Ep 62 | Before You Max Out a Backdoor Roth, Listen to This
In this episode, Priya Malani makes the case against one of the most repeated pieces of retirement advice in personal finance: convert everything to Roth. For high earners, blanket Roth conversions during peak earning years often mean paying taxes at the highest rate they'll ever see, then arriving in retirement with no flexibility to do anything about it. The real issue isn't Roth versus pre-tax. It's tax optionality — and most people give it up without realizing what they're trading away. This episode reframes how to think about tax strategy across a lifetime, not just during accumulation.
Takeaways:
"Tax-free in the future" often just means you prepaid at your highest rate today.
Converting to Roth during peak earning years eliminates the flexibility you'll actually want in retirement.
Pre-tax contributions improve your cash flow now AND give you lower-bracket options later — that's a double win Roth can't offer.
The income transition years before full retirement are often the most valuable tax window of your life, but only if you have money in multiple buckets.
Tax optionality isn't a fancy strategy. It's having choices. All-Roth means you've already made them for yourself, at the worst possible time.
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Stash Wealth is a Registered Investment Advisor. Content presented is for informational and educational purposes only and is not intended to make an offer or solicitation for any specific securities product, service, or strategy. Consult with a qualified investment adviser (that's us) before implementing any strategy. Investing involves risk, including the loss of principal. Past performance does not guarantee future results. There…we said it.
Transcription
Why Blanket Roth Advice is Dangerous for High Earners
Tax free money is powerful, but using it too early is like paying full price when a sale is happening in the future. There's a difference between tax optimization and tax free withdrawals. Sure, it feels great to get tax free withdrawals, but really the taxes have already been paid at a much higher rate.
Who the fuck am I to tell you what to do with your money? My name is Priya Malani, currently managing millions of hard working dollars. Enough for a play. Let's talk. Welcome to the F word, smart money.
Hey guys, welcome to the F word. Today I'm talking about why what you think of is tax free in the future is actually just a really expensive prepayment of taxes. Today I'm talking about something you've almost definitely heard about and very possibly been misled about Roth conversions. If you're a high earner, especially if you make over the Roth IR rate income limit, you've probably come across advice that sounds something like if you can get money into a Roth, you should. That's become a generally accepted best practice, but I want to share an alternate perspective that I strongly urge you to consider.
When you convert all of your retirement assets to Roth during your peak earning years, you're choosing to pay taxes at the highest rate you may ever see. Yes, even if tax rates go up in the future. And once you convert to Roth, there's no undo button. What most people don't consider is that by blindly doing this, they're often overpaying taxes over the course of their lifetime, not minimizing them, and they're giving up something incredibly valuable, tax optionality, because they don't fully understand just how powerful that optionality can be later on.
Now before we dive in, I want to be clear this isn't blanket advice. If you're maxing out your 4-O1K, doing backdoor Roths, and still have money leftover to invest in taxable accounts, you're probably in a financial position where you have enough to do multiple strategies at once. This episode is specifically for people who are converting all of their retirement assets to Roth without keeping any pre tax money for future flexibility. If you're strategically diversifying across multiple tax buckets, you're already doing what I'm advocating for.
But if you're converting everything to Roth because someone told you tax free is always better, that's who this episode's for. Today I want to talk about why blanket Roth advice is dangerous for high earners and how having multiple tax buckets in retirement gives you flexibility that pure Roth strategies simply don't. I'm not going to quote contribution limits or income limits in today's episode because what I want to talk about are the fundamental reasons you may want to think twice before shifting your retirement assets to all Roth reasons that stand regardless of income or contribution limit. OK, let's get into it.
Clarifying Roth Conversions and Their Risk for High Earners
First things first, let's get our language straight to eliminate some of the confusion. When someone says Roth conversion, they could be talking about two different things. 1st is the backdoor Roth. This is a workaround for people who make too much to contribute directly to a Roth IRA. You put after tax money into a Traditional IRA, then immediately convert it to a Roth IRA. You're adding new money to your retirement savings just using a backdoor to get it into the Roth.
The second thing people could be talking about is a Roth conversion. This is when you take money that's already in pre tax retirement accounts like a Traditional IRA or a four O 1K and convert it to Roth. You're not adding new money, you're moving existing money from 1 tax treatment to another and you will pay income tax on the amount you convert right now at today's tax rate. But these are not the same thing. However, in advice circles, especially online, they're often treated as if they all point to the same conclusion. More Roth is better. And that's the first problem. Because Roth isn't a destination. It's not a goal. It's simply a tax treatment. And tax treatments only make sense in the context of when you earn the money, when you withdraw it, and what tax buckets you'll be living in across your lifetime.
