7 Things You Need to Know About Roth IRAs to Maximize Tax-Free Income
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Many of us know the benefits of raffia, at least at a high level. We know that they can create taxi income of some type. However, to truly utilize rapparees their false extent, it's important than we know all of the different nuances to rap hires so we can most effectively them in our planning. That's why today i'm going to over seven things you need to know about rough I A raise to ensure you're getting the most out of them. When IT comes to retirement planning.

this is another episode of ready for retirement on your host, James can all. And i'm here to teach you to get the most of life with your money now on the up. So to start, let's deffand what a rough I array is.

A rough I array and individual retirement encounter, individual retirement arrangement. And unlike a traditional I array, any money that you put in pretax mean you attacks to furl on those contributions. But then when you pull that money out, typically in retirement, you pay taxes on IT.

It's a complete opposite with a rah fire rate. Any contributions that you put any don't any tax break for. However, all of the girls then on so me, you are making qualified distributions future, the growth is both tax free as well as the distributions are tax free as well.

So what do you need to know about rougher race one? Number one, the first thing that you need to know is how much can you put into IT, but that just the basic from the winning over seven other different things you need to note to entry in the most of rough I R race when IT comes to utilized in the effectively you're planning. So for twenty twenty four, and these numbers will stay the same.

For twenty twenty five you can put up to seven thousand dollars pr individual into a rap array or traditional ira ray. Now that seven thousand and or a limit is cumuli tive. So hypothetic ticket you could put four thousand into a roth and three thousand into an I R A.

You could put seven thousand and one and nothing in the other. But that seven thousand is a cat between the two. If you are fifty years old, older, you can make an additional one thousand dollar catch up contribution for a total of eight thousand dollars.

So that's starting point. That's what most people do know about rough. I let's start through, in no particular order, other planning points you need about rough hia race.

The first playing point number one is that contributions to rough hia race are available for the draw at any time. You do not have to be fifty nine and a half. You don't have to reach a certain age to access your contributions completely penalty free and tax rate so hyped.

There's ally, let's say, that year thirty five years old and you make a five thousand contribution this year in the next year, in the following year and then you don't touch those dollars and they grow to, let's say, twenty five thousand dollars by the time that you're forty. So by the time that you're your twenty five thousand years in roth, I fifteen of that is your own contribution and ten thousand of that is growth on your roth contributions. You can pull out the fifteen thousand you put in completely taxi, completely penalty free does not matter that you're not fifty nine and a half yet.

It's the growth on those dollars you can't touch until fifty nine and a half. So if you were to pull out the ten thousand years of growth, that is what would be text, that is what we would be assessed, an early withdrawal penalty of ten percent. But the contributions themselves can be pulled out at any time.

Now you may ask all, how does I R S know if this contribution and pulled out is actually money that I put in or growth on that money? The I R S is always going to treat the first dollars out of your roth ira as contributions. So hypothetically, use the same example.

If you put in fifty thousand dollars of the course of your lifetime, the first fifteen thousand dollars will draw. You don't get to tell your roth ira provider or the I R S. This is growth or this is contribution.

The arrests just assumes that the first fifteen thousand is contribution. Once you've pulled out that a mount, then they are going to assume that difference above that is growth. In that example, the second thing to know about raphia raised is they're something called the five year rule.

And the five year rule says that you need to wait five years, many time, that you've opened and funded your original rough ira until you can pull money out tax free. Now to add on the point number one, the point number one, I said you can take contributions out at any time. That is still true. What i'm talking about the five year rule is in order to get access to the growth on those dollars, you need to await at least five years.

For most people, this is somewhat irrelevant because you open your account and you've typically had IT funded for more than five years before you start making the girls, especially because for most people and makes lot of sense for your rough area to be some of the last dollars you use in retirement, although not always because of that, you're almost always going to be meeting the five year rule. But let's say that you are fifty eight years old and you open your first rough I A in two years and now you retire. You contributed your rai way for a couple of years that assume five thousand per year.

So you put in ten thousand, and that is soon that ten thousand grown to twelve thousand. You see, you know, I won't take this whole twelve thousand out because i'm now about fifty nine and a half. This is a row, I ray. Therefore, this money should all be tax free or not quite because you haven't met the five year rule. The two thousand dollars of growth in this example would still be subject to a penalty because it's not a qualified distribution because is not yet met the five year rule.

Now i'm going to include a link to another video that i've made right up here and that video I break on the five year rule and a much more detail because there's things have to do with what if it's a conversion and what if it's a contribution? How does this work in different scenarios? So you should to check that video out.

