GOOD DAY EVERYONE!

Last week’s BLOG discussed the GOAT Millionaire Builder – the 401K Retirement Plan. Click below link if you need to read that blog.   

{DO YOU WANT TO JOIN THE 401K PLAN MILLIONAIRE CLUB? {KINDA OF LIKE THE MILE HIGH CLUB – BUT A LOT LONGER LASTING!}

DO YOU WANT TO JOIN THE 401K PLAN MILLIONAIRE CLUB? {KINDA OF LIKE THE MILE HIGH CLUB – BUT A LOT LONGER LASTING!}

THE GOOD NEWS – If you do not have access to a 401K plan, there are other great savings tools available to save for your retirement plan. 

RETIREMENT PLANS/TOOLS OTHER THAN 401K – PLAN

• ROTH INDIVIDUAL RETIREMENT ACCOUNT (IRA) 
• TRADITIONAL INDIVIDUAL RETIREMENT ACCOUNT (IRA)
• Simplified Employee Pension (SEP) PLAN 
• 403 (b) PLAN 
• 457 PLAN 
• HEALTH SAVINGS ACCOUNT  
• NON-RETIREMENT INVESTMENTS

Today I am going to dive into the ROTH IRA and future blogs will discuss the remaining options.

ROTH INDIVIDUAL RETIREMENT ACCOUNT (IRA)

ROTH INCOME LIMITS 

Majority of Americans CAN contribute to a ROTH IRA. In fact all Americans can, as there is a way around earnings limits!  

For 2019, to contribute to a ROTH IRA, your MODIFIED ADJUSTED GROSS INCOME (MAGI) must be less than $122,000 if single and $193,000 if married and filing jointly. Contributions begin to be phased out above those amounts.  You are ineligible to contribute any money into a Roth IRA once your income reaches $137,000 if single or $203,000 if married and filing jointly.

2019 MAXIMUM CONTRIBUTION

The maximum you can contribute to a Roth IRA for 2019 is the same as a traditional IRA,  $6,000 if you are younger than 50 years of age. Once you exceed 50 years of age, you can add another $1,000 per year in “catch-up” contributions, bringing your total eligible contribution to $7,000. 

ROTH CONVERSION FROM TRADITIONAL IRA

But as usual with any Federal law, there is a way around it. If your income exceeds allowable limits, you can do a Roth Conversion from a traditional IRA –BACKDOOR ROTH IRA. There are no income limits or phase-out ranges for doing conversions. Here is how you do the backdoor Roth IRA strategy. The backdoor allows you to contribute to an IRA as non-deductible and then convert it to a Roth IRA.  

You can do a backdoor Roth IRA in one of two ways. You can contribute money to an existing Traditional IRA, and later transfer the money into a Roth IRA account. Second, you can convert your existing Traditional IRA, to a Roth IRA account. Your bank/brokerage will help you with the mechanics. You can roll any existing Traditional IRA money regardless of the years you contributed to the Traditional IRA. 

HOWEVER, you will owe taxes on 100% of the non-taxed dollars in your traditional IRA.  Again your bank/brokerage firm can help you to calculate the amount of dollars that will be taxed. 

ROTH IRA ADVANTAGES

• While you are making contributions to a ROTH account, you can withdraw your contributions to the account ANYTIME tax- and penalty-free.  However if you are less than the age of 59.5, you will pay taxes if you withdraw the earnings. I will show an example below.
• A ROTH IRA, unlike traditional IRAs are not subject to required minimum distributions, mandated to after the age 70 1/2. And you can add funds to it at any age, provided you have earned income from, say, a job or self-employment. Traditional IRAs close the door to new contributions once you turn 70 1/2, even if you’re working. 
• The younger you are when you start investing in one, the more advantageous because that creates more time for your contributions to compound tax-free.   Read Blog: FOLLOWING THIS WARREN BUFFETT RULE  (COMPOUNDING) WILL MAKE YOU WEALTHY!
  • https://wealthbuildingpowers.com/2019/06/03/following-this-warren-buffett-rule-will-make-you-wealthy/
• Anyone regardless of age can open a Roth IRA, therefore, once your children start to earn money you or their grandparents can contribute to their Roth account as a gift.  This will fantastically kick start their road to wealth!  The recipients must have earned income, and you can only contribute an amount up to that person’s annual earnings or $6,000, whichever is less.} 
• ROTH IRA’s are good to leave to your heirs, because even heirs are NEVER taxed! Your spouse does NOT have to take mandatory distributions.  Heirs other than a spouse must take distributions from the ROTH IRA over a determined period of time based on their age.  JUST REMEMBER THAT MONEY IS WITHDRAWN TAX FREE (MY FAVORITE TWO WORDS!) 

