Roth This way - EP #84

Apr 11

Welcome to episode 84 of the One for the Money podcast. This episode airs on April 15 which means it’s the tax filing deadline. Now no one likes paying more taxes than they have to, and a great way to accomplish this is by using a Roth Retirement account. In this episode, I’ll share how everyone can have a Roth.

In the tips, tricks, and strategies portion, I will share a tip on how for the same amount of money it may make more sense to complete a Roth conversion than a Roth contribution.

In this episode...

What is a Roth Retirement Account? [1:56]
Direct Roth IRA Contributions [2:46]
Roth 401ks, SIMPLE IRAs, and SEP IRAs [3:44]
Roth Conversions [7:36]
Backdoor Roth IRAs & Pro-Rata Rule [8:36]

MAIN
I remember years ago a coworker of mine shared with me that she and her husband hoped that their income would one day be high enough that they would no longer be eligible to contribute to a Roth IRA. It’s true, that certain individuals, can make too much income to contribute to a Roth IRA. But in this episode, I will share how everyone, regardless of their income level can contribute to a Roth IRA or put differently, how everyone can Roth this way. Okay, that was pretty bad but I had to try.
But first, it would be helpful to provide a brief explanation of what exactly a Roth retirement account is and how they came about. A Roth retirement account is merely a retirement account on which you invest monies on which you already paid taxes. Because you are contributing money after it’s been taxed all of the growth and all of the distributions are 100% tax-free (provided you follow the required distribution rules; age 59.5, etc). These are a fantastic way for individuals to build a tax-free bucket of money that they can utilize in retirement that won't have any taxable implications.
Roth IRA Contributions
The first way to contribute to a Roth IRA is to make direct Roth IRA contributions. For the 2025 tax year, individuals who earn less than $150,000 or married couples who earn less than $236,000 can contribute directly to a Roth IRA. For those under 50, they can contribute $7000 and for those 50 and older they can contribute $8000. Roth IRAs are a fantastic way to build a tax-free bucket of money for retirement. I set these up for my wife and me early in our marriage and I’m so glad I did. These can be especially great for kids as well. I call them Kid Roths and I’ve set these up for our three boys. That way they can benefit from decades of compound growth. If you are early in your career it can be a great time to invest in a Roth IRA.
Roth 401ks/Simple IRAs and SEP IRAs
Roth 401ks/Simple IRAs and SEP IRAs are another great way for anyone regardless of income level to contribute to a Roth investment account. For whatever reason, Roth 401ks, Simple IRAs, and SEP IRAs have no income limits like Roth IRAs do. So regardless of one's income, they can contribute to a Roth 401k. Roth 401ks are great for lower earners as they can allow you to put away even more money on a tax-free forever basis. Individuals can put up to $23,500 in 2025 and for those 50 and older they can put away an extra $30,500. Oddly enough, for those specifically between the ages of 60-63 they can put away $34,750. Why especially those ages, not sure, you’ll have to ask Congress.
Roth Simple IRAs have lower contribution limits namely $16,000 for those under 50 and $19,500 for those 50 and older. Roth SEP IRA limits are based on a percentage of one's income.
These all are great vehicles where individuals can put a lot more money away on a tax-free forever basis. These can make a lot of sense for individuals in their lower-income years such as those early in their career or for those that are late in their career when they are working part-time prior to retirement.
However, these can also make a lot of sense for much higher earners who also happen to have very large pre-tax retirement account balances. As I explained in episode 82 the reason why high earners with large pre-tax retirement accounts should consider stopping contributions to these accounts is because they will be forced to take out huge sums when they reach 75 via required minimum distributions. You haven’t paid taxes on these funds yet and the IRS finally wants to get their slice.
For example, if at age 60 you had a balance of ~$2 million in your pre-tax retirement account, at a modest 7%/annual rate of return it will be $5.5M at age 75. You will then be forced to take out $223,000 at age 80 it will be $316,000 and at 85, it will be $418,000.
And it's not just extra income tax you will pay. With all the extra income you’ll have to pay a lot more in Medicare Part B premiums which are based on income. It could be as high as $591/month vs the lowest premium of $185/month (and those are 2025 numbers).
And if you think you can leave this problem for your kids, they’ll have even more tax problems they will now as they will have just 10 years to withdraw 100% of the funds which will occur during some of the highest earning years.
You’ve got to hand it to Congress, it is an incredibly stealthy way to raise tax revenue by making the inheritors pay the taxes. Because who feels sorry for beneficiaries inheriting money and having to pay more taxes. But with proper planning, more of that money can be spent by the actual beneficiaries and not by the government.
