Stuart Schiffman 0:00

Well, you know, it's funny. The Backdoor Roth. My daughter is a big fan of Harry Potter. And when I think of the Backdoor Roth, I think of he who Shall Not Be Named. Because the Backdoor Roth really is something that advisors know they should not even mention, that in literature and writing to a client, you don't mention Backdoor Roth.

Seth Harrison 0:31

Are tuned in to the Money Script podcast. Today we will share strategies to help you grow your financial literacy and improve your Money Script. I'll be back with some important announcements. Until then, enjoy the show.

Yohance Harrison 0:49

Welcome to the Money Script podcast. It's your host, Johans Harrison. So happy to be with each and every one of you on this beautiful day. Yes, it's a beautiful day day. It doesn't matter if it's raining, if it's snowing, or whatever the weather is. It's a beautiful day. You're alive. You're able to listen to this wonderful podcast because we know that we are your favorite podcast to tune into. We know it, we know it, and you've also told us. So we appreciate that. So I am saying thank you to all of those that have given such wonderful reviews on Apple and on Spotify. We really appreciate that. Not because it just tells us that we're awesome. No, it's not that. But when you do that, it helps the algorithm so that other people learn that this is out there, that there is a free resource for them to go and improve their financial literacy. So, again, I'm Johannes Harrison, CEO and founder of Money Script Wealth Management. I bring this podcast to you to help you improve your financial literacy. I am a financial advisor. I'm also a client of the financial market. So I don't tell you to do things that I'm not going to be doing myself. Well, if it applies to me, that is. Not everything does. But I want to. To have this, this. This podcast for you so you can have a resource to help you make better financial decisions, to help you bring your values, your goals and your financial behaviors into alignment and encourage you to go get some help. Okay, I have a clogged shower right now, and I've poured all the Drano down and it's not unclogging. And that's. That's where my work stops. I'm calling a plumber. I'm not. I'm just. I'm just not that guy. I'm a call a plumber and let the plumber deal with it. I'm a call in someone that knows more about that service than I do. I know My limitations. So I want you to also learn yours. I have with me today in the studio. Well, in his studio, virtual studio, we should call it. Stuart Shiffman. He is also a financial advisor. We met at the Altruist conference back in October. I think it was October of 2023. Altruist, for those who don't know, is a custodial platform. A fast growing custodial platform that is very client and advisor friendly. There's lots of platforms that are one or the other, but this is one that is finding a way to do both. One that I use and a lot of our clients use as well. So something if you're an advisor listening to it. If you haven't heard of Altruist, I do encourage you to give them a look. But for our normal listeners or regular listeners, this is another episode of Between Two Advisors. So, yes, you're going to have two advisors talk and shop for a little while. We'll do our best to make sure that we refrain from the acronyms and break things down so that you can understand them and give you some resources where you want to learn more. So with that, Stuart, welcome to the Money Script podcast. How are you today?

Stuart Schiffman 3:35

Good, thank you so much, Johannes. Appreciate it.

Yohance Harrison 3:38

Indeed, Indeed. I appreciate you. So Stuart and I bumped into each other at the conference and Stuart asked me, he said, hey, so you have a podcast. What's that like? And I said, don't you come on and find out. So here he is. So, Stuart, this is your first podcast, am I right?

Stuart Schiffman 3:52

It may be my second, but okay. I think the first really was not from a. A company that anyone know or podcast anyone knows about, but. So you're the first major.

