Ep 54 | The Backdoor Roth Isn't the Flex You Think It Is
Tax season is coming, and if you're a high earner, there's a good chance you're paying more than you should without realizing it. Priya sits down with Eric Dauphin, CPA, to break down why W-2 earners often get crushed on taxes compared to wealthy people, why the backdoor Roth obsession is overblown, and what actually matters when you're trying to keep more of what you make. This isn't about loopholes. It's about understanding what you can actually control and making decisions based on clarity, not fear.
Takeaways:
Why high earners pay worse taxes than people with more wealth
The real math behind Roth vs. traditional retirement accounts
Why tax diversification beats tax avoidance
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Guest Bio:
Eric Dauphin is a CPA who specializes in tax strategy for business owners and high earners, not just compliance, but planning that supports growth and better decision-making. He has over 10 years of experience across corporate and personal tax, bookkeeping, payroll, and software implementation. He's built his own firm, so he doesn't just advise entrepreneurs, he relates to them. Eric earned his MBA in Public Accounting from SUNY Oswego. Talk to him about his German Shepherd, SU sports, and all things money, coffee, and business.
Transcription
Unpacking Tax Misconceptions for High Earners
OK, so the mistake that you were talking to me about yesterday was how people come to you and they want to know how to fund accounts for their children.
Yeah.
Tell me about that.
Yeah. So a big one is, is I call it like skipping the steps, right. They may not have a lot of savings, they might not be able to even pay the tax bill, but they're they're kind of looking for the loopholes right there. They're trying to do the backdoor Ross. They're trying to start trust and now they're trying to kind of fund their children's retirement before, you know, theirs is funded. The kid doesn't need more in their retirement than you do at, you know, 12 years old.
Which very well might be the case if you start funding it when they're born. 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 play, Let's talk. Welcome to the F word. Smart money, no?
Hey guys, welcome to the F word. We're getting practical today because tax season is right around the corner and if you're a high earner, there's a good chance you're paying more than you actually should without even realizing it. I've known today's guest, Eric Dolphin, for over 5 years. It's probably closer to six or seven by now. He has my personal taxes, he does our business taxes, and he actually works with many of our clients who, you know, once their financial lives get a little bit more complicated, Little little beyond DIY or people who just simply refuse to spend their weekend with tax software. Totally get it. That's just not their vibe. But good news, just people like Eric out there who fucking love this shit.
Today we're breaking down why high earners often get crushed on taxes. The biggest misconceptions we see every single year, back to conversion, cough, cough, and what actually matters if you want to keep more of what you make. So let's get into it. Eric, welcome to the show. Thanks.
For having me, I'm excited.
Two, we were chatting before this even started and I was like, I should have hit record because there's like so much knowledge. Every time I talk to you, I learn more. We're going to try to keep the jargon to a minimum and really get into some misconceptions that I feel people have clients come to us. I mean, today I will be satisfied if we put an end to everyone thinking that backdoor Roth conversions are the be all, end all. If I have one more client come to us and be like, oh, I'm here because I need to do a backdoor Roth. We're like, well, why do you need to do that? So we got to get into it.
So let's start with something that feels, I guess, a little counterintuitive.
Why W2 Earners Pay More Than the Wealthy
We talked before about how high earners often end up with worse tax outcomes than people who are wealthy. Like, that blows my mind. It's very irritating. So why is that the case?
Yeah, I think a part of it is understanding. So, you know, being locked into AW2, you file your tax returns sometimes on your own, sometimes with a professional and you either get a little bit of refund, maybe you owe some money, maybe you owe a lot of money. But I think it's it's kind of limited to that result. And so part of it is just a lack of understanding of what goes into that. And so we see that a lot with W2 earners. And then the other thing is part of it is the tax situation is kind of set up against them. So they, they have a lack of deductions, you know, like a business owner or investor would have.
And then they, as they increase their income, they're now hitting these thresholds where, you know, maybe their IRA deduction is limited. Then they might lose out on the child tax credit. They just increase the, you know, the state tax deduction to itemize, but that gets limited 500,000. So as you move up 345 a million, you really start to lose out on pretty much everything. You know that someone that can at least adjust their income or make a little bit lower income has access to and it's in the tax code.
When you're saying a wealthy person can have better outcomes, it's because they have more options.
Yes.
At their level of wealth to are they controlling their wealth? Is that what it is?
