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Thinking About Making A Back-Door Roth IRA Contribution?

People who are otherwise precluded from making direct Roth IRA contributions may consider the two-step back-door Roth IRA.   As usual, the devil is in the details.

The “cream in the coffee” rule applies to back-door Roth IRA’s.   

That means, if you hold assets in a traditional IRA and you make a nondeductible contribution to your traditional IRA, and then make a distribution from your traditional IRA to your Roth IRA, only a percentage of the distribution from the IRA to the Roth IRA will be tax-free.

If you have more than one IRA, all IRA distributions are treated as one distribution.

The nondeductible amount (that you wanted to put into the Roth IRA) gets blended in with the pre-tax IRA amounts.  When you try to extract just the nondeductible amount for inclusion in your Roth IRA, you also extract pre-tax amounts.  

The amount that would be treated as tax-free (and not reported as gross income) would be calculated as follows:

Total distribution from IRA’s x (basis in nondeductible IRA assets / total IRA assets) = Tax-free distribution to Roth IRA.

The amount to be reported as taxable from the distribution would be the Total Distribution minus the amount of the tax-fee distribution.

A taxpayer’s basis in an IRA is the nondeductible amount contributed (the after-tax amount).   All other amounts in the IRA are tax-deferred.

Example:  Jess has $100,000 total IRA assets of which $5000 are nondeductible contributions.   Jess decides to make a distribution to fund a Roth IRA.   The taxable amount would be:

$5,000 – ((5,000/100,000) X 5,000) = $4,750.   

The tax-free amount would be $250.   ($5000 distribution - $4,750 taxable amount)

This means the benefits of a back-door Roth IRA might not be as cost effective or as easily attainable as you might have thought if you have traditional IRA assets.

Situations where a back-door Roth IRA would work well

If you have most or all your retirement assets in an employer plan (e.g. 401(k)), then a back-door Roth can work well.    The employer plan assets are not factored into the calculation to determine the taxability of a conversion from an IRA to a Roth IRA.

Nonworking spouses who don’t have any IRA assets but can make nondeductible IRA contributions based on their spouses earned income can tax-efficiently utilize the back-door Roth strategy

Good advice:  Consult your tax advisor before making decisions abotut your Backdoor IRA because they have tax ramifications.

Are There Problems Hiding In Your 401(k)?

I’m not referring to whether you’re investing in 5 star or 1 star funds.  

  • Is your 401(k) on autopilot?

  • Did you make your fund selections by looking at recent performance numbers and piling into the fund with the best performance last year?

  • Did the number of fund choices get too complicated?

  • Did you allocate a percentage to each fund offered?

  • Do you ever rebalance?

  • Are you stuck on round number savings rate?  For example, do you use a 10% rate when you could use a 10.8% saving rate or a 13% rate?

  • Are you still scared from the Great Recession and because of that missed out on the market advances since then?

  • Does your savings rate and strategy reflect your objectives?

  • Do you know how much you’ll need to retire comfortably and stay comfortably retired?


We can help.   Call or email.

What's The Market Going To Do?

That’s a question I am frequently asked when I meet someone and they learn I am a financial planner.   (Believe me, if I knew what the market was going to do,  I’d be doing everything in my power to take advantage of that uncommon knowledge.)

It sure makes for lively TV debates and compelling reading though, doesn’t it?   Every TV guest and financial journalist (with or without a finance background) has an opinion.  Some express their opinion forcefully as if that will transform their opinion into fact. 

Sadly, no one knows.   The economy won’t tell you either.  And yet forecasters spend time trying to link the economy and the market to portray the economy a predictor of the markets.   

Example:    Think back to March 2009, with the S&P 500 index at 677, and the economy in tatters with plenty of people thinking the end of the world was near at hand, would you have forecast the recession to end in June 2009 and the stock market to rise 64.8% by the end of 2009?   Come on.   Be truthful. 

And even when the market turned, the economic forecasters called for inflation and a double-dip recession.    Oops.

Long-term goal focused investors know what the market will do in the long-term.   Just ask them.

The declines are temporary and the advances go on to new highs (at least it has always been that way).

