If you could have $1.3 million in 30 years and not worry about taxes, but you would have to put away $583 a month and over 30 years that’s $209,000 that you put away, but got back $1.3 million. Would you do it?

Today I’m going to give you everything you need to know about the Roth IRA, this incredible account I believe every working individual should have.

What is a Roth IRA?

Most of you are probably familiar with a 401(k) or 403(b) as I would say they are the two most talked about types of retirement savings accounts. Little did you know there are many different retirement savings accounts out there that can help you save and invest even more, like the Roth IRA.

So a Roth IRA is an IRA that allows earned-income qualified individuals, key words earned-income, to save up to a specified limit each year set by the wonderful government of the USA. “The Roth IRA was established by the Taxpayer Relief Act of 1997 and named for its chief legislative sponsor, Senator William Roth of Delaware”, big thanks to the late senator.

The key attribute of Roth IRAs is that the contributions made by a qualified individual would be with after-tax dollars. So, if you qualify to have a Roth IRA then any dollars you have laying around can be used to fill up a Roth IRA.

How Much Can You Save Per Year?

In 2024, a qualified individual can contribute up to $7,000 per year and $8,000 if the individual is 50 years old or older. This is not a lot compared to 401(k) and 403(b) limits, but as we will see in a little bit there are  huge tax advantages that make up for the low contribution amount.

Do You Qualify for a Roth IRA?

To be eligible to contribute to a Roth IRA you have to meet certain income requirements. Let’s review the 2024 income requirements from the IRS. 

As you can see how much you can contribute starts to phase out once your income reaches $146,000 for those filing Single, head of household, or married, filing separately (if you didn’t live with spouse during year) and $230,000 for those Married filing jointly or qualifying widow(er)…as your incomes increases you do reach income levels where you’re no longer eligible to contribute to a Roth IRA. BUT don’t worry though, we’ll go over how to contribute to a Roth IRA if you’re above those income limits.

What About Taxes?

One of the benefits of a Roth account is that you’re contributing with after-tax dollars. You’ve already paid taxes!  Your first response is probably how is that a benefit? 

Well, that after-tax money you contributed your Roth IRA would then buy index funds, ETFs, a money market fund or whatever you want to invest in and per today’s law grows tax-free and when you get ready to make qualified withdrawals you actually don’t have to pay any taxes on the money. This means your contributions and the compounding growth of the money doesn’t get taxed when you make withdrawals. 

This is not how a traditional 401(k) works right, the money that goes into that 401k is tax deductible for the year you make contributions. You end up paying taxes on the money you withdraw that includes your contributions and the growth, You’ve just been deferring paying taxes until it’s time to take the money out after that eligible age. Similarly, a Traditional IRA works the way a 401k does. But with a Roth IRA you don’t pay any taxes on withdrawals from what you contributed or the growth.

All the research I’ve done says there is a small chance the government could change this. However, this is very unlikely as politicians typically wouldn’t want to do anything to lose support of their constituents. If it did change trust me every personal finance YouTuber and personality would talk about it. Make sure you check with a tax professional.

How Do You Open a Roth IRA

So how do you get a Roth IRA. The easiest way I’ve found to open a Roth IRA is at a brokerage company. Vanguard, Fidelity, Charles Schwab to name a few. My wife and I have our Roth IRA with Vanguard and honestly very happy with it. Really take the time to consider what you’re looking for from the place you open a Roth IRA.

 – As we discovered earlier it is true that some of you are ineligible to have a Roth IRA AND directly contribute to it. This is where one of the greatest financial hacks comes into play. It’s called the “back door Roth conversion”. So a Traditional IRA doesn’t have any income restrictions as far as, you would need to fund a Traditional IRA with after tax dollars and the  convert what you put in the Traditional IRA into the Roth IRA right after the money clears into your Traditional IRA.

So the basic steps I followed to complete a backdoor Roth contribution at Vanguard is:

1. Open a Traditional IRA
2. Open a Roth IRA.
3. Contribute whatever amount up to the yearly limit to the Traditional IRA preferably the full limit all at once at the beginning of each year.
4. Once the money clears into the account you simply go online to your account and find the button that says, convert to Roth IRA
5. If you get stuck you can always chat with customer service at these brokerage firms, my experience has been that these firms are very helpful and will make sure you accomplish what is you want to with the roth conversion transaction.

Some very critical pieces of information when doing a backdoor roth conversion you should know beforehand:

1. Before you do the roth conversion make sure you understand what the pro rata rule is or at least have a general idea. The pro rata rule determines the tax consequences of an IRA distribution including a Roth Conversion based on the value of all IRA accounts aggregated together. Why is that important? Because if you have post-tax $7,000 in a traditional IRA you’re planning to convert to a Roth IRA, BUT have one other tax deferred IRA account like a SEP IRA or SIMPLE IRA, the money in that account will affect what you may end up having to owe when you file taxes. For example, let’s say between your Traditional IRA and SEP IRA you have $100,000. You want to convert the $7,000 in the traditional IRA so you do. Now you have $93,000 left in your SEP IRA. When you file taxes 93% of the $7,000, you converted which is $6,510 would be considered taxable. 
2. You would owe nothing for the conversion if the only IRA you had was your traditional you just contributed to.
3. Very important though is when it comes time to taxes, make sure you file Form 8606 with your taxes reporting your conversions. Whoever you do your taxes should know about this form and if they don’t that might be a problem and you’ll probably want to consult with a tax professional who is.

