Getting to Know ROTH

gonna want to sit tight for that. A couple of things too, to keep in mind as we have our conversation with every tirement planning professionals from COSS Financial, don't forget if you ever miss part of the program, or you want to listen back to it, or you want to share it, if you head on over to Classsfinancial dot com. There's a link to the podcast right there again the website class Financial dot com. Telephone up for Class Financial six oh eight four four two five six

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really elevate your retirement strategy. The choices available to you do often depend on whether or not your employer offer certain of these elements, and of course your personal financial situation, so you know, make sure again that you talk to your advisor or your accountant as a follow up to anything we discussed today. But traditionally, contributions to retirement accounts have been made on a pre tax basis. That's often

why they call them traditional IRA contributions. Traditional just means the longest standing and the longest standing rules were that you could make pre tax contributions to your retirement account, whether through your employer's sponsored retirement plan or a traditional IRA. This approach allows your money to grow tax deferred, but you'll pay taxes when you start withdrawing funds in retirement based upon your tax rate at that time in retirement.

So you get the idea. The traditional contributions have been around for a long time. I earn one hundred thousand dollars, I put ten thousand dollars into a four to one K plan on a traditional pre tax basis, meaning I save the taxes on that ten thousand dollars. It then grows tax deferred, and when I get into retirement, then I pay ordinary income taxes on that when I pull it out. However, since the introduction of roth iras in nineteen ninety seven, individuals have had the opportunity to save

for retirement using after tax dollars. And yes, you did hear me right, nineteen ninety seven, it's not that old, everybody. Roth IRA contributions are kind of a newer concept when we think of it in the in the grand scheme of things here. And while you don't get an upfront tax deduction on ROTH contributions, the key benefit is that

qualified withdrawals in retirement are generally tax free. So often Eric and I when we're talking to people will say traditional contributions are pre tax, tax deferred and then taxable. WROTH contributions are basically the opposite. You get no tax deduction today on a WROTH contribution, it grows tax free, and as long as you abide by the rules, which we'll be talking about here in a little bit, when

you get into retirement, you pay no tax on the withdrawals. Now, I will warn everybody as I start going into some of the key aspects of this, there are some errors that people make in their simple logic, which is tax free is better than taxable. So I'll do all wroth no matter what. Now, that's not really the way the math works out on this. If you don't believe me, call us and we'll walk you through the math. Then you'll have a couple of aha moments where you go, oh,

that's true. That's true. So roth versus pre tax is a lot more nuanced than just one sounds better than the other. There's a lot that goes into that consideration. But here's some important aspects to consider about roth irays. So wroth iray contributions are made with after tax dollars. Again a meeting, there's meeting, there's no immediate tax deduction, and in essence, you pay taxes now to enjoy tax

free withdrawals later. Contribution limits for roth irays are the same as traditional iras, so in twenty twenty five you can contribute up to seven thousand dollars to a roth ira if you're under fifty and eight thousand if you're over fifty. Thanks to what's called a catchup contribution, you do need to have earned income to contribute to a roth ira, and if your earnings are less than the contribution limit, then you can only put put in money

up to the amount that you earn. Furthermore, you can do contributions for non working spouses, again provided that you have enough income to support those contributions. One of the

most important things about roth contributions is income eligibility. In twenty twenty five, single file can contribute fully with income under one hundred and fifty thousand, and then they're phased out between one fifty and one sixty five, and for married couples filing jointly, contributions are allowed under two hundred and thirty six thousand, with phaseouts from two thirty six to two forty six. Some of you are going, what

the heck are you talking about. Well, you have to have earned income to be able to contribute to a wroth, but you can't have too much earned income. That's the idea here, right, So if I want to do a roth ira, and the key component here is ira wroth war one days are different. We're going to be talking about that in a moment when Eric gets to it. But if I want to make a contribution to a roth IRA, I have to have earn enough earned income

to offset that contribution. But if I have too much earned income, then I am phased out of having the ability to make that contribution. So some interesting things, and I will just say, you can contribute to a roth ira. One one quick point. You can contribute to it up to the tax filing deadline. You can do what are called like prior year contributions right before April fifteenth of

this year. If you talk to your account and you account says you should do a roth IRA contribution, you can actually attribute that contribution to the prior year up into the tax filing up until that tax filing deadline. So there you go. A few things to know about roth iras.

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your appointment tech Coss Financial. It will be complementary to you again their number six oh eight four four two three seven. So Eric, Now, let's just say you have access to a four WROTH four oh one K. Should you consider contributing to that?

you get a few more options. So a ROTH Flora one K is an employer sponsored retirement account that allows you to contribute after tax dollars, just like a ROTH IRA, which gives you the opportunity for tax free growth, tax free withdrawals in retirement, and these these were introduced around two thousand and six, but honestly it was a pretty

slow adoption for employers. But they've gotten pretty popular here over the last couple of years, and as of a couple of years ago, now almost ninety three percent of employers offer a ROTH four one K option. Now, one thing to know about WROTH for one ks is it's not actually a separate account that you're opening. So often people say, well, I only have a pre tax four O one K or a ROTH four oh one K.

