Use the "Monarch Side Door" Please
- Constantine J Kitrinos, CPFA
- 1 day ago
- 9 min read
The Roth IRA Playbook: Conversions, Taxes, and the "Monarch Side Door"
It happens every single year. You sit down at the kitchen table or breakfast bar as we do at my house, and stare at the bottom line of your tax return. Bam, you realize just how much of your hard-earned wealth is being permanently siphoned off by Uncle Sam. Doesn't seem like using the term "wealth" for your take-home money is appropriate anymore. You know you need a tax-free fortress, whether for today or tomorrow. Then you have that aha moment: you need a Roth IRA, right?! But then you remember, you look at the IRS income limits, run the math, and feel like the door got slammed in your face. Understandably, you get frustrated, annoyed, and feel defeated. The only thing left to do is throw your hands up in the air. All you can think is "I make too much money. I'm locked out."
Let's look past the generic financial advice, strip away the confusion, and break down exactly how you can leverage Roth conversions, navigate the disastrous IRS traps, and use what we like to call the "Monarch Side Door." Yeah, I know you've heard of the "Backdoor" Roth and other names, but I like mine better. Not biased at all. 😂
The Art of the Conversion: Full vs. Partial
If you already have money sitting in a pre-tax Traditional IRA, you can move it to a Roth IRA through a process called a Roth conversion. On the surface, you immediately think, yes please, let's go! You take the money out of the taxable bucket, pay the income tax on it today, and move it to the tax-free bucket forever. That part sounds good, but there's a little more to the decision-making process than tax today versus tax later on.
You generally have two choices: a full conversion or a partial conversion.
A full conversion sounds great in theory—rip the band-aid off, pay the tax, and be done with it. I've had clients hell-bent on doing this in one swift action, come in and request that we just make it happen. We immediately pump the brakes and just have a convo about it. They understand conceptually that they'll have to cough up a good chunk of change now, but they'd rather be done with the tax and part ways with that money now so they can have more freedom later on. But if you have $500,000 sitting in a Traditional IRA, fully converting that in a single calendar year will artificially spike your income into the absolute highest tax stratosphere. Seeing a high percentage in that category will easily turn your smile to a frown. You'll be handing over a massive, unnecessary premium to the government, and who wants that?
That is exactly why we strategically execute partial conversions with careful precision.
By doing a partial conversion, we surgically move just enough money from your Traditional IRA to your Roth IRA to fill up your current tax bracket, without spilling over into the next, more expensive bracket. Giving less away gives you more firepower to make the most of your money. We repeat this process over several years. It allows you to systematically drain your taxable accounts at a controlled, known tax rate.
But before you log into your brokerage account and start moving money around, there is a massive trapdoor you need to know about, and if you're not careful, it's very easy to overlook. It can be an honest oversight without intention, but the IRS isn't so forgiving, and some moves like this can be irrevocable.
The Pro-Rata Rule: The Coffee and Cream Trap
This is where people get themselves into serious trouble, and fast. If you have multiple Traditional IRAs—maybe an old rollover from a previous employer, plus a personal IRA you opened years ago—the IRS doesn't look at them as separate accounts. I see this happen all the time, and people tend to lose track of their old 401k's and IRA's if they don't consolidate when they change jobs. To the IRS, you only have one gigantic Traditional IRA balance. So what, you think to yourself. If you try to make a non-deductible (after-tax) contribution to one IRA, and then attempt to convert only that after-tax money to a Roth to avoid paying taxes, the IRS will hit you with the Pro-Rata Rule.
Let me explain this using my favorite analogy because everything seems easier with an analogy: so here goes, the Coffee and Cream. Think of your pre-tax IRA money as dark black coffee. It's the money that hasn't been taxed one bit. You'll get a reduction in taxable income in the year you contribute, and you're loving life that year. Instant gratification! Think of your after-tax (non-deductible) money as heavy cream: sweet, frothy, and tasty as heck. If you pour that cream into the coffee, you now have a blended cup. If I ask you to pour just the cream back out into a new cup, you can't do it because it's blended with the coffee. Every drop you pour out will be a blend of coffee and cream.