Yohance Harrison 4:05

Oh, we're in a mate. We're in the major. Did you hear that, ladies and gentlemen? This is the majors. We're in the major. Welcome, Stuart, to the major leagues. We're happy to have you. So, so, so Stuart and I are recording this in the beginning of 2024, and as we were preparing for the show, we thought of two things that we wanted to help educate everyone on today. The first one is going to be around backdoor Roth IRAs, which some of you have heard me talk about on previous episodes. Like I said, we're just going to talk shop a little bit about them. Stuart said he's come across a couple of nuances that I may not be familiar with, so I'm excited to learn from him. And then the other thing we're going to talk about is really just for Those of you that have financial advisors and for those of you that are financial advisors, just finding ways to raise your quality of advice and improve the relationship with, with your clients and for all those of you that are clients, ways for you to go back to your financial advisor and say, hey, can we, can, can you help me make better financial decisions by providing me with a little bit more? So with that, let's just, you know, let's just set the, the, the, the foundation here of this term known as a backdoor Roth ira. So like I said, some of you may have heard it before, we've spoken on the show briefly and it's actually a term that kind of the industry made up. You're not going to go into, you know, the IRS website or anywhere else and find, you know, backdoor Roth ira. No, it doesn't exist. What does exist is the ability for all Americans, if you earn money, if you have wages, to be able to contribute to a traditional ira, also known as a contributory ira. And what also exists for all Americans thanks to, was it the tax and job no. 2010? I can't remember the Tax act, but it was a tax act in 2010. Yeah, yeah. That said anyone that has an IRA is allowed to convert that IRA no matter what their income is. There used to be income limits. It used to be if you made over a hundred thousand, you weren't allowed to convert. So that rule exists. So those rules are existing simultaneously. You can put money into an IRA and you can convert that IRA to a Roth ira. And that is kind of where the backdoor Roth IRA came from. Because going back to that traditional ira, there are income limits and rules to, if you have a plan at work, et cetera, that will remove the deductibility of that IRA

Stuart Schiffman 4:12

We're happy.

Stuart Schiffman 6:03

Yes.

Yohance Harrison 6:43

and therefore could kind of persuade someone not to want to make the contribution or they feel they can't. But because of the non deductibility rule and the ability to convert to the Roth, voila, the term backdoor Roth IRA was born. So Stuart, I'm just curious, what has been your experience with backdoor Roth IRAs over the years?

Stuart Schiffman 7:10

Well, you know, it's funny it, the backdoor Roth, it's, it's. My daughter is a big fan of Harry Potter. And when I think of the backdoor Roth, I think of he who Shall Not Be Named. Because the backdoor Roth really is something that advisors know. They should not even mention that in literature and writing to a client, you don't mention backdoor Roth if you want them to make A contribution or find a way to make a backdoor Roth. You really have to talk about, hey, it's time to make that contribution to your ira, a non deductible contribution to your ira and then maybe six months later tell them, hey, let's convert that if it makes sense to a Roth. And that is the backdoor Roth going from the traditional to making the conversion and putting in a Roth account. So yeah, so my experience,

Stuart Schiffman 8:09

I've had really interesting experiences with. I have clients who had tax deductible IRAs and they were no longer able and eligible to do that to make it more because they were earning too much, they wanted to keep contributing. So what we had to do, I had instance of one client who literally took all their money out of an ira, a contributory IRA and just. And then opened up the field for a non contributory ira. So it's a separate ira, Right. Because if you try to make a Roth contribution, sorry, a make the Roth, the after tax Roth, the problem that you're going to have is that it's going to be looked at pro rata.

Yohance Harrison 8:58

Pro rata rule. Yes. Thank you for bringing that up.

Stuart Schiffman 9:01

Yeah, yeah.

Yohance Harrison 9:03

So that is so yeah, you know, I learned something. I learned something about this almost by oops, I almost screwed up.

Yohance Harrison 9:13

I was aware of the pro rata rule, but I forgot. I'll use the word forgot. I'm okay with saying that. I forgot that. Simple IRAs and SEP IRAs. So simple IRA is this a retirement plan for small business owners. And the same thing with SEP ira. SEP stands for Simplified Employee Pension Plan. It doesn't really act like a pension. I don't know why they call it that. But hey, it's had the name for 50 years. The but those count. Those count towards the pro rata rule. The SEP IRA and the SIMPLE IRA. And I discovered this must have been two or three years ago. I discovered it on maybe like December 23rd. And I said, oh crap, you got to get this money out of this IRA or else your, your conversion is going to be treated as a taxable conversion. Because remember I was saying earlier that anyone that has an IRA can convert no matter their income. So you can convert your SEP IRA into a Roth. Your simple. Be careful doing the simple because simple have some other nuanced rules with them. And this is something that goes without saying, but actually doesn't go without saying. I have to say it. I'm required to say this. I'm obligated to say this as a financial advisor. Talk to your CPA before trying to execute any of this. I'm gonna say it again for people in the back. Talk to a CPA or qualified tax professional before trying to execute any of this. As a matter of fact, I would encourage you. Don't even try to do it on your own. This goes back to the whole plumbing thing. Know your limits. I've met multiple people that messed it up. Okay, I'll share another mistake that I saw someone make on their backdoor strategy. They made a contribution to their IRA in, say, January and they were eager to invest the money. So they invested it and they happen to make some really good investments.

