Your Guide to Roth IRAs - YouTube

Today's Cardinal Lesson- we're going to  talk about the Roth IRA as opposed to the  

Traditional IRA. So Traditional IRAs or the IRA  has been around since the early 70’s. And in 1997,  

William Roth was the Sponsor of the Roth Tax Bill-  or the Roth, and it became the Roth IRA. Which is  

a way to set up a Tax Free Retirement Account,  okay. Now, I've had some people that have  

commented about me using the word: ‘Tax-Free.’  Not necessarily in a positive way, and they're  

saying they didn't necessarily agree with me. And  the part that's Tax-Free about it, or never Taxed  

is the Accumulated Earnings. So Earnings,  accumulate Tax-Free. So it is funded- a Roth  

IRA is funded with after Tax Dollars. So you know,  like, if we use an example of my 23 year old son-  

just starting on his first job. He got a  really nice salary. He's a Graduated Engineer,  

Mechanical Engineer, and he's sitting down  going over the stuff with me. And I said  

he has an option in his 401K to have Salary  Deduction. To have it go straight into the Roth.  

He doesn't get a Tax Deduction for that. In other  words, he's putting after Tax Money in there.  

It's going to make his paycheck a little smaller,  but I still recommended that he did it. Because,  

the Earnings that he's going to  enjoy over, like a 40-year career,  

are going to far outweigh that money that  he's putting in there now. And that's all  

going to be ultimately Tax-Free for him. So  the part of the Roth IRA, which is Tax-Free,  

is the Accumulation. Which after 30 or 40 years of  Accumulation, many times, that far outweighs the  

Contributions that were put in there, okay. So,  it started by William Roth. He was the sponsor of  

the Bill, so it got named after him. It's funded  with after Tax Dollars. And another real advantage  

to this, is that when you've been accumulating  money in a Traditional IRA, or a Traditional 401k-  

which is where most money is when you get  to be 72. You have to take a certain amount  

of that out every year. It's a little bit of a  complicated formula, we can help you with that.  

And that amount that you have to take  each.. out each year grows over time. So  

what the government's saying to you, with  Required Minimum Distributions or RMDs,  

is you've enjoyed this Tax Deferral all these  years: Now the party's over. You've got to  

start taking some money out of here, you're  retired. With the Roth, if you fund it with  

after-tax dollars, or you pay the Taxes during  a Conversion. You're not going to face RMDs. So  

that, many people that put money in a Roth, end  up leaving it there, or leaving some of it there  

for the rest of their lives. And that goes on to  their heirs, and their heirs inherited without a  

tax bill attached- which is pretty sweet. So you  got no Required Minimum Distributions on the Roth.  

Now for Contributions, because many of you  are eligible each year, even though you have  

a Retirement Plan at work or you got a 401K.  You're eligible to put: if you're 50 and over,  

$7,000 a year for each of you,  if you're married, or $14,000  

into a Roth account. So you know, you start adding  that up. I have many people that come in to me,  

and they start doing. They're coming in maybe five  years before retirement, and then what we're going  

to do is plan out the next five years. And  this is included, that we can go ahead and  

make a contribution. Some of the people come in,  have already been doing that for a few years,  

and so the income limits on that are $144,000  for a Single, $214,000 for a Couple. So if  

you're over that, you can't do this. I've got  another way you can talk to me about a backdoor  

Roth IRA, okay. I mean we actually do have a  way to do that, but for people that are under,  

that's pretty easy. You can just open one and  you're putting after-tax dollars in there.  

Now they get.. Roth’s have this thing called the  Five-Year Rule and what it means, is that when you  

open a Roth IRA, when you open your first one,  you can't take any money out of there Tax-Free  

until five years have passed. That's  an oversimplification of the rules,  

a little bit complicated. But, so, for that I'd  recommend if you don't have a Roth of any kind,  

now that you would open one. Even if you put $100  in there or $500, because you'd start the top  

clock ticking on the Five-Year Rule. So  that's something we could cover individually,  

it's something to think about. Now, another  advantage to the Roth IRA is the Distributions  

from a Roth and Distributions in Retirement  Accounts is translated as Income you live off of.  

Many people just don't have the luxury of waiting  until Required Minimum Distribution time or 72  

to start pulling money out of there, people have  to live off of it, okay. And so when you're living  

off of regular 401K Money or regular Traditional  IRA money, that creates a Tax Bill. It also  

creates Income that is used to ‘Extra Tax’  Medicare under IRMAA. And it causes your Social  

Security to be Taxed with an, or with a Roth,  the Income or the Distributions are Tax-Free.  

So they don't run up a bill for IRMAA, or for  Social Security. So if we can catch somebody,  

you know, in your early 60’s- mid 60’s- and we  can plan for a while through Roth Conversions.  

So that you'll.. you'll be under the  thresholds for these kind of things.  