I go that more detail. The third thing that you need to know about rougher race is that even if your income is too high, you can still get money into rough a race. So that's back up.

What does that mean you and come into high well, for twenty twenty four, if you're married finally jointly, if your income exceeds two hundred and forty thousand dollars and by income specifically, I mean you're modified, adjust a growth income. If that exceed two hundred and forty thousand dollars, you cannot put money directly into a rapper, right? Rarely starts at two hundred and thirty thousand dollars from two and thirty thousand and two hundred and forty thousand a phase out.

If you make under two hundred and thirty thousand dollars and modify the just gross income in your married from jointly, you can make a full roof a contribution. If you make over two hundred forty thousand dollars, you cannot make any rough contribution. If you make somewhere in between, you get to make a phased out contribution depending on your income levels.

If you are single, those numbers are one hundred and forty six thousand dollars, two hundred and sixty one thousand dollars. So under hundred, forty six thousand dollars and modified, adjust gross income, you can make a full contribution. Over one hundred and sixty one thousand and modified, just a gross income, you can make any contribution.

And anywhere in between, your contribution limit starts being faced out. So what if you do you make above that amount? Typically you think, okay, I just can make a rough contribution.

Well, you still can. There's two ways in which you can do so. One is what called a backdoor roth contribution.

Now the back door roof contribution. There are a lot of rules around this, specifically something called the pro a rule. So talk your financial adviser or talk to your tax prepare before you do this.

But if you make, let's say, three hundred thousand dollars and you're not eligible to make a direct rough ira contribution, what you can do is you can contribute to its called a non n deductable ira. So A K H is a traditional I R A. But because of your income, you're not going to be able to deduct that traditional area contribution, assuming your covered by your time pain at work.

This that is more details to this I want to cover right now to talk to your finding ancient advisor, talk to your tax adviser before doing anything. But if you make a non deduct what I ra contribution, you can then convert that into your rough. That's a concept, the back to our rough contribution.

In addition to that, you can also maybe make a mega backdoor rough contribution. So if your four one k plane at work allows for after tax contributions, that can then be converted to rough contributions, that another way of doing the same thing, you make an after tax contribution, A K A. You don't get a tax benefit for making that contribution because you don't get a tax benefit.

Those aren't pre tax dollars. So when you convert those dollars to your rough, there's no tax impact for that converted amount. A lot of other details, lot of other nuances to this.

So i'm gona reemphasize talk yo tax repair, talk your financial a ton research before actually implement. But that's another great way to get money into a rough that said, four one k are unique in general and that there are no incompletions. So if your plan offers a rot four O N K IT doesn't matter. If you make a hundred thousand or hundred million dollars per year, you can still get the full four one key contribution into a rough for a one k the same way that you could into a traditional four o one k so keep that in mind that you can always do a rough for one k regards of your income. And even if your income exceeds certain limits, you can still potentially do a backdrop routh contribution.

Just be very careful what's called the parade, meaning makes you don't have other traditional I R rays or simple I R rs or step I R rays outside of your four one k because that could range into the whole thing, or if your plan allows, you could do a meg back to a rough contribution through your four one k at work. The fourth thing that you need to know about rough hiera is they don't have any required minimum distributions, and this can be a huge benefit if you have a traditional I R A R, A traditional four one k when you turn eight, seventy five or seventy three, depending upon your birthday. You're gona be required to start taking funds out of that account.

A general way to think of that is your first year required distributions. You're going to be forced to distribute about three point eight percent of your account baLance as a required distribution as you age, that number goes up. The time that you're in your middle eighty is closer to seven, eight percent of your entire count baLance that you're forced to distribute.

Now with a raw I R ray, that's not the case. As of now with a raw array, you can continue, let that thing grow. So if you want to continue, let them grow A K A, continue to grow tax free, compound tax freely of more tax free, and come the future, you can do so.

Or if you want this to be an account, you can automate, pass you, your children or your beneficiaries. That's a rough account that can continue growing tax free and ultimately past the next generation, and that can be a substantial asset for them as well. So that's a really important thing to note, is no R M D on rough I R race.

The fifth thing that you need to know is the rough I re distributions are not included in provisional income. Now if you're not collecting in social security yet, provisional income does not mean anything to you. But as soon as you start collecting social security, provisional income becomes pretty significant for a good number of people.

