Unlock the secrets to long-term wealth, as we dive deep into the world of Roth IRAs. Imagine a retirement account where your investments grow tax-free, you can withdraw contributions without penalties, and your savings are protected from creditors. Sounds too good to be true? Tune in as I walk you through setting up a Roth IRA, whether you're making new contributions, rolling over an old employer Roth 401k, or converting a traditional IRA. We’ll also break down the tax implications of these conversions and show how paying taxes upfront can pave the way for significant tax-free growth in the future.
Unlock the secrets to long-term wealth, as we dive deep into the world of Roth IRAs. Imagine a retirement account where your investments grow tax-free, you can withdraw contributions without penalties, and your savings are protected from creditors. Sounds too good to be true? Tune in as I walk you through setting up a Roth IRA, whether you're making new contributions, rolling over an old employer Roth 401k, or converting a traditional IRA. We’ll also break down the tax implications of these conversions and show how paying taxes upfront can pave the way for significant tax-free growth in the future.
The Roth IRA is the number one place that you should be saving and building wealth for the long term.
Speaker 0:
I want to explain why and I'm going to get into all the details here, but let me just hit the three primary reasons.
Speaker 0:
First, tax-free growth when you're making money in a Roth IRA, you pay no tax as you're building the account and you pay no tax when you're pulling the money out. The second reason a Roth IRA is awesome. It is the best way to save money because you can pull money out that you put in at any time. If you put in $7,000 as a contribution and you need the money in a month, you can pull that $7,000 back out no penalty, no tax. That's different from other types of retirement accounts. And the third reason a Roth is cool is because Roth IRAs and retirement accounts in general are asset protected. You can file bankruptcy, you can have a lawsuit against you. They can't get the money in your Roth IRA. They get your regular brokerage account or other assets, but your retirement accounts are protected from creditors. Those are the three primary reasons Tax-free growth you can pull the money out, you put in at any time and it's asset protected.
Speaker 0:
I'm Matt Sorensen, wealth lawyer, ceo of Directed IRA. We have over $1.8 billion in retirement account assets. I'm going to break down how you set up a Roth IRA, how you start it, how you get the money in and then how you invest, grow it and pull the money out later. So we're going to go through the life cycle of having a Roth IRA. Let's start with setting up the account. Well, you're going to need a Roth IRA account. Here at Directed IRA, you can do it easily online. Most places, if you're using a broker dealer, you can set up the account online, but you got to get money into the account.
Speaker 0:
There's three different ways you can get money into a Roth IRA. The first way is you can make a new contribution. You can put 7,000 bucks in a Roth IRA. We're going to come back to that and how the rules work on that and a Roth IRA we're going to come back to that and how the rules work on that. The second thing is maybe you have an old employer Roth 401k. A lot of people have Roth 401ks. They've left that employer. A Roth 401k can get rolled into a Roth IRA. And the third category is you can convert existing traditional dollars in an old employer traditional 401k or in a traditional IRA maybe a broker-dealer IRA or your credit union IRA you can convert that traditional IRA to a Roth IRA and pay the tax.
Speaker 0:
Now, if you're converting from traditional dollars to Roth and let's say you have a $100,000 traditional IRA you want to convert to a Roth IRA, you can do that and the benefit to doing that is think about this if I have a $100,000 traditional IRA and I later grow that and turn it into a million dollar traditional IRA over the next 20, 30 years of investing that account, when I pull out that million dollars in retirement, I'm paying tax on the million dollars as I pull it out. That's really not a million dollars of wealth to me. That's really like $700,000 of wealth if I'm in a 30% tax bracket because I'm getting taxed on that money as it's coming out of my traditional IRA or traditional 401k. But if I have a million dollar Roth IRA, that million dollars is coming out in retirement totally tax-free. That is like a million dollars because I'm paying nothing to the state or federal government as I'm pulling money out of the Roth IRA later. That is why people will convert from a traditional IRA to a Roth IRA Now, if you have that $100,000 account and you want to convert it to a $100,000 Roth IRA account, you will pay tax on $100,000. The value of the account at the time of conversion is the tax you're going to pay, or I should say, is the taxable income you're going to have to pay. The value of the account when you convert from a traditional to Roth let's say it's a hundred thousand is what you take into your taxable income. So I'm going to take that a hundred grand into my taxable income. Let's again say I'm in a 30% tax bracket, federal and state combined, so that $100,000 is now on my tax return at a 30% rate. So I got to send $30,000 to the IRS. Now that sucks right now. Right, I don't love that. No one loves paying taxes now, but that $100,000 is going to grow and come out tax-free later in retirement. So that's why you see a lot of people converting over from traditional accounts to Roth, why the Roth IRA is the number one account that we have here at Directed IRA.
