Jonathan Clements's Blog, page 7
October 17, 2025
Backdoor Roth Explained
For 2025, if you are filing your taxes as single and make less than $150,000 ($236,000 if married filing jointly) of modified adjusted gross income, you can contribute a maximum amount of $7,000.
But if you make $165,000 (single) or $246,000 (married jointly), you are ineligible to contribute to a Roth IRA directly. Luckily, there is a strategy that allows you to contribute indirectly (or the “backdoor” way).
Backdoor Roth
Backdoor Roth is a strategy that allows high-income earners to contribute to a Roth IRA through a conversion process. The idea is simple: instead of contributing to a Roth IRA, you contribute to a Traditional IRA first and then convert the contributed amount to a Roth IRA.
Before I dive into the strategy, let me give a bit of background on how this strategy came to exist.
Prior to January 1, 2010, you could only convert from a Traditional IRA to a Roth IRA if your adjusted gross income was $100,000 or less. Luckily, after 2010 this income condition was eliminated, which is how the Backdoor Roth came to exist indirectly.
Here is a step-by-step guide:
1. Eliminate traditional IRAs balances
The first step is to roll over all your Traditional IRA, Rollover IRA, Traditional SEP, and Traditional SIMPLE IRAs into 401(k) or 403(b) plans before December 31, 2025. This is because if these accounts don’t have a $0 balance, you will be subject to the pro-rata rule on your conversion.
If you are a solo business owner, you can also roll over these accounts into a Solo 401(k). If you don’t have 401(k) or 403(b) plans available to roll over into, there isn’t much you can do and you should generally avoid this strategy. You could potentially explore a Solo 401(k) for your side hustle, which may allow you to roll over these balances into it.
If you are doing the Backdoor Roth process but get laid off during the year, do not roll over the 401(k) or 403(b) balances into an IRA.
2. Make a non-deductinle contribution to a Traditional IRA
The next step is to contribute to a Traditional IRA. This contribution will be non-deductible. If you don’t have a Traditional IRA account, open one. Fund it with however much you want to contribute, up to the $7,000 limit for 2025.
Note: You or your spouse need to have earned income, such as wages or self-employment income, to contribute (same rule as a direct Roth IRA contribution), even if you are using the Backdoor Roth process.
3. Wait once the money settles
It usually takes a few days for your money to clear the bank and settle in your Traditional IRA. It’s generally recommended not to buy any stocks or ETFs within the account itself. That step should be done after the conversion.
4. Convert to a Roth IRA
Now, you will need to have a Roth IRA account to which you will convert your contribution. It will be easier if both accounts (Roth and Traditional) are with the same broker (e.g. Vanguard, Fidelity and so on), as this will simplify the conversion process.
You can typically complete the conversion online, or you can call your broker and ask them to process the conversion.
Here’s an example of the online conversion:
As part of the process, you will be asked if you want to have any taxes withheld. Make sure to elect not to have any state or local taxes withheld from the conversion.
5. Invest within the Roth IRA
Now that the money is within your Roth IRA, don’t forget to invest it.
6. Notes
It’s generally best to complete both the contribution and conversion within the same calendar year. For example, say you contribute $7,000 for 2025 on 10/1/2025. The money settles on 10/3/2025, and you convert on 10/4/2025.
This is a “clean” conversion and will be easily reported on your tax return (more on this in a bit).
However, say you convert on 1/1/2026. You will actually need two years of tax return filings to correctly report your Backdoor Roth process: 2025 will show the contribution, and 2026 will show the conversion. So it’s best to complete both steps within the same year.
Also, it’s best to convert as soon as the money has settled. This is because your original contribution will likely be placed in a money market fund yielding around 4%, which may generate dividends that are taxable. If you do receive any dividends (say, $2 of income at the end of the month), it’s best to convert them along with your contribution.
7. Tax time
During tax time, you will receive quite a bit of paperwork (Form 1099-R, Form 5498). You need to make sure you enter it correctly in the tax software, or, if you are using a CPA, double-check their work. If you are using a CPA, make sure to tell them that you did a Backdoor Roth for the year.
With your 1040 tax return, you will need to file Form 8606.
