#87 - The Mega Backdoor Roth and How Pilots Can Maximize Retirement Contributions with Timothy Pope

[00:00:00] Welcome back to Passive Income Pilots, everyone. Tait Duryea here with Ryan Gibson. How you doing, man?

[00:00:06] I'm doing great and I'm excited to unpack the wild world of do you put your money into a traditional? Do you put it into Roth? What is Mega Backdoor Roth?

[00:00:16] What are all these things that we can do as investors with our retirement plans? And we're going to unpack that today.

[00:00:22] And by the end, you'll have hopefully more clarity on what all those things are I just talked about and also kind of the different strategies.

[00:00:29] Because a little spoiler alert for the end, there is like five or six different ways you can go with your retirement and how you put Roth in traditional and how do you know which one is which.

[00:00:38] And I've never really had anybody explain it as well as Timothy Pope did who's coming on the show today.

[00:00:44] Yeah, the Mega Backdoor Roth, I gotta be honest, when I first heard about it, it was like, that sounds inappropriate.

[00:00:49] It's a strategy that allows you to put more money than the $23,000 that you currently have as a limit in 2024 and that changes.

[00:00:59] Into your 401k.

[00:01:00] So we're going to get into that and why you might want to utilize this strategy and why you might not want to utilize this strategy.

[00:01:07] So if you're hearing somebody that's like, oh yeah, you got to take advantage of this.

[00:01:10] We want to unpack this for you so that you can make an informed decision of whether you would like to utilize that or not based on your situation.

[00:01:18] Yeah. And this episode is being recorded in the tax year 2024.

[00:01:22] And if you hear 23,000 next year, it might be 24,000.

[00:01:25] You know, if you hear 69,000 next year, it might be 72.

[00:01:28] We don't really know what the limits are going to be.

[00:01:30] So take it for what it's worth.

[00:01:32] These numbers can all kind of change.

[00:01:34] The IRS puts out new guidelines every year and what it can be and what it can't be.

[00:01:37] So you just have to become familiar with the concepts and not necessarily be hung up too much on the exact numbers as you may be listening to this in 2025 or 2026.

[00:01:47] And they do usually move in lockstep.

[00:01:50] So, you know, the 401c3 limit, which we've talked about, $345,000.

[00:01:54] Actually, the new numbers are out for next year.

[00:01:55] It's $350,000.

[00:01:57] $69,000, I believe, is being raised to $70,000.

[00:02:00] So they move in lockstep with each other.

[00:02:02] So the ratios between them are fairly standard.

[00:02:06] Yeah, and as always, we're not giving any tax legal or investment advice on the show.

[00:02:09] Always go do your own due diligence.

[00:02:11] Check with your CPA, your accountants, your investment professionals.

[00:02:15] This is just friendly conversation with Tate, Timothy Pope, myself about the things that are available to you.

[00:02:22] But everybody's positioning is different and unique.

[00:02:25] And I think that's what's so beautiful about the optionality that we have as investors is we can go do kind of whatever we want to do.

[00:02:32] The whole point of the show is to make it so that you're aware of all your options and the people that might help and guide you to those strategies on what to do and what not to do and what's the best fit for you.

[00:02:43] So with that, Tate, let's get to the show.

[00:02:50] Welcome to Passive Income Pilots, where pilots upgrade their money.

[00:02:55] This is the definitive source for personal finance and investment tactics for aviators.

[00:03:00] We interview world-renowned experts and share these lessons with the flying community.

[00:03:05] So if you're ready for practical knowledge and insights, let's roll.

[00:03:10] Tim Pope, thanks so much for coming back onto the show.

[00:03:13] Thanks, Tate.

[00:03:13] Thanks, Ryan.

[00:03:14] It's great to be here.

[00:03:15] Yeah, so Tim and I were catching up before the show.

[00:03:18] And Tim, I understand you've got a new flight lesson in the works.

[00:03:23] Tell us a little bit more about what you're working on in your flight training.

[00:03:26] Yeah, that's right.

[00:03:27] So Ryan, I was picking your brain about flying the Cirrus.

[00:03:30] And so next month, I'll be jumping in that bird and brushing up on or really doing my instrument training.

[00:03:38] And then, you know, to be a more proficient pilot and actually get places as opposed to just drilling holes in the sky.

[00:03:45] Nice.

[00:03:45] Yeah, that's cool.

[00:03:46] So what flight score are you going on at?

[00:03:47] What airport?

[00:03:48] So this is going to be Concord Regional.

[00:03:50] So JQF for those in the southeast that are close to Charlotte.

[00:03:54] And Arrowood Aviation, they've got a number of Cirruses, SR-20s, SR-22Ts.

[00:03:59] I'll be starting in the SR-20 and probably G6.

[00:04:04] So nice.

[00:04:05] That'd be so fun.

[00:04:06] Beautiful plane.

[00:04:07] Great avionics.

[00:04:08] I'm jealous.

[00:04:09] I wish I could have learned and got my instrument rating in something a little bit more that's today's world.

[00:04:15] You know, we had to learn on the six pack and all the steam gauges.

[00:04:18] So lucky you.

[00:04:20] That's great.

[00:04:20] Well, you know, I thought about that.

[00:04:22] Like I went back and forth.

[00:04:23] Should I do a 172?

[00:04:25] Should I do the instrument training on the 172?

[00:04:27] And then you got to do the transition course, as you know, as a Cirrus pilot.

[00:04:31] And then you got to spend time getting comfortable in the seat.

[00:04:33] And I figured if I do my transition course and then my instrument training in the Cirrus, then when that's all done, I should be pretty comfortable.

[00:04:41] Yeah, I think it really comes down to your comfort with an airplane, right?

[00:04:46] So I think, you know, Tate and I, we have over 10,000 hours of flying experience.

[00:04:50] And when you go fly general aviation, you wonder how much of that is the training that you'll get at the flight school that you're going to,

[00:04:56] or just how much of it is going to recurrent flight training every nine months or so and just having these procedures pounded into your head and flying the line and things like that.

[00:05:06] But I think it's good to start with the plane that you might be doing the most trips in to get your comfort level to a point where you feel good about using that instrument rating.

[00:05:14] And even if there is a day where it might come into play, you've got more familiarity with the plane that you're flying.

[00:05:20] So that's great.

[00:05:21] Love it.

[00:05:21] Yeah, I know we wanted to bring you back to the show.

[00:05:24] We had you on the show a long time ago, actually, probably about a year or so ago.

[00:05:29] And we were talking about the spillover plans, the market-based cash balance plans from a while back.

[00:05:35] But today we wanted to bring you back to continue our conversations and really kind of continuation on what Jesse Reed was talking about a couple of episodes ago.

[00:05:44] And we really wanted to get into what the heck a mega backdoor Roth is.

[00:05:49] Pilots may be wondering, they hear about it in the forums.

[00:05:51] They have no idea what the heck we're talking about.

[00:05:54] Or what people are talking about when they say it.

[00:05:56] But could you kind of just start there and just give us a little bit of what that is and why pilots should care?

[00:06:02] Yeah, so that's a good question.

[00:06:03] So mega backdoor Roth.

[00:06:05] I think probably to understand what the mega backdoor Roth is, it makes sense to understand just what the backdoor Roth is.

