A Mega Backdoor Roth IRA is a tax strategy available to employees whose retirement plans allow them to make significant after-tax contributions and to transfer their contributions to a Roth IRA. In other words, if you want to maximize your Roth contributions, you need to understand the power of the Mega Backdoor Roth. So, in this episode, Michael, Tommy and John will be sharing the steps you can take today to ensure you’re not going to miss out on what could potentially be the biggest tax loophole of your lifetime, particularly if you are CSRS or CSRS Offset and have access to the VCP (Voluntary Contribution Plan).
Listen in as they touch on required minimum distributions, as well as how you can be as tax efficient as possible while taking advantage of your Roth contributions. You will learn why you shouldn’t blanket defer IRA or TSP distributions until you’re 72, why Roth IRAs aren’t talked about more and what you need to know about VCP (The Mega Mega Back Door Roth).
Listen to the full episode here:
What you will learn:
- What you need to know about CSRS right now. (4:30)
- Several updates and facts about Mason & Associates, LLC. (7:55)
- What the Voluntary Contribution Plan is. (10:45)
- How valuable the VCP is. (14:00)
- How these tax loopholes are created. (16:10)
- Tips on how to be more tax efficient. (20:00)
- What you need to know about required minimum distributions. (25:33)
- What VCP allows. (30:10)
Ideas worth sharing:
“Every time we buy or sell, those transactions are a taxable event.” - Mason & Associates, LLC
“Blanket deferring IRA or TSP distributions until 72 just isn’t the answer.” - Mason & Associates, LLC
“We shouldn’t wait for Uncle Sam to tell us when we should spend our IRA money. We should spend it when we want.” - Mason & Associates, LLC
Resources from this episode:
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Read the Transcript Below:
Congratulations for taking ownership of your financial plan by tuning into the Federal Employee Financial Planning Podcast, hosted by Mason & Associates, financial advisors with over three decades of experience serving you.
Michael Mason: Welcome to the Federal Employee Financial Planning Podcast, hosted by Michael Mason, I'm a certified financial planner. Across the table from me, John Mason, CFP as well. Tommy Blackburn, also certified financial planner and certified public accountant.
Folks, we have over three decades helping federal employees do their financial plans and we want to impart that knowledge on everybody.
So, tonight's episode, I'm excited about, is Voluntary Contribution Plan. But before you go into that guys, happy 4th of July. How was it? Everyone stayed safe and enjoyed your 4th?
Tommy Blackburn: Yeah, it's always welcomed to have a nice long weekend particular here in the summer. I know our family, we took the bikes out. We went to the pool and we checked out a local attraction here this part of the state and the country, Water Country, USA, which was kind of neat just to let Zoe go and check out some of the kid parts of the park. So yeah, it was a lot of fun.
John, how about you and your family?
John Mason: It went by really fast. We were closed Friday and Monday, which was great, so we had a long weekend, both the advisory team and the ops team, as you guys know. But we went camping.
So, Sarah, Carter and I are big into this RV kind of lifestyle and we don't tow anywhere, but we have a seasonal site. So, we were able to do beach in the morning, pool in the afternoon, walk, sunrise, sunset.
And it's getting a little bit better now with Carter being two and a half-years-old. The days aren't as hard and it's just really, really fun being outside, being in nature, having kind of that second house getaway.
So, really great weekend, and then yesterday, we cuddled with our dog as the fireworks were going off because she was terrified. So, that's how we spent the night of 4th of July, is trying to survive the fireworks in the neighborhood to the best of our ability.
Michael Mason: And of course, down here in Hampton Roads, Virginia, I've learned to avoid the highways (most of us have) — to avoid the highways as much as we can.
So, I played golf on Saturday and then Monday, Bobby and I went over to the Country Club and they had a nice event set up over there. So, stay close to home and off the roads. Would've liked to have seen my grandson, but that's a discussion for a later period there.
John Mason: Well, you can never get enough of Carter. Between you and mom, it's hard to have any alone time when you have grandparents that love your grandson so much, and we appreciate that too.