Also, it's very important. Most Roth advice stops at accumulation. Very little of it addresses distribution and that's where the math breaks. Just a quick side note, I see people all the time get confused and think they should be doing a backdoor Roth when they aren't even maxing out their four O 1K. Needless to say it's become a buzzword now.
Why are high earners most at risk? If you're a high earner, you're doing Roth conversions at the worst possible time. From a tax perspective. These are years when your salary is at or nearing its peak, you're getting bonuses or stock compensation. Your tax bracket is the highest it's probably it's ever going to be. When you convert to Roth during these years, you're paying taxes at your top rate. If you're making 300,400 thousand 500,000, you could be paying north of 35% in federal taxes alone.
Add state tax on top of that. If you live somewhere like California or New York, you're pre paying taxes on dollars that would otherwise be taxed at your highest current rate. But here's what you need to understand. Those same dollars might later be withdrawn in retirement when your total taxable income is lower and be taxed at a lower tax bracket. And that's the opportunity cost. Today you have no control over which tax brackets you pay in. In the future you will be able to control which brackets they hit and therefore how much you pay. Today you have no choice. In the future you can give yourself choice.
The Double Win of Pre-Tax Contributions for Cash Flow and Future Flexibility
And here's the double win no one really talks about. By contributing to pre tax accounts during your high earning years, you're also improving your cash flow. Right now you're lowering your taxable income, which means more money in your pocket during the years when you actually want to enjoy life, travel, save for a down payment, invest in other opportunities. And here's what makes this even more powerful. The tax savings isn't just theoretical. It's actual cash that you can use. Now.
Let's say you have $10,000 of gross income to invest. If you put it into a rock, you have to pay taxes on it first. At a 30% tax rate, that's $3000 in taxes. So you end up with $7000 actually invested. But if you put that $10,000 in a traditional 4-O1K, you avoid the $3000 tax bill today. So now you have 10,000 in your 4-O1K3000 that didn't go to taxes. And if you invest, and this is the key, if you invest that $3000 tax saving in a brokerage account, you now have 13,000 total invested, almost double what you would have had in the Roth, same gross income, almost double the invested dollars. And you've created flexibility, a tax deferred bucket, a taxable bucket, more control over future withdrawal strategy.
So overall you get two wins, better cash flow today and greater tax flexibility in the future. With Roth conversions, you actually get the opposite. Worst cash flow today because you're paying extra taxes and you're locking in your highest tax rate forever. Tax free money is powerful, but using it too early is like paying full price when a sale is happening in the future. There's a difference between tax optimization and tax free withdrawals. Sure it feels great to get tax free withdrawals, but really the taxes have already been paid at a much higher rate.
Leveraging Income Transition Years for Strategic Tax Planning
Another thing to think about, your income doesn't stay high forever. Here's another thing that most people don't consider when hyper focused on the Roth conversion. You don't go from making $400,000 in a year to full retirement overnight. Most people experience a few years of slowing down before they fully retire. Maybe some part time work or consulting early retirement before Social Security kicks in. During these years, your income situation changes pretty dramatically. Maybe you're consulting and making $150,000 instead of 400,000. Maybe you're working part time. Maybe you've stopped working entirely and you're living off your savings.
These are golden years from a tax perspective, not necessarily because you're spending less. You might still need $300,000 a year to maintain your lifestyle, but because you now have flexibility in how you create your income, I'll give you an example. Let's say it's the future. You're 60 and you're doing some consulting work in making $150,000 a year. You need another $150,000 a year to maintain your lifestyle. If you have money in different tax buckets, you can be strategic about where that additional $150,000 comes from.
Pull 50,000 from your taxable brokerage account, lower capital gains rate. Pull 50,000 from your Traditional IRA, filling up that lower tax bracket, that lower tax bucket. Pull 50,000 from your Roth tax free. You're paying some tax on that traditional withdrawal, but it's at a lower bracket. Compare that to what you would have paid if you'd converted that money years ago when you were making $400,000. You'd be looking at rates in the high 30s. That's a meaningful difference.
Now you might be thinking, wouldn't it be better if all 150,000 came from the Roth tax free? But here's what that misses. It's not tax free. The tax has already been paid on it when you converted it. But here's the bigger problem. If you already converted or contributed everything to Roth back when you were making $400,000, you paid a very expensive price for that future benefit. You're now pulling 150,000 entirely from Roth, which sounds great because it's tax free, but you're wasting the lower tax brackets that are still sitting there available to you. This is what I mean when I say you're overpaying taxes over your lifetime. It's not so much that converting to Roth is a bad choice, but because timing on that conversion matters. OK, so now we're ready to talk about tax optionality.