[00:06:11] Right.

[00:06:12] So we understand that the Roth IRA gives us tax-free earnings.

[00:06:18] Right.

[00:06:19] So we put money in, but after tax money in, it grows at some point.

[00:06:23] We take it out and we don't pay any tax on the earnings.

[00:06:27] Well, tax-free income on investments is so awesome that the IRS is like, wait, hold on.

[00:06:33] Let's put an income limit on here.

[00:06:35] Not everybody, not every high-income earning Tom, Dick, and Harry can dump money into the Roth.

[00:06:40] And so there's income limits to be able to put money into a Roth directly.

[00:06:45] And 2010, IRS took away income limits to do a conversion.

[00:06:50] So that created the backdoor Roth.

[00:06:53] So if you put money into a regular traditional IRA, and let's say you don't have any other pre-tax money lying around, and you move that money in short order in a timely fashion from the traditional IRA into the Roth, that's what we call a backdoor Roth conversion, particularly if you earn too much to go directly to the Roth IRA.

[00:07:12] Which I just want to, you know, double tap on this because it seems so silly that they prohibit a direct contribution, but you can contribute.

[00:07:22] Because I hear this all the time, I make too much money to contribute to a Roth.

[00:07:25] And it's like, well, yeah, but you can contribute and then the following day just convert it.

[00:07:30] So, you know, why are we beating around the bush here?

[00:07:33] Why don't they just remove the income limit?

[00:07:35] Yeah.

[00:07:35] You know, that's a really good question about how this can happen, how you can still facilitate this.

[00:07:40] And I think that this was probably an unintended consequence of the 2010 law, right?

[00:07:45] Because if you're not careful, let's say you have pre-tax IRAs laying around.

[00:07:50] And let's say you have a large balance of pre-tax IRAs and you go to do this backdoor Roth, you can stub your toe because the IRS works on a pro rata rule, right?

[00:08:00] And so you've got all this pre-tax, you dump in a small Roth IRA contribution or non-deductible contribution to your IRA.

[00:08:10] You move that over.

[00:08:11] The majority of that is going to be taxable to you.

[00:08:14] I think about it like coffee, right?

[00:08:16] My coffee comes out of the machine.

[00:08:17] It's black.

[00:08:18] Put a little creamer in there.

[00:08:20] And then every drop has mostly coffee and a little bit of creamer.

[00:08:24] And the same thing with each dollar that you would convert if you have pre-tax dollars.

[00:08:29] And so I don't know that the government's interested in taking away the income limit because if you go convert, it's great for them because it's tax dollars now.

[00:08:39] It's revenue now.

[00:08:39] Right.

[00:08:40] You know, right?

[00:08:40] You know, for the government.

[00:08:42] And then for the pilot, it's tax certainty, right?

[00:08:45] So we know that, hey, the income that we're going to pull out of this thing in the future until they either outlaw it or they change the law.

[00:08:51] We'll walk through the back door.

[00:08:53] And maybe I can talk about this pro rata rule for a minute.

[00:08:56] Please.

[00:08:58] Because so for the pilot listening at home, right?

[00:09:00] So if you have these IRAs sitting around and you're thinking, hey, I might be interested in doing a backdoor Roth, maybe look at consolidating those IRAs into a 401k.

[00:09:11] And that's where I kind of get a little frustrated with advisors that aren't pilot specific and airline specific, not knowing the NECs that you guys get and the income potential.

[00:09:22] And they're like, oh, yeah, let's just roll all these IRAs over.

[00:09:25] You guys are going to need the backdoor Roth.

[00:09:27] You're going to want it at some point and fairly early on in your career.

[00:09:30] And so in order to do that successfully and to not pay tax unintended on your Roth conversions, what you can do is you can, if your 401k allows and accepts a rollover, you can roll that into the 401k, clean that up.

[00:09:45] So now you've got no pre-tax IRAs with no pre-tax dollars in them.

[00:09:52] And then you're free to do the backdoor Roth every year.

[00:09:54] Okay. You got to break that down because we've talked on the show before about the benefits of not rolling an old dusty 401k from a previous airline over into your current airline 401k.

[00:10:08] And we've talked about taking IRAs that you might have and rolling them into self-directed so that you can diversify into other asset classes.

[00:10:15] So break that down.

[00:10:16] You're saying that it actually would be beneficial from a tax perspective to roll it into a current airline 401k?

[00:10:24] If you're going to do the backdoor Roth.

[00:10:26] Got it.

[00:10:27] So if, let's say, let's say I have $500,000 or 200, whatever the number is in a pre-tax IRA, depends on what I want to do with it.

[00:10:35] If I want to do the backdoor Roth, then I'm looking at rolling it somewhere where it's not going to count against me.

[00:10:42] If I'm going to want to use a different asset class and go to the self-directed route, then I probably don't care about just the regular backdoor Roth and I go to the self-directed route.

[00:10:50] Right.

[00:10:51] So none of these things are done in a vacuum.

[00:10:53] They're all like, okay, well, what's my goal?

[00:10:55] What am I trying to accomplish?

[00:10:56] And then you work with it from that way.

[00:10:59] So it really doesn't matter either way.

[00:11:01] You can decide whenever you want, really, to convert those pre-tax traditional funds into a backdoor Roth, right?

[00:11:09] I mean, it really is up to you and how much tax burden you can really withstand in that tax year.

[00:11:15] Is that right?

[00:11:16] Well, so the backdoor name means that we're not paying any tax on our conversion.

[00:11:22] That's the thing.

[00:11:23] Gotcha.

[00:11:24] So if we do pay tax on it, that's just a regular Roth conversion.

[00:11:28] And to your point, Ryan, you're 100%.

[00:11:29] It's just, hey, how much do I want to absorb this year?

[00:11:31] So break that down for me because it was my understanding that if I had $50,000 to convert this year from pre-tax to Roth, I would tack 50K onto my adjusted gross income.

[00:11:45] Right?

[00:11:46] So if I'm already making a half million dollars a year and I don't have many tax write-offs, I'm going to go from 500 to 550, and that's going to be a really bad sting.

[00:11:56] Walk me through what you're talking about here where you can do a tax-free conversion.

[00:12:00] Yes.

[00:12:01] So in your case that you just mentioned, Tate, so that $50,000 is pre-tax.

[00:12:06] The tax-free conversion goes, hey, I've got this $50,000.

[00:12:11] I'm in Charlotte, so I'm going to use American.

[00:12:13] I fly for American.

[00:12:14] I'm going to take this $50,000 and I'm going to tuck it into my American 401k.

[00:12:18] So it's no longer an IRA.

[00:12:20] So now I've got zero pre-tax IRAs laying around.

[00:12:26] And then I'm going to do Roth conversions.

[00:12:29] So current limit, $7,000 a year.

[00:12:31] I'm under 50, so $7,000.

[00:12:33] You put that in, you convert that, and that conversion is tax-free.

[00:12:37] And then you do it again and again and again.

[00:12:40] Can you do that with money that's already sitting in your 401k?

[00:12:45] The tax-free conversion?

[00:12:47] Right.