I think it's ability to control it right? So you can have a multi $1,000,000 business, but maybe you only take a salary of this much. Or you can build your wealth through real estate, you know, which the appreciation isn't taxed. So there's other ways to build wealth that isn't necessarily taxed as highly as W2. I mean even the stock market, right? You can invest in a stock so long as you don't sell it. You know, your stock can be going up, your wealth's going up, no tax, you know, maybe you pass it on or maybe you sell it down the road. Whereas the W2, you know, you're really just locked in. This is how much you're making every year. This is the answer. You file your taxes and and that's it.
OK. OK. So basically you're saying the tax code isn't punishing the success of a high earner, but it is rewarding a different type of income or the variety of income that not all high earners have access?
Avoiding Pitfalls for High Earners, Not Rich Yet
To definitely. Especially I like the word variety. Yeah, it's a variety. This is key.
Where do you see your Henry clientele get stuck because they're early in their careers but already earning a lot?
Sometimes they get get stuck, you know, at their first job, right? Rather that's maybe an equity agreement they didn't fully understand. We've seen people get hit there. Sometimes it's, you know, they're so young and they're making all this money, but they don't yet have access or a network of qualified professionals, advisors, Cpas, lawyers, all those things. So whereas, you know, as they get older, they they typically accumulate those. So definitely lack of that access and knowledge. And then another one we see a huge sticking point is that lifestyle, you know, again, with a diverse of diversified portfolio of, of income and wealth. Typically you kind of learn that there's absent flows in that and you can kind of you kind of play a little bit below the radar, whereas you feel this W 2 is so stable. Every income you get, you buy a different car, you buy a different house, everything goes up, obviously.
Yeah, we see that all the time and people come to us and they're like, yeah, you know, I was working with my dad's financial advisor, but he kind of ignored me and I didn't really get him to get into the weeds with me. I know we've talked about that before. That's like really difficult when you don't have the wealth yet to access like higher level professionals.
Yeah, they typically a lot of them have minimums now, you know, especially the older ones because their client list might be full. But you know, you have to have a million assets and if you're just starting out, even if you're making 500,600 thousand, you don't have those assets yet.
Understanding the Real Math of Retirement Accounts
OK. So this next topic, I'm really excited to talk about Roth versus traditional and why most people don't realize that the right answer is usually both. We see it all the time, and I'm sure you do too. If you ask 5 high earners what they've been told about should they invest in a Roth or should they invest in a traditional, we'd get 5 different conflicting but equally confident answers. So lay out like the variables at play, how do you know what type of account to be investing into? And how do you know if you should even be investing in both?
Yeah, that's, yeah, it's a really loaded question and I think, you know, just to give people kind of a 10,000 foot, you know, overview of this is at the end of the day, you know, they can only match up if you invest the tax that you save with the traditional. So if you have a traditional and you get a $10,000 tax deduction, you know, but you're paying, you know, 30% in tax, you have to take the $3000 and invest it. Somewhere else, right? Because you're not going to pay the same tax on that in retirement. Then they'll match. Otherwise with the Roth, you paid that 3000 on tax. It's already invested. So I think that's a huge thing that people overthink is I would say nine times out of 10, you're you're making so much money that the answer is traditional every time.
There's almost zero scenario, you know, high earners should be putting Roth money into their 401K and and the numbers really speak to it. You know, to throw a couple out here, you know, so someone that makes 400,000 married, you know, they put $23,000 in their 401K, they're gonna save about $8,500 in tax. So like that that is not a small number, but that does hinge on that you actually save it and invest it elsewhere. On the flip side, you know, if you're someone making $120,000 married, you still would save about 2600. You know, it's not a small number, but I think you can kind of see that the math of it, you know, they're all gonna be a little different.
What you said about like matching if you save the difference is critical. But what I think most people miss and I see this all the time, is that they, they like the confidence or the assurance of putting money into their 401K and having it directly invested. Because once it's invested, they don't touch it right here. What I hear you say is you have to replicate that same behavioral choice by saving or by invest, by not spending the difference. Otherwise the math.
Yeah.
Doesn't match up.
Yeah, you've got to take your tax savings and essentially invest it right in their. If you don't, then it is a superior product. You know, Roth, if you're just going to go spend the $2600, then yeah, put it in the Roth. It does have some, you know, there's some, you know, there's a cost of investing, you know, paying the tax right now. But a lot of people would get more benefit out of, you know, trying to use those dollars for something else right now. And then the other thing is you can do both. You don't have to be a part of it. It's just, you know, balance the two of them. Maybe you can do X percent in one, X percent the other. That's, that's where you know, an advisor comes in and you can say, okay, what am I trying to set up here? Am I trying to, you know, focus on reducing my tax, you know, every year? And then in the end, yeah, I'm going to pay a little bit more, you know, that's all right. But you can see that balance and they'll shift as you know, your income shifts.