Michael Mason: Yeah, so I'm really excited about this. We've been talking about it around the office. We've probably touched base on the voluntary contribution. We definitely touched base on CSRS, Voluntary Contribution Plan in CSRS episode one or two.
But we wanted to do a direct episode just dealing with the CSRS, CSRS Offset Voluntary Contribution Plan.
As we look at it guys, the last ones that were hired was 1983. So, you're coming up on 39 years of service. So, in the next three years, we believe that unless you’re just like working, and many people do like working past 42 years; but most are going to retire in the next three years.
And we believe the Voluntary Contribution Plan is one of the best kept secrets and absolutely one of the biggest tax loopholes in America. So, we wanted to hit that hard so that you don't miss this opportunity.
And just because I say three years, doesn't mean that it's three years. There might be some tax law changes that cuts this off sooner than your retirement.
Tommy Blackburn: Well, that's interesting, Mike. So, you're referring to we had the Build Back Better Act that was making its way through Congress, but ultimately, didn't pass, but who knows that they pull it back off the shelf. And that would have nixed the ability to take advantage of what makes the VCP so very, very cool that we're going to talk about.
As we mentioned, we’re running out of time for these CSRS active folks. We did want to mention some who may have a little bit longer of a runway in the three years we're showing. You kind of mentioned it as well, is those who had a break in service or came back as CSRS Offset.
So, there could be some who have a little bit longer before they've hit that maximum amount and the VCP could still apply to, assuming Congress leaves this door open.
John Mason: That's right guys. And we have a few CSRS Offset clients who are still active right now and many of those maybe only have 10, 15 years of federal service. So, they may be shooting for that 20, 25-year mark.
So, if they were hired before ‘83, then terminated and had a break after that and came back sometime maybe in the ‘90s or 2000s, they could still be working towards that ultimate pension multiplier. And then like you guys stated the Build Back Better would've killed this opportunity because it would've eliminated the ability to convert after-tax dollars to a Roth IRA.
And as we move throughout the episode today, we're going to talk a little bit more about probably not Build Back Better, but like how the mechanics of this VCP really works and why this loophole may go away in the future.
Tommy Blackburn: And one thing I think is worth mentioning — we're not going to spend a lot of time on the Build Back Better Act, but I'm imagining many people who CSRS with this VCP opportunity probably were unaware that this was even on the chopping block.
And I guess just a little bit of a shout out to our team here, I know we spent time reaching out to every client that this applied to, to update them as to what was making its way through Congress and how it could affect them and if we wanted to take advantage of it, that window could be closing.
So, I think it just goes back to previous episodes we've talked about of, they're not talking to you, working with an advisor who specializes in you, in your situation.
John Mason: If I recall correctly, Tommy, we were working a couple cases or working with a couple of families towards the end of last year. I think we were able to do or at least get the ball rolling on two or three VCP transactions in December.
Now, they didn't close in December, so Build Back Better would've nixed that, but we got the ball rolling in December and the ultimate VCP and we'll just throw it out there early; VCP to Roth IRA. We'll talk more about what that means, was completed in quarter one of this year at kind of record speed.
Tommy Blackburn: Yep. Us and the clients this applied to were pushing pretty hard to make sure they took advantage of it once everyone realized how valuable this is and we're going to spend some time going through why we think it's such a cool planning technique for those it applies to.
Michael Mason: I'm going to take just a minute when I get the mic back and go through exactly VCP. But John, there was a couple of important things about Mason & Associates we wanted to hit early in this podcast as well.
John Mason: Absolutely. I think just reminding our listeners that our website, masonllc.net, we are a full-service financial planning firm and we specialize in serving federal employees. So, if you've been listening to this podcast, you probably have gathered that we have this unique specialty in serving federal employees.
But what full service financial planning means guys is that we wear a lot of hats; tax planning, retirement income planning, government benefits planning, education, monitoring net worth. There are so many functions that we perform for our clients. So, we just wanted to remind our listeners of that.