[00:12:47] So the, I mean, this seems like if you could, it would be a complete no-brainer to chunk $7,000

[00:12:52] every year, right?

[00:12:53] It would be genius.

[00:12:55] So you would take the airline's contributions that are pre-tax and you just throw $7,000

[00:12:59] into your Roth every year.

[00:13:01] And if that's the case, and I haven't been doing that, then I'm a complete idiot, right?

[00:13:06] But is that not the case?

[00:13:07] It's got to be coming from an IRA.

[00:13:10] Well, that brings us to today's topic, which is the mega backdoor Roth.

[00:13:13] Okay.

[00:13:14] So you can do it in the 401k and here's how, right?

[00:13:19] So when you guys log on, you know, you've got the 401k limit for 2024 for elective deferrals

[00:13:26] is $23,000, right?

[00:13:29] You can choose whether that's pre-tax.

[00:13:32] You can choose whether that's Roth.

[00:13:35] Unlike the IRA, the 401k does not have an income limit for you to participate in your

[00:13:40] Roth.

[00:13:41] So let's say that you've knocked out your $23,000 of your elective deferral.

[00:13:47] And let's say that your company direct contribution is not going to bring you up to that limit of

[00:13:53] the $69,000 annual additions limit.

[00:13:56] So you're making less than $345,000 a year.

[00:13:58] So you're making less than $345,000.

[00:14:00] So in that case, whatever that difference is, let's say your $23,000 company's contribution,

[00:14:08] you can put what's called post-tax contributions into the 401k.

[00:14:13] You can take those post-tax contributions, convert them in a timely manner, and then they'll

[00:14:20] sit in the Roth and that's the mega backdoor Roth and it's tax-free.

[00:14:24] Okay.

[00:14:25] So walk me through how this would actually happen in a real life scenario.

[00:14:31] So I want to take an additional $7,000 and I want to put it into my Roth tax-free.

[00:14:40] Now, when you say tax-free, is it post-tax money that's going in or am I still getting the tax

[00:14:45] benefit on that $7,000, but it ends up in a Roth account?

[00:14:48] When you say tax benefit, you mean like...

[00:14:51] The write-off on the $7,000 exactly.

[00:14:53] Yeah.

[00:14:54] No, you're not getting any tax benefit there.

[00:14:57] Okay.

[00:14:57] So it essentially acts the same way as contributing directly to the Roth.

[00:15:02] Correct.

[00:15:03] Got it.

[00:15:03] And the key that in some custodians, you could automate this.

[00:15:08] Hey, if I put any post-tax dollars in there, just convert them immediately to Roth.

[00:15:13] Right?

[00:15:13] So that's pretty easy.

[00:15:14] Some, it's going to be a little bit more manual.

[00:15:16] Hey, I made this contribution.

[00:15:17] Let me go move it to the Roth.

[00:15:19] And the reason we talk about moving it is because let's say you take that $7,000 post-tax

[00:15:23] contribution and it grows.

[00:15:25] That earnings, if it's not converted, you're going to pay tax on that earnings, which kind of

[00:15:30] defeats the purpose.

[00:15:31] Right?

[00:15:32] So Tate, your question was like practically speaking, how does this work?

[00:15:36] This comes down to individual pilot choice and how aggressive they want to be.

[00:15:41] So we have some clients that will max out their 401k and they say, hey, you know, I know

[00:15:47] by August or July, it's going to be maxed out.

[00:15:49] I also know that I'm not going to be getting spill cash this year.

[00:15:53] So then they'll continue making contributions, post-tax contributions to the 401k and then

[00:15:59] have those converted over to Roth.

[00:16:01] And so they're not getting a tax deduction on those post-tax contributions, but they are

[00:16:07] putting more, they are getting more money into a tax-free account, which is the whole goal.

[00:16:12] All right.

[00:16:12] So let me, for the slow guy in the room, for the slow guy listening or gal.

[00:16:16] That's me.

[00:16:17] Yeah.

[00:16:18] Yeah.

[00:16:18] And me too.

[00:16:20] We get the benefit of the podcast though.

[00:16:22] So here we go.

[00:16:24] So you're saying that, let's say I max out my $23,000 contribution.

[00:16:30] You're saying that all that can go into my 401k as a Roth contribution.

[00:16:35] Mm-hmm.

[00:16:36] So post-tax dollars, right?

[00:16:37] That grows and I can withdraw it tax-free, which I'm a big fan of because I think taxes

[00:16:42] are going to go up in the future.

[00:16:43] They're not going to go down.

[00:16:44] Right.

[00:16:44] And I think that I'm going to have more earnings in retirement than I am today.

[00:16:48] That's right.

[00:16:49] I hope so.

[00:16:49] Or I'm betting against myself.

[00:16:51] And so you're saying that in addition to that max out, whether I make $345,000 or don't,

[00:16:58] right?

[00:16:58] Like I'm going to max out what I can give to this plan at some point, $23,000.

[00:17:03] I can max it out on my first or second or third month of the year if I really wanted to, if

[00:17:07] I went all in, right?

[00:17:09] I think I can put in 50% of my paycheck into that, right?

[00:17:12] So the average mainline airline pilot can probably do that.

[00:17:16] At this point, assuming their professional or their personal expenses aren't so high.

[00:17:22] And then I can go, okay, I'm done with this $23,000.

[00:17:25] I'm now going to put in another $7,000, but I'm going to do it in the vehicle of an IRA.

[00:17:33] And then I have to take that IRA cash each year and enroll that into my 401k.

[00:17:38] Is that what you're saying?

[00:17:39] No, no.

[00:17:40] So we started with the IRA just to lay the groundwork of where these backdoor

[00:17:46] Roths came from.

[00:17:47] Gotcha.

[00:17:47] But when we say mega backdoor Roth, we're only talking 401k.

[00:17:51] So in your case there, Ryan, you know, you smash it out in the first two, let's say the

[00:17:56] first quarter of your $23,000.

[00:17:59] And let's say you want to keep going.

[00:18:01] You would still, you would, you would continue with those salary deferrals from your paycheck.

[00:18:05] They would go directly inside your 401k as post-tax contributions.

[00:18:08] You said you fly for, well, so your custodian is, is, is fidelity and you can automate those

[00:18:15] contributions right over to the Roth.

[00:18:18] Uh, those, those after-tax contributions right over to the Roth.

[00:18:21] Got it.

[00:18:22] And you're good to go.

[00:18:23] That makes sense.

[00:18:24] Does every airline have one of these post-tax contributions?

[00:18:29] The mega backdoor Roth, because is this a way to get more than that 23,000 of your own

[00:18:34] cash into your 401k every year?

[00:18:36] Yeah, it is.

[00:18:37] I would say, I mean, I haven't not looked at the plan description of every airline's 401k,

[00:18:43] but I would imagine that name.

[00:18:45] I mean, this is 2024.

[00:18:47] So like 99% of them are going to accept post-tax contributions.

[00:18:51] Where did they come up with the name mega backdoor Roth?

[00:18:55] Who came up with that?

[00:18:56] Well, you first hear it and it's like, it's like, what is that?

[00:19:01] Was this a, uh, is that a technical term or is that slang for, you know, something that

[00:19:08] has a technical name for it?

[00:19:11] Yeah.