Specifically, you will need Parts I and II. Part I will show that you’ve made a non-deductible contribution, and Part II will show your conversion to Roth. Line 18 of Form 8606 should be $0 or just a few dollars of earnings (if you converted more than the original contribution).
If you’ve done everything correctly (this is how you can double-check your CPA), line 4b of Form 1040 will be $0 or a few dollars (if you had earnings).
I hope you learned something new today.
Bogdan Sheremeta is a licensed CPA based in Illinois with experience at Deloitte and a Fortune 200 multinational.The post Backdoor Roth Explained appeared first on HumbleDollar.
Easy DAF (e.g. Daffy.org) for Donation of Appreciated Stocks
Hello, Humble Dollar community!! This is my first post, please excuse me in advance if not as articulate as so many of you who contribute to this site.
I am wondering if any of you have recommendations or thoughts on simple DAF platforms for contributions to non-profit organizations.
I have some highly appreciated stock (APPL at ~$250/share with my basis of about $15/share) and use this for most of my larger charitable gifts. I am a devoted Vanguard customer and make direct donations to non-profits thru Vanguard but tend to find the process a bit tedious and tracking of donations nearly impossible. Ugh, and tracking down DTC number, verification that stocks are transferred and notification to the non-profits has caused me many headaches over the years. I also make many smaller donations ($100 or less) throughout the year and using my AAPL shares is not ideal. Yes, this is a bit of a champagne problem and feel fortunate I'm able generously support non-profits.
I am planning to set-up a DAF fund for my smaller donations, probably $2-3k or less a year, and have been researching Daffy.org which seems like a great platform for transfer of AAPL stock (and some crypto). A DAFFY.org account is only $3/month if transferred securities stay under $25k. I can transfer my AAPL and they liquidate and have options for me to invest and then make cash donations to any non-profit. I can also set-up a charitable fundraising campaign for a non-profit, perhaps some of you would like to support my primary charity which plants trees in the Denver area for a health, resilient future :)!! Haha, just a small pitch to help support the environment.
There are a few other DAF platforms with low annual fees and minimum account balance that seem like good options. Of course, I could open a Vanguard DAF but this requires a $25k minimum transfer to open and donations of $500+/gift.
Any other recommendations? Daffy.org is only ~4 years old, Charityvest.org look like another simple platform with a $100 minimum annual fee. Thanks!!
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Calling All HD Writers
Many people mentioned that they're unsure what to write about, so here are a few ideas to get you started:
> What I wish I knew about money before turning X
> How my relationship with money changed after X happened
> The emotional side of retiring, and learning to spend the money I saved
> Downsizing
> Outliving your savings (and how I dealt with it)
> The hardest part about going from earning a paycheck to living off investments
> Helping my adult kids financially (and where to draw the line)
> Having inheritance conversations with my kids or grandkids
> Teaching my grandchildren or children about money, lessons I wish I’d learned sooner
> Finding purpose after retirement (because it’s not just about the money)
> The best and worst financial decisions I made in my X decade
> What surprised me most about healthcare costs
> Why I hired a financial planner (and what I wish I’d done differently)
> How inflation changed my retirement plan
While Jonathan can’t provide his amazing feedback anymore, HD can still host your learnings and continue teaching the next generation of readers. That’s what he would want us to do.
Logistics:
> Shorter posts (under 1,000 words) can be shared right here on the forum.
> Longer, in-depth pieces can be turned into articles and featured in the newsletter.
Write what you know. Your experiences, and the lessons behind them, matter more than perfect writing. If you’re not ready yet, that’s okay. Take the time you need, HD isn’t going anywhere.
Thank you,
Bogdan
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ACA Subsidies for Early Retirees
One of the greatest benefits I received from my last employer was the gift of health care insurance in my retirement years. At the time I was hired (almost 28 years ago), they offered an early retiree benefit: work for twenty years and, if you chose to retire after you turn 55, you could continue to receive coverage as if you were an active employee. Needless to say, it's a benefit they no longer offer.
I retired on my 55th birthday, after nearly 24 years of employment. I have to pay a portion of my health insurance premium and it's been steadily increasing. Next year my share of the premium will be $409/month versus the $240/month I'm paying this year. The full cost of the insurance (according to my former employers website) is $ 1223 per month.