Speaker 0:
Now you could also do the old employer 401k rollover, as I said, to a Roth IRA, and this typically has to be an old employer 401k. If it's a 401k where you work at your current job. You're restricted from moving that out from a 401k to an IRA until you leave or you hit retirement plan age, which is usually 59 and a half or 55 for some plans. Now the first way I said you can get money in is a new contribution. If you're like Matt, I've got no money in IRAs 401ks period, I can't convert. I can't roll over an old employer 401k. I'm at zero. How do I use a Roth IRA? Well, like everyone else that started at zero with any retirement account, you've got to start contributing. You can put $7,000 a year into a Roth IRA. Now here's why I love the Roth IRA in particular, and this is one of the perks a lot of people don't think about.
Speaker 0:
When you put money into a Roth IRA, you can pull the money out whenever you want. So let's say I put 10 years of contributions into a Roth IRA of $7,000 for a total of 70 grand of contributions, and let's say now, 10 years later, that account is worth 200 grand. I have $130,000 of gains over time, which is totally reasonable to see over 10 years of investing window. I'm like I want to pull out that 70K. I need that. I'm starting a small business. I'm paying for my kids to go to college. Whatever expense you have, you can pull that 70K out whenever you want no tax, no penalty. The $130,000 of investment growth you got to wait till you're 59 and a half to pull that out, but the contributions and money you put in the Roth IRA you can take out at any time. It's like a supercharged savings account because you can have access to what you put in at any time but all the money grows and can be invested tax-free and comes out tax-free in retirement. There is no account that has that option besides the Roth IRA. That's why we love the Roth IRA because it's this supercharged savings tool that you have access to the money you put in and it grows and comes out tax-free.
Speaker 0:
Now some of you high-incomeers might be thinking but Matt, I love the Roth IRA but I can't do it. I make too much money. I max out my 401k at my day job. Well, you can still do what's called a backdoor Roth IRA. If you make more than 146,000 single or 230,000 married, you start phasing out where you actually can't make a regular $7,000 Roth IRA contribution every year. But you can do something called the backdoor Roth IRA where you make a non-deductible traditional contribution and convert it to Roth and now you've got $7,000 in a Roth IRA every year. This is what I do. The backdoor Roth IRA is a super popular strategy for sophisticated investors. Most smart financial advisors are using it. You can do it at directed IRA or any significant financial institution that understands this strategy. So look out for the backdoor Roth IRA. I've got a video here you can watch to learn more about the backdoor Roth IRA and how that specifically works. All right, I want to hit one other benefit of the Roth IRA, which is asset protection, and then we're going to get into how do you invest and grow the account and then also how do you access that money before retirement and once you hit 59 and a half. But let's talk about asset protection benefits of the Roth IRA.
Speaker 0:
Your IRAs are protected under state law from creditors being able to attack them and get at your retirement account assets Under law. Our government has basically said hey, we want to incentivize people to put money in their IRAs and 401ks and to do that, we're going to give them all these tax benefits, but also we're going to protect those accounts from creditors coming after them. So if you get in a lawsuit, you get in a car accident, you have a business issue, you default on a credit card or a loan and you get a judgment against you personally. That creditor cannot get into your 401k, your traditional IRA or your Roth IRA. Now there's the chart here with all the states, because the rules are a little different. We'll have the link in the description below.
