can actually access the principal you put in. So let's just say we did a Roth conversion today.

Jessica 24:42

Okay.

Brandon 24:42

And I convert it to $15,000 over. Yeah, I can't turn around and access that principal right away.

Jessica 24:49

Five years.

Brandon 24:50

I have to wait five years. And it also resets for each contribution. So for example, that fifth initial $15,000, then that $15,000 itself has a five-year period. And then say the following year, I did another $10,000.

Jessica 25:02

Okay. That's it. So it's like what? It's like a vesting schedule.

Brandon 25:05

Yes, exactly. It's a different reset for each conversion is its own five year period.

Jessica 25:09

So then that's something else that you need to think about. Like how much are you contributing at one time? Because you might want access to it, especially if you're in retirement. Wow. Okay. Do you is this something that well, I don't think that you have any client.

Brandon 25:23

Because this is for people that are under this is for people that are under 59 and a half years old. Yeah, yeah.

Jessica 25:27

Okay, okay.

Brandon 25:27

Just so they understand, like, oh, I can't convert this amount and then I oh I can access it. Nope. Yeah. You got a five-year period.

Jessica 25:33

Is this something traditionally that a financial advisor like you helps somebody navigate? Or is this a CPA thing? Because there's all of the tax stuff.

Brandon 25:42

Well, this is this is something that a financial advisor will often um help you out with. Okay. And but then also like I also like to work with the CPAs and tandem up everything together.

Jessica 25:53

Yeah. Okay.

unknown 25:54

Yeah.

Jessica 25:55

Build your team, right? Yes. Yeah. Whew. Okay. This was a lot. So we have our backdoor, we have our mega backdoor, we have our conversions. That was a lot.

Brandon 26:08

Yeah. And the biggest thing here is that understanding and getting the information, because if you don't thoroughly understand what you're doing, that's when the errors are going to happen.

Jessica 26:18

Yeah, we don't want that. What was the the rule?

Brandon 26:20

The pro rata rule. That's the number one. That's the number one that I say when it comes to if you're going to do the backdoor off and you have a traditional IRA, that's the number one thing I think people overlook.

Jessica 26:29

And you know, nobody on on the internet who's talking about a backdoor this and a backdoor that is ever talking about the pro rata rule.

Brandon 26:36

I've never personally heard anyone on social media. Now, obviously, I'm not saying there are. There probably are people out there obviously that have done it, but I've never come across where someone's talking about doing a backdoor um Roth contribution and explains it the pro rata rule.

Jessica 26:49

No, Because everything's a highlight reel.

Brandon 26:51

Because often what I do is I will hop in the comment section and say, like, you probably should also explain the pro rata rule. I know it's a longer video.

Jessica 26:58

That's the thing, right? Yeah, that's the hard part. Well, everybody's posting content for the for the algorithm, not for

Five Year Rule And Getting Help

Jessica 27:05

the the important things. Yeah. Which is wild. Okay. Well, if you don't want to do any of this alone, I personally don't, so I married one. Uh, but this is something that Brandon can help you with, right? So let's get your financial health in order, get all the things, and then you can have Brandon help you with the backdoor, the mega backdoor, the conversions, and certainly not messing up the pro rata rule. So if you need help, if you need some hand holding, reach out to Brandon, schedule your free introductory call. Um, because this is a lot. And I I don't want to pay more in taxes or fees than I have to. So I don't want to be messing up nothing.

Brandon 27:43

Yeah.

Jessica 27:44

Wow. All right. My head is spinning. We're gonna stop it right here.

Brandon 27:48

Yeah, and it obviously you have any questions, you know, you can go and email us or you know, hop into our DMs on social media. We're happy to help.

Jessica 27:55

Yeah, but this is a this is more than a DM response. Yes, it is more than a DM response. Let's just be very clear. Don't be sending us paragraphs when you need to be a client, okay? So, but yeah, this is a lot. You might have to re-listen to this episode again. I might have to re-listen to this episode again. Um, send this to a friend if you've been having, you know, backdoor and mega backdoor conversations over your dinner. Um, and hopefully you learn something. I know I learned something, and we will talk to you next week. Don't forget, Benjamin Franklin said, an investment in knowledge pays the best interest. You just got paid. Until next time.

SPEAKER_02 28:31

Sugar Daddy podcast go. Learn how to make the pockets grow. Find news of freedom split a week, bro. Smart investments, money flow.

Jessica 28:41

Thanks for listening to today's episode. We are so glad to have you as part of our Sugar Daddy community. If you learned something today, please remember to subscribe, rate, review, and share this episode with your friends, family, and extended network. Don't forget to connect with us on social media at the Sugar Daddy Podcast. You can also email us your questions you want us to answer for our past the sugar segments at thesugardaddypodcast at gmail.com or leave us a voicemail to our Instagram.

SPEAKER_00 29:10

Our content is intended to be used and must be used for informational purposes public. It is very important to do your own analysis before making any investment based upon your own personal circumstances. We should take independent money to advise from a license professional and executive or independently research and verify any information you find in our podcast and what to rely upon, whether for the purpose of making an investment decision or otherwise.