Yohance Harrison 11:20

So come the end of the year, when I met them, they said, oh, yeah, well, I just did a conversion. I'm doing the backdoor Roth ira. I just converted all of my ira. So you know that's not going to be taxable, right? I was like, I mean, I hope not. Let me take a look at it. Well, their contribution was, I don't know, it must have been $5,500 a year or $6,000 that year. Well, what they converted was close to $15,000 because their investment had done really well. I was like, actually, most of this is going to be taxable. No, it's not. It says here. I said, no, it says that the non. The earnings, what hasn't been earned. I was like, but that's an earning. So you're going to have to pay taxes on that. Oh, I wish I talked to you before. Yeah, me too. So that's something else to be careful of is that the earnings, if you go to do the conversion, any earnings you have on that money becomes taxable. Okay. Because the contribution, the non deductible contribution. Yeah, you don't have to worry about that now. You still report it. There are forms where you have to report that you made the contribution, but if you have any, and ask on that form, what were the earnings, Better hope that's a zero, because if it's not and you convert it, you're going to have to report that as earnings. And potentially depending on how you want to pay the taxes, you could pay a penalty on it too. So that's something else to keep in mind. And that comes in with conversions as well. Depending on the age when you do the conversion, you would be careful. Talk again, talk to a tax professional. Because if you pay for the taxes with the IRA and you're not 59 and a half,

Yohance Harrison 13:01

you're probably going to be paying some penalties. You're probably going to pay some penalties. Yeah, so. So, Stuart, I got an email from a client just yesterday and they have received this email from their employer. And I don't know if you've come across this. I know I need to spend a little bit more time reading up on it myself. But there are apparently some employer plans offer an after tax contribution that they're also. And they've been offering it for years, but now they're forcing those people to convert it to the Roth. Have you come across that yet, the forcing part?

Stuart Schiffman 13:06

No.

Stuart Schiffman 13:38

No. I mean, typically there's a pre tax and an after tax contributions that you can make. So either a standard 401k or a Roth 401k. But I haven't heard of the force. I'm not sure why that would be.

Yohance Harrison 13:50

Yeah, no, this, this is. I won't name the organization. It's a big company. They basically sent an email saying you have until a certain date to convert this to the Roth because they were eliminating the after tax and just going to offer the pre tax and the after tax Roth and not the after tax. Taxable, I guess you would call it. But as I was reading, I was like, oh, this is going to be painful if you had this for years and there's a lot of gains in here. That's. That doesn't sound like fun, but there are some employers out there that will assist you with creating something that looks like this after tax contribution conversion right inside of your 401k plan. So there's ways that you can participate in that without having to go set up the IRA and all that other stuff. But of course, the IRA just gives you additional money to do it. While we're speaking to the IRA and we are in a new year, there are new numbers for the ira. I'm not sure if our listeners are aware of that. Where's my cheat sheet? I try not to memorize them because they change too often. So I use my brain to remember other things like, you know, picking up my daughter from school and things of that nature. So 2024,

Yohance Harrison 15:03

the new IRA limits. If you are under the age of 55. Zero in 2024, you're allowed to contribute. Was that $7,000? I got it right. Seven thousand to the IRA. Whether that's you're contributing to the Roth or you're contributing to the traditional contributory IRA. And if you are over the age of 50 or turning 50 this year, your new number is 8,000. Do I have that right? And there's what it says, yeah, 8,000. So that's. That's that's a pretty big benefit. So if it is, you know, if we're listening to this and it's 2024, if you haven't made last year's contribution, you have until April 15th or the day you file taxes to do that. No extensions unless the IRS grants one. I know during COVID they had some extended extensions. I guess that's a term I know in California, Stuart, where you are, you all had some extensions if you were in the, the flood zone or something last year.

Stuart Schiffman 16:06

Exceptions for that as well.

