Don’t Play Pension Roulette - Alternative Retirement Strategies for Pilots

Part 3 - The Backdoor Option

High-Income Earner? A backdoor Roth IRA contribution may be worth considering to reduce future taxes on investment income

I was asked to speak to a group of pilots about saving for retirement. This article is taken from that material and specifically references that industry and situation. However, there are other industries and job types that also offer pension plans. Those employees should be aware of how pensions work and how they can impact their retirement. Even if you aren't a pilot, I believe that the information in this article can help you. I share it in the hopes that you will become more aware of the details of your retirement and take control of your future.

Backdoor Roth Contributions for High-Income Earners

To qualify for a Roth IRA, an individual’s Modified Adjusted Gross Income (MAGI) must be less than $153,000 in 2023 for a single tax filer and $228,000 in 2023 for married and filing jointly.

Because a pilot’s earned income is typically higher than this limit, a backdoor Roth IRA contribution may be worth considering to reduce future taxes on investment income. This strategy allows the movement of money into a Roth IRA when your annual income disqualifies you from making direct contributions. Here’s how it works:

• Open a Traditional IRA

• Make a non-deductible contribution to the Traditional IRA

• Convert the account into a Roth IRA

• Pay the tax upon conversion

When using this strategy, there are two 5-year rules you need to consider:

1. Because the backdoor IRA is categorized as a conversion and not a contribution, you cannot access funds in the converted Roth IRA without penalty for five years.

2. You cannot withdraw Roth IRA earnings free of taxes unless your first contribution to the Roth IRA was made at least five years ago. (Even if you are 59 ½.)

Talk with your tax advisor about the IRS aggregation rule intersecting with pro-rata regulations and state tax implications on conversions.

For more information read the blog "High-Income Earners: It's Possible to Achieve Tax-Free Income in Retirement" a multi-post series that goes more depth about this strategy.

Consider Your Options and Take Control

It is good to have options. Consider yourself lucky and learn from those who were left with no plan, no savings, and no other options.

If you need help, have questions, or want to speak with IRA experts, call our team at Preferred Trust at 888.990.7892. We’re ready to help you take control of your retirement, diversify, and get one step closer to a comfortable retirement.

Thank you for keeping us all safe in the friendly skies!