Other Important Things to Consider

1. There is an age requirement to withdraw the money and that is 59 1/2.
2. Very important to note is even if you’re 59 1/2 you still have to consider the 5 year rule. There is a 5-year rule where you need to have held your account for at least five years before you can withdraw contributions and earnings with no tax or penalty.
   1. Yes there are exceptions, like first-time home purchase and college expenses, but generally for most of us we’ll need to have held the account for 5 years and reach 59 1/2 to be able to withdraw contributions and earning with no tax or penalty. 
3. What if I Have an Emergency?
   1. Regardless of age you can withdraw contributions you made into a Roth anytime tax and penalty free. This is because you’ve already paid the taxes remember. Any growth and earnings however may be penalized depending on when you withdraw. This is still good to know that you can take the money you contributed anytime you need.
4. How much can you expect to have in your Roth IRA – well that depends on how much you invest and what you invest. But if we take the 2024 maximum contribution limit of $7,000 and divide that by 12 months we get approximately $583. If that’s all you ever contributed and invested it in a low cost broad based index or etf that tracks the S&P 500 index or US Total Market there’s a good chance you’ll earn and average annual rate of return of 10% over a 30 year period which equates to $1.3 million.

The Roth IRA is a powerful investment account you can open today, but there is another account you really want to know about called the HSA. The video on the screen will teach you more, click on it and I’ll see you over there.

If you could have $1.3 million in 30 years and not worry about taxes, but you would have to put away $583 a month and over 30 years that’s $209,000 that you put away, but got back $1.3 million. Would you do it?

Today I’m going to give you everything you need to know about the Roth IRA, this incredible account I believe every working individual should have.

What is a Roth IRA?

Most of you are probably familiar with a 401(k) or 403(b) as I would say they are the two most talked about types of retirement savings accounts. Little did you know there are many different retirement savings accounts out there that can help you save and invest even more, like the Roth IRA.

So a Roth IRA is an IRA that allows earned-income qualified individuals, key words earned-income, to save up to a specified limit each year set by the wonderful government of the USA. “The Roth IRA was established by the Taxpayer Relief Act of 1997 and named for its chief legislative sponsor, Senator William Roth of Delaware”, big thanks to the late senator.

The key attribute of Roth IRAs is that the contributions made by a qualified individual would be with after-tax dollars. So, if you qualify to have a Roth IRA then any dollars you have laying around can be used to fill up a Roth IRA.

How Much Can You Save Per Year?

In 2024, a qualified individual can contribute up to $7,000 per year and $8,000 if the individual is 50 years old or older. This is not a lot compared to 401(k) and 403(b) limits, but as we will see in a little bit there are  huge tax advantages that make up for the low contribution amount.

Do You Qualify for a Roth IRA?

To be eligible to contribute to a Roth IRA you have to meet certain income requirements. Let’s review the 2024 income requirements from the IRS. 

As you can see how much you can contribute starts to phase out once your income reaches $146,000 for those filing Single, head of household, or married, filing separately (if you didn’t live with spouse during year) and $230,000 for those Married filing jointly or qualifying widow(er)…as your incomes increases you do reach income levels where you’re no longer eligible to contribute to a Roth IRA. BUT don’t worry though, we’ll go over how to contribute to a Roth IRA if you’re above those income limits.

What About Taxes?

One of the benefits of a Roth account is that you’re contributing with after-tax dollars. You’ve already paid taxes!  Your first response is probably how is that a benefit? 

Well, that after-tax money you contributed your Roth IRA would then buy index funds, ETFs, a money market fund or whatever you want to invest in and per today’s law grows tax-free and when you get ready to make qualified withdrawals you actually don’t have to pay any taxes on the money. This means your contributions and the compounding growth of the money doesn’t get taxed when you make withdrawals. 

This is not how a traditional 401(k) works right, the money that goes into that 401k is tax deductible for the year you make contributions. You end up paying taxes on the money you withdraw that includes your contributions and the growth, You’ve just been deferring paying taxes until it’s time to take the money out after that eligible age. Similarly, a Traditional IRA works the way a 401k does. But with a Roth IRA you don’t pay any taxes on withdrawals from what you contributed or the growth.

All the research I’ve done says there is a small chance the government could change this. However, this is very unlikely as politicians typically wouldn’t want to do anything to lose support of their constituents. If it did change trust me every personal finance YouTuber and personality would talk about it. Make sure you check with a tax professional.

