Written by
Ruzanna Queenan, CFA
April 5, 2022
Realtor Success

Is a Backdoor Roth Something You Should Consider?

Many real estate agents who have been in business for a while have large SEP IRA balances. At tax time, I often get asked - what about a Backdoor Roth?

Is it the right thing for me to do and save on taxes?

A Backdoor Roth IRA is essentially a conversion. You convert a portion of your SEP IRA into a Roth IRA. And once you convert the amounts, the money in your Roth IRA grows tax-free. When you retire and you need the money to live on, you don't pay any additional taxes.

It's a great tool, but the Roth IRA conversion has several implications that you need to be aware of.

First, the amounts that you convert are considered regular income, and you will owe taxes on it in the current year at your current tax rate. Therefore, you need to have cash available on hand to pay for these taxes.

If you incur additional income, it may push you up into a higher tax bracket and you may need to pay more taxes overall than you intended to. Additionally, if you're in your peak earning years, your tax rate is probably pretty high as it is and you will owe tax on this conversion at your high tax rate.

For most people, when they retire, their tax rate actually drops depending on how much retirement income they have, what the balances are in their retirement accounts and how they’ll need to take their distributions. You may inadvertently end up in a situation where you are paying taxes at a higher rate now to avoid paying lower taxes later.

As with everything in personal finance, the tools and the strategies are there, but you need to carefully consider how they apply to your personal needs and your personal situation. What I recommend is that you work with a financial professional who knows all the ins and outs and can look at your personal situation and consider the right factors to make the right choice.

Do you have a plan to maximize your retirement income?  If not, it may be the time to get one Please schedule a call with me to make sure you have good information and you’re using the right strategies to plan your best retirement.

Ruzanna Queenan, CFA

I am Ruzanna, the President of Queenvest. Like many women, I wasn’t always good with money, but I learned through many years of work in the financial industry how to use money well. I am fortunate to have the opportunity to help strong, ambitious business owners and executives take control of their money and ultimately, their personal success.