[00:19:11] I didn't know that it's so much, uh, a technical term as it's just descriptive and it's, and

[00:19:16] it's comparing it to like, Hey, if you were to do a backdoor Roth conversion, you know,

[00:19:21] you're capped out at 7,000.

[00:19:23] If you do a mega backdoor, it could be way more than 7,000.

[00:19:27] Um, you know, it's up to the, the annual additions limit, right?

[00:19:32] And, and major airline pilot cases, you guys are racing the company for the NEC.

[00:19:38] If we step away from the airlines and just kind of put it in the broader perspective,

[00:19:43] most people are not racing the NEC from a company like that.

[00:19:47] You see what I'm saying?

[00:19:47] So you're saying the mega part is the additional above $23,000 individual contribution.

[00:19:54] That's the mega part.

[00:19:55] So mega is more than 23,000, right?

[00:19:59] And then backdoor refers to the ability of it to go in post-tax and basically grow tax-free

[00:20:07] and be withdrawn tax-free at the end of your life cycle.

[00:20:11] So mega more than 23,000.

[00:20:12] I see you shaking your head.

[00:20:13] Uh, yes.

[00:20:14] Uh, and then post-tax is the backdoor component of it.

[00:20:18] Mega more than 23,000 and also mega just more than what you can do in an IRA.

[00:20:22] Gotcha.

[00:20:23] Now you just got a much bigger shovel in your 401k.

[00:20:26] To help me understand this concept, let's take somebody like myself who, and I know that

[00:20:33] I'm in the minority here, but I don't make contributions to my 401k.

[00:20:37] The company maxes out because I make more than 345.

[00:20:40] So the company contributes their, their amount.

[00:20:44] I think it comes up to 58,000 something.

[00:20:47] So it's shy of the 69,000, but I would rather take the, the Delta there and invest in alternatives,

[00:20:56] private placements, real estate.

[00:20:57] Uh, but that's me.

[00:20:59] And I, I know that I'm a minority here, but talk to me how the mega backdoor Roth fits into

[00:21:05] my situation.

[00:21:06] And I would assume the answer would be it doesn't, right?

[00:21:09] Because it only comes into play if you are wanting to put above and beyond that 23,000.

[00:21:14] Is that correct?

[00:21:16] That's right.

[00:21:16] Right.

[00:21:16] So if you were, if you were just letting the company put the non-elective contribution

[00:21:22] in, and then you're taking your dollars and investing them elsewhere, then this may not

[00:21:27] be something for you.

[00:21:29] If you're somebody who's using the, the 401k and using it's either pre-tax or it's Roth

[00:21:36] allocations or so forth, then this is something that you could, you could jump on.

[00:21:41] But if you're not putting any of your own money in, then right.

[00:21:44] It's, it's a backdoor that you've, you've kept shut.

[00:21:46] Right.

[00:21:47] Okay.

[00:21:47] Understood.

[00:21:48] One more question there.

[00:21:50] What if somebody wants to minimize their 401k contribution?

[00:21:55] So meaning they make over three, 345.

[00:21:59] So the company is going to, they, we, they want to let the company fill up the bucket first

[00:22:03] and edge them out.

[00:22:04] We talked about this with Jesse Reed, the fact that if you, if you wait and you let the company

[00:22:09] get to the deadline, get to the finish line first, and then I might only have, you know,

[00:22:15] I don't, I can't fit the 23,000 in because there isn't enough room left.

[00:22:20] There might only be, let's say $11,000 that I can fit in there.

[00:22:25] If I let the company fill their entire.

[00:22:29] 69,000.

[00:22:30] Well, not 69.

[00:22:32] We, we did the math, right?

[00:22:34] If airlines were contributing 20%, then they would hit the 69,000 at the same time that

[00:22:40] they would hit the $345,000 limit.

[00:22:43] I believe it was right around there.

[00:22:45] But since we're only at 16 or 17%, depending on your, your airline, it's going to be just

[00:22:49] shy of that 69,000.

[00:22:51] So you're going to hit that $345,000 annual compensation limit where they have to shut off

[00:22:56] their, their contributions.

[00:22:57] They're going to end up this year at 17%.

[00:23:01] I think it was 58,000 something.

[00:23:03] So it would allow you in the very tail end of the year to contribute 11 ish thousand dollars.

[00:23:09] So if you were to let the company fill that up first, and then you backfilled that 11,

[00:23:15] whatever was left, then could you use the mega backdoor Roth strategy?

[00:23:20] Or do you have to be the first one to the finish line?

[00:23:22] Do you have to put that full 23,000 in?

[00:23:25] You did not.

[00:23:27] I'm just thinking practically.

[00:23:29] So let's say there's $58,000 in there and you're asking like where the other 11 could go.

[00:23:34] Yeah.

[00:23:35] And like that first 11 would just be a standard contribution until you get to the full 69,000.

[00:23:41] Right.

[00:23:42] But if that's right.

[00:23:43] And that's exactly right.

[00:23:45] And in, in that case there, uh, Tate, you would just go pure Roth, right?

[00:23:50] Because there's no income limit on the 401k side and you know, you haven't used your 23.

[00:23:55] So put your 11 in the Roth and then we're happy as a clam at 69.

[00:23:59] And then, but it is the, is there any additional that you can get in there with the mega backdoor Roth after you hit the 69 between the two of you?

[00:24:09] No.

[00:24:09] Okay.

[00:24:10] Yeah.

[00:24:11] Yeah.

[00:24:11] Yeah.

[00:24:11] That's, that is the limit for the mega backdoor Roth is that 69, uh, combined.

[00:24:17] Understood.

[00:24:17] So with someone who let's, let's look at the complete opposite side of the spectrum.

[00:24:22] And we talk about the super saver, right?

[00:24:25] That does 50% of their paycheck from January, February, March, they get to that $23,000 limit.

[00:24:31] Company isn't even close.

[00:24:34] They start doing mega backdoor Roth.

[00:24:36] That's going to edge the company out of finishing off its contributions sooner.

[00:24:43] Right.

[00:24:43] Am I correct in saying that you might hit that $69,000 limit sooner than you get to $345,000 of annual income?

[00:24:52] That's exactly right.

[00:24:54] And so, and I think that, that goes to, you know, your conversation with Jesse Reed and previous episodes, whereas how do you, how do you want to massage this thing?

[00:25:03] Particularly thinking about the market-based cash balance plans.

[00:25:06] I mean, do you have more money going into that or you want less money going into that?

[00:25:09] Right.

[00:25:09] Right.

[00:25:10] Okay.

[00:25:10] So I'm starting to get this.

[00:25:11] So, so if you, if you were to do this and you, and you mega backdoor Roth as much as possible, you'd be forcing cash to spill sooner into the market-based cash balance plan.

[00:25:23] That's right.

[00:25:24] Got it.

[00:25:24] That's an aha moment for me.

[00:25:25] That is an aha moment.

[00:25:27] Yeah.

[00:25:27] Big time.

[00:25:28] So if you're somebody who, who likes the market-based cash balance plan, wants as much cash in it as possible, then you're somebody who would want to utilize this strategy.

[00:25:39] There's that.

