Financial Planning: Backdoor Roth IRAs and Home Affordability | Smart Change: Personal Finance

There has been talk of late in Washington about the possibility that Congress could get rid of the so-called “backdoor” Roth IRA in the not-too-distant future. And rising home prices in the United States have made it more expensive to become a homeowner. In this foolish life video clip, recorded on November 3rd, Certified Financial Planners® Matt Frankel and Robert Brokamp share their views on these two topics.

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Robert Brokamp: I’m going to talk a little bit about the backdoor Roth, which is something we’ve talked about quite regularly here on the show. First, the Roth is particularly attractive today because we have tax rates that are at the lowest we’ve seen in decades, and tax rates are likely to rise in the future. In fact, they will definitely rise by the end of 2025, when the 2017 tax cuts will expire.

Plus, with burgeoning federal budgets, underfunded Social Security, underfunded Medicare, most people expect tax rates to go up. One way to protect your retirement from higher tax rates is a Roth. You can contribute to a Roth in several ways. First of all, if you have a Roth 401(k) at work — or a Roth 403(b), Roth TSP, if you’re a federal employee — you can always contribute to the Roth. There are no income limits on the Roth 401(k), 403(b), TSP. There to be income limits on the Roth IRA. If you earn a certain amount, you cannot contribute to the Roth IRA.

So there’s a trick called the Backdoor Roth IRA. You contribute to a non-deductible traditional IRA and then convert to a Roth. Now, maybe a month or two ago there was discussion about Congress eliminating the backdoor Roth. So there’s been a lot of talk about doing your backdoor Roth while you still can. Well, the latest version of Build Back Better, Bill of Plan, whatever they call it, has stripped that down. So it looks like the Roth back door is safe for now.

If you’re not sure about the income limits for the Roth IRA, not sure what the backdoor Roth is, I’m going to put an article in Slido by my colleague here, Matt Frankel, which he wrote recently that will explain the backdoor Roth for you. Meanwhile, while I do that, Matt, what do you have to tell the crowd?

Matt Frankel: I just wanted to talk about home ownership. I recently saw an article that said home ownership is at its lowest level of affordability since the financial crisis. That’s pretty bad. And it’s easy to see why they would say that. The median home price in the US has risen about 20% since early 2019. But there is also a downside: the mortgage interest rate is much lower than it was then.

So I want to put into perspective how much more expensive home ownership has become, and how much more it has become has not become so expensive, things like that. Just the headlines I saw today because we just got a glimpse of the average mortgage rate. The average mortgage rate today is about 3.24% on a 30-year fixed-rate mortgage. That’s down from 3.3% last week, it’s kind of coming back. A lot of that has to do with the dwindling demand from the busy and crazy summer home market we saw. But this has fallen sharply from before the COVID pandemic. At the beginning of 2019, the 30-year mortgage interest rate was about 4.4%. In mid-2019 it was still slightly above the 4% level.

What does that mean for home ownership? On a $300,000 mortgage, an interest rate of 4.4% as we saw at the beginning of 2019 and the average interest rate of 3.24% that we see today is a difference of about $200 on your monthly payment – on the same amount . That’s a 15.2% discount from what the same amount would have cost to borrow in early 2019 compared to now. As I mentioned, house prices have risen about 20% since then. But if you take the difference between the two, the average mortgage payment is only about 4% higher on a new existing home purchase.

That said, there are areas of home ownership that have become more expensive. That’s just talking about the principal-and-interest portion of your payment. Keep in mind that for the most part, real estate taxes are based on the value of your home. Same with homeowners insurance — [the premiums] are based on replacement costs. Not only that, but your down payment would be 20% more than for the exact same house and percentage. So home ownership has become expensive, yes. But lower mortgage rates have compensated for that. The whole point of this: If you want to be a homeowner and you’re a renter, don’t necessarily give up on the dream. Talk to a lender and see what’s out there, see what you can afford, and then move on.

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