Maximize your Roth options – Retirement Daily on TheStreet: advice, analysis, and more. about finances and retirement

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By Jada Diedrich, CPA

Roth IRAs are a great way to build your retirement nest egg, help your kids learn financial responsibility, and save money in taxes. Before we dive into this popular investment strategy, let’s first explore the basics: When you make qualified withdrawals from a Roth IRA, you don’t pay income taxes. The government allows you to contribute $6,000 each year ($7,000 if you are over 50) if your modified adjusted gross income (MAGI) in 2022 does not exceed $144,000 for a single taxpayer or $214,000 as a single taxpayer. as a married couple declaring jointly. When you reach this income bracket, you cannot make a direct contribution to the Roth IRA.

Jada Diedrich

If your income exceeds these limits, are you out of luck? Not necessarily. Here are some planning opportunities that could open the door to Roth retirement savings for those who thought it was closed.

Does your company’s pension plan have a Roth option?

Many companies have a Roth option in their 401(k) or other qualified plans. If you don’t know, it’s worth asking. Income limits do not apply when you make contributions to an employer-sponsored plan. Using this strategy, contributions can be made after you reach age 70 if you have earned income.

If you are eligible to fund a Roth IRA, this can be done in addition to contributions to your company’s retirement plan. For example, in 2022, you can defer $20,500 ($27,000 if you’re over 50) to your Roth employer or traditional 401(k). Plus, you can make a Roth IRA contribution of $6,000 ($7,000 if you’re over 50) if you’re within the income limits.

Some plans allow you to make after-tax contributions to qualifying pension plans. It’s possible to really take advantage of some savings opportunities if you have the cash to do so.

There are some aspects of your business plan that you will want to understand. For example, employer matching contributions do not go into the Roth portion of the plan, they go into the traditional plan and are taxed upon withdrawal. Be sure to speak to your benefits manager for a summary of your specific plan.

Have you heard of the Roth IRA “backdoor”?

This strategy is a two-step process in which you make a non-deductible contribution to a traditional IRA (which has no income limit) and then convert it to a Roth IRA. If you do so immediately, there may be no tax consequences. The plan has some complexities – especially if you have other IRA accounts (SEP, SIMPLE, etc.) – so be sure to consult a tax professional to understand your specific situation first. It should be noted that there have been discussions among lawmakers to remove this strategy. Although this is still an option, it is another good reason to contact a tax professional before using this method.

Other Roth Conversion Strategies

Another way to use Roth conversions is to convert existing traditional IRAs to Roth IRAs. While this creates ordinary income for the amount you convert, there are many scenarios — especially for new retirees who haven’t started collecting Social Security — where it could lower your taxes over time. Because you are effectively lowering your traditional IRA value, the required minimum distributions (RMDs) on these accounts will be lower. Additionally, Roth IRAs do not require minimum distributions, so this conversion strategy can help retirees control their taxable income during retirement. This can result in reduced Medicare costs for the retiree since Medicare Part B premiums are based on your taxable income in retirement.


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Roth IRA planning for children

When we see the benefits of tax-free growth over time, many wish we had started saving Roth sooner. There is no minimum age to fund a Roth IRA, only a requirement to have earned income. For example, if you have children who work part-time, they should consider funding a Roth IRA. Encourage them to set aside some of their earnings in their own Roth IRA, or you can offer them contributions on their behalf. As long as the amount contributed to the Roth does not exceed his earned income, you can also “match” his contributions. These are all great ways to teach kids about saving and investing.

Let’s see how much you can save over time if you start investing different amounts at different ages. Suppose the following:

  • You want to retire at age 65.
  • The market gives an average return of 6%.
  • You have a starting balance of $10,000 in your Roth IRA.
  • You earn $30,000 a year, so you’re sitting at a marginal tax rate of 12%.
For illustrative purposes only.

For illustrative purposes only.

Pay now or pay later

Using Roth retirement savings strategies means you pay taxes now, rather than later, as you would with traditional retirement savings. Making the best decision depends on whether you think your income taxes will be higher in retirement than they are now. If your crystal ball is cloudy like ours, when it comes to future tax rates, you may decide to use some of the two strategies. Also, keep in mind that if you missed making contributions in a given year, you have until April 15.and of the following year to contribute.

Whether you invest in a Roth or a traditional IRA, this retirement strategy is a great way to grow your money. It’s also a fun way to start your kids on the path to financial responsibility. Since many factors can play into this wealth plan, it is best to consult your wealth advisor for more information.

About the Author: Jada Diedrich, CPA

As a CPA and Buckingham Wealth Advisor, Jada Diedrich spends time getting to know her clients personally and professionally. By building strong relationships, she enhances her ability to help clients set and achieve their goals.

For informational and educational purposes only and should not be construed as specific investment, accounting, legal or tax advice. Some information is based on third party data which may become obsolete or otherwise superseded without notice. Third-party information is believed to be reliable, but its accuracy and completeness cannot be guaranteed. People with special needs and those who care for them have unique circumstances and people should speak with a qualified professional based on their own situation. Neither the Securities and Exchange Commission (SEC) nor any other federal or state agency has approved, determined the accuracy, or confirmed the adequacy of this article. R-22-3525


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Email Jeffrey Levine, CPA/PFS, Director of Planning at Buckingham Wealth Partners at: [email protected].

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