[00:25:40] Also, if you're somebody who is, haven't hit some of your stronger earning years yet.

[00:25:47] So maybe you're lower on the seniority list and you're, you're wanting to be aggressive with tax-free.

[00:25:54] This could be another use case for you.

[00:25:56] Right.

[00:25:56] And just knowing that like the timeline of this season, this is, this is absolutely going to be a season, right?

[00:26:02] It's going to exist for a couple of years.

[00:26:03] And then you, you might say, ah, you know what?

[00:26:06] I'm going to do something different now because now I'm forcing spill.

[00:26:10] Understood.

[00:26:10] I want to, I want to make sure we nail that into the ground.

[00:26:14] So you've got a pilot who's making 345 or greater, right?

[00:26:19] And that pilot has a fork in the road to decide.

[00:26:22] Do I want to make outsized contributions to this thing?

[00:26:26] Be the 50% guy or gal.

[00:26:28] Go for it.

[00:26:30] Fill up the bucket as much as possible.

[00:26:33] And then force spill over cash.

[00:26:35] That's, that's like one road to go.

[00:26:38] Or you're the more probably me and Tate type of person who says, I'm not going to contribute anything.

[00:26:45] I'm going to hit the 345.

[00:26:47] The company is going to get my 58K or 59K, whatever we decided it was.

[00:26:52] No spill, you know, very minimal spill over cash, if any.

[00:26:55] Or you could be a newer pilot with less income potential.

[00:27:01] And you could say, hey, I want to maximize my post-tax tax investment, right?

[00:27:08] My post-tax dollars.

[00:27:10] So I'm going to start making contributions to my 401K early to get more post-tax dollars into my 401K.

[00:27:18] Knowing that I'm not going to make enough this year to get to the 345, right?

[00:27:24] Or you could be that pilot that says, I'm not, I'm still not going to contribute anything because I know the next few years or contribute less.

[00:27:33] Cause I know in the next few years, I'm going to start making money and my 401K is going to be massive.

[00:27:37] And I can start putting 50K a year aside to do a syndication or a private placement, whatever it might be.

[00:27:44] Tons of different ways to go with this, right?

[00:27:47] Like you, you have got to really think about when you get into this career, like what type of retirement roadmap do I want to have for myself?

[00:27:54] And how long do I have?

[00:27:55] And what is my career earnings potential?

[00:27:57] And where am I going to go?

[00:27:58] Because there's like four different ways you can do this thing.

[00:28:01] And so if you're listening to the show, I would imagine you're kind of interested in doing private placement.

[00:28:08] You're, you're probably interested.

[00:28:09] You're probably a super saver and you probably spend, you choose to invest your money wisely.

[00:28:15] So that's why we bring people like Tim on the show to kind of help us with all these different roads to go.

[00:28:21] Cause as you know, if you're listening to the show, we're not giving any tax legal or investment advice.

[00:28:25] We always say that at least once or twice.

[00:28:26] But we want to show you what the different roads can go on and kind of different tactics and strategies for, for where you go.

[00:28:34] So I just got my hat.

[00:28:36] I think I'm caught up.

[00:28:37] I think I'm still in like row eight of the airplane.

[00:28:39] I'm not quite, I'm not hanging out of the tail at least anymore, but, but, uh, you know, thanks for, thanks for laying that out.

[00:28:45] Do I have that right?

[00:28:47] Yeah.

[00:28:47] I think, I think it's spot on.

[00:28:49] And I think you bring up a really good point about, I mean, folks, you are pilot in command of your personal finances, right?

[00:28:57] And it doesn't have to be just the exact same as the guy or the girl you fly with.

[00:29:02] I, you know, I love when people think like, I want you to think about maximizing your life first.

[00:29:08] What does that look like?

[00:29:09] If you were to maximize your life, you know, what do you have?

[00:29:13] What do you not have?

[00:29:14] What money stresses went away?

[00:29:15] How did they go away?

[00:29:17] All of this.

[00:29:18] And then you figure out, okay, well, how am I going to make the dollar support it?

[00:29:22] And, uh, like, like the two of you, Hey, I'm not contributing anything to my 401k.

[00:29:27] And you're comfortable with that.

[00:29:29] You're confident that why did you have these other things going on versus somebody that, you know, you know, that may be less familiar with private placements or, or alternative investments.

[00:29:39] That's like blasphemy.

[00:29:40] Well, you know what I mean?

[00:29:40] Like, it's like, it's like, look, there's way more than one way to accomplish these things.

[00:29:45] Definitely.

[00:29:46] Yeah.

[00:29:46] I think you also have to, and this is just anecdotally.

[00:29:49] I think you have to look at your spending habits, uh, as an individual.

[00:29:54] And if you're somebody who, if it's, if it's sitting in the checking account, it just gets spent, you know, cause you feel wealthier.

[00:30:01] You may want to consider, you know, you may want to consider, you know, putting the maximum into your 401k and, and you're chunking as much as you possibly can so that it just disappears.

[00:30:11] That, that might be a better opportunity for you.

[00:30:13] But if you're somebody who's really disciplined with spending and, you know, is, is utilizing some of the other strategies that are out there, you know, maybe it makes sense to, you know, consider a different path.

[00:30:25] But it's, um, it's all personal.

[00:30:28] You know, it's interesting that you say that because, you know, it's kind of like, I view it kind of like three levels, right?

[00:30:34] Three levels of awareness, right?

[00:30:36] You, you've got the Dave Ramsey level of awareness, you know, Susie Orman, Dave Ramsey, you're spending all your money into an oblivion.

[00:30:43] You have no idea what to do.

[00:30:45] Go subscribe to Dave Ramsey, Susie Orman, whoever, and like, learn how to not rack up credit card debt, learn how to not, you know, spend yourself into an oblivion, right?

[00:30:55] We've all flown with that, that pilot, right?

[00:30:58] Where they're at the end of their retirement and you're like, how much do you, you only have that much in your, you know, where did all your money go?

[00:31:03] And they're immediately looking for corporate flying jobs after they've, uh, retired.

[00:31:08] Yeah.

[00:31:08] And not for, not because you're bored, because you literally need to go find that.

[00:31:12] And there's lots of different reasons, but of course people lost their retirements and that's no laughing matter.

[00:31:17] Yeah.

[00:31:17] And that's seriously, we're not talking about that.

[00:31:19] We're not talking about people who got the rug pulled out from underneath them.

[00:31:21] We're talking about people who have spent into oblivion and made really bad financial decisions.

[00:31:26] Then you have a level up of like, Hey, you know, you know, better, right?

[00:31:31] You know, to save, you know, to make your contributions to your retirement, you know, to control your spending habits, to have a budget, to, to, to do a career.

[00:31:40] And guess what?

[00:31:41] That's like more than probably 60 or 70% of us.

[00:31:45] Right.

[00:31:45] That's, I think as pilots, we do a pretty good job of saving, putting money away, stuffing money into a 401k.

[00:31:52] And then I would say that's, that's kind of the second level, but the third level up, which is what we're trying to do on the show is like bring awareness to, okay.

[00:32:00] You've done all that.

[00:32:01] You maxed all that out.

[00:32:03] You've got all this, you've got this huge retirement 401k or nest egg.

