The episode discusses the basics of a Roth IRA and outlines the five ways to contribute to a Roth account, including personal contributions, spousal contributions, backdoor Roth contributions, mega backdoor Roth contributions, and strategic timely Roth conversions.
The episode discusses the basics of a Roth IRA and outlines the five ways to contribute to a Roth account, including personal contributions, spousal contributions, backdoor Roth contributions, mega backdoor Roth contributions, and strategic timely Roth conversions.
There are five ways to contribute to a Roth account. Do you know them all?
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And welcome to the 23rd episode of the retire early retire now podcast. I'm your host hunter Kelly. I released these podcasts episode every Tuesday morning. So go ahead and subscribe. So you can be notified when those episodes come out. This podcast aims to educate you on how to maximize and optimize your financial situation so that you can retire early or retire. Now. And you're going to want to subscribe because in the next few weeks we have some great guests coming on to the podcast. I'm excited to talk about taxes. college preps for your children. talk about real estate. So the lending process and then buying the house as well. So we'll have a CPA, a college prep coach mortgage broker in a realtor. So. Next few weeks are going to be exciting, filled with some great content to hopefully help you maximize your situation. and if you have any questions or maybe want to see some, some particular content, go ahead and leave a comment or reach me on Instagram at Palm valley WM. And We'll certainly cover those topics as well, but if you're liking what you hear, go ahead and leave a five star review on that favorite podcasting app.
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Let's start today's episode with just talking about the basics of what a Roth IRA is. I've mentioned it in a few other episodes, so I won't go in too much detail. check out those previous episodes. I think I did an episode called Roth IRA three tips and mistake. you can go ahead and check that episode out and it gets into more details of what a Roth IRA is, but essentially you're going to put that money into that Roth account post-tax is going to grow tax deferred. And then when you're ready to take it out for retirement is going to be tax-free. And remember if you have not contributed for your Roth IRA in 2023, you can go ahead and contribute. Uh, up until April 15th, you can contribute up to$6,500. If you're over the age of 50, you can have a thousand dollar catch-up. So 7,500 and then the IRS has index for inflation. So this upcoming year, 2024. You can contribute up to$7,000 or$8,000 for that. Catch-up. So just think about that as you're going through this podcast, all, should I contribute for 20, 23? Did I already contribute? just go ahead and think about that. And so now that we have an idea of what a Roth IRA is, when should we contribute? let's talk about the five ways that we can get that money into a Roth IRA or a Roth account. And that we'll talk about here in just a second. So the first way would be to contribute for yourself. So open up a Roth IRA. maybe have a 401k, that has a Roth option and you go ahead and contribute. Now the cool thing about the Roth 401k is that there is no. income restrictions. So where they Roth IRA. If you're over a certain income. you can not contribute normally. And we'll talk about that's, another sneaky way that you can get money in there that we've talked about before, but just running the meal. Let's contribute to the Roth IRA or 401k. So there's two ways that you can get money into Roth. The second way would be your spousal contribution. So whether your spouse works or not, as long as there's enough joint income, To contribute to both of the Roth IRAs. And go ahead and contribute to it or consider contributing to it because you can write. And so a lot of people miss that, they're like, oh, my sauce doesn't work. I can't put into the Roth IRA. That is incorrect. As long as you have enough income to cover both of those contributions. Then you can put into a Roth IRA, right? Number three. Would be to backdoor the Roth. So I mentioned a few seconds ago, if you. make too much money per the IRS guidelines you can sometimes do. What's called a backdoor Roth contribution. So that would be making a non-deductible contribution to your IRA. Then converting that to a Roth IRA. And so there's some nuance to that. If you have IRAs, then you could be subject to prorata rule. so again, refer back to my Roth, IRA, three tips and a mistake. We talk about this mistake. So if you have IRA money, you may want to consider getting that into a 401k, your employer plan. Or, you may want to consider not doing the backdoor Roth because you will owe some taxes on that money in that year. That's in your IRA. Plus you'll have post-tax and pre-tax, so it gets pretty complicated from a tax standpoint. But doing the backdoor Roth is a way to get money into your Roth IRA. So again, it would be a non-deductible contribution into your IRA and then converting that money to a Roth IRA. So the IRS says if you do it that way, and there's no other IRA money, whether it's with St custodian or nine. Completely different custodian. then you would be able to. Contribute that money in that particular fashion.
