Everyone seems to have a general concept that Roth IRAs are a pretty special type of account. In this video, Shane Tenny, CFP®, explains what they are, how they work, and whether high-income families can use them.
Transcript:
[00:00:09.27] Hi, everyone. Shane Tenny coming to you from Spaugh Dameron Tenny to talk a little bit about Roth IRAs. What makes them so special? Why does everybody think they're so great to use in saving for retirement? And can wealthy families even take advantage of the Roth IRA rules?
[00:00:26.26] Well, to understand Roth IRAs, it's helpful to contrast it with how regular IRAs work. Let me explain this, and then we'll answer the second question. With a regular IRA, you are limited to the amount of money you can contribute and save based on IRS rules.
[00:00:43.29] For this year, it's $7,500 for individuals under 50 or $8,600 for individuals who are 50 or older. You put your money in, it may be tax-deductible depending on your income and whether you tax-deductible, have access to a 401(k), But regardless, any growth or appreciation in a regular IRA happens tax-free.
[00:01:06.25] When you take money out in retirement, after age 59 and a half, the withdrawals are then taxed at your income bracket, whatever it may be and whatever the rules are at that time.
[00:01:17.23] In contrast, the Roth IRA still allows you to contribute the same amount and limits. The money grows tax-deferred, but in retirement, it's all available tax-free, assuming you make withdrawals of gains after age 59 and a half.
[00:01:35.05] I had a client from the Midwest many years ago after I explained this to him. He said, You know, it sounds to me like with an IRA, you get a deduction on the seed, but the harvest is taxable. And in a Roth IRA, you pay tax on the seed, but the harvest is tax-free. I thought that was pretty clever, pretty sharp. So, with that understanding then, can wealthy families even use Roth IRAs? The answer is,.
[00:02:03.03] For families where the household income for a married couple is over about $250,000, you cannot make direct Roth contributions, but you can make Roth conversions. That's the key terms you want to understand. No on the contribution for a family is over $250,000-ish, but yes on the conversion.
[00:02:28.11] What I mean by this is that there are income limits on who can make direct deposits to Roth IRAs, but there are no income limits on who can make deposits to a regular IRA, and there are no income restrictions on who can convert regular IRAs to Roth IRAs. For families of means of income over the limits, it's a two-step process to get money into a Roth IRA.
[00:02:56.16] First, it needs to be deferred into an IRA, and then immediately just converted to a Roth IRA, where you then benefit from all the privileges of tax-free accumulation and withdrawals.
[00:03:09.04] I hope that helps. It definitely is a bit confusing, but it can be a really great strategy. If you have any other questions, look at the blog on our website, or as always, reach out. We're happy to help any way we can.