I love that because again, that just that it's both if you're in that in between situation and you're not totally sure. The other thing that is important to to note is tax planning is tax forecasting. You know, we have a political climate that is ever changing. And what you tax that you'll pay in 30 years might be different than you tax it you'll pay today. And so there's like all these things that we don't know for certain and we all actually need a crystal ball for. But I think you're right, knowing what you're trying to do, what's going to benefit you most and then using both if need be and keeping an eye on the political climate because that also changes in favor of one or the other.
Yeah, that that's a big one is people will want to throw what if scenarios at you and say, well, if I retire in, you know, 30 years and you know the tax rates are 90%. Like, I don't know if that's true. Like, I can't speculate on that. So you know, today's rules, today's tax code says this is the best thing you can do. And there may be a time where maybe the tax code changes, you know, and there's opportunities to shift, you know, from a traditional to a Roth or vice versa or move money around. You know, we can do that when that happens. I would say, again, just over thinking what's going to happen in 30 years.
Yeah, you can always reassess. I love that. And we take the same approach. OK, one thing that comes up a lot with the clients that we share or even separate, even just our clients, you know, is the backdoor Roth conversion. I feel like that it's gotten like way too much airtime. There are very few situations in which you actually need to do one, but people are obsessed with it. Can you help us explain one, what it is and when it actually is necessary?
The Backdoor Roth: When It's Actually Worth It
Yeah, so and it's kind of again, back to, you know, the name makes it sound sexy and it's being all these things. But again, typically like I say like 95% of the time, you're contributing directly to your IRA, you get a deduction or you can contribute directly to a Roth IRA. But for you know, when you make a lot of money, you can't do either. You're locked out of both. So again, this is mostly reserved for people that are making significant income, you know, 350 plus that married. And so there, you know, again, it's not something to brag about because it just means you're making so much you're locked out of those.
Conversely though, if you're doing it right, to me it kind of signals, you know, hey, you're actually taking care of the base of stuff. They have their 401K, they're doing all that. And now this is almost like this next step. It's not the first step. It's if I already did everything else right, I'm doing this too.
Yeah. And so basically you kind of, again, they allow you to put the money in a traditional IRA and then convert it to a Roth. And to clarify, most high earners if they do that are not getting a tax deduction because they're just too high in income level or they already have a 401K. So you're not getting the benefit of a tax deduction and it's more just a place to put your retirement dollars. If you already, you already maxed out your 401K, you maxed out, you know, if it's an option, you do a backdoor or Mega backdoor Roth through work, then yes, you should probably move forward.
And it seems like it's always the, you know, engineers and the finance bro and those types that hear about it. They get obsessed with it. But I feel like, again, based on what you're saying, it should be I maxed out my 401K and anything else I'm setting aside is beyond that. Not I'm totally ignoring my 401K, but I'm doing a backdoor Roth. Like that's just not the scenario.
No, that's a big, you know, kind of alarm sounding is if I see a tax return or we onboard a new client and they have a $6000 Roth IRA and nothing in their 401K that that is a huge problem. And you try to figure out like what what happened here because the 401K or you know especially if you're in your, you know, your 20s and 30s, those are game changers. You're actually the accumulation is the real benefit. So yeah, that's a huge one. I mean, I have a chart I show sometimes on how much it costs them over time and it's staggering.
People Skipping Steps: Funding Kids Before Themselves
The next one I feel like I've heard in our conversation and before, this is another huge pitfall and it relates to overthinking taxes and what people are getting wrong. It's setting up accounts for your kids before you're on track yourself. So can we talk about that?
Yeah, I would say there's, there's levels to this. And so we see people, they may not have a lot of savings, they might not be able to even pay the tax bill, but they're, they're kind of looking for the loopholes, right? They're, they're trying to do the backdoor Ross. They're trying to start trust and now they're trying to kind of fund their children's retirement before, you know, theirs is funded. And so, you know, that's a huge mistake we see and try to walk people through, you know, get the basics covered first, work with your advisor to kind of make sure it's in line with your plan. Because again, you don't, you don't need your, your, your kid doesn't need more in the retirement than you do at, you know, 12 years old.
Yeah, which very well might be the case if you start funding it when they're born before taking care. Like it's kind of like this is cheesy, but like the oxygen mask and an airplane, like put yours on 1st and then and we see that too. We're like, OK, so how do we do a 529? It's like, wait, hold on, hold on, hold on. You are not on track for retirement. Like let's make sure we get that step covered 1st and then additional dollars.
