InSight

Four Options for High Earners to Benefit from a Roth

Financial Planning Dentist

Alright, let me break down the Roth IRA magic for you:

Think of the Roth IRA as the superstar of retirement accounts. You pay your taxes upfront, but when you retire, you can withdraw all that moolah tax-free – if you’re at least 59½ and you’ve had the account for five years. What’s more? That money keeps growing tax-free ’cause, unlike other accounts, the government can’t make you start withdrawing at 72.

Here’s the tricky bit, though: Only those making $138,000 or less in 2023 (or $218,000 if you’re married) can throw money into a Roth IRA. And, you can only chuck in $6,000 a year ($7,000 if you’re 50+). Earn between $138,000-$153,000 ($218,000-$228,000 for couples) and that limit shrinks.

Peter Locke from the InSight Center for Awesome Tax Strategy says, “Lots of high earners can’t put their money straight into a Roth because of these income limits.” But, there are alternative ways for the big earners to be part of this tax strategy:

Roth 401(k): If your job offers this, there’s no earnings cap. You can put in $20,500 in 2022 or $27,000 if you’re 50+. The catch? Unlike Roth IRAs, you’ve gotta start pulling money out at a certain age

Roth Conversion: If you’ve got a traditional IRA, you can flip that money into a Roth. But, you’ll need to pay taxes on it. Pro tip: Spread this out over the years to lessen the tax sting. There’s a fancy “pro rata rule” if your IRA has mixed contributions.

Backdoor Roth: Earning too much? Put money into a traditional IRA then, surprise, switch it to a Roth. Remember the pro-rata rule though!

Mega-backdoor Roth IRA: This one’s a bit of a dance:

   – First, fill up your regular 401(k) till it’s bursting.

   – Then, stash after-tax cash till you hit the $61,000 limit in 2022 ($67,500 if you are above 55).

   – Now, quick! Move those funds into a Roth IRA. Do it fast so you’re not taxed on any gains.

More related articles:

Market InSights
Kevin Taylor

There Is Too Much Money

You read that right, there is simply too much cash in the capital markets to not see a handful of effects that could impact your investments and plan. The supply of money floating around is massive right now. There is a lot of risk, COVID has us concerned about the

Read More »

Investment Bias: Recency

It’s no secret that investors tend to chase investment performance, in fact most mutual funds and investment companies count on it. Flows into mutual funds are highly correlated to the funds performance in the prior four quarters. Thus, investors piling into an investment shortly after peaking and about to reverse

Read More »
boulder colorado financial planners
Articles
Kevin Taylor

What Constitutes “Like-Kind” in a 1031 Exchange?

The requirement for tax-deferred exchanges of property has always stated that the Replacement Property acquired must be of a “like-kind” to the property sold, known as the Relinquished Property. This principle has been in effect since the addition of IRC Section 1031 to the tax code in 1921. The basis

Read More »

Pin It on Pinterest