Aug 27, 2019
This week, I’m talking about the Roth. Depending on your income and what’s offered through your 401k plan at work, you’ll want to take a serious look at the Roth IRA or the Roth 401k.
What’s interesting, though, is that in practice, I find that not enough people take advantage of the Roth. There are deep misunderstandings and plenty of bad advice about the Roth.
So this week, I’m going to do my best to help you better understand why the Roth is a compelling choice, especially in those last few years as you approach retirement.
Today, I’m giving you the foundation for the rest of the topics this week. We’re talking about what a Roth is, what it isn’t, and how the money in a Roth IRA or Roth 401k is taxed.
Ok, so what is a Roth. Roth IRAs and Roth 401ks are retirement accounts. Some people think that Roths are a type of investment, like a stock or a CD. A Roth is not an investment, but rather, a type of account that holds investments like stocks and bonds.
I like to think of the Roth as a type of bucket with specific rules and regulations about what happens to money going in and out of the bucket. So in the Roth bucket, you do hold investments - like cash, bonds, mutual funds, stocks, etc.
What’s unique and powerful about the Roth is how it’s taxed. Money going into the bucket has already been taxed. So, you don’t get a tax deduction for making contributions to the Roth, like you do with a Traditional IRA or 401k. But here’s the value of the Roth.
Once you put money in the Roth bucket, it’s not taxed again! It grows tax-free, then when you take money out of the Roth, it’s not taxed either. So Uncle Sam doesn’t get to put his dirty little mitts on your money again once it’s in the Roth.
So the potential long-term tax benefits of contributing to a Roth are tremendous.
There are 2 types of Roth accounts - the Roth IRA and the Roth 401k. There are a couple important distinctions.
In 2019, you can put up to $7,000 into the Roth IRA if you’re over 50. And you can only contribute to a Roth if your household income is below a certain threshold. In 2019, that threshold is just over $190,000.
The Roth 401k, on the other hand is much more flexible. You can contribute up to $25,000 to your Roth 401k if you’re over 50. And those income limits that lock out high income earners, don’t apply to the Roth 401k.
Let me repeat that - you can contribute $25,000 to your Roth 401k in 2019 if you’re over 50, no matter what your income is. It’s a sweetheart deal with seriously compelling long-term potential tax benefits.
The trick is that your employer must offer a Roth 401k option in your retirement plan, so if you don’t have access to a Roth 401k at work, go talk to your employer.
That’s it for today. Thanks for listening. My name is Ashley Micciche and this is the One Minute Retirement Tip.
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