Yohance Harrison 16:08

Yeah. But for the most part, just count on the April 15th of the day that you file. And so if you haven't done 2023 and it is still before April 15th and you haven't filed, that means you may be eligible to do both 2023 and 2024. So I'm thinking about. But again, like the plumber, go get professional help, financial advisor, cpa, someone to help you walk through this process because you don't want to mess it up. Okay. Okay. So, Stuart, you said there were a couple other nuances that you've come across with this strategy. Tell me about them.

Stuart Schiffman 16:49

Oh, I was.

Stuart Schiffman 16:52

The Form 8606 is something that you recognize

Stuart Schiffman 17:00

that has to be filled out properly and that's even for advisors. We need to coordinate also with CPAs to make sure that these things are done properly. It can backfire and that's the last thing we want to happen to our clients.

Stuart Schiffman 17:14

The other nuances is really, really, I think what I mentioned earlier about. For the financial advisors, they really need to make sure they're communicating properly to their clients because the financial advisors could get audited and it'll look like, hey, you were talking to your client about a backdoor Roth and that is not legitimate. You can't go in with the intention.

Stuart Schiffman 17:38

You're. Even though backdoor Roths are currently acceptable, it is not something that we know will be acceptable and you know and you'll be grandfathered. But it may not be acceptable a year or two or three, four years from now.

Yohance Harrison 17:52

Oh no. They tried to get rid of it during COVID It was on, it was in the. I can't, I can't keep up with the names of the acts. But the, the most recent tax reconciliation bill, in one of the original versions, they were trying to eliminate. That was one place where the word backdoor Roth IRA appeared. They were trying to eliminate these so called. I think they even put in quotations. I remember reading. I was like, what? They're trying to get Rid of this.

Stuart Schiffman 18:18

I mean, it's a great opportunity for if you're eligible and oh, yeah, you, you want to keep putting away tax deferred money is definitely something to take advantage of, but it's not something that we can guarantee you that will be there forever. And if you're eligible, do it, it's, it's worthwhile.

Yohance Harrison 18:38

So the going Back to Form 8606, I can share with everyone that, because I did bring this up, I mentioned making the contribution in 2024 for 2023 or whatever year you're listening to this, I, that could go away too. But right now you're allowed to make contributions to IRAs up until your tax filing day. That really screws up form 8606. And it's, and it's, it's actually on the, it's on the firms because the firm, the custodian that you're doing this with, whether it's Wells Fargo, Charles Schwab, you name, insert firm name here, they may not give you the forms so that you can report on 8606 properly until after tax season has happened. And I've seen that happen where clients have made those late contributions, but then they don't get the form until May or June. Right. And then the CPA is trying to do 8606 and it's filled out wrong. So again, this is, call in some experts if you think this is something that you, that you, that will help you reach your financial goals. Get some help from experts. It is a more complicated strategy. This is not as simple as just going on ABC, you know, custodian online and opening a Roth IRA and throwing 6500 or 7000. It's not that simple. And we do have to take into account your household and your income and your tax brackets. There's, there's a lot of. And other accounts that you have. That's something I've come across as well where I've met people like, oh, yeah, you know, I do a, I do the backdoor strategy every year. And then, you know, I start to ask them other situation. I found out they have a half a million dollar rollover ira. I'm like, well, I mean, you haven't been caught yet. Or you filled out form 8606 wrong. Because 8606 asks total of all other IRAs. You know, I actually, I had one that filled out 86 and didn't realize they were paying taxes on it because on 80 they just didn't realize it they thought they were doing something. No, you're not. You've been paying, you know, fifteen hundred dollars in taxes on your Roth conversions every year because you have another ira. And that was, that was a, in a, with a prospective client. And that's when I was telling the story earlier about it was late December. And I said, wait a minute, I've got a client in the situation. Oh. And it was just the sep. I just forgot it existed and that it was going to be part of calculation. I said, oh, quick, let's go put your SEP in your 401k so that you don't have any IRA assets by December 31st. Ready, go. And we had to work. We got it done, by the way. And if you're listening, I, I already admitted this to you. We got it done.

Stuart Schiffman 19:31

Okay.