A Little History: Ten Years After … from Barrons’s July 7, 2008

“IT'S OFFICIAL: THE BEAR HAS ARRIVED. The Dow Jones Industrial Average last week qualified for the widely accepted definition of a bear market of a 20% drop from the highs. The good news is that once the decline reaches that arbitrary 20% mark, based on history, the market has suffered most of its losses. The bad news is that the decline typically drags on for some time, and time may be the worst enemy. Investors may initially try to grab erstwhile highfliers that have crashed and burned but rarely regain their former status. And as the decline wears down investors' psyches, they tend to bail out at the market's nadir, when things look bleakest -- and when the greatest opportunities present themselves.

The post-1940 average bear market (as defined by the Standard & Poor's 500 index) produced a decline of 30.4% from a peak that took 386 days to reach its trough, according to data compiled by Bespoke Investment Group. By the time the market was down the requisite 20%, the average bear market was 74% completed. Based On those averages, the bear market would have another 118 days to run and would face losses of another 14% from current levels.

Rarely does the market get a short, sharp shock, as in 1987, when the bear market lasted just 101 days -- with most of the total damage of 22.51% done on Black Monday, Oct. 19. The longest march downward was the 1973-74 decline, which took 630 days and sliced 48.2% off the S&P.” 1

For the record, the S&P 500 registered a 56% decline from October 2007 to March 9, 2009.2   Worse than even the “perma-bears” envisioned.  And oil was selling at $145 per barrel.1   The economic fallout was only going to get worse – much worse.   

As of today,  the economy has recovered and the S&P 500 index has risen to 2780 as of July 11, 2018.    Those who did not panic out and remained invested prospered.   

The declines have all been temporary.


1.  Barron's July 7, 2008  "The Bear Has Arrived"

2.  S&P 500 Historical Data - Yahoo Finance

Starting To Worry About The Market?

Starting to worry about the market?


The higher the stock market moves, the more money it attracts from investors who don’t want to miss out.   And the more nervous investors feel about the possibility (or should I say probability) of market declines.   The worry of a market decline is acute if you are older and have accumulated significant assets.   The pain of a decline will be sharper because the temporary disappearance of more real dollars.   Percentages don’t hurt as much.


How about a few facts?


Since 1948 (we call this the modern era), intra-year declines have averaged 13.4% and the return of the S&P 500 index has been positive in 51 of those 70 years.1


In January 1948, the S&P500 index stood at 14.83 and as I write this on June 21, 2018, the index is at 2770.   That’s a 19,162 % gain and an average annual gain of 7.7 % excluding dividends.

(Source:  www.finance.yahoo.com)


During that 70 year period1:


  • There were 182 declines of 5% or more on average every 4.5 months lasting on average 47 days.
  • There were 56 declines of 10% or more every 1.3 years lasting 115 days.
  • There were 20 declines of 15% or more every 3.5 years lasting 216 days
  • There were 11 declines of 20% or more on average every 6.3 years lasting an average length of 338 days.


  1. (Source:  American Funds Guide to Market Fluctuations, February 2018, https://www.americanfunds.com/advisor/literature/detail.htm?lit=322201)


  • Averages obscure the range of possible outcomes.


  • Declines have been common and temporary. 


  • The stock market has a history of recovery.  


Yes, there were extended periods during which the decline seemed to go on forever.   During the period August 1929 through August 1939, the return for the period was -5.03%.  During the more “recent” September 1964 through September 1974 period, the return was .49%.1


What happened during those time periods?  The Great Depression and then in the ’64 – ’74 period, losing in Vietnam, Great Society spending, move off the gold standard, OPEC Oil Embargo, Watergate, Nixon’s resignation… to name a few (wild ‘n wooly time period to say the least).


Could that happen again.   I hope not.   But let’s face it, trying to base an investment strategy on Armageddon isn’t going to be the way to accumulate wealth.   The world does not end.   And if it does… well…


Losses feel twice as bad as gains feel good.   We are just wired that way.  This feeling clouds people’s judgement causing them to act (sell) during period of fear (of losing it all or too much).   But the markets are resilient and the recoveries are strong.   You do not want to miss out on rebounds by being out of the market (especially if you sold on the way down).   Avoid selling low and buying high.    Sure you may feel a strong need to “do something” – especially guys (we like to fix stuff).   To paraphrase Warren Buffett and Charlie Munger:  sometimes the best thing to do is nothing.


It’s best to stay focused on your plan and your goals.  If they have not changed, then why change your investment strategy?  A long term view turns out to be the clearest.

Playing a Long-term Game With a Short-term Strategy?

This brochure provides a long-term perspective on investing...and may challenge you to alter your current investment strategy.