The Benefits Of A Backdoor Roth IRA

Backdoor Roth IRA - Horseback ridingIs A Backdoor Roth IRA A Good Move?” on Daily Capital is probably the best post on the internet that explains who should do a backdoor Roth IRA, how to do a backdoor Roth IRA, who is allowed to do a backdoor Roth IRA, the risks of a backdoor Roth IRA, and who doesn’t need to do a backdoor Roth IRA. Have a read and I’m sure you’ll agree.

Long time readers know that I’m one of the biggest detractors of the Roth IRA program. The main reality is: most people will make less in retirement than during their working years. Therefore, taxes should be lower, all things being equal. I present many more arguments as to why a Roth IRA is suboptimal.

But after spending some time editing the Daily Capital post, I’ve come around to the idea that for some people, a backdoor Roth IRA is a good move. Here are three main reasons why a backdoor Roth IRA should be considered.

The 401(k) Participation Rate Is Shocking

Just Out Of ReachAccording to the Bureau of Labor Statistics, only about 55% of the American workforce has access to a 401(k) and only about 38% of the total workforce participate. Doing some low level math, that means roughly 31% of those who have access to a 401(k) are not participating. What are people doing with their money? FOMOing?

At a 38% total workforce 401(k) participation rate, no wonder why everybody is worried about retirement. With 31% of workers with access to a 401(k) not participating, this looks a whole lot like self-inflicted pain, which is one reason why the wealth gap continues to increase. Even though I recently wrote about the average 401(k) balance finally breaching $100,000, we’ve still got a long way to go.

The reason why I’ve been such an avid 401(k) contributor my entire career is because I knew I didn’t want to get in at 5:30am in the morning and leave after 7:30pm for the rest of my life. The only way to extricate myself from a tiring life was to save and save some more. Besides, once your 401(k) is set up, saving becomes easy due to automatic deductions.

Now that I’m out of the work force, I think it’s a duty to expound upon the reasons why everybody with access to a tax-advantaged retirement plan should contribute. Once we get the participation rate up, then we can work on increasing the savings amounts. Let’s begin.

Reflecting On Two Years Of Freedom From Work

Why work when you can SCUBA?March 2014 officially marks my two year anniversary since I last held a full-time job. It’s been an amazing two years, filled with uncertainty and excitement as I worked to balance play with trying to feel useful.

To keep some discipline, I created a “production schedule” that officially began at 7:30am and ended at 11:30am. Sometimes I’d cheat by calling it quits before 10am because there was nothing left to do. Other times I’d keep going because I’d get hooked on what was happening in the stock market until it closed at 1pm PST. By spending three to four hours a day trying to produce something – writing in my case – I would never feel guilty spending the rest of the day doing whatever I wanted.

“Feeling useful” is probably the single most important attribute I’ve needed to experience during this time away. I’ve spoken to other people who no longer have to work and everyone agreed they need something meaningful to do in order to feel fulfilled. I’m thankful this site provides an easy way to add some value to society, no matter how small it may be. If you’re an early retiree who is bored and would like to share some insights, I’d be happy to publish your post here.

This post will share with you some thoughts after two years of being away from the days of always wanting to get paid and promoted faster. I’ve written a similar post about what early retirement feels like, but that post was written immediately after emancipation – like when Andy Dufresne from Shawshank Redemption finally broke free. 

The Only Reasons To Ever Contribute To A ROTH IRA

Government Pork SpendingDisadvantages Of A ROTH IRA: Not All Is What It Seems” ignited a flurry of responses from people who have already been contributing to a ROTH IRA, which I will address in this post.

One of the main things people have learned is that the government manipulates individuals into forking over more money than they otherwise should due to gross mismanagement of their own budget. Massive deficit? Let’s announce this huge “benefit” to allow people to convert their pre-tax retirement funds into a ROTH IRA! We’ll raise the spectre of higher tax rates to get more people to bite.

It’s sometimes daunting to go against the government because they employ some of the smartest people on Earth to keep themselves in power while keeping the rest of us dependent on their largess. But I’m here to help you fight back and live a better life.