I assumed my premiums would go up over the years although even I'm surprised by the magnitude of this year's increase. But it was the chance I took retiring at such a young age.
This morning I found this article on CNBC: https://www.cnbc.com/2025/10/17/aca-e...
It documents a couple who both retired early, ie. before they became eligible for Medicare. They estimate they'll earn $127,000 in pension income in 2026 and are upset because they may not get their 'enhanced' ACA healthcare plan subsidies. They currently pay $442/month (total) for their ACA care insurance plan that covers both of them. The 'enhanced' subsidies were introduced during the pandemic to allow more people to afford to enroll in the ACA plans. Based on their income, they wouldn't have been eligible to receive subsidies prior to the pandemic. Without the 'enhanced' benefits, their ACA premium will jump to $1700/month for the two of them.
It makes me wonder how many people jumped on the 'early retirement' boat between 2021 and now assuming that the 'enhanced' ACA premiums would be in place forever. $1700/month in premiums for two people isn't unusual--and a bit of a bargain depending on the coverage they have. If I were covering my husband on my 'early retiree benefit' plan, we'd be paying nearly $1100/month for coverage (with my former employer picking up an additional $1350/month). And our income is nowhere close to the $127,000 a year the couple in this story have.
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Digital Lockout: A Cautionary Tale
I recently flew to Spain to meet a friend who was coming from London. We enjoyed a few lovely days together until disaster struck. After spending an hour at the pool, my friend went to check his phone for the time—only to realize he'd forgotten to take his phone out of his swimming shorts pocket. By then, it was too late: the phone had slipped out and been sitting at the bottom of the pool the entire time.
Attempts to revive the device failed, so we drove to the nearest phone store to purchase a replacement. That's when the problems compounded. Although his SIM card worked in the new phone, he couldn't validate the verification emails from his cloud backup services—there was no way to prove his identity without access to his accounts.
The result? He was stuck in Spain with no access to his cash(all digital), return flight boarding documents, or phone contacts. As a self-employed contractor in the middle of signing up for a new contract, the potential loss of income and reputation couldn't have been worse.
I'd never really considered this digital lockout scenario before, but watching my friend's increasing agitation and frustration as he unsuccessfully tried to access his much-needed details brought it powerfully home. Thankfully, after a further day of frustration, a friend of mine had the phone number of one of his friends. After a whole lot of upheaval and further phone calls, a key holder gained access to his home laptop and could confirm the validation emails. In total: three days of worry and disruption…and three days of all drinks and food on me.
So what could my friend have done to avoid this nightmare? Particularly when we're traveling and perhaps already out of our comfort zone. The solution, to my mind, isn't abandoning security measures, but building in redundancy before disaster strikes.
Keep a note in your wallet with critical phone numbers and flight details, old-fashioned perhaps, but paper doesn't need validation emails. Carry a physical card for payments, screenshot your boarding passes and important documents, then email them to yourself for browser access. And consider giving a trusted contact back home access to essential information they could retrieve in an emergency.
The irony is that modern security protects us brilliantly from hackers but can lock us out just as effectively when things go wrong. I guess the question isn't whether your password is strong enough—it's whether you can prove you're you when everything that proves it is under water.
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October 16, 2025
Drinking on the Job
I’m blaming Nick for this post, which has nothing to do with retirement. Still, I thought you may enjoy hearing about the drinking culture in the beer business, in the 70s.
My first job in the beverage business was as a driver-salesman for Pepsi. After several years I decided to pursue a job selling beer. It was 1977, I was 24 when I applied for a job and was called for an interview at the beer distributor. I arrived for the interview after finishing my Pepsi route, still in my uniform.
I was greeted at the front desk by the operations manager. Once inside his office he explained that the warehouse foreman was retiring, and that a keg of beer had been tapped, and asked if I’d like a glass. Sure, I said, sounds great. It was the first of three beers consumed during the interview. I was hired on the spot.
The first day on the job, I was sent to work on the breaker pile. That’s where we re-packaged beer that came from broken mother cartons. Soon after I started that process, my new supervisor, Larry, approached me. “Dan, we have some errands to run, and I want to see how you handle the truck”.
