Key Podcast Highlights

What Is a Roth IRA?

  • When you put money into a retirement account like a regular 401(k) or an Individual Retirement Account (IRA), you’re just deferring taxes. You’re not paying taxes on that income until you take it out. Typically, you have to take it out sometime after the age of 70.
  • With a Roth IRA, it’s a little bit different. When you put money into a Roth account, either an IRA or Roth 401(k), you’ve already paid taxes on it. It’s after-tax money. It also stays after-tax forever and you can leave it in there for however long you want to.

What Are the Maximum Contributions to a Roth IRA?

  • Maximum contribution for a Roth IRA is $7,000 if you’re under the age of 50. It’s $8,000 if you’re 50 or older. However, there are some limitations. For example, in 2024, if you’re earning more than $161,000, you’re going to be limited putting money into a Roth IRA. If you’re married and filling jointly, that limitation is $240,000.

If You Earn a Lot, Can You Still Take Advantage of a Roth Account?

  • You can. In fact, you can do something called a backdoor Roth. This avoids income limits for contributions. You can basically convert your regular IRA into a Roth IRA. There are some limits for doing this. Some people recommend that every time you convert a regular IRA to a Roth IRA, you should open a separate Roth IRA account. This way you can track the income on it. Others also warn that there are a bunch of IRS regulations around converting these.

Transcript

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Gene (00:02):

Hey everybody, this is Gene Marks and thanks for joining me this week on the Hartford’s Small Biz Ahead podcast. This week I wanna talk to you a little bit about Roth IRAs and backdoor Roths as well. A Roth IRA is something that everyone should have if possible. You are now allowed if you’re a business owner to set up a Roth 401(k) account. That’s also like your regular 401(k) account. And as individuals we can also buy Roth IRAs, all with the same limitations, that come with regular IRAs. Now, first of all, let, let’s talk a little bit about what a Roth IRA is. When you put money away into your retirement account, like a regular 401(k) or an or an IRA, you do realize that you’re just deferring taxes, right? You are not paying taxes on that income and until you take it out and you’re forced to take it out sometime after the age of 70, those age ranges are going up, but it’s approximately after the age of 70.

Gene (01:02):

And when you take it out, you have to pay taxes on that money. With a Roth IRA, it’s a little bit different. Here, you put money into a Roth account. Again, an IRA or a Roth 401(k). You’ve already paid the taxes on it. So this is after tax money. But the really amazing thing about Roth IRA, it’s tax free. It grows completely tax free forever, and you don’t have to take it out. You can leave it in there forever and then pull it out whenever you want. So, particularly if you’re a younger person, whether you’re an employee or a business owner, by maximizing Roth, say you’re 30 years old or 40 years old, if it’s in there for 20 years, you’ve got money in a Roth account, it will grow tax free over that period of time, which is an unbelievable benefit and an incredible incentive, for putting money into a Roth.

Gene (01:53):

Everybody should have Roth accounts and be putting the maximum amount they can into it. And by the way, a Roth IRA, the maximum contribution is $7,000 if you’re under the age of 50. $8,000 if you’re age 50 or over. Now, there are some limitations to that, okay? So for example, in 2024, you are gonna be limited to putting money into a Roth IRA if you’re earning more than $161,000. If you’re married and filing jointly, that limitation is $240,000. So Roth IRA contributions, just be aware if you’re earning a lot of money, more than that, are limited, they’re gonna be cut off for you. So keep that in mind. Now, some of those high earners, are like, “Hey man, can we still take advantage of Roth?” I mean, say we’re over those income limits. And the answer is actually, “Yeah, you can,” if you’ve put money before into IRA accounts…

Gene (02:59):

Or even if you’re able to contribute to IRA accounts going forward, you can do something called a backdoor Roth. And what a backdoor Roth is, it avoids these income limits to be eligible to contribute to one of these Roth retirement accounts. You basically convert your IRA, your regular IRA into a Roth IRA. Now there are limits for doing this. So lemme just give you some of the things to consider. Okay? There are still some limits for doing just this. Some people recommend that every time you convert a regular IRA to a Roth IRA, you should open up a separate Roth IRA account. So you can track the income on it and the cost basis and all of that. So you have to, it’s just a recommendation, not a requirement. Others also say they warn that there is a bunch of IRS regulations around converting this.

Gene (03:52):

So you’re definitely gonna need to hire a financial planner or somebody that is, that’s experienced in doing just this. There are other financial planners that say, “Hey, listen, you don’t have to go this far to let your, assets grow tax free.” You could set up a deferred compensation plan where, you promise compensation to yourself, but you don’t pay yourself until the future. And only when you pay yourself is when you pay your taxes. So it’s like you’re just deferring the compensation this is for you or your employees and it’s kind of the same thing. It’s like your money is there. It could be growing tax free because you can set an interest rate along with it, but it’s just not paid until, some triggering in that deferred compensation amount.

Gene (04:35):

You can do the same thing with like a profit, sharing account as well. The other thing that people are concerned about with Roth IRAs is they sound too good to be true because they are, right now. If you put money into a Roth IRA or a Roth 401(k), it grows tax free forever and you could take it out without penalty. And many people say like, at some point the government’s gonna like put their their fingers into this because they’re looking at all this tax free money being grown. They’re gonna start saying, “You know what? We’re gonna start taxing this money or at a certain number.” So, you put your money into a Roth under one set of rules and then the rules change on you as well.

Gene (05:13):

So just be aware that, people do have those concerns. But the bottom line is this, you should be contributing as much as possible to your Roth IRA account. I think it’s very, very important to do. If you have a business, you should open up a Roth 401(k) account and also have people contribute to that. Remember, people can contribute to an IRA up to $7,000 in 2024, $8,000 if they’re over the age of 50. And also remember there are income limitations as well. As much as $240,000 for 2024 for married filing jointly. If you’re making more than that, you’re gonna be limited in contributing to a Roth account. However, you do have the ability to do backdoor Roths, convert…

Gene (05:56):

Your IRAs into a Roth, so that it can grow tax free and you want to talk to a financial professional to do just that. So those are my thoughts on Roths and backdoor Roths as well. Real important investment consideration this year. If you can take advantage of ’em, you should, but you should definitely talk to a financial advisor about it. My name is Gene Marks. You’ve been listening to the Hartford Small Biz Ahead podcast. If you need any help or advice or tips in running your business, please visit us at SmallBizAhead.com or SBA.TheHartford.com. I’ll be back with you next week with some more thoughts on some topic that might be of interest to you. I look forward to it and we will see you then. Take care.

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