Understanding Tax Optionality and When Roth Truly Makes Sense
This is probably the core idea I want you to walk away with today. Tax optionality means having choices if you have money in different types of accounts. Pre tax accounts like traditional 4-O1K or an IRA. Roth accounts. Regular taxable investment accounts AKA a brokerage account. You can decide every single year how much should I pull from each account to minimize my taxes. Some years it makes sense to pull from Roth, some years it makes sense to pull from pre tax. Some years you may do a mix. You get to choose based on what's happening in your life that year. But if your money is all Roth, you don't have choices anymore. You've already locked in your tax rate at the highest rate you'll probably ever pay.
So why should you care about flexibility in the future when everything could be tax free? Great question. The flexibility lets you use Roth strategically instead of by default. Having the traditional allows you to be strategic in the future and now strategic now because pre tax contribution improves your cash flow today so you can live your best life keeping that money available to save for something you have coming up. You wouldn't have that option in the Roth and strategic in the future. Having pre tax money allows you to choose to pay tax at the low tax bracket rather than being forced to pay it at the higher brackets. Today.
Let's look at another example where taxes are higher in the future. Let's say in the future the lowest tax bracket is 25%. Higher brackets go up to 45%. If you have some pre tax money, you can intentionally take income up to the 25% line and then stop. Then use Roth for the rest. If you only have Roth, you can't fill up that 25% bracket. You already prepaid taxes at today's top rate. You gave up the option to pay at a lower rate in the future. So truth is you didn't avoid taxes, you just lock them in early. Bottom line, all rock forces you to spend your most valuable dollars in a year when the tax code would have actually worked in your favor. Again, you didn't avoid taxes, you actually missed the opportunity to neutralize them.
That's what tax optionality means. It's not about paying less tax once, it's about having the ability to make smart decisions every year based on what's actually happening in your life. OK, where does the Roth make sense now? I said this wasn't an anti Roth episode. Roth is incredibly powerful in the right situations. Here are 4 One, when you're early in your career and your income is lower. Great 2 during a career transition, 3 in the early retirement years when your income drops. 4 when you're intentionally filling up low tax brackets.
The problem is converting everything to Roth without thinking about when you'll actually use this money and what your life will look like then. The point I want to make isn't that you shouldn't use a backdoor Roth, it's that you don't want all your money sheltered from taxes in the future at the cost of a higher rate today. Sounds kind of silly, but it's true. If the tax is already paid, you've eliminated your ability to reduce taxes. If you're converting A Roth every year because someone told you to, but you haven't thought about what your taxes will look like, it's 60 or 65. You're guessing. And guessing with your retirement savings is expensive.
So here's what I want you to take away. If you're converting everything to Roth every year without thinking, pause. Because as I said earlier, once you convert to Roth, there's no undo button. The smartest tax plans aren't necessarily the most aggressive. They're the most adaptable. If you arrive in retirement with only Roth assets, you've locked yourself into one outcome. If you arrive with money in different tax buckets, you've given yourself options. And in retirement planning, having options is everything.
Priya's Best Bite and Final Thoughts on Roth Strategy
OK, before I let you go, I always end the show with a segment called Best Bite. I like to share the best thing I've eaten in the last week. This episode isn't going live until March, but I'm recording in February. It was my birthday week and I had a lot of delicious dishes. The dish I'm picking today is the Chrysanthemum salad from Don Angie's in the West Village. It is totally not what I expected when it comes out. It looks like a heavier salad because it's actually covered in cheese, but it was light as a feather. It's definitely meant as a sharing portion. I finished the whole thing and then moved on to my pasta. So I highly, highly recommend the chrysanthemum salad at Don Angie's. I've actually done a best bite from their sister restaurant, San Sabino, which is the Steak Magazine.
Oh, actually, that could be a great night. Start with the chrysanthemum salad at Don Angie's, and then pop next door to San Sabino for the Steak Magazine. Oh, so that's my best bite. If you're in the area, definitely check it out. If today's episode made you rethink what you thought you knew about the Roth, great. This was meant to be more of a measure twice, cut once moment. If you know someone who's aggressively converting everything to the Roth without thinking about tax strategies that they'll want to employ when they're wealthy in the future, please send this episode their way.
As always, please like, follow, subscribe so you don't miss future shows on how to master your money in your 30s. I'm Priya Milani, thanks for listening. We'll see you next time.
Thanks for listening to the F word with Priya Milani. If you like what you heard, hit subscribe wherever you're listening and leave us a review while you're at it. Or approval junkies. Don't forget you can find a ton of great resources, content, courses, and other freebies at stashwealth.com. Now for the capital F
THE STUFF OUR LAWYERS WANT US TO SAY: Stash Wealth is a Registered Investment Advisor. Content presented is for informational and educational purposes only and is not intended to make an offer or solicitation for any specific securities product, service, or strategy. Consult with a qualified investment adviser (that's us) before implementing any strategy. Investing involves risk, including the loss of principal. Past performance does not guarantee future results. There…we said it.