Speaker 0:
Most states are going to say, hey, your Roth IRA is protected entirely. You got a million dollar account and you got a hundred thousand dollar judgment against you. We're not going to let that creditor touch your million dollar account. You can file bankruptcy and still keep that million dollar Roth IRA. Now there are some states where there's some caveats, california, of course, being one shocker there I know. In California they say we're not going to provide unlimited creditor protection on your IRA, but if a creditor is chasing you down and trying to get your assets, we will let them have access to your IRA unless you need that money in the IRA to provide for yourself or your dependents. So you have to show that, hey, I need these assets in my IRA to take care of myself or my dependents in retirement. Now, if you can prove that, then you get to keep the IRA and the creditors at bay. Most states, again, are not going to have that requirement.
Speaker 0:
Your retirement account is protected from creditors. Now I'll just make a note on this. 401ks are a little different. They're protected under ERISA and a federal law, but IRA creditor protection is at the state level and that's why you got to know your specific state. And again, the good news is, most of the 50 states have unlimited creditor protection for your Roth IRA.
Speaker 0:
All right, now let's talk about investing and growing the account. Now, remember, retirement accounts are something we're investing for the long haul. Now the Roth IRA has the unique ability where I can pull the money out that I put in the contributions whenever I need to or whenever I want, but the earnings and growth we're trying to grow this. So we have a large retirement account when we reach 59 and a half. Now, the nice thing about this is time is one of the best things on your side, as you're building an investment portfolio and for a retirement account, I want to use the rule of 72 to show you how your account can grow over time, based on the rate of return you're getting. Now, the rule of 72 tells us how long it takes for your account to double in size. So, for example, if I had a hundred thousand dollar account, how long is it going to take for that account to be $200,000, just from the growth of my investments? Well, it's going to depend on your rate of return. Now the rule of 72 says if I take 72 and I divide it by the rate of return let's say it's 8% which you can get from the S&P 500 fund. That's going to tell me how long it takes for that account to double over time. Well, 72 divided by 8 is 9. It's going to take me 9 years for that account to double. So in nine years, without putting any more money in, that $100,000 becomes $200,000. And then nine years later, that $200,000 becomes $400,000. And then nine years later that $400,000 becomes $800,000. So you can see over time how your money can grow. Now this is at an 8% rate of return.
Speaker 0:
Now let's say that you're self-directing. Maybe you're investing in real estate or other assets where you can get a better rate of return than 8% in the stock market. And this is what our clients are doing every day at Directed IRA. They're investing in alternative assets, whether it's real estate or small business or private companies. They're lending money on notes against real estate, which is what I'm doing right now. Right now, I'm lending my money at 12% interest and two points and I lend the money out twice a year. It's on six-month notes to other real estate investors secured on the property. This is something you can do with a Roth IRA or any type of retirement account. It's called a self-directed IRA. Watch this video here to learn more about how a self-directed IRA works.
Speaker 0:
But I just want to show you, regardless of what you're investing in, if you have a better rate of return, how your money is going to grow and how significant that is over time. All right, now let's take a 16% rate of return and use the rule of 72. That says, at a 16% rate of return, when does my money double and how's it going to grow over the longterm? So if we take 72 divided by 16, that's four and a half percent. Now it takes four and a half years for my a hundred grand to be 200 grand. Another four and a half years for my $100,000 to be $200,000. Another four and a half years for my $200,000 to be $400,000, and so on. So now, if I look at four and a half years here, this is over 18 years, my $100,000 turns into $1.6 million. So now you can see, by doubling the rate of return at 16, my money doubles at four and a half years and in 18 years I have $1.6 million. If I'm getting an 8% rate of return, it's going to take me 27 years to have half of that $800,000. This is the power of the rule of 72 and getting a better rate of return, how it's going to supercharge your retirement for the future.