Off we went. Soon it was time for lunch, and Larry asked me where I’d like to eat. Keep in mind that the prior week I was selling soft drinks. I said “well Larry there’s a McDonald's over there, and a Burger King down the street”.
Larry cut me off. “Dan, listen, that truck we're driving is a huge rolling billboard for Stroh's beer, our customers don’t want to see it sitting at a fast food restaurant”.
So off we went to Shawn's Back Door, a fine Irish style pub I might add. One sandwich, and five beers later, I assured Larry that I was fine to drive, and we returned to the warehouse.
Our union contract had language regarding screw ups that could get you fired. One of those things was being intoxicated while on duty. That was pretty vague language, and no one that I knew of had ever lost their job for drinking too much.
Eventually the company toughened up the rules. The clarified policy stated that a driver could have a beer at lunch, and another at his final stop. We used to joke that we’d save up all ten beers for our last stop on Friday. Can you imagine a policy like that governing today’s workplace?
Then, while in contract negotiations in 1988, a copy of that policy ended up on the table between “us” and “them”. Neither the company’s attorney nor the union's staff rep had been aware of the language, and although those two guys hated each other, their eyes met (not in a romantic way) in a rare moment of agreement. The next day, a new company policy banning all drinking on the job went into effect.
Oh, oh, oh, here comes the tie-in to retirement planning. 1988 was also the year that our 401K was negotiated and implemented.
TahDah
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351 Exchange – Tax-Free Transfer of Individual Stocks to an ETF
In an effort to simplify and consolidate my portfolio, I recently completed what’s known as a Section 351 exchange in a taxable account. This provision of the Internal Revenue Code lets investors transfer assets—such as stocks and securities—to a corporation without recognizing a taxable gain or loss, provided certain conditions are met.
With help from my financial consultant, I exchanged a portfolio of individual stocks in a separately managed account (SMA), held since 2020, for shares in a new exchange-traded fund (ETF). Because the transaction qualified under Section 351, it was tax-free, and my original cost basis carried over to the ETF.
The SMA portfolio held global growth equities, with both long- and short-term gains and losses. The new ETF—a focused growth fund—owns many of the same companies. In fact, the SMA’s asset manager launched this ETF, offering SMA clients the opportunity to contribute their holdings during its initial seeding via the 351 exchange. I could have included other stocks or ETFs I held elsewhere, but I limited the exchange to the SMA positions.
Since opening the SMA, I’ve tracked every purchase, sale, and dividend in Quicken (dividends were not reinvested). I also managed tax-loss harvesting, instructing the manager to temporarily replace any sold stock with an index fund for 30 days to avoid the wash-sale rule. Keeping the SMA synchronized in Quicken took time and discipline, but it provided useful insight into performance and taxes.
There’s an after-tax advantage to ETFs compared with SMAs. I was provided the following example: assuming an 8% annual return, 20% turnover, and less than 1% in dividends, the ETF structure can deliver roughly a 1-percentage-point annual savings after accounting for fees and taxes. Before the exchange, I harvested stock lots with losses to offset this year’s SMA capital gains.
The exchange itself was efficient—only three business days from the removal of the SMA stocks to receipt of the ETF shares. The brokerage provided detailed tax-lot information, including share counts, cost basis, and unrealized gains and losses. Although Quicken doesn’t have a one-click “351 exchange” transaction, it can be recorded accurately by treating it as a non-taxable security swap, ensuring the cost basis carries over properly. (I followed a process laid out by ChatGPT.)
Investors aren’t locked into the ETF. Once received, ETF shares can be sold, donated, or even used in another 351 exchange. Several new ETFs are now being launched through this mechanism, accepting stocks and other securities from investors across multiple custodians. These funds can offer an efficient way to diversify or rebalance portfolios—say, shifting from concentrated technology holdings to value, international, or fixed-income assets—all while deferring taxes.
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Healthcare Insurance Alternatives to Covered California Marketplace
We are a couple who retired early (early 60s) and like many are facing a big jump in our Healthcare costs (California residents). Has anyone here looked at alternatives to the marketplace, such as insurance brokers, for Healthcare? Any recommendation or insight would be welcome. Also, I searched the articles and couldn't find anything about this. Thank you.
