Save Yourself Millions in Taxes

Based on the current tax code in United States, everyone has the chance to save millions in taxes within a special allocation through the 401K. It's available to all,,, but most have no idea it exist..

Depending on your age, the mileage may vary here but in every case you have the potential to save a considerable amount of money with this strategy. If you're in your 20s, 30s, or 40s this could very likely save you several million dollars in retirement. If you're in your 50s or 60s its will be a great retirement kicker that has the potential to still save 100's of thousands in taxes. Ok, do I have your attention now.. Good! Let me explain.

FI 201: The 1%ers 401k Setup

If you're still employed this is a perfect time to make sure you're maxing out your tax advantages in your retirement investments. The 401k has many know has a pre-tax contribution limit in 2021 of $19,500. This is the maximum amount the employee and/or the company can contribute to this bucket in the 401k. You likely also know that within that bucket of $19,500 you could also change the distribution to be part ROTH and then keep the rest as a pre-tax source. Nearly all of the top websites on 401K and nearly every investment firm's site will describe the 401k in this manner. They will tell you that your $19,500 bucket can either be pre-tax, ROTH or a combination of both. From my experience this is what most people recognize as their 401k plan...

As it turns out, theres much more than means the eye. Here's were it gets interesting. The 401k as an investment tool does not stop at $19,500 per year. The 401k's maximum contribution annually is a whopping $58,000. This is broken down into 3 buckets: Pre-tax, ROTH, and After-Tax. The Pre-tax and the ROTH bucket has the max contribution at $19,500 and the After-tax maxes out at $38,500. For the few that know about the after-tax contribution option many believe that because the 401k after-tax is no better than using an outside investment firm often times they just opt out of this portion of the 401k plan at this point. What they failed to be realize of is that entire $38,500 in pre-tax money can be converted into ROTH money the second it's in the 401k. This is commonly called a Back-Door Roth or more formally called a In-Plan Roth Conversion.

“This single, easy to setup, method has the potential to save you from paying MILLIONS of DOLLARS in taxes in retirement!!!"

The Back-Door Roth is a huge BOON for someone seeking FI. Think about it, if you just invest that $38,500 as an after-tax source you have of course already paid taxes on it once before it entered the 401k. Then any gains(interest and dividends) your money has accumulated over the course of it being in the 401k will be taxed when you take it out in your retirement years. Depending on the length of time that money was in the account the gains could be 4 to 20 times the actual amount you put in! So taxes will be a huge issue, even if, in retirement your tax rate is less then you're at now. Just imaging going from having 20% of your 401k retirement money going to taxes to now 0%. Thats the power of this simple to implement tool.

Now lets run the numbers to compare what the Average Joe would do vs. the RJPICKENS.com reader!

For many its not realistic to invest this much money into the 401k until their salary will actually support it. In this case, lets say Average Joe and the RJPICKENS.com reader are both 33 years old, they max out the after-tax portions of their 401k for 10 years and only RJPICKENS.com readers actually take advantage of the Back-door ROTH. They have the same growth rates in their investments and start to pull $100,000 (net) to live on in retirement at 70. The effective tax rate when they retire is at 25%. Let's see who wins!!!

To really see this unfold over time we're going to split this story into 3 parts. The first chapter of this story is the Accumulation Stage. This is the first 10 years of when both the Average Joe and the RJPICKENS.com reader are saving and investing the $3,208 per month to max out the after-tax portion of their 401ks for a total of $38,500 per year. Here are the results for both contestants. At this time, its only on paper that RJPICKENS readers have converted their after-tax investments to ROTH. So no material benefits realized at this time....

Ok, now this is a really great start for both contestants. They have remained diligent investors for a decade and in total have contributed $384,960 to their accounts with an additional interest totaling another $202,053. Not bad at the age of 42 having a FI fund worth $587,113! Now for the next 18 years they won't touch the accounts, they will simply let compounding interest work its magic.

So far this is a great story for both contestants. Leading up to retirement at the age of 60 they both have accumulated $2,466,212. Just 18 years earlier the account only totaled $587k but with compounding interest and their money earning money on their money 76% of the account balance is just the interest.

Now that they reached the age of 60 they are fully retired and ready to start pulling the equivalent of $100k in todays money when they retire. Due to the ever present inflation of 2% that cuts the purchasing power of the dollar in roughly 1/2! So now in retirement they need to pull $200,000 to have the lifestyle they wanted. This part is the same for both contestants. The only difference moving forward for Average Joe is in order to have the same amount of (Net) income as the RJPICKENS Reader he needs to also cover the 25% tax hit. So annually he's pulling $266,666 annually. Again due to the Backdoor ROTH conversion the RJPICKENS Reader only has to pull the actual amount that he wants and needs in retirement which is the $200,000. Lets see how this plays out over time...

Both contestants started out with nearly $2.5Million at the age of 60, how could it be that Average Joe is stuck eating cat food by age 78!!! The simple answer is Average Joe had to pay taxes on every withdrawal which ate away at his seed corn.

On the other hand, take in the RJPICKENS Reader's retirement path! He's able to pull out $200k annually but still grow his wealth over time!!! The key distinction is the seemingly small amount of taxes that he didn't have to incur was able to compound and grow over time! it initially just allowed him to maintain the FI Fund as it inched up in value but over time things started to snowball.

While the Average Joe was broke as a joke at 78 the RJPICKENS Reader had more money than ever and at 95 was able to pass on a trust fund worth over $3.4 Million!

Backdoor ROTH conversions are a huge deal. If you don't feel the power of this tool yet, re-read this post as needed. Now, if you're jumping up and down, grinning ear to ear - GOOD- you clearly fully realize the power of this free advice. All I ask is that you share this post with anyone and everyone that you think could benefit from this tool.

Cheers!

RJ