How Do You Open a Roth IRA

So how do you get a Roth IRA. The easiest way I’ve found to open a Roth IRA is at a brokerage company. Vanguard, Fidelity, Charles Schwab to name a few. My wife and I have our Roth IRA with Vanguard and honestly very happy with it. Really take the time to consider what you’re looking for from the place you open a Roth IRA.

 – As we discovered earlier it is true that some of you are ineligible to have a Roth IRA AND directly contribute to it. This is where one of the greatest financial hacks comes into play. It’s called the “back door Roth conversion”. So a Traditional IRA doesn’t have any income restrictions as far as, you would need to fund a Traditional IRA with after tax dollars and the  convert what you put in the Traditional IRA into the Roth IRA right after the money clears into your Traditional IRA.

So the basic steps I followed to complete a backdoor Roth contribution at Vanguard is:

1. Open a Traditional IRA
2. Open a Roth IRA.
3. Contribute whatever amount up to the yearly limit to the Traditional IRA preferably the full limit all at once at the beginning of each year.
4. Once the money clears into the account you simply go online to your account and find the button that says, convert to Roth IRA
5. If you get stuck you can always chat with customer service at these brokerage firms, my experience has been that these firms are very helpful and will make sure you accomplish what is you want to with the roth conversion transaction.

Some very critical pieces of information when doing a backdoor roth conversion you should know beforehand:

1. Before you do the roth conversion make sure you understand what the pro rata rule is or at least have a general idea. The pro rata rule determines the tax consequences of an IRA distribution including a Roth Conversion based on the value of all IRA accounts aggregated together. Why is that important? Because if you have post-tax $7,000 in a traditional IRA you’re planning to convert to a Roth IRA, BUT have one other tax deferred IRA account like a SEP IRA or SIMPLE IRA, the money in that account will affect what you may end up having to owe when you file taxes. For example, let’s say between your Traditional IRA and SEP IRA you have $100,000. You want to convert the $7,000 in the traditional IRA so you do. Now you have $93,000 left in your SEP IRA. When you file taxes 93% of the $7,000, you converted which is $6,510 would be considered taxable. 
2. You would owe nothing for the conversion if the only IRA you had was your traditional you just contributed to.
3. Very important though is when it comes time to taxes, make sure you file Form 8606 with your taxes reporting your conversions. Whoever you do your taxes should know about this form and if they don’t that might be a problem and you’ll probably want to consult with a tax professional who is.

Other Important Things to Consider

1. There is an age requirement to withdraw the money and that is 59 1/2.
2. Very important to note is even if you’re 59 1/2 you still have to consider the 5 year rule. There is a 5-year rule where you need to have held your account for at least five years before you can withdraw contributions and earnings with no tax or penalty.
   1. Yes there are exceptions, like first-time home purchase and college expenses, but generally for most of us we’ll need to have held the account for 5 years and reach 59 1/2 to be able to withdraw contributions and earning with no tax or penalty. 
3. What if I Have an Emergency?
   1. Regardless of age you can withdraw contributions you made into a Roth anytime tax and penalty free. This is because you’ve already paid the taxes remember. Any growth and earnings however may be penalized depending on when you withdraw. This is still good to know that you can take the money you contributed anytime you need.
4. How much can you expect to have in your Roth IRA – well that depends on how much you invest and what you invest. But if we take the 2024 maximum contribution limit of $7,000 and divide that by 12 months we get approximately $583. If that’s all you ever contributed and invested it in a low cost broad based index or etf that tracks the S&P 500 index or US Total Market there’s a good chance you’ll earn and average annual rate of return of 10% over a 30 year period which equates to $1.3 million.

The Roth IRA is a powerful investment account you can open today, but there is another account you really want to know about called the HSA. The video on the screen will teach you more, click on it and I’ll see you over there.

Next video

Should I Open a Roth IRA?

Having a Roth IRA can be a really good inheritance to leave loved ones or any beneficiary you name. This is because your beneficiaries do not pay income tax on distributions as long as you’ve held a Roth account for more than 5 years. Also, your beneficiaries cannot just let the money sit there. They will have to make required minimum distributions, but that’s OK. Your beneficiaries will have a good source of income to do with what they want. Hopefully good choices. For more information on beneficiary rules visit this link.

Also, unlike most other retirement accounts Roth IRAs don’t force you to take minimum distributions at age 70 1/2. The money you invest in a Roth can keep growing and growing and growing. You get the point. Another reason Roth accounts are great for passing on.

If you have the ability to do so, open up a Roth IRA as soon as you can. There’s a 5 year window that can affect some of the things you can and can’t do. Don’t worry we’ll talk more about Roth IRAs in the future, because there is so much more to know. If you have any questions feel free to ask below or contact me through our Contact Us page. I still highly recommend you speak to a professional about Roth IRAs. If your financial situation allows, you can definitely benefit from having a Roth IRA.