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Drinking and finances
I just read a wonderful article about someone who quit drinking at the age of 70.
https://www.wsj.com/health/wellness/i...
I have been reading more and more articles about how dangerous even moderate drinking is and I have been considering quitting completely.
I wanted to know how readers of HD handle drinking and if it has affected their life and finances. I look forward to your comments.
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Perspective from a grateful recipient of outpatient economic care
Growing up, we never wanted anything but our expenditures were also not extravagant. My parents purchased new Chevy Suburbans, and then drove them for ten years or 200,000 miles, whichever came first. We rarely ate out (and the options in my town of 2,000 people were limited) because Dad said Mom could make food as good as any restaurant. When we traveled, we were encouraged to order off the Dollar Menu. I remember Dad’s excitement when he discovered Little Caesar’s five dollar pizza. Now our suburban of seven people could be fed for a mere ten or fifteen dollars! It quickly surpassed McDonald’s as our travel restaurant of choice.
My parents tithed faithfully and supported multiple missionary families, but that seemed par for the course at our church. We hung out with teachers, farmhands, and accountants; my parents didn’t go to the parties the “rich farmers” went to. When I went to college, I was very happy to get my grandparent’s five-year-old 2002 Camry. A classmate whose family had money got a Hummer.
When my dad died in a twin engine plane crash the year after I graduated from college, it became clear that between his retirement accounts, share in the family ranch, and life insurance policies, my mother was a wealthy woman.
The book The Millionaire Next Door has a chapter on “economic outpatient care.” The author warns against it. Well, my parents, particularly my mom, have given me and my siblings a lot of it.
My undergrad, dietetic internship, and medical school were paid through a combination of college savings plans. (Scholarships paid for college tuition and two years of medical school.) One of my brothers followed his dad into the Air Force, and his college savings plan ended up contributing to his three sisters’ educations.
My first car was a gift from my parents. Mom contributed $15k to my second car when my beloved Camry gave up the ghost in 2023.
Our house was bought in cash by Mom, and my husband and I are in the process of paying her back. We have saved substantially on interest rates and all the additional fees that go into a traditional mortgage.
Last year Mom gave us children ten thousand dollars, which we used to cut down some perilously tall and dying trees in our backyard and to assist with the construction of a workshop for my husband’s business.
Mom is planning on gifting us more money this year, the max allowed by the government: $19.5k each to children and spouses, so $39k total for my husband and I. She asked if we’d prefer to take the money off our house debt, but we told her we’d prefer to use it for replacing our windows and possibly toward adopting a child.
Mom frequently assists with purchasing airline tickets when we are visiting her. When we visited my sister in Uganda, she paid for us to have a night in a nice hotel.
It’s impossible to know all the ways this financial assistance has impacted me, but some ways are clear. I know I’ve had substantially less (read: zero) stress about student loans. I was able to look for a job for three months after completing my dietetic internship without being concerned about making ends meet. Similarly, I didn’t have to worry about taking on more debt when I made the decision to apply to medical school. When my car broke down, we got a $23k lightly used car instead of a $12k car. We purchased a house several years sooner than we would have otherwise. Our neighbors rest a little easier with the trees out of the way, my husband’s workshop is going to be finished sooner than our earlier financial timeline predicted, and we’re probably getting windows this year instead of next year. I can only think of ways this money has made my life better. However, I also know there is satisfaction from doing things the hard way, and the financial assistance has kept me from experiencing a lot of that.
Currently, I max out my two work retirement accounts and we’re contributing to a taxable account to save 20% of our pre-tax income for retirement. We tithe 10% to our local church and have designated 1% of our budget for spontaneous giving. We use a budgeting app called YNAB to keep us on track with our financial goals.
From my standpoint, I don’t think I’ve been spoiled by my parents’ gifts, and neither have my siblings. I believe their lessons in living frugally, working hard and giving generously to others have played a large part in setting my siblings and I on the right path. My mom’s transparency on financial matters has also been helpful. I do feel extraordinarily fortunate and grateful for their generosity, as well as responsible for managing my finances wisely.
Although I’m still early in my career and financial journey, I’ve been happy to find websites like the Humble Dollar. I’ve been interested to read the articles about giving money to children and wanted to be able to contribute my perspective as a child who has been given much.
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