We are taking new clients and those clients typically, are federal employees at or in retirement/at or near retirement. Those folks typically have an investment portfolio, 700,000 or more. So, if after listening to this podcast, you're thinking, “Wow, I would love to work with a financial planning team that specializes with federal,” you can work with us.
If you're at or in or close to retirement with 700,000 or more, let's find out if we're a good fit and you can schedule that introductory phone call two ways; (757) 223-9898, or our website, masonllc.net. You can request that introductory phone call, which is a no obligation 30-minute call with one of the advisors on our team.
Really just so we can do some mutual fact-finding, are we a good fit? Should we progress in this relationship? And of course, we always love to hear from people who have been getting value from this podcast; we love any feedback that we can get during those calls.
And lastly, we're a virtual planning firm. I mean, how cool is this, guys? Not only are we pushing out this content that anybody throughout the country can listen to and even throughout the world, but we're able to serve folks across all these various states and in all these locations because we're location-agnostic and that we are able to serve our clients in a virtual capacity.
Michael Mason: And in this capacity, in this subject that we're dealing with, in the Hampton Roads area, we feel like we've done this enough on the local radio show. But now, that we're virtual and now, that we've got the podcast, we want to make sure that the folks in Northern Virginia, one of the highest federal employee populations, maybe the highest in the country, and folks all the way out in California get the same opportunity to get this.
So, let's talk about Voluntary Contribution Plan, V as in Victor, CP; Victor, Charles, what's the P?
John Mason: And P oh, I can't think of P off the top of my head. I'm sorry.
Michael Mason: We'll call it Paul, but that's okay. So, Victor, Charles, Paul, Voluntary Contribution Plan.
CSRS predates, the CSRS retirement system, predates social security and Voluntary Contribution Plan has been part of it from the beginning. It just didn't get interesting until 2010 when conversions, Roth conversions became available to everybody regardless of your income level.
So, let's talk about what the Voluntary Contribution Plan allows. It was originally designed to increase your CSRS pension, as if it needed increasing. You can get 80% of your high three, but you could contribute 10% into the Voluntary Contribution Plan, 10% of your compensation every year. And then you could take an additional annuity from that. So, the 10% that goes in, goes in after tax, you don't get a pre-tax, so you're saving after tax.
The neat thing is they allow you to catch up. So, my dad, he started CSRS back in the late ‘60s and maybe the first year he made $8,000. Well, that 10%, 800 in most plans, if you didn't put that $800 in, you lost that opportunity.
But literally, he was able to go back and add up just like you are, CSRS, CSRS Offset — add up everything you've made over your career and put that amount, 10% of that amount into your Voluntary Contribution Plan.
Again, you have to use money. Can't take it from your IRA that's pre-taxed, you can't take it from your Thrift Savings Plan. You wouldn't want to, even if you could. You have to take money that has already been taxed. Think about that Nags Head house that you sold, think about maybe an inheritance or just that brokerage account that you've accumulated along the way.
John Mason: Well, it's such a unique vehicle, Mike, because we're so used to in this industry annual contribution limits. So, I can put $6,000 into my Roth or 7,000 into an HSA or 27,000 into TSP. So, we have these like use it or lose it annual limits that we've all been accustomed to. And this 10% of base pay is truly like accumulative.
So, if you don't use it in 1983, it rolls forward. And then you're ‘84 and they keep compounding and they keep rolling forward. It's the only retirement vehicle I think that I've ever seen that exists where these contribution limits is accumulative rather than a year by year.
Tommy Blackburn: One thing, I think another way to phrase it and you guys are really hitting it well, is we have an … so the annual contribution, annual licenses, that's what we're so used to. We have an annual license, we have to use it each calendar year. This is a lifetime license.
And I think you're absolutely right, John. I can't think of any other accounts that get this type of tax treatment that you get a lifetime license on. So, it's pretty cool. And one of the things, maybe how we got here is, as I was looking at our notes that we've got jotted down is this is older, I believe, than social security.
