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3 Reasons I Don’t Invest in a Backdoor Roth IRA

…Yet. These are the top 3 reasons that I don’t invest in a backdoor Roth IRA…yet.

For many high income earners, a backdoor Roth IRA is one of the first accounts that they invest in after maxing out their employer sponsored retirement accounts.

But not me.

Yup, I am a physician finance blogger and I have never done a backdoor Roth IRA!

Seems like blasphemy. But hear me out! And I’ll get that in a bit.

But first, let’s refresh.

What is a backdoor Roth IRA?

For the uninitiated, the backdoor Roth IRA is a way for high income earners to contribute to a Roth IRA. It is colloquially called a backdoor Roth IRA.

I won’t get into the nitty gritty of exactly how to do this here, but will describe the general idea.

backdoor Roth IRA

Let’s say your income as a married couple is above $206,000. You already maxed out your 401(k) and 457(b) options. You want to maximize your tax advantaged investing before going into a taxable account.

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What you can do is contribute $6000 to a Traditional IRA. Because you are above the income limit, your contributions will then be taxed. Leave it in the Traditional IRA and your money will be taxed again upon withdrawal.

BUT…the government will now allow you to roll your (now after-tax) Traditional IRA contributions into a Roth IRA once a year. Once this rollover is done, the money will grow tax free and not be taxed upon withdrawal. You are contributing to a Roth IRA through the backdoor…hence the nickname.

It’s a good deal!

So why don’t I invest in a backdoor Roth IRA?!

It’s not because I don’t think it’s an awesome thing. It really is. But here are the 3 reasons that I have not contributed to a backdoor Roth IRA yet.

1. My written investment plan tells me not to

The written financial plan that Selenid and I created about 8 months ago is our treasure map. In it, we created our financial goals and financial priorities. We then created an investing plan that assures us of meeting our financial goals.

It’s basically our treasure map to financial freedom.

So, we don’t mess around with it. We do what it tells us. That’s actually the huge advantage of writing a financial plan. It takes the guesswork and emotions out of it. I don’t need to fret about saving enough money or stress about investing in a new hot stock tip. I just follow my plan and what it tells me to do and rest easy knowing I will be successful.

Well, my financial plan tells me that we shouldn’t invest in a backdoor Roth IRA at this time.

Don’t believe me? Check out our actual written plan for yourself right here!

Contributing to a backdoor Roth IRA account is #8 on our financial priority list. Right now, we don’t have enough money to reach this priority.

Check it out, this is our financial priority list:

  1. Pay down high interest loans/debt (>8%)
  2. Establish emergency fund
  3. Maximize VDC retirement account
  4. Invest in vetted real estate (cash flowing rentals w/ cash-on-cash ratio >10%)
  5. Contribute to 529 college savings account
  6. Maximize 457(b) retirement account
  7. Pay down medium interest loans (6-8%)
  8. Contribute to back door/spousal Roth IRA (every January if contributing – 2 steps)
  9. Contribute to retirement taxable account
  10. Pay extra to mortgage
  11. Pay down low interest loans (<3%)
  12. Donate to charity with equity dividends

We already paid off our high interest debt and have our emergency fund. So the next priorities are maximizing our VDC (403b) retirements accounts and investing in real estate.

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We then contribute to our kids’ 529s. I actually have to admit that we don’t contribute to my 457 yet. But we do pay a lot down in loans. This is something that we should change around in our written plan.

Then our the money from our 43+% savings rate runs dry. Just before reaching the point of investing in the backdoor Roth IRA.

This just means that, to me, I’d rather pay down loans and invest in real estate and matching retirement accounts etc., before I invest in a backdoor Roth IRA.

Until the money can waterfall further down the priority list. Then I will be stoked to invest in a backdoor Roth IRA with my wife.

2. Direct real estate is a better investment vehicle

This is obviously a huge debate. Many people have very strong feelings about investing in real estate or retirement accounts/securities.

I’m not so dogmatic. I use a hybrid approach as you can see from my financial priority list above.