[00:32:07] Like what else is out there that you can sprinkle in a little diversification to Tim's point, like for your life.

[00:32:14] Right.

[00:32:15] Because, you know, we, you know, we just had this happy hour where 50 pilots came to Atlanta and, you know, one of the gentlemen were asking, do I go have my own rental properties?

[00:32:23] Do I go, you know, what do I, you know, I'm just getting started at Delta.

[00:32:26] What do I do with my cash?

[00:32:28] And it's like, well, what do you want to do?

[00:32:30] You know, it's the Shershire cat.

[00:32:32] What, what way does this, what way do you want to go?

[00:32:34] It's like, well, you got to pick what way you want to go.

[00:32:38] You'll end up wherever you want to end up.

[00:32:40] You got to, you got to go the direction that, you know, do you want to be an active investor?

[00:32:44] Do you want to be a passive investor?

[00:32:46] Do you want to think about these things?

[00:32:47] Do you want to diversify what's important?

[00:32:49] And one guy asked me, he's like, Hey, what, what do you, what, what should I do?

[00:32:53] You know?

[00:32:53] And I said, well, tell me about yourself.

[00:32:54] He said, well, I have a spouse and I'm trying to get her to do this.

[00:32:57] And I'm trying to get her to do that.

[00:32:58] And I'm like, well, geez, maybe you should bring your spouse along with you.

[00:33:01] So, so you can, you know, be on the same page for this type of stuff.

[00:33:05] But anyway, it got me excited to talk about, I think just, you know, all these different

[00:33:10] options that we have as, as investors and aviators.

[00:33:13] And it's, this is a good thing.

[00:33:14] We have good problems on our hands.

[00:33:16] We certainly do.

[00:33:17] I was going to say, we have, we have great problems.

[00:33:19] I mean, we have choice, right?

[00:33:21] And earlier this year, we did some work about, can I retire on my company's NEC by itself?

[00:33:28] And that was really, cause I know, I mean, you think about 17%, going up to 18% for a lot

[00:33:34] of carriers in 2026.

[00:33:36] And folks are, they're wondering, they're thinking about it.

[00:33:39] And of course the usual financial planning caveat is it depends.

[00:33:43] But what we found was like, Hey, at 25 years old and 35 years old, the probability is very

[00:33:49] high.

[00:33:50] And we just looked at you saving nothing, uh, only the company's NEC.

[00:33:56] And we did not adjust for state income tax, but like FICA and everything else.

[00:34:00] Right.

[00:34:01] So with that being said, that's a lot of trust in the company.

[00:34:04] I mean, I think spirit just filed bankruptcy.

[00:34:06] Right.

[00:34:06] I think I know.

[00:34:07] So that's a lot of trust in the company on that.

[00:34:10] So, but what I do with that is say, Hey, typically for an early career pilot, put the pedal to

[00:34:16] the metal for like the first 10, because we can map out everything.

[00:34:21] We can do all these scenarios and we can mitigate a lot of the risks that we know about.

[00:34:26] And it's the risk that we, we don't know that we can't even fathom that are going to come

[00:34:30] and just push us aside.

[00:34:31] And we're surprised.

[00:34:32] So put the pedal to the metal.

[00:34:34] And then you come up for air and you, you start to do different things.

[00:34:38] Right.

[00:34:39] And I think that that's a really, that's a really good way to set yourself up for success.

[00:34:44] Um, quite frankly is, is you, you've got options, but you're also haven't forgotten.

[00:34:50] Like, you know, I want to live as well.

[00:34:52] I think that's such, such good advice.

[00:34:55] You know, the, again, the power of compounding.

[00:34:56] I did the math recently, maybe it was a year or two ago.

[00:35:01] So, and it shocked me once you have a few million dollars in an account and you think the company,

[00:35:06] you know, the company's putting in 50 something thousand dollars a year into this 401k.

[00:35:11] And you think, wow, that's a lot.

[00:35:12] And it pales in comparison to the market gains on a two plus million dollar investment account.

[00:35:19] Uh, you were making so much more money on compound interest than you are from those,

[00:35:25] the contributions the company's making or that you were making, whatever.

[00:35:28] It's wild.

[00:35:30] You look at the, the impact that the contributions have, and it's very small in comparison to the impact that the compounding returns have.

[00:35:40] So the earlier you can get cash into these and, you know, the younger pilots out there are obviously in a much better position

[00:35:46] because they just have a longer time horizon, but yeah, the earlier you can get that cash on temperature and, and compounding.

[00:35:54] Um, I mean, the difference in just five years at the tail end is massive.

[00:36:00] So anyway, good plug.

[00:36:03] Okay.

[00:36:03] So let me make sure that, that it's around this conversation out that I, that I have this correct.

[00:36:07] My contribution limit as an employee into my 401k is $23,000.

[00:36:14] That's it.

[00:36:16] Of course, there's a $69,000 limit for, for both sides, but let's forget about the company for right now.

[00:36:21] Just me, 23,000.

[00:36:23] But with the, uh, Megavac door Roth, how much could I potentially put in?

[00:36:30] No company?

[00:36:32] No specific company.

[00:36:33] Is that what you're saying?

[00:36:33] Okay.

[00:36:34] So, uh, yeah, let's, let's say that, uh, yeah, if the, if the company's contribution was zero, which it isn't, but just to help us understand the concept here,

[00:36:42] what would the maximum amount be that I could put in as an employee?

[00:36:46] 46,000.

[00:36:47] You could do all 69.

[00:36:49] Yeah.

[00:36:49] You could do all 69.

[00:36:51] So if there's no company contribution to consider, so 23 would be your elective deferral.

[00:36:58] That would be the one that you could choose pre-tax on or Roth on.

[00:37:02] And then the Megavac door would be your post-tax contributions.

[00:37:07] So if there's no company contribution to consider.

[00:37:09] So you're saying another 46,000 was your original answer, which is the full amount.

[00:37:13] So you, you could put all $69,000 in there, assuming that the company was giving you nothing.

[00:37:19] So like in the instance where I think I can get, well, at some point, if I was structured correctly, I could do a solo 401k is like a, as a business owner.

[00:37:29] Right.

[00:37:30] And so Mark Kohler has talked about this on his podcast quite a bit, which is like, I could, I could put $69,000 into a solo 401k.

[00:37:38] I don't do that anymore because I have, it's convoluted, but I used to, you know, whatever the limit was, I'd put that in there every year.

[00:37:46] But now you've got, you got your airline in there.

[00:37:49] So they're going to, they're going to push down with that, that total contribution limit.

[00:37:52] But you can race them to the finish line.

[00:37:56] That makes a lot of sense.

[00:37:57] I'm glad we looked at it with the 0% airline contribution.

[00:38:01] Cause now I think I got my head wrapped around this whole thing.

[00:38:04] Yeah.

[00:38:04] Yeah.

[00:38:05] I don't, you know, I think whoever discovered this.

[00:38:08] And started looking at it.

[00:38:09] We've probably not working with airline pilots initially, just because that big fat, non-elective contribution.

[00:38:17] You know what I mean?

[00:38:17] When you look at you, when you look for this stuff online, it always talks about, okay, well, if you put in 11,000 and your company matches and it's like not even close to our reality.

