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My $102K Roth IRA Mistake | Top 5 Roth IRA Mistakes to Avoid in 2022 - YouTube
Channel: FIRE Psy Chat
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welcome to fireside chat my name is sai
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let's talk about the five common
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mistakes people make with the roth iras
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i have seen a lot of these mistakes
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being made during the financial coaching
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sessions with my clients i did the math
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the other day and i probably shouldn't
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have but i did it anyway and i'm going
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to show you this chart i turned 18 in
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2004 and i was already earning enough
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back then to maximize my ira
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contributions but i chose not to and
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these here are the actual s p 500
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returns and the ira contribution limits
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from 2004 to 2016. if i lump sum invest
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in my roth ira up to the maximum
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contribution every year even with these
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three down years i would have had 102
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000 in total return just in the roth ira
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but because i didn't know how to
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properly budget and instead i got myself
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into 110 000 in consumer debt i didn't
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start contributing to my roth ira until
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2017 when i paid off my debt completely
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so if i add fifty five hundred dollars
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and six thousand dollars for these five
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years my roth ira would have grown into
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266 000 today so try not to look back if
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you can i was just doing this for fun
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but now i feel like crying myself to
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sleep
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anyway let's get into these five
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mistakes and mistake number one is not
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contributing to your spousal roth ira
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did you know that you can contribute to
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a spousal ira if you have a non-working
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spouse at home and that's an extra six
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thousand dollars a year that people
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forget to contribute the working
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spouse's income has to exceed the total
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ira contributions made on behalf of both
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spouses so for example when you're
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filing taxes as married filing jointly
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you have to make at least 12 000 a year
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in gross income or 14 000 a year if
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you're age 50 or older keep in mind that
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you cannot open join accounts with ira
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and your account is assigned per
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taxpayer so one spouse will have one ira
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and your non-working spouse will have
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another ira you can however both
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contribute from your joint checking
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account into the two separate roth iras
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you also have to file your taxes as a
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joint tax return or marry finally
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jointly when you're both retired you can
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share the withdrawals or distributions
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from both accounts together you can also
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compete who made more money in their
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roth iras just kidding don't do that
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let's say you're both 30 years old and
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you contribute 12 000 into your two
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separate roth ira accounts each account
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with 10 average annual rate of return
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could turn into two million dollars by
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the time you turn 60 years old
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keep in mind that these two million
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dollars is in one of the roth iras so
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total combined is four million dollars
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so if you have a non-working spouse at
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home and that person doesn't have a roth
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ira open i encourage you to open one
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today when you're both contributing to a
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spousal ira it doesn't matter who funds
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the account the named account owner of
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that spousal ira will remain the same as
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long as that person lives it is entirely
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up to your non-working spouse to make
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decisions on what to invest how to
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invest how to make withdrawals and how
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to designate beneficiaries by the way if
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you need help with your personal
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finances you can schedule a free
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one-on-one 20 minute financial coaching
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session by visiting firesidechat.com
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coaching the number two common mistake
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people make with their roth ira is not
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designating their beneficiaries this is
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especially important for people who are
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single or divorced when you're married
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if you leave the beneficiary blank then
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it automatically goes to your spouse but
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you have to think about the worst case
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scenario what happens if you and your
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spouse both die in a car accident at the
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same time
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i would recommend having contingent
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beneficiaries and reviewing the list of
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your beneficiaries on every financial
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account you own at least once a year if
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you're divorced your marital status
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doesn't get updated on your ira so if
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you haven't updated your beneficiary in
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a while your ex-spouse might still be
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listed as the primary you probably
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wouldn't want your ex-spouse to get your
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retirement money right because remember
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that your retirement account beneficiary
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designation
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trump your will and trust directives
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this is why we check our beneficiary
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designations once every year because
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life always happens my iras have both
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primary and contingent beneficiaries
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your contingent beneficiary is in case
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your primary beneficiary passed away at
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the time the benefit is to be paid the
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worst case scenario is if both you and
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your spouse pass away at the same time i
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would be careful with designating your
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miners to be the contingent beneficiary
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if your child receives an inheritance
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from you the child has to wait until 18
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or 21 years old depending on the state
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that you live in to take full possession
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of the inheritance until then the
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probate court will designate a guardian
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or that child's other parent to handle
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the inheritance most people wouldn't
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want the court to designate their
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ex-spouse to look after the money that
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they work hard for i would arrange some
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sort of guardianship so that the probate
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judge would approve the appointment of
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that guardian to handle the money for
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your child you can also set up a family
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trust so that you can designate a
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trustee to have more control over your
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money if you pass away you can even
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designate your trust as the contingent
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beneficiary in your ira in your will you
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can designate an adult custodian to
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manage inheritance under the uniform
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transfers to minors act or utma
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depending on the state that you live in
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you can transfer a or you can open a
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utma with a broker for your child
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whoever you designate as a custodian can
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make financial decisions in the child's
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best interest so bottom line check your
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beneficiaries at least once a year and
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make sure you trust that person to
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handle your money if you pass away
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mistake number three people make with
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the roth ira is not using a backdoor
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roth ira because they're above the
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income threshold the irs states that if
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you make over