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The fourth way to contribute to a Roth IRA is doing what's called a nega backdoor Roth. So we've already talked about just normal. Roth IRA, backdoor contribution. And the mega backdoor Roth works pretty similar, but it is employer plan based. And so a lot of people don't realize that the 22 500 or now 23,000, that you can put in your 401k. a lot of times employers will allow you to put up to. Another$46,000. So per the IRS guidelines, you can put up to$66,000 into, and I think for 20, 24, 60$9,000 into an employer plan. So a lot of times a portion that I large portion of that is your contribution. And then a portion of that would be your match. Right? if the employer plan allows it, you could go ahead and say, oh, I have, lots of income. And if I only can. Art. If I am only able to put in the 23,000, the IRS says that's only a small portion. Of what I need to save in order to reach my retirement goals. Right. If you reach out to your plan administrator or your HR contact, they will be able to tell you, oh, you can actually put a non-deductible contribution into this. 401k account. And if you can do that, then you're allowed to, again, put up to$46,000 more. Minus any employer match and you would be able to do that on a nondeductible basis. And then if you can do either a in-service rollover or do a conversion with inside the plan, it works just like the backdoor Roth. IRA contribution. So you would be able to convert that to Roth before that money starts growing. And then you would have that money into Roth. So sometimes. You're not able to do that. So you have to wait. And do that conversion later, but let's say, this year you call, you ask your HR director. Hey, can I put on. After tax or post-tax dollars into my 401k. And they say, yes, And then you go ahead and you do the calculation and you get, let's say you have no match for sake of easy numbers. You put$46,000 nondeductible contributions, and then you want to make sure that you can either do what's called an inservice rollover or withdrawal, and you would roll that money over to a new IRA. And then you convert right away or the plan may allow for you to convert. two Roth 401k as well. So you would just have to call your HR director. This is something that a financial advisor can help with too, because they know the terminology. And then if this is a feature of the plan, the plan administrator or the HR contact will have. knowledge about it as well. so a financial advisor can really help in this sense if you're unsure of how that works, but again, you're just making a larger contribution. That you've already paid taxes on, and then you're converting it to the Roth portion of your 401k, or essentially get it into your Roth IRA. So now that you have that large sum of money into your. Roth IRA. And the reason why they call it the mega backdoor Roth is because it is a much larger contribution than you would normally have, in a IRA contribution. Right? And so the fifth and the final way is I guess, technically per IRS, Guidelines is not necessarily your contribution, but as you get ready to retire, or maybe you take some time off of work and you have an extended period of time. 2 3, 4, 5, 10 years of maybe lower income. The other way to contribute to your Roth IRA is just start to do. Timely Roth conversions. So that you can get more of that pre-tax money into your Roth IRA. So technically it's not a conversion. Or technically it's not a contribution, but, in a way you are contributing to your Roth IRA. But you're strategically planning on when to put that money in from your traditional IRA or some pre-tax 401k money so that you can do it at a lower tax bracket. So again, We've talked about these Roth conversions. A number of times. And the game that you want to play is that you want to put that money into a pre-tax account when your tax rate is higher. And then let's say you take some time off of work. Maybe you start a business and you have lower income for. Some number of years or you retire early and you have other. Assets that you can access that maybe don't count as income. Then you can start to do. Roth conversions, where you're taking that pre-tax money moving into your Roth IRA. It's counting as income, but the rate is much lower. And so if you can get a number of years, Or you can do this. This can, again, Start to really, hyper you're hyper accumulate your wealth because now. Even if I get back to the same amount of money that I had before, because let's say you have a hundred thousand dollars, you can convert 20, but you pay a little bit taxes. Well, if that money just gets back to a hundred thousand dollars after I'm done converting all of it. Well, now I have a hundred thousand dollars at us. Post-tax tax-free. Versus a hundred thousand dollars. That is a taxable. So theoretically you still have more money. so that's the fifth and final way that you can get money into your Roth IRA.
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This podcast is all about contributing to a Roth IRA, but at the end of the day, you still want to make sure that what you contributing makes sense for your financial situation.
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So, if you were unsure about how the shattered. He's fit into your overall plan. Like, how does a Roth IRA contribution or backdoor Roth or mega backdoor Roth or these conversions make sense for me? Go ahead and reach out to me via my website. You can schedule a call. My website is Palm valley. wm.com. Again, we're on, uh, Instagram as well. Palm underscore valley, underscore w M or you can email me at hunter at Palm valley, wm.com.
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I get excited about answering these types of questions. That's why I do what I do. So. Feel free to reach out. and Asher questions so that you can get the answers that you need.
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And if you liked today's podcast, go ahead and subscribe again. We have some great guests coming on here in the next few weeks. I'm excited about the content that I'm about to put out through this podcast. So hopefully it's helping your situation. optimizing, maximizing and helping you get to the point where maybe you can retire early or get to the point where you can retire now. And so we will see you in the next one. This podcast is for educational purposes. Only this podcast is not financial advice. This is not investment advice. This communication should not be relied upon as a sole factor or an investment making or financial planning decision. If you would like help, please seek a. Tax financial legal or insurance professional, please keep Palm valley wealth management in mind when making those considerations.