Yohance Harrison 21:21

So. So I want to transition. If you have more questions about that, Stuart's information is going to be in our show notes. Of course, my information's in the show notes. We're happy to, to have a complimentary consultation with you and talk to you a little bit about, and see if it's something that you should consider as being a part of your financial plan. I want to transition a bit because again, I mentioned Stuart and I were talking about just quality of advice. And both Stuart and I, we are fiduciaries, meaning that when we work with clients, we are required to always keep our clients interest ahead of our own. And not just at the time of us saying let's make a contribution to this ira, but also three months, six months and seven years from then. And there's no limit on that. As long as you are a client working with us, we have to make sure that the things that we've told you and are telling you or encouraging you to do are in your best interest. And I just have to say it flatly, not all financial advisors are the same. Okay. I once worked for a firm where we didn't have a fiduciary standard. We didn't. Now, it didn't mean that we did things that weren't in the client's interest, but we didn't, we weren't held to that standard of advice. And the type of firms that we run now, we are. So, Stuart, you were sharing with me a little bit about some of your thoughts on the industry and where it's going and how we as advisors and for those of you that, that are on the other end, how you should be looking to improve that relationship with your financial advisor. Can you share that with our guests a bit?

Stuart Schiffman 22:57

Yeah. Johannes, I think that, you know, I'm sure your audience members have some idea about how advisors differ. A lot of people call themselves financial advisors. You could be a stockbroker and call yourself a financial advisor. You could be an insurance agent, call yourself financial advisor. You could work for HR Block and call yourself a financial advisor.

Yohance Harrison 23:17

I've seen it. I've seen HR Block with financial advisor. I'm like, what are you.

Stuart Schiffman 23:21

Oh, okay, yeah, yeah. Well, and here we are going, well, wait, we're financial advisors and we actually do financial planning and all the other things, but the Department of Labor has different standards and there's a lot of fighting going on in the industry and a lot of pushback. Currently, if you're working for a brokerage company or insurance company and you're an agent of those companies and you call yourself financial advisor, then you have to conform to a suitability standard, really is what it is. So when you sell something, it's in shows to be in the client's best interest. Well, for fee based advisors like Johannes and myself, we are at a higher standard called a fiduciary standard, which means that at all times we have to be taking your interests, best interests at heart, not just when we're not just one word giving advice, but at all times. And one of the things I was thinking about, which is not mentioned, but it should be in these standards, is how you give advice, the quality of that advice. And I really believe that when it comes to giving advice that the clients should have, ultimately they should be making the choices. It's our responsibility to give them good information, to transfer knowledge, give them the pros and the cons, but ultimately it's their decision about what they want to do. And I just don't see that that often with a lot of clients, with a lot of advisors, a lot of advice. So I was just thinking that maybe somehow this should be part of the standard as well.

Yohance Harrison 25:05

I agree, I agree. And I think that,

Yohance Harrison 25:11

I think the technology can actually assist us with this. For those of you that are avid listeners of the show, our 99th episode was with Pulse360, which is a tool that allows us to deliver advice and remain compliant. And so with that tool, just as you were saying that, Stuart, I was thinking, you know, there's probably some key recommendations that I give to a lot of clients where it's probably missing a little bit more of the education of the pros and cons. You know, just like the, the Roth IRA. Hey, consider contributing up to $6,500 to Roth IRA for 2023. And I've probably given that recommendation 50 times in the last year. And I know that I've had conversations with the client of the pros and cons of the Roth ira. But you would go back and pull that and say, well, was it in the writing? Was it there what the pros and cons to remind them it may not be. I know I. I do give L Investopedia a lot in my communication to clients. So when I'm saying something like Roth IRA or saying something like. Or even going back to backdoor, I'll send the link to something like an Investopedia to say, here's some pro. Because they'll list, you know, a laundry list of pros and cons and other questions they should ask. And I have to commend a lot of my clients will come back with me with questions directly from that. Like, hey, does this apply to me? Which is good. And I do believe. I agree with you, Stuart. We as an industry get to do a better job of. Of arming our clients with more information so they can make better decisions. A lot of times we as humans, we don't make decisions because we don't have enough information. We choose just to do nothing. Whereas if we had the information, if we had the education, we can make an informed decision. So back to your point. As in the industry, whether you're on the suitability standard or you're on the fiduciary standard, are we giving clients that education to make an informed decision, helping them see what the pros and cons are? Not just do it because your brother did it, and he's my client too. No, here's why. Here are the pros and cons. Here's where it could go wrong. Okay? Understanding the risk. And I know we do that a lot when it comes. Well, I'm speaking for myself, but most advisors, we do a great job of that. When it comes to talking about investing in the stock market, it's not hard to talk about when it can go wrong because all they gotta do is turn on tv, they can see when it goes wrong, or look at a magazine or newspaper.