I mean, VCP has been around for … so as laws and the way we plan have changed, it's almost like this forgotten Relic. It was setting up this way, and as things have changed, we're able to now take what was antiquated and nobody paid much attention and all of a sudden, it's become a very valuable tool.
John Mason: So, two additional points, Tommy, because you got my mind thinking, is number one, in 1983 when you started CSRS — I'm saying you, the listener, CSRS, you started, you probably didn't have a lot of disposable income. So, you’re going to save in one place or the other. And that was probably the case for many years.
And then your income was building, and then you sold a house, and then you made a profit on something, and then you received an inheritance. So, it's like now at the final last year or two of your retirement, you have disposable income and assets where you can go back in time and do this.
Well, the first year, I was a financial planner, maybe I didn't have that discretionary income to put it into a Roth. I never get that back again. So, how powerful, just like the pension; you could have 27 years of CSRS service making a dollar a year, and then your last three get stepped up to a hundred thousand in your pensions based on a hundred thousand. So, that retroactive capability is huge.
You mentioned antiquated. Here's how antiquated VCP still is; if you do a $300,000 transfer from VCP to a Roth, you're going to receive three receipts for that transaction because the computer program only issues receipts at $99,999.99.
So, this is the type of system that we're talking about, ancient, ancient, ancient that is never been more applicable than it is today.
Michael Mason: Yeah, I mean, we had a VA hospital doctor that we could account for $3 million of lifetime earnings. So, to drop $3 million in, or 300,000 (10% of 3 million), we dropped in 300,000 and to John's point, he got three receipts; 99,999 for his deposits. And this is how tax loopholes are created.
Do you think Congress when they created the Roth and then they created the ability to convert from a taxable account to a Roth, do you think they went back to 1925 and said, “Is there anything that was created back there that might harm us in this?” No, but the VCP was, and that's why it's a loophole.
John Mason: One thing, we've been talking about this lifetime license and how neat it is and just how rare it is. I think an important caveat here; that lifetime license only exists as long as you are still active.
So, if we want to take advantage of this VCP opportunity that we're going to go further into, the main caveat is we have to do it before your pension is adjudicated. At that point, this lifetime license is gone.
Michael Mason: And that’s why we're doing this special edition because we're looking at a tick tock, the clock is counting down three years that maybe you're missing the greatest tax loophole, greatest opportunity of your lifetime.
John Mason: So, VCP, we've kind of hitting … we're a little bit all over the place, which is great because we love how dynamic this podcast can be. So, let's take a step back for our listeners.
So, let's take a little bit step back and let's do some education on investments, specifically not like the underlying mutual funds or ETFs or stocks, but the type of investment like an IRA or a Roth IRA or a taxable brokerage account, what we would also call non-qualified.
I think we need to talk about the differences between those so that when we ultimately really drive home the value of ECP, it's crystal clear for our audience because we've talked about why this opportunity is so unique.
And a couple things as we start diving into like the different tax statuses of accounts, we just want to make sure for our listeners that we point out that the underlying investments in an IRA, Roth IRA or taxable account may be the same. So, you could own Ford stock in all three of those accounts and all three would perform the same way, the same performance.
The difference is when you go to liquidate that account and spend your money, how is it going to be taxed? Or if you were to trade throughout the year, how is it going to be taxed?
So, the underlying performance is different or is the same, but the taxable nature of the portfolio is different depending on what account you're in.
Michael Mason: That's a great point and sometimes, it's a neat story. When Roth IRAs first came out, I helped my brother-in-law early 2000 get a Roth IRA, and that Roth IRA had the same underlying investments that his a hundred thousand dollars IRA had. But when we put the money in, I said, “Hey, if we're going to get tax free return, let's get something to write home about.”
So, we put it in there and what we wrote home about was a two-year period where the market dropped 50%. And I remember him saying to me, in 2003, he says, “Whatever we do, I don't want one of them damn Roths” because he solely go from-
John Mason: Because they just lose money.
Michael Mason: Yeah. So, everything lost, but it was very apparent in that Roth IRA that it went from two to one.