Speaker 0:
So we always want to focus on getting a great rate of return. Now, that's sometimes easier said than done, but I just want everybody to know that is your focus. You don't want the money sitting in a CD or a bank account getting 1% or 2% or maybe 5% interest. You want to be actively involved, focused on your money, learning how to grow and build a retirement account that you're looking forward to, and that takes getting a great rate of return. Otherwise, you can just keep putting money in, put your $7,000 a year in, and keep working harder and harder and putting more and more money in, and that's fine. I want you to max out your contributions, but we also want your money working hard for you as well, not just you working hard for yourself.
Speaker 0:
Okay, let's say we've built this Roth IRA over time and we're in our forties or f 50s. We got enough money in this Roth IRA. We're not a retirement plan age yet of 59 and a half and we want to start taking money out of this Roth IRA. Well, you can do that. Remember, you can take out any of your contributions without tax or penalty at any time. It's just the earnings and growth that you're going to have to wait later on to take out. Now, once you do hit 59 and a half, though, you can pull the money out of your Roth IRA whenever you want the contributions or the earnings and growth.
Speaker 0:
Now, there's a little caveat to that, something called the five year rule that says you can take money out of your Roth IRA no penalty, no tax, once you hit 59 and a half, so long as you've had a Roth IRA for five years. So someone that's 57, let's say, and sets up a brand new Roth IRA and they've never had one before and they start putting money in it. They can't start pulling money out when they're 59 and a half. They're going to have to wait until they're 62, because they've got the five-year rule, plus waiting until they're 59 and a half to get the money out tax and penalty free. So just remember there is a five-year rule that does say you have to wait at least five years after having your first Roth IRA. But once you've had one Roth IRA for five years, all Roth IRAs count. It doesn't matter, you can have a hundred Roth IRAs. As long as you've had one for five years, you've met the five-year rule. Now for most people this isn't an issue, but maybe someone in their fs or 60s is looking at this and wondering how to get access to it. Just know you're going to have to have it for five years.
Speaker 0:
Now I want to go back to what I said earlier about a traditional IRA Roth. There I want to pose a question here for everyone Would you rather have a million dollar traditional IRA or an 800,000 Roth IRA? Now, for me, I'd rather have an $800,000 Roth IRA because when I pull 800 grand out of that in retirement, I pay zero tax on the 800,000. That is really 800,000 to me. But if I have a million dollar traditional IRA, as I pull that money out and again, let's say I'm in a 30% tax bracket I'm only getting $700,000. The IRS in the States getting the other 300. So that million dollars in a traditional IRA or even traditional 401k is not as valuable as the money sitting in a Roth IRA. So this is the benefit of the Roth IRA the money's coming out totally tax-free.
Speaker 0:
Now, if you like tax-free growth, asset protection and pulling the money out that you put into your retirement account whenever you want, you should have a Roth IRA. It's the reason it is the largest account at Directed IRA. We love Roth IRAs here. Our clients love them. You should have a Roth IRA. And remember, if you're high income and someone's told you you can't have a Roth IRA, that's not true. You just need to do the backdoor Roth IRA. Now.
Speaker 0:
Roth IRAs are amazing, not just because of those benefits of tax-free growth, having access to the money and asset protection, but you can self-direct it. You can invest your Roth IRA into real estate, into small business, into notes, private companies, private funds, startups, crypto. These are all assets that your Roth IRA can own. If you're like man, I don't love the stock market, I don't love mutual funds, so I've never opened up a retirement account. Guys, that's not the only thing your retirement account can invest in.
Speaker 0:
When you have a broker-dealer IRA, that's the option for your Roth IRA. You have an IRA at a broker-dealer. You can buy broker-dealer products like stocks, bonds and mutual funds. But that is not the only thing Roth IRAs can invest in. Our clients at Directed IRA have self-directed Roth IRAs and they can invest in any asset allowed by law, which includes real estate, private companies, crypto, small businesses, private funds. These are all assets available to use and be invested in from your Roth IRA. Please get over to Directed IRA to learn more. We look forward to being of service with you and we'll see you next time.