[00:38:27] Yeah.

[00:38:27] So let me, sorry.

[00:38:29] And again, the confused guy over here.

[00:38:31] So my $23,000 can go in traditional or it can go in Roth, whatever I want it to go in as right.

[00:38:40] Or you go a hundred percent of one thing and a hundred percent of another thing.

[00:38:43] Mm-hmm.

[00:38:44] The mega backdoor Roth situation where I, I race the company and I win, I, I put in more than that 23K before they can fill it up.

[00:38:53] You know, whatever it is.

[00:38:55] You're saying that that can be go in all as Roth effectively, right?

[00:38:58] Or get converted for free without paying a penalty.

[00:39:02] Yeah.

[00:39:02] And I think it has to be Roth, right?

[00:39:04] You can't, you can't say, Hey, I want to write off this money.

[00:39:07] Like you can that first 23,000.

[00:39:09] Exactly.

[00:39:10] Yeah.

[00:39:10] Correct.

[00:39:11] That's right.

[00:39:12] And I think too, like, as we, you know, we sit here and we're like, well, who's in, who's in Washington?

[00:39:17] This is some dumb rules.

[00:39:18] Cause I, you know, I'm able to skirt them.

[00:39:19] Right.

[00:39:19] Like the rules weren't always in place.

[00:39:22] Right.

[00:39:22] So there were, you couldn't always take this post-tax contribution money and convert it to Roth.

[00:39:28] Right.

[00:39:29] So, so you would have had to pay ordinary income tax on the gains of those post-tax, but today you can.

[00:39:34] So, you know, hence the mega backdoor.

[00:39:37] And who is tracking all this?

[00:39:39] Is it just your 401k plan provider is just looking at how much of which dollars are which?

[00:39:45] Yeah, exactly.

[00:39:46] Your custodian.

[00:39:47] That's right.

[00:39:48] Gotcha.

[00:39:48] Well, that's super helpful.

[00:39:50] Can we, can we spend a little bit of time on why someone would do pre-tax versus post-tax

[00:39:58] and that first 23k leading up to not having the option?

[00:40:01] How, how, how would one, how should one think about allocating for your post-tax dollars?

[00:40:05] Could I get your thoughts on that?

[00:40:07] Yeah.

[00:40:08] So this is a, I mean, this is a good one.

[00:40:12] Pre-tax versus, versus Roth.

[00:40:14] I think this is the annual or for, for our client, it's, it's the perennial conversation.

[00:40:19] When you're thinking about Roth, right?

[00:40:23] So this is where we introduce tax certainty.

[00:40:26] Hey, these, the earnings are the earnings.

[00:40:28] I will not have to pay tax on.

[00:40:30] If somebody is retiring within 10 years or, or beyond 10 years, because I, I tend to agree

[00:40:38] with you, Ryan, I believe tax rates are going to be higher in the future.

[00:40:42] And no, I'm, I don't have any insider intel, but I'm like, you know, five to 10 years, we might

[00:40:47] start to see some stuff.

[00:40:48] So if you think that taxes are going to be higher in the future, then you're going raw and because

[00:40:55] you're locking in whatever your, your rate is now.

[00:40:57] If you expect taxes to be lower in the future, or maybe you had a big event this year, like

[00:41:05] another liquidity event that's boosted up your, your taxable income for the year.

[00:41:10] And, you know, you, you need some deductions, then you're going pre-tax.

[00:41:14] Um, so those are the two things that come to mind.

[00:41:17] I mean, I, you know, there are some folks that whatever life circumstances, um, they've

[00:41:24] been dealt or that they've navigated, maybe do not have this huge nest egg.

[00:41:29] And so maybe they're 10 years out or 15 years out from retirement.

[00:41:34] I use 10 about around 10 is, is what sometimes I see, you know what they may be going pre-tax

[00:41:41] just because when you start to unwind it, we don't expect them to have more income and

[00:41:46] retirement than they do now.

[00:41:48] And so they're able to, you know, take that deduction here too.

[00:41:51] So, so those are some of the, some of the use cases that I think about.

[00:41:56] I do like, uh, I mean, I, I just, I anticipate taxes are going up.

[00:42:00] And so, um, we do the raw thing.

[00:42:03] The other thing, the other thing is when folks can't, when the pain is too much on, uh, on their

[00:42:09] taxes, right.

[00:42:09] Whatever state they live in, you add the federal and the state and they don't, and

[00:42:13] mostly it's W2.

[00:42:14] We'll see that as well.

[00:42:16] Uh, the pain gets a little hard to handle and then they'll, they'll switch over to pre-tax

[00:42:20] as well.

[00:42:21] So Tim, so we've covered knowing if taxes are going up or down or whatever there might be,

[00:42:27] but let's talk about like mandatory distributions, because when you hit a certain age and you can

[00:42:33] go over that age with us, um, you're going to have to start, start taking mandatory distributions

[00:42:38] from your retirement when you retire.

[00:42:40] So if you're a 40 year old airline pilot, like me, maybe you're not thinking about this

[00:42:44] yet, but at some point you're going to have to start taking distributions.

[00:42:48] When you take distributions that gets logged as income and you're going to have to pay

[00:42:52] taxes on it.

[00:42:53] And if you're a super saver, like a lot of pilots are right now, you're going to have a

[00:42:57] huge retirement plan and you're going to have to distribute out all that income at some point.

[00:43:03] And that's going to be taxable income, whether you like it or not.

[00:43:08] So can you kind of talk about the threshold of when that might trip you into a higher tax

[00:43:13] bracket later on in the future and kind of how you might think about putting it in Roth

[00:43:16] versus traditional?

[00:43:18] Yeah.

[00:43:18] So I'm glad you bring that up because there is this, maybe this misconception or maybe

[00:43:23] it's just commonly talked about that.

[00:43:26] Hey, once you get into retirement, you're going to have less income than you do now.

[00:43:31] And if you are a super saver, that is not necessarily the case.

[00:43:35] Uh, to your point, Ryan, you, you have this large pot of money and in it off the top of my

[00:43:40] head, I don't know what that dollar amount is, but you know, somebody could go and play

[00:43:44] with the calculators and give yourself a, you know, a rate of return.

[00:43:47] But what happens is, yeah.

[00:43:50] So let's say you retire at 65.

[00:43:51] Well, you're going to want to replace your income that you were earning.

[00:43:55] I talked to nobody who says, Hey, I want my standard of living to go down in retirement.

[00:44:00] Nobody.

[00:44:01] Okay.

[00:44:02] So we, okay.

[00:44:03] So, you know, now you're gonna have all this time on your hands.

[00:44:05] So how are you going to, how are you going to use that time?

[00:44:07] And a lot of times you do stuff.

[00:44:09] So we've got your, your regular contributions that are coming out.

[00:44:12] Now, even before we get to the RMD age, if you're modified adjusted gross income is over

[00:44:19] some fairly low number, uh, it's not coming to the top of my head.

[00:44:23] You're going to have what's called IRMA.

[00:44:25] So income, um, IRMA, I R M M A income related monthly adjustments.

[00:44:32] That's where your premiums on your Medicare go way up from a low of like, you know, 80

[00:44:40] something dollar, 180 something dollars a month to a high of over $600 a month per person.