LET’S LOOK AT A COUPLE OF ROTH IRA EXAMPLES

Example 1: Susan is 40 and has made a monthly contribution of $416.67, to her Roth IRA for the past ten years.  She determines she needs the money for a down payment on a home.

• Beginning Principal Amount: 0
• Monthly Deposit: $416.67
• Period (Month): 120
• Annual Interest Rate: 7%
• Compound Method: Monthly

• Balance at maturity: 
  • Total Principal: $50,000.40
  • Interest Earned: $22,539.54
  • Maturity Value: $72,539.94

RESULTS: Susan can at anytime withdraw the money she deposited, up to $50,000 and pay ZERO TAXES.  If Susan decides to withdraw her earnings, $22,539.54, she will pay tax on the earnings at her regular tax rate. 

NOTE: If you want to withdraw earnings tax-free, though, you must be at least age 59 1/2, and you must have owned the Roth for at least five years. At 59 1/2 years of age, all of Susan’s withdraws are tax free from above ROTH account.  

Unlike a traditional IRA where you pay regular earnings on all untaxed dollars pulled from your IRA account.  

Example #2: Susan, made a monthly contribution of $416.67, to her Roth IRA for the past thirty years.  She just turned 59 ½.  

• Beginning Principal Amount: $0
• Monthly Deposit: $416.67
• Period (Month): 360  
• Annual Interest Rate: 7%
• Compound Method: Monthly

• Balance at maturity: 
  • Total Principal: $150,001.20
  • Interest Earned: $361,289.34
  • Maturity Value: $511,290.55

RESULT: At 59 ½ Susan can begin withdrawing 100% of HER money from the ROTH and will pay ZERO in taxes.

ROTH IRA DISADVANTAGES

• Unlike a traditional IRA, where the contributions may be tax-deductible, a Roth IRA has no up-front tax savings. Money goes into the Roth after it has already you have paid taxes.
• But when you start pulling money out in retirement, your withdrawals will be tax-free.

• Let’s See What Impact Above Tax Factor Has

• If you contribute to a traditional IRA and write off $5,500 in the 22% bracket brings the out-of-pocket cost to ~$4,290.  In this case you may be better contribution to a traditional IRA. 

CONCLUSION

I believe the ROTH IRA is a great investment tool for one simple reason- if you wait until you are 59 ½ you pay ZERO taxes on every dollar you take out. I lost my license to tell fortunes a few years ago (for making up stuff-who knew) but I am fairly certain of one fact. United States federal taxes will likely continue to increase. Just look at the majority of the candidates running for President. Almost all are promising some great free deal. Notice they seldom say how they are going to pay for free college, Medicare for all, free banana ice cream (happens to be my favorite). The answer to how they pay for it is easy. LOOK IN THE MIRROR- YOU PAY FOR IT WITH MORE TAXES!

That Green New Deal, will suck the color green right out of your wallet!  

If you believe federal tax rates are going to climb as I do, I want as much money as I can place in a ROTH IRA.  

You can open a Roth IRA through a bank, brokerage, mutual fund or insurance company, and you can invest your retirement money in stocks, bonds, mutual funds, exchange-traded funds and other approved investments. You have until the federal tax-filing deadline to make your Roth IRA contribution for the prior year. 

Roth IRAs can help you build a sizable nest egg if you start saving early enough. 

IS A ROTH IRA RIGHT FOR YOU?

ROTH IRAs are an alternative for those without access to a 401K Plan as well people that may already have considerable sources of income that will be taxable in retirement, like a pension, 401(K)s or Social Security, and want to build up a stream of tax free cash flow

Note:  If you invest in both a Roth IRA and a traditional IRA, the total amount of money you contribute to both accounts cannot exceed the set annual limits of one account ($6,000 or $7,000 for those 50 and older). If you do exceed above amounts, the FRIENDLY IRS will charge you a six percent excessive-contribution penalty.  Let’s not give the IRS any more money than we have to!

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DISCLAIMER

I am a proud nerd (as my beautiful wife and daughter have told me) investment and finance blogger, with a NC State, Chemical Engineering, University Rutgers, MBA and Harvard University, Advanced Management education.  

I started my first business at ~13 years of age. 

I am a successful investor in equities and real estate and happy to share my personal finance and investment lessons learned with you. However, I am NOTa licensed financial advisor.  Please do not construe my suggestions on this blog, as recommendations for your personal situation.  For individual finance advice please seek your own licensed CPA or financial advisors.  

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