Earnings Accumulate Tax-Free. I mean I've  already gone over that, but it's, just  

when you start looking at that, when I look at an  account where somebody has, let's say they have  

$1,000,000 in their 401K. And when we really dig  into that account, you know, there's $300-400,000  

that they actually contributed, or their employer  contributed. The other $500-600,000 Earnings. They  

haven't paid any Tax on any of it, and now they  have, you know, what Ed Slot refers to as a as a  

Tax Bomb. Because somebody's gonna have to pay Tax  on that thing, and if they're just in their 60’s,  

that thing is going to inflate even more. And  if the plan here is to leave it to your kids,  

that's not necessarily a very good Estate Plan.  Because you're handing your kids a tax bill,  

and in order to get any money out of this  thing, the kids are going to have to cash  

it in and pay the Taxes all at once. Now with a  Roth, Beneficiaries have 10 years to distribute  

the money to themselves. So, you know like if if  if a beneficiary inherited $200,000 worth of Roth  

IRA. Maybe they want some of that  money, now, but they can leave  

the Balance. Let's say they wanted $50,000  now. Well first of all that's Tax-Free,  

which is pretty sweet, doesn't show up on  their Tax Return. And then $150,000 of it,  

they could leave in the Roth, and then it  accumulates even further Tax-Free. And they could  

wait till the end of the 10th year, and then they  have to pull it all out. But they still don't have  

to pay Taxes at the end of the 10th year, or they  can space it out, or create an Income. So it's,  

it's not only Tax-Free during your life. The  accumulation in Earnings and the Principal,  

then it's Tax-Free for another 10 years, for money  left on Deposit for your Heirs, pretty sweet.  

Now a lot of what we do in Financial Planning  is, people say, ‘Man I want in.’ Okay,  

well then we need a Conversion plan. And you  know a Conversion just means I have ‘X’ amount  

in Traditional, a big balance, and now  I'm going to convert a portion of that  

over to the Roth. I mean we had one guy that  just didn't want to play that way, he just said,  

I want to convert the whole thing. And I said,  you know, that's going to create a big Tax Bill-  

I don't care. I want to do it. Could you at least  spread it because this was in December, last year.  

Could you at least do, half this year, and half  in January. Now he didn't want to do any of that,  

and he ended up paying us the Planning Fee,  just to tell him what the Taxes are. So we did,  

we calculated all of it, and sent it to him and he  converted the whole thing. But he created a huge  

Tax Bill, so I think it's more prudent to do it  over a series of years. Okay, and to have a plan  

and what a lot of people use is for a couple,  the top of the 24% Tax Bracket: is $340,000 of  

Adjusted Gross Income for the top- for a Single is  $170,000. So a lot of people, when they're looking  

at a Roth conversion stand, they say I can stand  paying the taxes, now at a rate of 24%. So if this  

couple had $150,000 of income, otherwise, that  they're paying Taxes on- If we converted $190,000  

of Roth in this year, they would, they're gonna  have to pay tax on that $190,000. And but,  

but they would, that would be the most Federal Tax  Rate that they paid. Of course, you'd have to add  

the State Income Tax, we get a lot of people  doing these in Texas and Florida- where they  

enjoy no Taxes. But we've got to factor that in  too. It's still, for many people, makes sense  

to develop a strategy. That's what we do as part  of a Retirement Plan. So we can later draw from  

that Account Tax-Free. Now, another question on a  Conversion that we need to ask: Are you going to  

pay the Tax out of the Converted Money? If you're  going to do that, you need to be over 59 and ½.  

The next thing, or you know, are you going to  pay it out of the converted money. Or are you  

going to pay this out of other money that  you have sitting on the sidelines? And if  

you don't have that money, then obviously it's  going to come out of the conversion amount. We  

can make it work either way but ideally you  pay these Federal Taxes out of money sitting  

on the sidelines. And then you get to convert  the whole amount- it ends up in the account.  

Now the conversion spread, over a number  of years, Roth 401K. New contributions,  

we have a lot of folks come into us at: 60, 61,  62, 58. And they've got a few more years of work,  

and then they're going to retire, and then  they want to figure out how they're going to  

live after that. And that's what we're doing  in the Retirement Plan. Well if their 401K  

allows Roth contributions, as opposed to regular  Traditional contributions. My suggestion is they  

go make that change and I'm suggesting that to  you, to consider it. You know if you want to call  

me up, and look at the whole situation, I'll be  glad to talk with you. But it is to think about,  

just changing your contribution, and that's  going to lower your paycheck, because it's  

it's not your contributions. Then, they are not  Tax Deferred or Tax Deductible. They’re after Tax,  

so it'll have an effect on the amount of your  paycheck, but you'll start accumulating Roth money  

right away inside of your 401K. If your 401K  allows it, so I can help you figure all that out.  

If you, if you need help now, then we get down to  I have a lot of people ask questions about, ‘What  

money do I put in in the Roth?’ And ‘What money do  I leave in the Traditional?’ Or in other words, if  

I've got several Mutual Funds or several different  Stocks, you know which ones are in the Roth,  

which ones are left in the Traditional. And  my general answer to that, and I could give  

you a specific answer, if I'm handling  the money or giving the advice on it, is  

you put the riskier stuff- that's in Gross Stocks  in the Roth. Because, presumably that's going  

to grow substantially. And that growth will be  Tax-Free, not just tax deferred, and you're going  

to leave the more conservative stuff over still  inside the Traditional. It's providing you safety  

and balance of risk, but over time,  it's presumably going to earn less  

because you're sooner or later somebody's  going to have to pay Taxes on that Money.  

So I hope this was very helpful, I'm  Hans Scheil and thank you for listening  

you.