But with this being said, I honestly feel that $6,000 invested actively in real estate according to my strategy (which you can read more about here), I can make more money. That’s exactly why real estate is the #4 priority and the backdoor Roth is #8.

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If real estate was not on the list or was lower, we would have more than enough to invest in backdoor Roth IRAs as well as my 457 and a taxable investment account.

But that is just not my strategy.

3. I will use Roth conversions to diversify as I approach my drawdown phase of life

Another advantage of the backdoor Roth IRA is that it allows high income earners to place retirement savings in a tax-free, rather than tax-deferred investment account, like 401(k)s etc.

Related Post:
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This allows for diversification in where money is drawn from during retirement. Sometimes you will want to take out money that has already been taxed. Other times you will want to take out money that has not been taxed. It all depends on your tax bracket that year along with myriad other factors.

It’s nice to have this flexibility.

And I will lose out on some of this flexibility by not investing a much in a backdoor Roth IRA as I would if I started to use it right now.

But, this is not the only way to accomplish this. You can also make Roth conversions in your tax deferred retirement accounts, like my 403(b). Now, not every account will allow for this but it appears that mine does. So, at some point I will likely make some Roth conversions to convert some savings to the tax-free variety.

Ideally I will do this is a year in which I am in a lower tax bracket for some reason. I may also do this in a year when my wife has REPS from real estate investing and I can use our passive losses from real estate to offset these taxes.

And that is why I do not invest in a backdoor Roth IRA yet.

Do you have your investment strategy planned out? If not, I can help!

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graduating to success

What do you think? Do you invest in a backdoor Roth IRA? Why or why not? Should I amend my investment strategy?

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    Jordan Frey MD, a plastic surgeon in Buffalo, NY, is one of the fastest-growing physician finance bloggers in the world. See how he went from financially clueless to increasing his net worth by $1M in 1 year and how you can do the same! Feel free to send Jordan a message at [email protected]

    10 thoughts on “3 Reasons I Don’t Invest in a Backdoor Roth IRA”

    1. Same here … I’m reminded of the tim ferris aphorism about how lions don’t hunt field mice. The calories expended on hunting field mice exceed the calories gain from consuming the field mice. It’s a time management trick. Back door Roth’s are valuable but for me there are more valuable things I should be doing first

      Reply
    2. Hey Jordan. Do you think you could have spared at least some money in the back door Roth? I wouldn’t want you to fall in the trap where because you can’t Max it out you just don’t contribute anything to it.

      Reply
    3. Jordan, I like the “financial priority list” structure you have at the top of this post and in your IPS. I just inserted that into the financinal plan we are drafting that I’m basing on yours.

      Rikki, do you have any personal financial plan drafting tips? I think you mentioned in comments in a prior post that you took a class. I’m finally finishing my financial plan up this weekend. I decided for simplicity to keep it to one page for iteration #1. But I think I have allocation anchors and stuff like that. Thanks!

      Reply
    4. Thanks for sharing! I just don’t get it. True that a Roth IRA provides a very limited amount of saving for retirement and will never be sufficient by itself. However, I am skeptical that 30 years or more of tax free compounding will end up being inferior to other investment options such as real estate. I am certainly always interested in a contrarian view, but I fear this message may end up steering people in the wrong direction and they may miss out on simple and limited but powerful tool to aid in their investment goals. Thanks for what you in representing us surgeons in the blogosphere!

      Reply
      • First off, surgeons represent!

        For sure the Backdoor Roth is a very simple and excellent tool. In fact, my brother (not an MD) just opened one yesterday which made me very proud.

        And I’m not saying that anyone shouldn’t use it. In fact I will use it at some point. But as of yet, it’s not high enough on my priority list financially.

        Real estate with its tax free cash flow and tax free step ups via 1031 exchange, not to mention REPS tax advantages makes it a more attractive wealth building option for me. But, it is certainly more work than investing in more traditional avenues like a Backdoor Roth…

        Reply

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