If you contribute to a ROTH IRA or convert your pre-tax retirement accounts into a ROTH IRA, you aren’t going to be damned to hell. You’re just not maximizing your wealth over time. I’m a rational person who likes to see both sides of the story. So let me share with you the only legitimate reasons why one should ever contribute to a ROTH IRA.

For those of you who already have a ROTH IRA account, what you are about to read probably makes so much sense you might feel a little bad. But don’t worry. The number one solution when you are in a hole is to stop digging and slowly climb out.

Top Mistakes That Are Hurting Your 401(k) Returns

Retirement Life In MexicoHopefully everyone who has access to a 401(k) is contributing to a 401(k). To not do so is a mistake you don’t want to realize when you’re old and grey. The government isn’t going to save you because, with a large Social Security funding gap, the government is having a hard time saving itself. In fact, the government will probably hurt your ideal retirement life by either raising the retirement age limit for receiving Social Security and Medicare, raising taxes, or both.

I only have 13 years of experience contributing to my 401(k) because I rolled it over to an IRA two years ago. But 13 years is long enough to realize plenty of things I’ve done wrong. My 401(k) mistakes have cost me probably close to $150,000 since I started, which equates to around 35% of my 401(k) amount when I left Corporate America. In other words, instead of having $400,000 in 2012, I could have had $550,000 had I optimized better.

There’s a chance you’re making the same 401(k) mistakes that I’ve made. This post is a reflection of such mistakes as well as the mistakes I’ve witnessed personal finance consulting clients and readers make throughout the years. Hopefully this post will make you richer down the road as we analyze each mistake and solve them together!

Credit Card Approval Standards On The Rise: Excellent Credit Scores Still Get Denied

Deny ButtonOne reader with a 805 credit score e-mailed me saying he recently got denied for the Barclaycard Arrival World MasterCard. As part of the FICO Open Score Access initiative, he got his credit score in the mail plus the nice rejection letter. The reason for the rejection was a high debt-to-income ratio.

The credit score is supposed to encapsulate everything from outstanding debt, number of credit lines open, and debt to income levels, yet here he is being denied a credit card with just a $3,000 monthly credit limit to start! If someone with a credit score that’s in the top 10% can’t get a credit card, what hope is there for the other 90%? Let’s find out more about his story.

The reader used to make about $200,000 a year for the past three years, but is currently unemployed and earns $40,000 a year from his various passive income streams + his $1,800 a month unemployment checks. He’s only got two other credit cards and always pays them off in full. The problem with his financial profile is that he has a $800,000 mortgage on a $40,000 income. With the industry standard of a mortgage amount no more than 5X your annual income at existing rates, it’s easy to see why a 20X ratio would cause concern.

But here’s the kicker. The reader also has $500,000 in cash, CDs, and liquid after-tax stock investments! Surely if you were the credit card company you’d be OK with approving a potential lifelong client even if he does have a high debt-to-income ratio of 20:1. What’s missing here is the calculation of debt-to-total-assets

The Average 401(k) Account Balance Breaks $100,000: Here’s How Much To Save By Age

Average 401k Balance Chart

Source: Manning & Napier

Investment management firm Vanguard reported the average account balances for 401(k) plan participants reached a record high of $101,650 at year-end 2013. Bust out the champagne! Who said there’s a retirement crisis on our hands?

Based on the Investment Company Institute (ICI), 51 million American workers were active 401(k) participants. 51 million is roughly half the US workforce out of a total population of 313 million. Hence, if the average 401(k) balance for half the US workforce is $101,650 then I dare say things aren’t as bad as they seem.

With MyRA or IRA making up for the other half of the working population with $5,500 a year contributions and Social Security, personal savings, personal investments, and pensions taking care of the other 200 million Americans, we’ve got America covered.  (See: How Much Should I Have In An IRA By Age)

OK, maybe it’s not so easy. We’ve got a lot more work to do to ensure a great retirement life, so let’s revisit my recommended 401(k) savings amounts by age or work experience to make sure. I also provide a savings guide by income chart as well.