And the TikTok trends right there, you can write off this and this and you know, if you set up this account for your kid. But sometimes, again, the simple and best answer is just continue to make more money, invest it. And you know, a lot of these high earners, they're not at the point where they need to plan generational wealth transfer yet, but that's kind of this the step that they're trying to skip to.
Common Tax Decisions: What to Focus On
What is 1 tax move you think people overthink?
Typically it's either, you know, they're filing status is a big one. So we get a lot of people saying like, you know, I don't know if I should file, you know, joint or separate. And we usually will do that calculation, you know, when we prepare the return anyways. So we will kind of give them that answer. You know, there's times where they'll come to us and say I got to be separate for student loan purposes or things like that. But I think they put a lot of time into worrying about, you know, how we're going to file and how much can I save doing that. Whereas again, the software is kind of going to optimize that for us.
The second one would be like itemizing. You know, everyone says I bought a house and I need to work with a professional, kind of this mystery of standard deduction versus itemized deductions. And it's, again, it's typically not that exciting. You get the standard deduction from the IRS and you know, if you have enough deductions to kind of beat it, you're going to itemize. You know, that's just how it works, but it's not worth, you know, don't always go spend money. You don't want to spend the dollar to save the $0.30, right? So that's kind of a big, big thing that people overthink a lot.
And then what about under think? What is 1 tax move people under think every year?
Yeah. So I already touched on this a little bit, but I think between you and I, we both see like just the capital gains, not understanding that you sold some stock, you know, for whatever reason. And if it was your advisor or sometimes we see a company sells, right and they don't have a choice on that. And so they get hit with a tax bill. They never saw the cash. So they like can't comprehend that they owe a tax on that. But again, it's not a bad thing. Your wealth went up, you made money in the market and you got to pay the tax. And then on the flip side, also like definitely not understanding capital losses, you know, those are going to be limited each year and all that. But I think again, it's, it's not super complicated. Just taking the time to to walk through it with someone who understands it and you know, do a little research, but that's all good things. You're making money.
Obviously I adore you and I want people to work with you if they want to work with someone, but that's not the point. The point is that taxes feel scary, but they're not so scary. And the newer software is that, especially the ones built with AI, there's, there's a lot that people can do to like set themselves up and tap into the hacks and the things that you're talking about. But if you're not interested, then yeah, seek out a professional.
Yeah, exactly. There's plenty of people that else, you know, I'll say, look, with your with your return, you're probably going to get the same answer in TurboTax. It just comes down to do you want to do it or do you kind of want to outsource that work, right. And then some people, you know, their situation gets complicated enough where you know really don't advise, they do it on their own.
Most Henry's who are just starting to make cracks through 2 three, $400,000 can usually get away with the Turbotax's of the world and we're very transparent about that. We don't need to pay for someone unless you literally want to delegate it or like you said, your situation gets a little bit more complex.
Syracuse Hot Dogs and Connecting with Eric Dauphin
So OK, we always end the show with a segment that I call Best Bite. I just, I love food. I love a good recommendation. I love to go out and eat. If you had to tell me something you ate recently that was so freaking good, where do I need to go and what do I need to order?
Yeah, this is probably more nostalgic than anything else, but. So I'm in Syracuse, NY and upstate. I went to Hides the other day. So Hides is in in Liverpool, NY. They've been around since the 1800s selling Hoffman hot dogs, right? And fries Kind of that old school drive in ice cream right next door. So, you know, I went there last week. I would say if you're in town, that's what I would probably have to recommend.
I love that. I love a good hot dog and a place that goes back to the 1800s. I haven't gotten a recommendation like that. That is awesome. OK, cool. And no, I I know where I'm going. When I'm in Liverpool, NY, which is like a couple hours north of the city, It's a.
Little farther than that, but.
Yeah, OK, so if people do want to work with you, you're amazing team, where can they find you? How do they follow you? How do they get all your great advice and tips and tricks on going? Yeah, sure.
So I'm on LinkedIn, so it's Eric Duffin, you know, just search me. You know, our website isdf-cpas.com. You can, you know, follow us on there. We put our blogs on there. And then of course, you can reach out to you or Stash and I'm sure they'd be happy to make the referral.
Yeah, absolutely. Stash Wealth is definitely happy to to set you up. Okay, that was awesome. Eric, thank you so much for being here. It was incredibly helpful. If this episode helps you rethink how you approach taxes, please click the share button and pass it around. And as always, make sure you're subscribed so you don't miss future episodes if you like this one. A quick rating review really goes a long way. It helps more people find the show, and we really want to bring more clarity to the topic of money and taxes and all the things. All right, that's it for today. See you next time.
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