Siller & Cohen’s Wealth Unpacked Blog: Roth IRA (Part 1)

By Siller & Cohen on June 14, 2023

Siller & Cohen’s Wealth Unpacked Blog

Should you consider doing a Roth IRA?

Reasons to do a Roth IRA

• Tax free investment earnings and growth.
• The amount contributed may be taken out tax and penalty free at any time regardless of your age or how long it’s been in the Roth.
• If certain requirements are met, the investment earnings and growth may be withdrawn income tax and penalty free. The basic rules are:
  • The owner must be age 59 ½, or the withdrawal must follow the death or disability of the owner.
  • The owner has had a Roth IRA for at least 5 years.
• Unlike a traditional IRA, there is no Required Minimum Distribution (RMD) at age 73 (starting in 2023). So, money is not forced out into taxable investment accounts.
• Roth IRA’s may be transferred to your heir’s income tax and penalty free.
• You may want to consider funding a Roth IRA for your minor children or grandchildren, once they have earned income, as a way of building tax free funds for them over time. What a great graduation present that can be!

Considerations:

• Unlike a traditional IRA, contributions are not tax deductible.
• The amount that may be contributed to in any one year is limited (except in the case of a “Roth Conversion”, which will be discussed at another time).
• If your income is too high, you may not be eligible to contribute. However, a technique known as a “Backdoor Roth IRA”, may provide a work around.

What are the contribution and income limits for 2023:

What if your income is too high?

Consider the Backdoor Roth IRA. How does it work:

• First you contribute to a Traditional IRA- There is no income limit for contributing to a Traditional IRA. The income limit applies to whether you can deduct your contribution, but that is irrelevant with this technique.
• Secondly- you convert the Traditional IRA to a Roth IRA. This should be income tax free, except for any earnings generated by the Traditional IRA before it is converted to a Roth.

This technique works unless you already have Traditional IRA balances in place. In which case, the “IRA Aggregation Rules” would minimize or eliminate the benefit of this approach.

If the Backdoor Roth IRA doesn’t work because of the IRA Aggregation Rules, then there is another potential option. This option may be available if you have a 401k plan at work. This would involve several steps-If you would like to explore this, please don’t hesitate to reach out to us.

What’s the big deal about a $6,500 contribution?

So, let’s assume you can work around the “too much income” problem. What’s the big deal about a $6,500 contribution? That doesn’t sound like a lot. Let’s look at the impact of compounding over time. Let’s assume that you are a married couple, both age 40 and you both contribute the maximum of $6,500 per person until age 50, then you increase it to $7,500 each year through your age 65. Assume a 6% annual rate of return.

The power of compounding would provide the following amounts of income tax-free funds:

Age              Value

65                $869,601

70               $1,163,722

75               $1,557,322

80               $2,084,049

85               $2,788,927

As you can see the numbers become impactful over time.

For illustrative purposes only.

Summary Roth IRAs are powerful vehicles that if contributed to on a regular basis can provide meaningful dollars over time. If you meet the 5-year rule and are age 59 ½ or older when you withdraw the funds, all your withdrawals will be income tax and penalty free. Regardless, it is important to remember that your contributions may be withdrawn at any time income tax and penalty free.