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Roth IRA: The Multi-Tool of the Financial Industry.

If you’re a backpacker, you know the value of the multi tool. Maybe you own a Leatherman from your homeschool past. Maybe you picked up the knock-off version from Wal-Mart that could do about the same things. Maybe you splurged and got one of those fat Swiss Army Knives. But whatever your multi tool of choice, one thing is for sure: it can do anything. Need to replace an outlet in the kitchen? You have a screwdriver. Battery cables too loose on your car? You’ve got pliers. Your bulk co-op order of whole-grain wheat comes in a 5-gallon bucket that has been too aggressively secured? You have a knife. Your bread making dreams are back in business.

As I think about it, the Roth IRA is our industry's equivalent of the multi tool. You can do a lot with it. And you can fund it a lot of different ways. And as of December 23, 2022, Congress just added another item to the list (#6 below), so let's dive in.

  1. Funding: Individuals under the age of 50 can put $6500 in per year. This is a $500 increase from previous years. Individuals 50 years of age and older can fund $7500 per year. This is also a $500 increase from previous years. Both of these figures assume that individuals had earned income equal to or greater than these figures.

  2. A little help from the folks: If your child has earned income, they do not need to put their money into the Roth IRA if you want to do it for them. As long as you can prove their earned income, you can fund up to the lesser of their annual income or the funding limit. Alternatively, Grandpa or grandma can fund a Roth for grandkids, subject to the same limits.

  3. 401(k) match...kind of: As you might have already been thinking, you could put some money into a Roth IRA for your child, and they could put some of their money. Some parents choose to make this function like their own 401(k) match for their kids.

  4. First house: Anyone who is buying their first house can take up to $10,000 out of the Roth IRA without tax penalties for the down payment on the house.

  5. Like a 529: If you are familiar with 529 education savings plans, a Roth IRA can be used for all of the same purposes. No taxes, no penalties.

  6. Speaking of 529s... as of just before Christmas 2022, Congress passed legislation allowing some 529 funds to be rolled over into Roth IRAs. There are limitations on this, and we'll discuss those in a future post, but be on the lookout for this. This legislative change will likely reduce one of the main reasons why folks are hesitant to fund 529 accounts in the first place. Namely, they are concerned that they will be penalized if they and their children find alternative ways of funding education. This will help with that.

  7. Backdoor Roth conversion: You may have heard that you make too much money to fund a Roth IRA. If that is the case, don't worry. The IRS, for reasons unbeknownst to me, allows you to fund a nondeductible IRA, and then move those funds over to a Roth IRA in what they call a backdoor Roth conversion. Essentially, this is funding a Roth IRA in two steps instead of one.

  8. Roth 401k: If you have access to a 401(k) plan at work, odds are good that you can contribute to the Roth side. This means that you would still get the same employer match that you would have otherwise and be subject to the same vesting schedule is as you would have been, but your contributions get out of the tax game now and forever.

  9. In-plan Roth conversion: Not every 401K plan allows this, but if yours does, the in-plan Roth conversion involves taking funds from your pretax balance, sending in the tax money to the IRS, and moving the remainder to the Roth side of the 401K. This does not involve a premature distribution, so you are not subject to the 10% early distribution penalty tax that the IRS would assess you for withdrawing early.

So that scratches the surface. If you want to talk about one or more of these options, let us know. We’re here to help!


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