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.

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Kevin Taylor

Your Money, Your Freedom: The 4-Point Fun Guide to Decoding Your Employment Dependency!

Ever wondered how chained you are to your 9-to-5? Or dreamt of making your money work for you while you sip cocktails on a beach, climb mountains with friends, or just hang out with children and grandchildren? Welcome to the guide to adding content to InSight’s – Employment Dependency metric—your secret weapon in the quest for financial freedom! 1. Your Money’s Scorecard Imagine for a moment that your investments are akin to a bunch of lazy couch potatoes. Yes, those starchy loungers sprawled across your financial living room, eyes glued to the TV, completely oblivious to the world of productivity. Now, ask yourself, how many of these lethargic spuds would it take to keep your life’s engine running—your fridge bursting with food, your Netflix subscription ticking over for those all-important binge sessions, and even ensuring there’s enough in the kitty for those spontaneous adventures or cozy dinners out? This quirky analogy is precisely what delving into your investment asset performance feels like. It’s an exercise in evaluating whether your hard-earned money is actively working towards your dreams and lifestyle needs or if it’s just taking up space on the sofa, idly passing time. It’s high time those potatoes were given a meaningful job! If your employment dependency is on the higher side, meaning a significant chunk of your lifestyle relies on your job income, the pressure on these couch potatoes—your investments and savings—is somewhat alleviated. They can afford to be a bit more relaxed because your job is doing the heavy lifting. However, if that dependency figure is alarmingly low, indicating that you’re leaning heavily on your investments to fund your day-to-day life, then it’s a wake-up call for your sedentary spuds. This scenario demands that your investments shed their couch potato persona and shift into high gear. Transforming these idle assets into diligent workers is essential to securing not just your current lifestyle but also your future comfort and financial independence. It’s about making your money work for you, pushing those investments to sweat so you can eventually kick back and enjoy the fruits of their labor. 2. Lifestyle Limbo: How Low Can You Go? How long can you keep sailing smoothly if your paycheck suddenly turns into a ghost, leaving you in a financial limbo? It’s a scenario that many might find daunting, yet it’s crucial in understanding how equipped you are to live not just a life, but your best life, sans the regular income stream. This goes beyond the mere basics of survival; it’s about thriving, indulging in your passions, and maintaining your lifestyle without compromise. The Employment Dependency metric serves as your financial limbo stick in this high-stakes game. How low can you dip without hitting the floor? The beauty of this metric is that the lower your dependency on your employment income, the more freedom you have to enjoy life’s pleasures without the ominous cloud of the next payday looming over you. It’s about achieving that delicate balance where your financial stability is not rocked by the absence of a paycheck, allowing you to lead a life filled with joy, security, and prosperity. Moreover, the concept of employment dependency doesn’t just offer a snapshot of your current financial resilience; it’s also a crystal ball into your future, especially your retirement years. By putting your lifestyle through a “stress test” using the Employment Dependency metric, you gain invaluable insights into how your days of leisure and retirement could look. Will you be sipping margaritas on a beach, or will you be pinching pennies? This metric illuminates the path to ensuring your retirement paycheck—funded by pensions, savings, and investments—can support your dream lifestyle. It’s about preparing today for the tomorrow you desire, making sure that when work becomes an option rather than a necessity, your lifestyle continues unabated. This dual focus on present joy and future security is what makes understanding and optimizing your employment dependency so crucial. 3. What If… The Game Life, with its unpredictable twists and turns, often throws us into scenarios we never saw coming. Imagine one day you’re on top of the world, with a hefty bonus check in hand, ready to splurge or invest. The next day, the tide turns, and those freelance projects that were your bread and butter suddenly dry up. Here’s where playing the “What If” game with your Employment Dependency metric becomes your secret superpower, allowing you to navigate through life’s uncertainties with grace and poise. Think of it as your personal financial forecasting tool, crafting an umbrella sturdy enough to shield you from any storm that life decides to brew. This approach not only tests your financial resilience in times of stress but also empowers you to remain comfortable and secure, no matter the financial weather outside. It’s about preparing for the worst while hoping for the best, ensuring that whatever life tosses your way, you’re ready to catch it with a smile. But let’s push the envelope further. What if your Employment Dependency metric could do more than just safeguard your current lifestyle? What if it could open the door to possibilities you’ve only dreamed of? Imagine living on a cruise ship, traveling the world without a care, or dedicating your days to volunteering for causes close to your heart. By understanding and adjusting your employment dependency, you start to sketch the blueprint of your life’s next chapter. It’s not just about surviving; it’s about thriving in ways you’ve only imagined. This foresight enables you to allocate your finances not just for survival or comfort, but for the fulfillment of your deepest desires and dreams. Asking “What might it require today to get there?” transforms your financial planning from a mere exercise in numbers to a strategic map leading to your ideal future. It’s about realizing that with the right planning and insight, your financial decisions today are the seeds of the lifestyle you aspire to live tomorrow. 4. Your Financial Safety Net Finding yourself high on the employment dependency scale can feel akin

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Kevin Taylor

Overview of tax documents and when to use them

Common Tax Documents: W-2 Form: Issued by employers to employees, showing wages earned and taxes withheld throughout the year. Used for reporting income on personal tax returns. 1099 Forms: Various types including: 1099-INT: Reports interest income earned from bank accounts. 1099-DIV: Reports dividend income from investments. 1099-MISC: Reports miscellaneous income, such as freelance earnings or rent payments. 1099-R: Reports distributions from retirement accounts. 1098 Form: 1098 Mortgage Interest Statement: Shows mortgage interest paid during the year, used for deducting mortgage interest on tax returns. Bank and Investment Statements: Summarizes interest, dividends, and capital gains earned from bank accounts, brokerage accounts, and investment funds. Property Tax Statements: Documenting property taxes paid on real estate owned, which may be deductible on tax returns. Receipts for Charitable Contributions: Used to claim deductions for charitable donations made throughout the year. Health Insurance Forms: Form 1095-A: For individuals who obtained health insurance through the Health Insurance Marketplace. Form 1095-B or 1095-C: Provided by insurers or employers to report health insurance coverage. Educational Documents: Form 1098-T: Reports tuition payments and other educational expenses for claiming education-related tax credits. Less Common Tax Documents: K-1 Forms: Received by partners in partnerships, shareholders in S corporations, and beneficiaries of trusts and estates, reporting income, deductions, and credits from these entities. SSA-1099 Form: Reports Social Security benefits received during the year. Unemployment Compensation Statements: Reporting income received from unemployment benefits, potentially taxable. 1099-C Form: Issued by lenders when canceling debt, potentially taxable as income. Foreign Income Documents: Form 2555: For individuals claiming the Foreign Earned Income Exclusion Form 1116: For claiming the Foreign Tax Credit. HSA or FSA Statements: Detailing contributions and withdrawals from Health Savings Accounts (HSA) or Flexible Spending Accounts (FSA). Rental Income and Expense Records: Including rental income, expenses, and depreciation for reporting rental property income or loss. Gains and Losses Records: Documentation of gains and losses from the sale of assets such as stocks, bonds, or real estate.

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