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and forty four thousand dollars a year
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as a single person or two hundred and
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fourteen thousand dollars a year as a
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married couple you cannot directly
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contribute to the roth ira however there
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is a tax loophole to where you can
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convert your non-deductible traditional
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ira contribution to the roth ira this is
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also known as the backdoor roth ira
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strategy basically you need two iras to
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make the backdoor roth ira happen
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traditional ira and the roth ira my wife
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and i each have a traditional ira and a
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roth ira accounts we contribute directly
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to our traditional ira as non-deductible
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contributions because we're above the
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traditional ira income threshold what we
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do is we hold it in the money market
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account inside a traditional ira once
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the funding in the traditional ira is
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settled then i request a transfer from
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that money market account in my
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traditional ira to a money market
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account in my roth ira let me give you
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an example let's say i can't directly
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contribute to my roth ira because we're
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above the 214 000 income threshold as a
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married couple for the month of april
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i'm contributing 500 to my vanguard
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traditional ira as a non-deductible
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contribution i'm not going to invest
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that 500 in anything inside the
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traditional ira i need to wait a few
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days until the funding gets settled in
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the traditional ira and then i'm going
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to request a conversion or transfer of
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that 500 in my traditional ira to a roth
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ira when that 500 gets settled in the
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roth ira then i can start investing and
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enjoy tax rate growth you can also check
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out the detailed video i didn't on the
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backdoor roth ira strategy and i will
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put that video in the description below
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by the way you can get your free fire
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resources by visiting firesidechat.com
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contact and you can also check out the
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fireside chat shop and i have all of my
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stuff on my bookshelf at
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firesidechat.com
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shopping the number four common mistake
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people make is forgetting to contribute
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to a roth ira because they already have
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a 401k guys 401k is not the same as an
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ira and ira is your individual
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retirement account that you own
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and 401k is an employer sponsor
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retirement account that your employer
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manages if you're self-employed then you
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would manage a solo 401k in january 2021
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investment company institute published a
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journal that only 37 of u.s households
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owned iras and only 12 percent of u.s
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households contributed to a traditional
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or roth iras in tax year 2019
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you can absolutely own both 401k and ira
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and contribute to both accounts at the
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same time for the 401k you can
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contribute up to 20 500
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for the year 2022 and you can contribute
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up to six thousand dollars a year to
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either a traditional ira a roth ira or
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contribute to both as long as it's not
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exceeding six thousand dollars the
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common question i get from my clients is
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why they need to have both when they can
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contribute some to the more to the 401k
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and it's only six thousand dollars to an
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ira a roth ira allows you to grow your
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money tax-free and not every 401k offers
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the roth options so i always recommend
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to contribute up to the 401k employer
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match and then maximize their iras up to
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six thousand dollars and then slowly
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contribute to their 401ks until they
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reach the maximum limit at twenty
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thousand five hundred however if you
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have the roth option with your 401k then
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you can do either or you can maximize
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both broth 401k and roth ira at a total
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of 26 500 for the year 2022. i also
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encourage everyone to open a traditional
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ira and the roth ira today even if
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you're not ready to make any
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contributions there's a five-year rule
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for roth ira withdrawals so even if
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you're close to the retirement age at 59
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and a half you still have to have your
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roth ira open for at least five tax
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years after the first contribution you
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make to your roth ira you also have to
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have your account open for five years
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when you make a direct rollover from a
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roth 401k to a roth ira you can watch
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the detailed video i did on the plan to
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withdraw 2.8 million dollars when we
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retire early and i will link that video
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in the description below the number five
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common mistake people make with a roth
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ira is using it as an emergency fund you
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can actually withdraw your roth ira
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contributions at any time without
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penalties so for example if you
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contributed six thousand dollars this
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year and you made five hundred dollars
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in earnings you can withdraw six
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thousand dollars at any time without any
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penalties but but you will have to pay
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the penalty if you touch the earnings of
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500
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the money you contributed to your roth
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ira is already taxed so the irs can't
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tax you again your roth ira should be
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your very last resort like a serious
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illness a long-term unemployment or
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other big emergencies after you have
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depleted your fully funded emergency
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fund in cash however i know some people
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who use roth ira as an emergency fund
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because the reason is they don't want to
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lose the inflation and the loss of
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investing opportunity in the stock
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market but what happens when the stock
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market becomes volatile like we've been
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seeing right now in the short term your
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six thousand dollar contribution now
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becomes fifty five hundred dollars or
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maybe even down to five thousand dollars
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you should always keep your emergency
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fund liquid and not invested in anything
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even if it loses the inflation because
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you could lose a lot more to stocks etfs
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or mutual funds in the short term during
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market volatility
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you'll also lose many years of compound
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interest on the contribution you take
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out the six thousand dollars you would
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draw today is basically losing 126 000
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in 30 years with 10 average annual
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return you have to shift your mindset
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about how today's dollar could turn into
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21 in 30 years if you want to know more
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about how to build your first emergency
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fund and roth ira you can check out
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these two videos so with that said i
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appreciate you watching my video don't
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forget to subscribe and i hope to see
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you in the next video
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have a good one
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[Music]
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you
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