Peter, good to see you.
Welcome back, everyone. Today we're going to talk through four paths to a Roth IRA for high-income earners. Roth IRAs are, of course, a great way to create wealth.
We talked about them all the time. Roths offer tax-free withdrawals of contributions and earnings in retirement. Plus, that money can grow tax-free indefinitely because Roths are not subject to those required minimum distributions.
But there is a catch, of course. Please explain the income and contribution limits. Yeah, whenever the government gives you something good, they always limit how much you can take advantage of it or limit who can take advantage of it. So as compared to those workers who are covered by an employer-sponsored plan like a 401k or a 403b or a TSP, if you're saving on your own for retirement individually outside of your employer-sponsored plan, your contribution limits are exceedingly low. So in 2025, it is $7,000 per person is what you can contribute into a Roth IRA. Now, if you're 50 or above, then you can contribute an extra $1,000 for your catch-up provision. Theoretically, you can also make a contribution for a spouse.
Even if they are not working or a homemaker, you could make a spousal contribution. And even if you are covered by a workplace plan, that does not eliminate your ability to also contribute to your own retirement in an IRA or a Roth IRA. So just taking advantage of all your opportunities there. But the income limits, if you make too much, the government says, hold on now, Roth isn't for you. You make too much to take advantage of this. And those limits for 2023, $230,000, basically you cap out. You're not allowed to take advantage of the Roth for a married couple filing jointly. It phases out completely by 240,000. And for a single individual, that is 146 up to 161,000 is where the ability to contribute to a Roth IRA phases out.
But Erin, that's what this episode is. Real quick, you said 2023, and I don't think that's what you meant. 2023, did I?
You did. Yeah, sometimes I go back in time when the calendar year flips. 2025, thank you very much. For 2025, your limits are $230,000 up to 240. That's the phase out range above 240 for a married couple.
You're completely eliminated. And 146 to 161 for a single filer above 161,000 completely eliminated. However, what this episode is about is that there is almost always a way to get money into a Roth IRA, even if you fall into those upper income limit categories. Contributing of course $7,000 a year is good, but I'm sure a lot of people would love to goose those numbers considering all the benefits that come with Roth. So let's talk about how to increase your contributions, even if your income is above the limit. So the first option, you just kind of mentioned a little bit, see if your employer offers a Roth 401k option because this has no income limit.
Yeah. And look, especially for younger workers, it's not that there's any age where Roth doesn't make sense in my opinion, but if you look at the compounding power of just a few dollars being invested over the course of 30 to 40 years, I mean, that is what leads to investment success, right? It's a get rich quick scheme that takes 30 to 40 years of diligence and consistency to work, but $7,000 a year starting young can make for a pretty good retirement. So don't fret too much about those lower limits, especially if you are younger and getting started, but yes, Aaron, to your point in a 401k, we have much, much higher limits. So as I alluded to, it's kind of unfair in my opinion that those saving on their own don't get the same limits as those saving through an employer sponsored plan, but it is what it is. That's the tax code.
Not a lot of it makes sense. $23,500 in 2025. And if you are 50 or above, you've got the additional catch up provision, 7,500. So technically you could get $31,000 put away if you're above 50 and actually due to the secure act, there's this magic kind of donut hole between 60 and 63, where the catch up provision is $11,250 thanks to that secure act 2.0 for this year.
So, you know, there's, there's opportunity and that's your money. You can choose if your plan at work allows it to put all of your money on the Roth side, if you so desire. And if the company matches, they're still going to match regardless of which side you put your money on. The choice of whether or not to pay taxes now or later does not impact the match that they offer. Most companies are not nice enough to pay your taxes for you on the money that they match with. So their money will go into the traditional side, but you can choose to put your money on the Roth side and you will still receive that match if the company offers one. So I get that kind of question a lot and a lot of people are confused by that, but $23,500 is the limit for 2025, unless you're 50 or above or between 60 and 63, where you've got those catch up provisions. The next strategy would be something we've talked about many times before a Roth conversion.
Yeah. And by the way, I just want to mention with the 401k, no income limits there. So you're not subject to the same income capping provisions. Conversions.
Anybody can do them. Again, we're talking about ways that maybe higher income earners can take advantage of Roth. Now, if you've already got retirement dollars shoved in your left pocket where you deferred the tax on them, you put them in a traditional 401k or traditional IRA, and you're already in that bubble, the government does not mind you moving it from the left pocket to the right pocket, to the Roth.
It's just that at that point in time, that is a taxable event. There's no limit on how much you can convert, right? With new money, if you just got paid brand new wages in your hand, you're only allowed to contribute a certain amount into a Roth 401k or IRA. But if you've already got the money in a traditional IRA, you can move over as much as you want.
And at any income level, in fact, the higher the income level, probably the more the government would love you to move it over because you'd be paying higher taxes on it. So this is a great strategy to get money over in Roth, but you do need to be careful because there are some caveats and some gotchas with Roth conversions that before you execute on them, you really need to be aware of and consider carefully. Kind of a double, triple, quadruple whammy impact is that Roth conversions can actually cause social security to become more taxable. Roth conversions could potentially cause your Medicare premiums to be higher and they look back two years on that one. And then Roth conversions could potentially cause you to pay higher capital gains rates. So you do need to be aware of all of these factors and consider them with Roth conversions. That being said, we've done millions of dollars of Roth conversions for our clients over the last several years and hope to continue that because I believe it's one of our best financial opportunities. The next strategy would be a backdoor Roth.