John Mason: And also, I think to talk about on that story, is sometimes people, we've encountered throughout our decades of experience, Tommy, is they'll say, well, I don't want to fund a Roth IRA because I only have a few dollars in there. I want to fund my bigger accounts because won't my interest, my total portfolio grow better if I have one really large account rather than three, four or five small accounts?
Tommy Blackburn: Certainly, and so the percentage is going to be the same. It's going to all get us back to the same place no matter where it is.
So, if we have a million dollars spread out across 10 accounts earning 10%, that's going to get a hundred thousand no matter how we … and we can chop it up many different ways. Same way if we had one large account with a million dollars earning 10%, it's a hundred thousand.
So, yeah, we want to address that conception too, is that the balance is not as important. The rate of return is going to equate no matter how those numbers fall.
John Mason: So, for the first type of account, as we start getting into the benefits of VCP, the first account we're going to address is something called a non-qualified brokerage account. So, this would also be a taxable account. Think of this as John's brokerage or John and Sarah's joint brokerage account.
And there are some characteristics of this that we want you to remember and maybe take notes if you're listening and put them on like a side by side so you can compare the three different accounts we're talking about and replay this, if you need to, so that way, you get this big breakdown of the three kinds that we're talking about.
So, one, is the money going into a brokerage account is after taxes have been paid, so after tax contributions. That doesn't mean that you have to pay tax on the money you're putting in. It just means you paid taxes before it got to your checking account.
And then what do we do with it from there? Do we buy a CD? Do we leave it in checking or do we invest it somewhere, i.e. taxable brokerage account?
Every time we buy or sell, those transactions are a taxable event. If your investments are up, it's a gain. If they're down, it's a loss. Mutual funds, ETFs, stocks, they're going to kick out distributions like dividends and capital gains. Those are taxable in this account.
So, be aware, this is 2022 right now. You are down, you have lost money in your accounts or you have a very unique investment strategy. There's going to be dividends and capital gains distributed this year.
So, when your 1099s come out next March, you're going to see that you lost X percent and had a taxable event. So, that's what we're talking about. Those dividends and cap gains are taxable, sometimes at a preferred capital gains rate or other times ordinary income.
These accounts are accessible at any time. So, we don't have 59 and a half limits. This could be like I want to buy a new house 15 years down the road, and I need this money to be accessible then at 40, rather than having to wait till 59 and a half.
And then lastly, a characteristic and I'm sure there's more, is under current rules, if Mike, you and Bobby, you and mom passed away and left me an asset, I would get what's called a step up in cost basis. And I would inherit that Ford stock tax-free if I sold it immediately.
So, there is some nice tax preferential treatment when you look at those favorable rates potentially, as well as that step up in basis. But boy, these are hard to manage. There's a lot of moving parts and as a financial planning team, we love nonqualified accounts, but at the same time, they're kind of a thorn in our side.
Tommy Blackburn: Yeah, I was thinking that we love them because it gives us flexibility. The movement of money in and out of a brokerage account is not a taxable event, but as you said, any trades, dividends, interest, those all, capital gains, that's all impacting our tax return every year. So, managing to that, thinking about how tax efficient we want to be in conjunction with everything else, it's a skill.
And another thing I was thinking about in the brokerage account to maybe help people remember this — because we're getting ready to now start diving into retirement accounts; IRAs, Roth IRAs.
Brokerage account, maybe think of that as like non-retirement account, it’d be another way to think of it, even though it's absolutely there available to you in retirement, but it's not specifically created for retirement.
So, now, I think we're transitioning into our IRAs, 401(k)s and of course, for our federal listeners, TSP. We're looking at the pre-tax traditional side of the house on these accounts.
Funds that are contributed into these accounts through payroll deductions, or if you're able to do an IRA contribution each year, if you meet those criteria, those funds are not taxed.
That's all pre-tax money. It is either going to lower your taxable income from your paycheck or reduce your taxable income on your tax return, assuming you qualify. There's a whole bucket that I don't think we'll get into called non-deductible, or if we do, we'll do it at a high-level.
