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By Jada Diedrich, CPA

Roth IRAs are a great way to build your retirement nest egg, help your children learn financial responsibility, and save money in taxes. Before we take a deep dive into this popular investment strategy, let’s first explore the basics: when you make qualified withdrawals from a Roth IRA, you don’t pay income taxes. The government allows you to contribute $6,000 each year ($7,000 if over age 50) if your modified adjusted gross income (MAGI) in 2022 isn’t more than $144,000 for a single taxpayer or $214,000 as a married couple filing jointly. When you reach that income bracket, you can’t make a direct Roth IRA contribution.

As a CPA and Buckingham Wealth Advisor, Jada Diedrich spends time getting to know clients personally and professionally. By forming strong relationships, she enhances her ability to help clients define and achieve their goals.

Jada Diedrich

If your income exceeds these limits, are you out of luck? Not necessarily. Here are some planning opportunities that may open the door to Roth retirement savings for those people who thought it was closed.

Does Your Company Retirement Plan have a Roth Option?

Many companies have a Roth option in their 401(k) or other qualified plans. If you don’t know, it’s worthwhile to ask. Income limitations don’t apply when you make contributions through an employer-qualified plan. By using this strategy, contributions can be made after turning age 70 if you have earned income.

If you are eligible to fund a Roth IRA, this can be done in addition to contributions to your company retirement plan. For example, in 2022 you can defer $20,500 ($27,000 if over age 50) to your employer Roth or traditional 401(k). In addition, you can make a Roth IRA contribution of $6,000 ($7,000 if over age 50) if you are within the income limits.

Some plans allow you to make after-tax contributions to qualified retirement plans. It’s possible to really take advantage of some savings opportunities if you have the cash flow to do so.

There are some aspects of your company plan you will want to fully understand. For example, employer matching contributions don’t go into the Roth portion of the plan, they go into the traditional plan and are taxed upon withdrawal. Make sure you talk to your benefits manager to get a summary of your specific plan.

Have You Heard about the “Back Door” Roth IRA?

This strategy is a two-step process where you make a non-deductible contribution to a traditional IRA (which has no income limitations), then convert it to a Roth IRA. If you do this immediately, there may be no tax consequences. The plan has some complexities — especially if you have other IRA accounts (SEP, SIMPLE, etc.) — so be sure to consult a tax professional to understand your specific situation first. It is worth noting there has been talk among lawmakers to remove this strategy. While it is currently still an option, this is another good reason to reach out to a tax professional before employing this method.

Other Roth Conversion Strategies

Another way to use Roth conversions is to convert existing traditional IRAs to Roth IRAs. Although this will create ordinary income for the amount you convert, there are many scenarios — especially for new retirees who have not started collecting Social Security — where doing so could lower your taxes over time. Because you effectively decrease your traditional IRA value, the required minimum distributions (RMDs) on those accounts will be lower. Also, Roth IRAs do not require minimum distributions, so this conversion strategy can help retirees control their taxable income during retirement. This may lead to lower Medicare costs for the retiree since Medicare Part B premiums are based on your taxable income in retirement.


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Roth IRA Planning for Kids

When we see the benefit of tax-free growth over time, it makes many of wish we would have started Roth savings sooner. There is no minimum age for funding a Roth IRA, only a requirement to have earned income. For example, if you have children working a part time job, they should consider funding a Roth IRA. Encourage them to put aside some of their earnings into their own Roth IRA, or you can gift them contributions on their behalf. As long as the amount contributed to the Roth doesn’t exceed their earned income, you can also “match” their contributions. These are all great ways to teach children about saving and investing.

Let’s look at how much you can save over time if you start investing different amounts at different ages. Let’s assume the following:

  • You want to retire at the age of 65. 
  • The market is giving an average of 6% return. 
  • You have a starting balance of $10,000 in your Roth IRA. 
  • You make $30,000 per year, so you’re sitting at a marginal tax rate of 12%.
For illustrative purposes only.

For illustrative purposes only.

Pay Now or Pay Later

Utilizing Roth retirement savings strategies means you pay taxes now, rather than later like you do with traditional retirement savings. Making the decision which is better depends on if you think your income taxes will be higher in retirement than they are now. If your crystal ball is cloudy like ours, when it comes to future tax rates you may decide to use some of both strategies. Also, keep in mind if you missed making contributions in a given year, you have until April 15th of the following year to contribute.

Whether you invest in a Roth or traditional IRA, this retirement strategy is a great way to grow your money. It’s also a fun way to start your children on the road to fiscal responsibility. Since many factors can play into this wealth plan, it’s best to consult your wealth advisor for more information.

About the author: Jada Diedrich, CPA

As a CPA and Buckingham Wealth Advisor, Jada Diedrich spends time getting to know clients personally and professionally. By forming strong relationships, she enhances her ability to help clients define and achieve their goals.

For informational and educational purposes only and should not be construed as specific investment, accounting, legal, or tax advice. Certain information is based upon third party data which may become outdated or otherwise superseded without notice. Third-party information is deemed to be reliable, but its accuracy and completeness cannot be guaranteed. Individuals with special needs and those who take care of them have unique circumstances and individuals should talk with a qualified professional based on their own circumstances. Neither the Securities and Exchange Commission (SEC) nor any other federal or state agency have approved, determined the accuracy, or confirmed the adequacy of this article. R-22-3525


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Email Jeffrey Levine, CPA/PFS, Chief Planning Officer at Buckingham Wealth Partners, at: AskTheHammer@BuckinghamGroup.com.