How does this work and how is it different from a conversion? So the backdoor Roth is specifically for those higher income earners that have new money getting paid into their hand, paycheck kind of income and want to get that into a Roth IRA. And it's funny because it's almost a completely unnecessary rule here that we even have that income limit in the first place because the government on many, many cases has legitimized the strategy for those same high income earners who they have eliminated from taking advantage of the Roth IRA to take advantage of the Roth IRA. It just takes them two financial moves instead of one. But the government has for whatever reason said doing it in one move, not allowed doing it in two moves.
You're OK. So the backdoor Roth conversion is that you put your money into a non-deductible traditional IRA with move number one. And then the next day, very quickly thereafter, you convert it over to the Roth IRA. Well, you weren't going to get a deduction for putting the money directly into the Roth IRA anyway.
So really nothing lost there. And in two moves instead of one, you essentially accomplish the same thing. You can get the money over into a Roth IRA. So again, like many parts of the tax code, doesn't make sense.
Completely unnecessary rule and limitation. The government has said that the backdoor Roth conversion is a completely legitimate strategy. But are you subject to the same limit, the $7,000 limit? Well, so theoretically, yes.
But we're going to talk about some other things. The big caveat here is that if you are considering this, be very cautious of other IRA money, because when you make the conversion, the government looks at the conversion as a percentage of your total IRA balance, not just like the dollars in isolation that you just contributed. So in other words, if you have $93,000 in an IRA and you contribute seven and you want to do the backdoor Roth conversion, well, you contribute that seven, you don't get a deduction for that. And then when you make the conversion, that $7,000 is only 7% of your $100,000 IRA balance.
So 93% of it is going to be taxable when you make that conversion. And a lot of people don't really realize that you really need to focus on converting over the underlying existing IRA balance you have before you worry about the backdoor conversion strategy. And this is getting in the weeds and can be very complex.
But if you're looking to get dollars into a Roth IRA, there's probably a way, but you need to be aware of all the rules. You know, I like getting in the weeds with you though, Peter. It's important that you know something. I live there.
I live there. Exactly. All right.
The last strategy would be a mega backdoor Roth IRA. So this one to me is kind of like advanced math. Yeah. And it very much is. And it's a way to get more dollars over there.
They're very specific kind of set of circumstances. But you can get more over there. And again, you know, you want to look at the balance that you have before you're worried about making big, big contribution then conversions. So I would say for most people, this strategy is not going to apply. It's more just about Roth conversions rather than back door, mega Roth conversions.
We are really, really looking first and foremost at, oh, you've got a mega balance there. Well, we need to do a mega conversion, but we probably want to do it in a bite sized piece process, a stepping stone process, because if you do it all at once, you bump up in our progressive tax brackets, you might bump yourself from the 22 to the 24 and not think too much about that. But if you bump yourself from the 22 to the 32% bracket, you're paying 10% more on those extra dollars.
Plus you're hitting that double, triple, quadruple whammy. If you are retirement and Medicare age, like you, you really need to be aware of those things. So again, we sit down, we, we, we, we help people understand the implications, the benefits, the disadvantages, crunch the numbers, talk to CPAs and accountants if we need to and work through the weeds to make sure that you understand the costs because there will be at the very least a tax cost for making a conversion or a Roth contribution, but sometimes they have additional ancillary costs as well. And we need to incorporate all of that when we compare it to the potential benefit of getting dollars into a Roth, which I think there is a big one because I believe the taxes are going to go up into the future. And I like growth that's tax free for me during my working years, especially just easier to pay a bill while I'm earning a paycheck. Then what I've seen for retirees trying to pay that same tax bill out of their finite amount of money the day after they retire and they no longer have a paycheck.
So a lot of reasons why, plus, like you said, no RMDs plus great for generational wealth legacy value because you're passing tax-free and you've basically during your own lifetime, disinherited the IRS. Yes. I love the sound of that. Peter, if somebody wants to talk through all these strategies with you, what's the best way to reach you? Give me a call at my office at Rashaan Planning, 919-300-5886, 919-300-5886. For listeners to the program, viewers of the videos, we do offer to put together a complimentary plan. We call it the optimized retirement plan. All you got to do is call that number. We'll have a quick chat. We'll set up a convenient time and then we'll go over your specifics, your goals, and put together that optimized retirement plan for you.
919-300-5886. You can also visit online. Rich on planning is what it looks like.
Rashaan planning. It's my last name, but it looks like richonplanning.com, richonplanning.com, or email me, peter at rashaanplanning.com. All right, Peter, thank you. A pleasure, Erin. Thank you. Hey folks, Peter.
Rashaan here with Rashaan Planning. So glad that you are enjoying the podcast, Planning Matters Radio. One of the tools that we've put out there that people really seem to appreciate and really are finding of value is at 919retired.com. It is your retirement tax bill calculator. If you've got any kind of retirement account, your tax deferred 401k or IRA, this is the website.
This is the resource where you can go. You can plug in your own numbers, your information. You can slide the, the, the tool calculator up and down for your tax rate or your amount of savings and see what your tax bill is likely to be if you default and defer to the IRS's plan versus what you could potentially bring that tax bill down to. A lot of times it is a very significant savings.
So if you have not yet, go to the website, 919retired.com. Run your numbers on the retirement tax bill calculator. 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 Brooks own capital management a registered investment advisor, 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.
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