So, these are all pre-tax funds. They haven't been taxed. They get to grow tax-deferred, meaning that the earnings, they're not going to be taxed while they're inside of this account.
Then what happens when we take money out of this account, out of the IRA, out of the TSP and say it comes to us directly, that is a taxable event. We are going to pay ordinary income taxes on that, which is usually the least favorable of our income tax rates.
Anything as John was mentioning on that non-retirement brokerage account, any trades, any dividends, capital gains, et cetera, that's all not taxable. Doesn't matter what happens inside of the IRA. It's only the money moving in and out of that account type that triggers a taxable event to us.
So, as we think about some other fun things we have here, is we've got required minimum distributions, what we refer to as RMDs. Those happen at 72. So, in our tax plan, it's very important to think about those because we're going to have income forced upon us, whether we want it or not.
So, we have to plan for that and John mentioned how does a non-retirement account work for death and how it's kind of favorable. It's a mess on IRAs, TSPs, 401(k)s. They thought they were simplifying it with the SECURE Act, but as regulations have come out, it's extremely complicated.
You probably think it's easy, you have 10 years, but it's not always that easy. So, it just depends on how that account was held and who's inheriting it as to how it's going to be treated. And there's a lot of nuances there.
John Mason: And these accounts guys are just a ticking tax bomb because most federal employees have these beautiful TSPs that they don't want to spend until they have to. And I know we've talked about this in other episodes, but just blanket deferring IRA or TSP distributions until 72 just isn't the answer.
Michael Mason: Yeah, John, I agree with it. We shouldn't wait for Uncle Sam to tell us when we should spend our IRA money, so we should spend it when we want to spend it, not when we are forced to at age 72 or maybe even, Tommy, as late as age 75, if SECURE Act 2 passes, right?
John Mason: Absolutely. So, that's working its way on the hill right now, and all indications are some form of that's going to pass.
Michael Mason: So, we've hit your regular brokerage account that's kind of taxed along the way. We've hit IRAs, traditional IRAs that are tax-deferred. When that money comes out, it's completely taxable, both what you put in and what's coming out.
So, the next thing, and this is really Tommy, leading to why VCP, Voluntary Contribution Plan is so sweet. And that's the Roth IRA option and you and I, and John, we've talked about this before. We're still kind of wondering why Roth IRAs haven't just been the talk of the town for the last 20 some years.
My best way to describe a Roth IRA, imagine that you could put Lotto tickets, buy Lotto tickets inside your Roth IRA, and you bought the mega millions and you put $1 in and you win 550 million, it's tax-free, it's tax-free. And I don't know what America's not getting about that.
So, let's think about Roth IRAs, if you're overage 50, you can put 7,000 in, as long as you meet the income requirements; married, filing jointly, you can't have adjusted gross income much over 200,000 and be able to do this.
You can put in 7,000 each, husband and wife. So, that's 7,000 license to put in 14,000 for a couple to never pay taxes on that growth ever again. No matter how big it grows, you're not going to pay tax on that growth or what you put in.
If you're under age 50, you can put in 6,000. Tommy, we've talked about this license before. If you get past April 15th of 2023, you can't go back and put 7,000 in for 2022, can you?
Tommy Blackburn: No, you have that annual license. I guess it's more than a year because you can go to the due date of the tax return, which is that April 15th date you threw out there. But once we go past that, it's over. It's a new window, that window's closed.
Michael Mason: So, everything you put into these Roth IRAs and or Roth 401(k) as a federal employee, you have a Roth Thrift Savings Plan option; everything that goes in you've already paid tax on it, everything it earns is going to come out tax-free, assuming you follow the rules. You've been in there five years and over 59 and a half.
And when that money comes out, it's completely tax free to you. If your spouse inherits it, he or she can continue that tax-free treatment for the rest of their lives. And if other than spouse inherits it, they can continue that tax-free treatment for 10 more years.
Tommy Blackburn: Yes. With a few caveats based on the situation, but generally, yes.
