Do You Like Tax-Free Money?
That was a rhetorical question, but for good reason: to get your attention.
Only 15% of US households contributed to a traditional or Roth IRA in tax year 2021. 1. This means even less than that contributed to a Roth IRA since this percentage accounts for both types of contributions. You may be aware that a Roth IRA is a retirement vehicle that can grow tax-free and can provide tax-free income. 2. Hence, the shock and awe. Why in the world wouldn’t more people be contributing to a Roth IRA?
Are you familiar with the saying that “a confused mind says no?”
Putting money in a Roth IRA can be confusing because there are so many rules, but that confusion is what we are hoping to remedy. Here is a simple, straightforward fact: If you have an IRA, qualified retirement plan and/or you or your spouse have earned income, then there is a very good chance you have the opportunity to put money in a Roth account.
Technically, there here are five primary ways you get money into a Roth:
- Roth IRA Contribution
- Roth Retirement Plan Contribution
- Roth Conversion
- Backdoor Roth IRA Contribution
- Mega Backdoor Roth Contribution.
Let’s visit them one at a time.
#1…Roth IRA Contribution. If you or your spouse have earned income for 2022 or 2023, there is a good chance you can make a contribution. It is important to note that there are income limitations that could prohibit a traditional contribution, but don’t be discouraged until you have read all five avenues for getting money into a Roth. Here are the basics:
| Contribution Limit | Additional Catch-up amount at age 50 and up | Income Limits | |
| 2022 (Through April 18th) | $6,000 | $1,000 | $204,000 – $214,000 joint
$129,000 – $144,000 single & HOH |
| 2023 | $6,500 | $1,000 | $218,000 – $228,000 joint
$138,000 – $153,000 single & HOH |
#2…Roth Retirement Plan Contribution. Depending on the type of retirement plan, you could possibly contribute as much as $22,500 for 2023. AND…if you are age 50 or older, there could be an additional catch-up contribution as high as $7,500. AND…thanks to the Secure Act 2.0, employers are able to make matching contributions into a Roth account!
#3…Roth Conversion. The amount you are able to convert from a traditional IRA to a Roth IRA is unlimited. This may sound like music to your ears, but remember that every dollar converted could be taxed as taxable income. This is where a professional needs to help you determine the best long-term strategy for you and your family. There is not a boiler plate answer—some people will have lower taxes in retirement. Some people will not. Some people will have tax diversification in retirement. Some people will not. Some people will need their IRA in retirement. Some people will not….and many more caveats could come into play.
#4…Backdoor Roth IRA. Perhaps you make too much money to contribute to a Roth IRA this year. You can, however, still make a contribution to a traditional non-deductible IRA without any income limitations. Technically, you could convert these dollars to a Roth IRA after the contribution is made. Beware! This is not as easy as it sounds. If you have other IRAs that are pre-tax, then the conversion could trigger some taxation. While this could be a great strategy, you should proceed with a professional and with caution.
#5…Mega Backdoor Roth IRA. While the retirement plan contribution deferral limits may be $22,500 or $30,000 for someone over the age of 50, this is not the maximum that you can put back into a plan in its entirety. This limit t is $66,000 for 2023. The amount over your contribution deferral limit is actually treated like a contribution to a traditional non-deductible IRA. It is after-tax savings, which makes it a great option for a Roth conversion if the retirement plan allows. This means that someone over the age of 50 could actually put $73,500 into a Roth account via contributions made in 2023.
Okay. We said we were going to simplify things and we fell right back into the deep end. Roth planning is not simple, so I encourage you to remember these simple truths:
- If you have an IRA, qualified retirement plan and/or you or your spouse have earned income; there is a very good chance you have the opportunity to put money in a Roth account.
- Seek the help of your retirement professional. This is what we are here for.
- Remember that you can either play now and pay later or plan now and play later!
Sources:
- https://www.ici.org/system/files/2023-02/per29-01.pdf
- Certain rules need to apply to received tax-free treatment.