Another way to contribute to a Roth IRA is via a Roth Conversion which has been around since 2010, that was the year the income limit for Roth IRA conversions was removed entirely. This allowed individuals with higher incomes to convert their traditional IRAs into Roth IRAs, thus opening the doors for many wealthy individuals to take advantage of the tax-free growth.
There are no income limits for Roth IRA conversions, so regardless of your income, you can convert any amount from a Traditional IRA into a Roth IRA. However, the converted amount will be subject to taxes. I complete these for many of my clients in the early years of their retirement. Consequently, we are able to save them hundreds of thousands and in some cases millions of dollars in taxes they would have paid had they let things go without the conversions. For more details on Roth Conversions, see episode 49 of this podcast.
The final way to get money into a Roth is via the backdoor. It is literally called a Backdoor Roth IRA. This is a strategy used by high-income earners to get around the income limits for contributing directly to a Roth IRA. This method also takes advantage of the ability to convert a Traditional IRA into a Roth IRA.
Here’s how the Backdoor Roth IRA works, step by step:
The first step is to contribute to a Traditional IRA. Unlike Roth IRAs, Traditional IRAs do not have income limits for contributions. However, the contribution might not be deductible if the individual is covered by a workplace retirement plan and their income exceeds certain thresholds.
Even if the contribution is non-deductible, meaning no tax break is received on the contribution, it is still allowed. The individual can contribute up to the annual limit (e.g., $7000 in 2025, or $8000 for those 50 and older)
Once the money is in the Traditional IRA, the next step is to convert those funds into a Roth IRA. This is where the "backdoor" part of the strategy comes into play.
Many people perform the conversion shortly after the contribution to minimize the amount of earnings that would be subject to tax. This is particularly helpful if the Traditional IRA has little to no growth.
But there are a few important caveats to Keep in Mind when it comes to backdoor Roth contributions.
These are subject to the
Pro-rata Rule: When you convert money from a Traditional IRA (or other tax-deferred account like a 401(k) if applicable) to a Roth IRA, you must pay taxes on any pre-tax contributions or earnings you convert. The pro rata rule comes into play if your Traditional IRA contains both pre-tax (tax-deductible) and after-tax (non-deductible) contributions.
The pro rata rule essentially requires you to treat the pre-tax and after-tax portions of your account as a combined pool when you do a Roth conversion. You cannot pick and choose which portion of your IRA to convert; it will be a blend of pre-tax and after-tax money, based on the proportion of each type of contribution in your account.
This can be avoided by rolling over any pre-tax IRA money into an employer-sponsored retirement plan (like a 401(k)) before making the Backdoor Roth conversion. Lots to consider so I would speak with an experienced Certified financial planner about these.
Now If you think these are impressive ways to get a Roth wait until you hear what the legendary investor Peter Thiel accomplished with a Roth. He started his Roth IRA with just a few thousand dollars. He then invested these funds into buying pre-IPO stock opportunities in FB and PayPal. He bought these shares for a fraction of a penny and as a result, he has a completely tax-free Roth IRA with a balance of over $5 Billion, with a capital “B”. That’s like having 5000 Roth IRA accounts each with 1 million dollars.
Roths are an incredibly powerful tax-saving strategy that everyone, regardless of income can create for themselves. I strongly encourage you to speak with a certified financial planner, who can help you consider your options. We’d be happy to assist you.
TIPS, TRICKS AND STRATEGIES
Welcome to the tips, tricks, and strategies portion of the podcast where I will share tips to determine for the same amount of money, it makes more sense to complete a Roth conversion or a Roth contribution.
For those under 50, the most you can put away in a Roth IRA is $7000. that would be a great contribution to get some money in a Roth IRA. But if you really wanted to get more money into a Roth so more money would be tax-free forever it might make more sense to spend the $7000 on the taxes paid to convert funds from a pre-tax IRA to a Roth IRA instead. For example, if you had $50,000 in a pre-tax IRA and you paid taxes at a 14% rate, you would have a $7000 tax bill. But instead of having just $7000 in a Roth IRA, you would have $50,000. That’s a lot more tax insurance. You could just contribute $7000 to the Roth and still have the $50k in pre-tax, but remember, that pre-tax IRA could become a ticking tax time bomb as we have no idea what tax rates will be in the future. But it’s likely higher because we have historically low-income tax rates as well as a historically high deficit of over $35T. Thank you congress.
Well, I hope you found these helpful, and until next time, remember a better life is a result of better planning, and that must include Roth IRA planning. Have a great one!