[00:44:45] So in a spouse, you've got your IRMA, uh, that's goes up and that's not a one year thing.

[00:44:49] That's an every year thing.

[00:44:50] As long as you're, you're modified.

[00:44:52] And you said RMD.

[00:44:53] What is RMD again for those that might not know?

[00:44:56] Yeah.

[00:44:56] So your RMDs, that's going to come after age 65 and a half.

[00:45:00] That's going to become at, uh, 73 or 75 depends on when, when you were born.

[00:45:04] And that's your required minimum, uh, distribution.

[00:45:09] So we talk about taking the, go ahead.

[00:45:12] No.

[00:45:12] So that is, you are required to take income from your retirement to be clear.

[00:45:19] And you have to pay tax on that.

[00:45:21] Yeah.

[00:45:22] Maybe from a traditional account of it.

[00:45:27] Then it's tax free.

[00:45:29] Exactly.

[00:45:30] And so if, you know, when these RMDs hit, that's not necessarily, if you're a super saver,

[00:45:37] not going to lower your, uh, your taxable income.

[00:45:41] And a lot of cases it increases it.

[00:45:43] Right.

[00:45:44] And you say, well, what if I don't take it?

[00:45:46] Okay.

[00:45:46] Well, uncle Sam says, Hey, you should have taken this.

[00:45:48] You knew you should have taken it.

[00:45:49] You didn't.

[00:45:50] So we're going to take a portion of it.

[00:45:52] It used to be a 50% excise tax.

[00:45:54] Now, if you can show that I now, and now it's, it's, it's a little bit less than that.

[00:45:58] But they're going to tax you for not taking it.

[00:46:01] If you don't take it.

[00:46:02] Right.

[00:46:03] This spurred another thought here, Ryan, because you would ask, Hey, can we walk through when

[00:46:08] to choose traditional or, or, or not a Roth?

[00:46:11] Sometimes we'll have clients that are like pre-retiree to retiree, but pre RMD stage.

[00:46:17] And they're thinking, you know, I'm going to, I'm going to outlive these dollars.

[00:46:25] But recently legislation change says, Hey, if you pass this on to say a child or grandchild,

[00:46:31] they have 10 years to empty this account.

[00:46:35] I don't know if that's a great idea.

[00:46:37] Depends on how old they are, but let's say that you're 90 and they're in their sixties.

[00:46:41] Maybe they don't want to distribute that, all of that money right in 10 years and then

[00:46:45] increase their own taxable income.

[00:46:47] So that's another reason folks will choose to either put money in a Roth or convert Roth

[00:46:52] because the Roth just gives you, gives your heirs more options.

[00:46:57] That's a really great point.

[00:46:58] I've, I've said it on the show before as well.

[00:47:01] It's, I kind of think my Roth is my toy fund in retirement.

[00:47:03] I can take a million dollars in one year, one chunk, not worry about the tax hit.

[00:47:08] You know, if I want to go buy a ski house or a boat or garage, whatever it is.

[00:47:14] Right.

[00:47:14] But you wouldn't want to take a million dollars in one year out of your, well, granted, you

[00:47:19] know, with inflation, a million dollars might not be all that much, you know, in a couple

[00:47:23] of decades from now.

[00:47:24] But the point is you don't want to take a huge distribution out of your traditional in

[00:47:30] one calendar year because you're just going to get smoked on taxes.

[00:47:32] So, um, I kind of think of that as my, okay, the traditional side is just going to trickle

[00:47:37] out and be my, my living expenses, uh, that sort of replaces my income.

[00:47:41] And then the Roth is more your toy fund.

[00:47:43] So I don't know, something that helps me.

[00:47:45] One thing that I would say to it, you know, Tim, I know we probably need to wrap up here

[00:47:49] and very gracious with your time.

[00:47:51] You know, I ran into somebody at the happy hour, the passive income piles, happy hour

[00:47:54] Atlanta.

[00:47:55] And, you know, he, he had something, I think pretty fundamental to say, which is we're all excellent

[00:48:00] savers here and we're, we're trying to do the best we can.

[00:48:02] But you always get to see your kids one time, right?

[00:48:07] You only, you only, you only get this one life.

[00:48:10] So go have some fun.

[00:48:12] I mean, don't, don't go, don't go too crazy.

[00:48:14] You can't invest, but take that trip you've been putting off or, you know, take your kids

[00:48:19] somewhere fun because this is, this is it.

[00:48:20] You get, you get one life and, and, you know, if you put every little dollar you earn into

[00:48:25] retirement and you don't have any time for anybody, you know, you're going to miss out

[00:48:29] on this opportunity to enjoy, enjoy the time that you have currently.

[00:48:33] So not to get off onto a tangent, but, you know, just to kind of, I like to make this

[00:48:37] a little bit personal too, of where it's like, Hey, go spend some money, go get that instrument

[00:48:41] ticket in the, uh, in the Cirrus, you know, take, take your kids on that trip that you're

[00:48:45] thinking about, you know, whatever it might be.

[00:48:48] Take, go buy that ski house now.

[00:48:49] Right.

[00:48:50] Well, maybe, maybe we're getting a little bit too off, too off a script here, but no,

[00:48:54] anyway, I just wanted to give that perspective.

[00:48:56] I love it.

[00:48:57] I appreciate it.

[00:48:58] Uh, because it's true and this is life, right?

[00:49:02] This is life.

[00:49:03] And that comment that I made earlier about, Hey, I want folks to think about how do I maximize

[00:49:10] my life first?

[00:49:12] Then how do I maximize my dollars to support that vision that I just created?

[00:49:16] A lot of times if we do it in opposite order, you guys know the goalposts always move.

[00:49:22] There's always more.

[00:49:23] There's a, you know what?

[00:49:24] And, and we sacrifice that dream that maximize life because we're maximizing the dollars first.

[00:49:31] And so I do it and you're, you're right on, you're right on.

[00:49:35] And, um, we are in a great position to have options and to be able to save well, but also

[00:49:42] live, um, and, and live well too.

[00:49:45] So well said.

[00:49:46] Well, Tim, thank you so much for coming on today, breaking down the mega backdoor Roth

[00:49:51] for us.

[00:49:52] It's definitely demystified it for me.

[00:49:54] Uh, and hopefully it has for the listeners as well.

[00:49:57] How do people find out more about you if they'd like to, you know, read about you, work with

[00:50:02] you, uh, get in touch with you?

[00:50:04] Yeah.

[00:50:05] So I'm on LinkedIn, uh, Timothy P Pope.

[00:50:07] Uh, you can find me there.

[00:50:09] Uh, you can listen to the pilot money podcast.

[00:50:11] Uh, you can hear, uh, financial planning, uh, tips and strategies for pilots, um, on that

[00:50:18] show.

[00:50:18] Uh, and then you can also drop by the website, which you'll find on other, either of those

[00:50:23] places.

[00:50:24] Uh, Timothy dot hope as a terror investors.com.

[00:50:28] Thank you so much, Tim.

[00:50:29] We appreciate you, your wisdom and look forward to having you on again sometime in the future.

[00:50:34] Good luck with your training.

[00:50:35] Thank you.