Michael Mason: So, that’s your typical Roth IRA. There are many versions. We’ve talked about backdoor funding, Roth IRAs and whatnot. But the greatest opportunity and that's where VCP is and let's just go ahead and switch into that.
VCP allows active CSRS and CSRS Offset employees. Again, you have to be active — it allows you to fund your Voluntary Contribution Plan with 10% of your lifetime earnings as a CSRS employee.
So, you can go back and add up maybe $3 million of earnings. If you're Dr. Fauci who just announced his retirement a couple days ago, sometime before President Biden retires, he announced that he's going to retire. Well, he's been CSRS for 50 years. He may have 6, 7, $8 million of earnings. 10% of that, 10% can go into the Voluntary Contribution Plan.
Let's stick with a reasonable three million of lifetime earnings. That's $300,000. That's 300,000 that wherever it's sitting now; can't be in an IRA now. Can be in a brokerage account, can be in inheritance. That's 300,000 that can go into voluntary contribution, then it can roll to a Roth IRA.
And when it rolls to that Roth IRA, of course, you're not going to pay tax on the 300,000. You've already been taxed on that, but everything that 300,000 earns until the participant passes away, and for at least 10 years after that, is going to be tax-free.
This is going back in time when the first year you were CSRS and couldn't afford to save anywhere. You can go back and make up for a career of not saving and get that amount of money into a Roth IRA.
Tommy Blackburn: Nowhere else do we think you can do this. It's such an awesome tool. And as we went through those buckets and we think about too, if we have that 300,000 in this example, where else are we going to stick it right now? We're probably in a brokerage account that's being taxed every year as it generates capital, gains interest and dividends.
So, being able to take 300,000, put it into a vehicle that's going to get the most flexible best tax treatment we can think of for the rest of your life, your spouse's life, potentially, a time when someone inherits it, it's just awesome.
You can't find this tool anywhere else, and to be able to do such a large amount in this vehicle as Mike, as you were saying, 7,000 each in that married filing joint, and if we're doing a 401(k) or a Roth TSP, we're at, I think it's 27,000, if we're over 50. So, huge mega, mega funding here, opportunity.
Michael Mason: Tommy, 10 years ago and this is the first time you're going to hear this story. But 10 years ago, a client retired CSRS. We funneled a bunch of money into her Voluntary Contribution Plan now into a Roth IRA. They're taking a trip of a lifetime.
They called me sometime in the last three months and asked, “Where do we get 150,000 from for this trip?” And if we get it from their IRA, we're throwing 150,000 into taxable income. We get it from their Roth IRA, they get their trip, they pay no taxes. It's not going to increase their Medicare premiums.
And the beauty of this family just adding one extra — when they pass away, everything they leave, they're leaving to charity. So, why would they keep growing a Roth IRA, charities don't pay tax. They won't pay tax on the TSP or the traditional IRA. So, they should spend the Roth while they're alive and let the charity get the traditional IRA tax.
Tommy Blackburn: Because they're not going to pay any tax and charities don't pay tax. So, you want to leave those assets to a charity. A great example of awesome planning.
Michael Mason: Folks, Voluntary Contribution Plan, I think we've nailed it, Tommy. I think we've hit all the highlights.
Don't use an amateur in this. You want to do it the right way. You want to open that Voluntary Contribution Plan right away. You want to fund it at the maximum level. This is the greatest, we believe greatest tax loophole in America that should be taken advantage of.
Folks, this is the Mason & Associates, Federal Employee Financial Planning Podcast. Wherever you get your podcast, you can find this. Also, leave us five stars in a review. We'd appreciate that.
We are taking new clients. Our clients typically are 55 or older with $700,000 or more in assets to invest through our firm. We’re Mason & Associates, masonllc.net. Look forward to the next episode, the Federal Employee Financial Planning Podcast.
The topics discussed on this podcast represent our best understanding of federal benefits and are for informational and educational purposes only, and should not be construed as investment, financial planning, or other professional advice.
We encourage you to consult with the office of personnel management and one or more professional advisors before taking any action based on the information presented.