Stuart Schiffman 27:50

Yeah.

Yohance Harrison 27:53

But do we take. Yeah, I know, right? But do we take it that far on, you know, the life insurance that's being recommended or the estate plan or whatever else, are we making sure that the clients also are understanding both sides of that, of that coin? So I encourage for those of you listeners, as clients or prospective clients of a financial firm, start asking those questions. You know, if you get a Get a recommendation that sounds good and just say, hey, what are the pros and cons of this? Or also ask what are my alternatives? If I, if I chose, I didn't want to do this, what else could I do so that you can make an informed decision again, no matter where your financial advisor may be housed. So that was a good tip, Stuart. I appreciate that. So Stuart, for, for those individuals out there that are looking for a financial advisor. So I. Are you, are you just licensed in California? Are you licensed anywhere where you got five or more clients or are you.

Stuart Schiffman 28:47

Yeah, so I'm eligible to do business in just about every state, but I've actually as a state registered advisor because I have more than the de minimis number in California, Texas and Connecticut. Those are the main states which I'm already registered in. But as a state registered advisor, are you willing, you can always take on more clients in different states? Once you get to the number of five, then you have to start registering in those states as well.

Yohance Harrison 29:11

Absolutely.

Yohance Harrison 29:17

Yes, yes, indeed. So for those of you, wherever you are, if you are looking to get some more information, Stuart, how can they find you?

Stuart Schiffman 29:26

The easiest thing to do would be go to my website, which is www.compoundwealthadvisors.com

Stuart Schiffman 29:35

and you all my contact information will be right there.

Yohance Harrison 29:39

Awesome. And of course we'll put links in the show notes as well. And we'd love to hear from you. Let us know what other financial topics do you want to learn about? For those of you that have been avid listeners of the show, you know that I would spend a lot of time sometimes talking about a current event, which I think is important because you want to, you want to get a different edge or angle. Excuse me, on what some of the things that are going on. But I made it a commitment that this season we would spend more time talking about financial strategies just to help educate you. Just like Stuart said, talk to you about some of the pros and cons, things to look out for so that you can go back to your respective advisor or come to one of us or find someone and see if some of these strategies make sense to you. Because again, the whole intention of the Money Script podcast is to help you improve your financial literacy. So for those of you, you maybe learned some new terms today, some new ideas, some new strategies. If you are listening to this on time, and I know most of you do, you're right on time when it comes out, you're listening to it. Get ready for tax season. It's that time. It's it's now probably it's approaching February. You've already got some W2s. Go start pulling down those 1099s. Go find a professional to help you. You know, if your situation's simple and turbotax or H Block or one of those works for you fine too. But if it's starting to get complicated and taking too long and you don't know what you're doing, it's time to call a plumber. And that was a metaphorical euphemism. What I'm saying is find a professional, a tax professional. If you need some referrals, we've had some on the show. Go back to some of those other episodes or just reach out. We'd love to find someone to help you. So as I say every time, please tell a friend to tell a friend to tell a friend to improve their financial literacy today. And they can start by tuning in to the Money Script podcast. Stuart, thank you for being an esteemed guest on this major podcast. We major, y'all. You heard that? We're major now. Thank you for being a guest and we look forward to hearing from you in the near future.

Stuart Schiffman 31:35

Thank you so much. Hans. Great. Great to be with you.

Seth Harrison 31:44

I'm back. Wasn't that a great show? I hope you learned something. I know I did. Now before you go trying anything you heard today, remember it is not intended to be specific tax or legal advice. If you need that, go see a CPA or an attorney. If you would like any complimentary consultation with a knowledgeable advisor, visit moneyscript.com and schedule a 15 minute consultation. Want Johans to come speak at your next event? Go to the MoneyScript website for that too. Of course, if you're watching on YouTube, make sure to like, comment, subscribe and click the bell for notifications. MoneyScript Wealth Management is a registered financial advisory service in multiple states. Want to learn more? Get the full disclosure on our website moneyscript.com.