So what is provisional income? I'm not going to go over all of that in today's video, but what IT is is, is essentially a formally to calculate how much of your social security benefit is going to be pulled into the income that you're being taxed on. Because when you look at your social security benefit at a federal level, anywhere between zero and eighty five percent of that benefit is included in the income that you pay taxes on.

So when the important things, not when you do that, is that your social security benefit itself, half of that amount is included in your personal income. So let's look at a basic example. If you are married in your professional income is under thirty two thousand dollars, zero percent of your social security benefit is included in your income that you pay taxes on.

If your provision incomes between thirty two thousand and forty four thousand, fifty percent of those dollars are included in what you pay taxes on, or your provisional incomes about forty four thousand dollars, then up to eighty five percent is included in the income that you pay tax is on. So let's look at an example. So that can be little confusing.

But let's assume that you're married in both spouses have a social security benefit of twenty five hundred dollars per month. So five thousand months total, which is sixty thousand per year, and they're taking to combine four thousand per months s in the rough air race last nine thousand hours per month of income for a lot of people is a pretty healthy level income. You can do a lot of things on nine thousand per month until you start to think, what is that number after taxes?

Are we taking out a thousand for taxes? Are we taking out two thousand for taxes? Because then that's a different story.

In terms of alfa a at nine thousand goes what he is to think if that was their only income source, we wanted start by talking was their provisions. Income will start by taking half of their social security benefit. If their total social security benefit is sixty thousand, half is in thirty thousand.

If there are only other income source of social security, which is four thousand per months or forty eight thousand per year, doesn't matter how much that is. It's not included in their provisional income. Their provisional income is only thirty thousand dollars, which means they're under the threshold and none of their social security benefits IT is included in their tax.

Income in rough I race aren't tax as well. They're taking home nine thousand hours per months and not paying tax on any of IT. Now that examples is a little bit Cherry pick because most people have interest from cash.

The bank may be of some dividends of other types of income, but you can start to see the power of having a low provisions income and that IT protects a lot more of your social security benefit from being taxed. So all is to say, anything that you do have in rough areas when you do pulled out is not going impact your provision. Al income, there's six thing to know about, ruth, I array and come in.

This is kind of a tag on the point. Number five is a rough ira income is not included in your arma calculations. So depending on what your income is, that's going to determine not just what income taxes you pay at the federal level and or state level, it's also gona include things like common ch d pay in medicare sege charges.

This is what erma is erma as do you have to oh, an additional search charge in addition to your Normal medicare part b and party premiums. Well, that's based upon your modified just gross income. And because you raw fiera income is not included in your modified just gross income, you could hypothetically be taken a million dollars a year from your rough I R A.

And not only would that not be taxi ble, but I would not give up your medicare pretty ums to your medicare search charges in terms of premiums are paying there. So another benefit with rap I is not only are they not subject to federal state taxes, but I can also help you to keep your medical premiums low. And then finally, the seven thing that you need to know about rap fire race is that just because you are not working doesn't mean that you can contribute to a rough rough.

There is all based on earned income. So if you, in the spouse of neither of you are working, you know have any other income, neither of you can contribute to a rough if one of you is working though, your eligibility to contribute to a rough theory is based on your income as a couple. So as long as one of you is earning, let's say, sixteen thousand dollars per year, the both of you could contribute eight thousand dollars each to iraq by array, even if that sixteen thousand coming from one spouse and the other house has nothing.

Now you may say, well, James, if you're only earn in sixteen dollars per year, you need to live on that. You can't actually use that to contribute car off. That's very true unless maybe you're earning a low mount because that say you're working part time before you retire, maybe have a broker account and maybe a broker account, you say let's start citing some of these assets that are paying taxes on the dividends and interesting growth.

But we slight eight thousand per year of that in a rough I race. And now all the group on that is completely taxi forever. So even if you have low income and only one spouses income, you can still make a spouse L I R A contribution as long as there is earned income that justifies both those contributions.

Now one final point is we wrap up here. This isn't one of the seven, but an important thing to know. A lot of people get confused on is this income laments for rough ira contributions.

There are not income limits for rough ira conversions. So just because your income at a certain level means you can't make a rough contribution anymore, but that does not prevent you from doing rough conversions. So keep that in mind that these income limitations have to do with contributions.

They don't have to do with actual conversions. So those are seven things that you need know if you're gonna have a rough. I know that I can be powerful when IT comes to your ability to control your tax situation, retirement, but if you don't know all the different nuances and details to rough I, you're not going to be able to use them as effectively you, otherwise you could have.

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