2023 EP0506 | Financial Updates | Myth-busting Roth Conceptions

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Peter, good to see you. We're doing a little myth busting today, which I like. This one is you've got it all wrong about Roths. Roth IRAs are one of the most powerful tools you can use to become extremely wealthy.

And there are a lot of misconceptions about them, so we're going to clear up the confusion. Myth number one, you can't touch any money in your Roth account until you're 59 and a half years old. Yeah, actually, you can access the contributions that you have made to the Roth.

Now, the money that's grown since those contributions have been made, that's got some implications to it. But the government would love for those dollars that you put into that account to get back into taxable circulation. So you can actually remove the original contributions at any point in time.

And this is one of the places where there are certain types of accounts that can be multitaskers. Very rare in the financial world that we can serve more than one purpose. But for instance, if I needed some of the dollars in my Roth account for college expenses for my son, I could pull those contributions back out and use them for that purpose and then let the growth stay in there for my own retirement.

Because if you pull the growth out, it is subject to penalties and we don't want to incur those. We want to keep those growth dollars in the Roth account until 59 and a half. But the dollars that I originally put in, which by the way, always come out first, they can be withdrawn without taxes, without penalties at any point in time. OK. Myth number two, Roth IRAs are only for retirement.

Right. Well, and answer number one goes to this, but there's also the ability to take out up to ten thousand dollars, which could potentially include growth for a down payment on a home. So there are a few different instances and examples of when Roth dollars can be used for pre-retirement purposes.

And by the way, I want to throw this out there as well. I talked about using the Roth for college expenses. But if we have a college account, the 529 account, that cannot actually also be converted into a Roth now as well, making the 529 all that much more attractive. And I know that today's segment was on the Roth in particular, but just kind of a caveat there for for those that may have college expenses on their mind, but are a little hesitant to save for college specifically.

Those 529 accounts are now much more flexible as we are talking about the Roth being flexible as well. OK, myth number three, you can't contribute to a Roth if you make too much money. Yeah, I see a lot of people that have some confusion about the ability to get money into a Roth. There's really not a time when you're not able to get money into a Roth.

So the number one confusion is I make too much money, I'm income eliminated. Well, the government has a two step process to still get money into a Roth IRA that they have legitimized by talking about it and not saying that it's against the rules. It's called the back door Roth conversion.

And I don't know why they don't just simplify it and give everybody the ability to do it. But you make a non deductible traditional IRA contribution and then you convert those dollars over to Roth. Now, you do need to be careful about this if you have an existing IRA balance. You need to understand that that conversion is only a percentage of your total balance could cause some unintended consequences. So as with anything financially, make sure to consult with a professional and do this carefully. But if you are income eliminated, that does not mean you cannot get dollars into a Roth.

Likewise, you can convert over at any point in time. So if you do have an IRA balance, you can always make the conversion over to Roth. And that is whether you're earning income or not. I hear people saying, well, I'm not earning income. I can't get dollars into a Roth. And then they have an IRA balance. Yes, you can. You can convert those over whether you're making too much or not enough or no income at all.

And then I also hear, well, I'm a stay at home spouse. I don't earn income and therefore I can't get new dollars in. As long as there's earned income in the household, both members of a married couple are eligible for their own Roth contributions and spousal Roth contributions. So there's a lot of ways to get money into a Roth. And there are some limits and limitations, but oftentimes there are some workarounds there.

OK. And I want to end on one truth with one little exception. Anyone with a traditional IRA can convert it to a Roth. Right.

As long as it's yours. Right. If it's inherited from your parents or grandparents, if it's an inherited beneficiary traditional tax deferred account, you cannot convert that over to a Roth in their name or in your name. The only thing that you can do with those dollars is remove them.

And then you may be able to make some maneuvers with them to get them back in. But you've got to pay the tax on the way out first. And have that as as income. But other than that, yeah, as long as you are earning income, basically there are ways to get dollars into Roth accounts.

You can convert over a traditional account at any point in time, so long as it's not an inherited IRA or a beneficiary IRA. And just because I want to show everybody this comment because I like it. What are we looking at here, Peter?

Yeah. The concept of the giving tree with a little twist. It's a tax giving tree and it's the concept of the seed and the harvest with traditional 401ks and IRAs. We were taught to not pay tax on the seed, but that the taxes would be due on the harvest. And today in kind of the shift in paradigm that we've had in the financial world, it may make more sense in today's tax environment to go ahead and pay tax on the seed and then have all of the harvest there for us in retirement tax free. I like that.

I want you to write an updated giving tree book. Yeah. We'll chat DPT.

It would be easy. All right, Peter, this is very helpful. If somebody wants to talk through why a Roth may make sense for them, what's the best way to reach you? Give us a call. And by the way, you do need to crunch the numbers on this at any point in time, understanding the implications of the taxes that you might owe today versus in the future when you use those dollars. It's an important decision and it is one that's going to carry a price tag. It's just how can we control that price tag? So give us a call. Nine one nine three zero zero five eight eight six to run through the optimized retirement plan taxes and tax efficiency.

Efficiency is certainly part of that. So nine one nine three zero zero five eight eight six. Or you can visit online and get in touch that way.

Rashan planning dot com or you can email me Peter at Rashan planning dot com. All right. Peter, thank you very much. Thanks, Aaron.

Appreciate it. This has been planning matters radio. The content of this radio show is provided for informational purposes only and is not a solicitation or recommendation of any investment strategy. You are encouraged to seek investment tax or legal advice from an independent professional advisor. Any investments and or investment strategies mentioned involve risk, including the possible loss of principal advisory services offered through Brooke's own capital management. A registered investment adviser fiduciary duty extends solely to investment advisory advice and does not extend to other activities such as insurance or broker dealer services. Advisory clients are charged a quarterly fee for assets under management while insurance products pay a commission, which may result in a conflict of interest regarding compensation.