The Pro-Rata rule works exactly the same way. The IRS calculates the ratio of your after-tax money to your total pre-tax IRA balance across all your accounts. If your total IRA balance is 90% pre-tax and 10% after-tax, then any conversion you do will be 90% taxable—even if you specifically tried to only pull from the after-tax account! I get this question a lot - what if I create a new IRA and put money into it as a non-deductible contribution and then just convert that money? That works, right? Not a chance, but it's a good thought. Believe me, I don't make the rules, and I'm not even sure that they actually make sense or that they were well thought out with purpose. The folks who are in charge of the "rules" don't always have any idea what they're doing and don't even comprehend the impact of their rules; sometimes good, sometimes bad.
This calculation can cause a massive, unexpected tax bill. It's not the kind of surprise you want to get in April after having your CPA prepare your tax return. If you don't think this will happen to you or anyone, think again. This is not a game you want to play alone. You must seek advice from your CPA or tax advisor before executing these maneuvers to ensure your tax math is flawless. We always encourage joint planning with your CPA to make the most of your financial plan and investment decisions. It should be a cohesive plan with your trusted professionals sitting at the same table.
High Earners and The "Monarch Side Door"
Now, let's talk about the high-income problem. Wait, you think, I make great money, what's the problem? For 2026, the IRS contribution limits for a Roth IRA are $7,500 (or $8,600 if you're 50 or older). That's up from last year, but not a ton of money in the grand scheme of things if you're earning a good buck. However, if you are married filing jointly and your household makes $252,000 or more, the IRS completely says I don't think so and locks you out of making a direct contribution. Single filers get completely phased out at $168,000.
Does that mean you're out of luck without any options? Absolutely not. It just means we need to use a different entrance to see the same show. In the industry, it's widely known as the Backdoor Roth, but around here, we like to call it the Monarch Side Door. I don't like to think of it like you're going all the way around the building and slipping through the back side; it's more of a side step to gain access to what you need.
Here is the out-of-the-box playbook:
The Non-Deductible Contribution: Because there are no income limits to simply putting money into a Traditional IRA, you make a non-deductible (after-tax) contribution of $7,500 to a Traditional IRA. You take no tax write-off for this. Don't scratch your head just yet; there's a benefit, I promise.
The "Seasoning" Phase: Instead of instantly flipping it to a Roth and potentially raising red flags with the IRS regarding the "step transaction" doctrine, we let the money sit and "season." For how long, you ask. Well, again, there's no definitive rule or law on this. We typically let it rest in the Traditional IRA for about 10 months or so, allowing it to age properly. It gives the investor time to decide if they want to convert it or maybe do nothing other than keep it where it is. We both know the next move.
The Side Door Conversion: Once the money has appropriately seasoned, we execute the conversion, moving those funds directly into your Roth IRA. Because the money was already after-tax, the conversion event itself is largely a non-taxable event (assuming you navigated the Pro-Rata rule correctly and didn't have massive gains during the seasoning period).
Boom. You just successfully bypassed the income limits and funded your tax-free fortress. Life is good when you know the rules. Feel free to use The Monarch Side Door and enter the world of a tax-free future.
The Final Score
Taxes are the single largest expense you will face in your lifetime; more than kids, more than healthcare, more than anything. If you aren't actively strategizing on how to minimize them, you are leaving your wealth entirely exposed. I'm NOT going to let that happen without a fight. I hate taxes just about as much as anyone, actually, maybe a little more! 😆
Whether it's executing a multi-year partial conversion strategy to drain your pre-tax accounts, dodging the Pro-Rata coffee-and-cream trap, or utilizing the Monarch Side Door to bypass income limits, the tools are sitting right there on the table or at my desk. But these aren't do-it-yourself strategies for most. Not that it can't be done by the person who takes the time to do the research, the work, and has the mental capacity to spend the time thinking through things carefully. But, like many things, people cut corners, watch a short video, and think they can do it all. For most, it's a coordinated effort and requires meticulous planning, flawless timing, and coordination with your tax professional. You're paying your tax planner and your financial advisor; why not get the most out of the services you're paying for?
The tax code is written to reward those who plan and punish those who don't. It really is that plain and simple. The tax code doesn't always make sense, but that's not our job. We read over the rules, interpret them, collaborate with field experts, and adapt our plans to maximize the benefits available based on your specific situation. Are you positioned to take advantage of these rules, or are you still stuck playing defense based on yesterday's knowledge? Let's audit your strategy and ensure your wealth plan is built to win because, well, winning is fun!
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