It's all one account. It's just whether or not the employer allows you to put WROTH dollars into the account, and then the record keeper obviously is going to is going to keep those separate so that you can understand how dollars are going to be taxed when you're taking them out. But the fact that it's one account is going to come into play here when we talk about contributions in a moment. So whether you should contribute to a WROTH for one K, it depends on a lot

of factors. I mean, it depends on your income. You know what your current tax bracket is what we think your future tax bracket will be. But here's just a few things to think about when you're considering whether or not you want to make WROTH contributions to your four oh one K or four oh three B or or four fifty seven whatever type of plan your employer offers. Unlike roth aires, there's no income limit for contributing to a WROTH four to one K, so this actually makes

it accessible to higher earners. CJ was talking about some of those those upper upper end income limits that you know a which point you can't put money into a roth iray, we avoid that on the WROTH forur oh one K side, And speaking of contributions for for twenty twenty five, the total contribution limit to a four to oh one K, so that includes any dollars you put in before taxes or traditional and wroth, so the total is twenty three thousand, five hundred or thirty one thousand

dollars if you're over fifty and you take advantage of that catchup and then we've talked about this before too, but if you're between sixty and sixty three, you can actually add an additional ketchup contribution of eleven, two hundred and fifty dollars, which brings your total to thirty four thousand, seven hundred and fifty dollars. Now you don't have to do contributions. You know, you don't have to choose to do all pre tax or all WROTH. You can do

you can do some of both. And you know that's something that your advisor can help you determine based on your your tax strategy and where you are in life. One final update, and this is a this is a pretty new one. As of last year, r m d's required minimum distributions are no longer required for four o one ks. So previously you had to actually roll over the WROTH dollars before hitting r m D age or

they would make you take out. You know that whatever portion was attributable to your ROTH dollars from your four oh one K, now you didn't have to pay taxes on it, but you lost the ability to continue getting that tax free growth. So this this is a fix that that allows you to avoid those rm ds.

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eight four four two five six three seven. No charge for that initial get to know you appointment at Colss Financial. It will be complementary to you their number six oh eight four four two five six three seven. And if you've got a question, love to have you join us this morning telephe number here at station six oh eight three two one thirteen ten. That's six oh eight three two one thirteen ten. May have heard us mention Roth conversions.

We're gonna get the details from CJ. We will do that next as Money in Motion with Costs Financial continues here on thirteen ten.

aspects of Roth. What about those Roth conversions, CJ, who might be a good candidate for the excuse me, I pardon me, Eric, who might be a good candidate for those.

roth ira and then obviously tax free withdrawals later. Now you can do this at any age, and it actually avoids that ten percent early withdrawal penalty that people in cur if they take money out of an ira prior to fifty nine and a half. So in this case, you're just taking money from a traditional moving it over to a wroth, so you're avoiding that ten percent withdrawal penalty. But remember the amount that you convert is tax in

the year of the conversion. Okay, so it's going to increase your taxes the year that you actually perform the transfer, but then again you're going to get the tax free growth and then tax free withdrawals in the future. But why would someone actually choose to do this, right, Generally people are avoiding taxes and trying to defer them. Well, pre tax retirement accounts they are fully taxable upon withdrawal.

So that's whether that's by you or by your your beneficiaries if you don't, if you don't spend all your dollars, but moving the money earlier it does allow you to control the tax rate and you can be strategic about how much you're converting and when you're doing it. And one thing I mentioned there was you know, taxes are due on your your pre tax withdrawals, either by you or your heirs. So keep that in mind because your beneficiaries or your heirs in many cases they are they

benefit the most from moalth conversions. So that's something you want to talk through with your with your advisor, depending on your goals. But then this can be a really good strategy for taking a little bit more control over your your tax liability. So let's look at an example here, a recent retiree who maybe hasn't started Social Security yet,

or they there's no pension income for them. Maybe they have a large retirement account and they do have you know, maybe they saved up for a couple of years just in their savings account before retirement, and they have tax free dollars they can live off of for a couple of years.

tax rates. There's lower tax brackets that they're in right now, and it's generally most tax efficient when you do a conversion to actually pay from a separate account like a bank account for the tax rather than actually converting more and then withholding dollars from the conversion, because it allows you to get the most dollars into the WROTH and the most tax free growth.

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A S Financial dot com for that information. The telephon number for Class Financial six oh eight four four two five six three seven. Again that number six oh eight four four two five six three seven. No charge for that initial gets to know you appointment at Class Financial. It will be complementary to you. You heard Eric allude to what about kids, grandkids, the family? What does that have to do when it comes to Roth conversions? Are there reasons to be thinking wroth if you've got kids

or grandkids. With the tails from CJ and we'll do the Money in Motion Class Quiz question week next. As Money in Motion continues right here on thirteen ten, wu ib A talking with CJ. Closs and Eric Schwartz. They are our retirement planning professionals from Class Financial the website Class financial dot com. That's Class k l a as Financial dot com. They're telephone number six oh eight four four two five six three seven. No charge for that

initial get to know your appointment at costs Financial. It will be complimentary to you again that number six oh eight four four two five six three seven. Talking this week about Roth iras Roth four oh one ks Roth conversions and CJ. If someone wants to leave assets to maybe their kids or grandkids, does a Roth conversion?

was talking about. There is often between when you initially retire and maybe when you turn on Social Security or when you initially retire, your highest marginal income tax bracket comes plummeting down. Now for a lot of you, you're like, I don't know if I believe this. I don't understand. Listen, I get it. I totally understand that you are skeptical. But one of the biggest mistakes people can make is assuming they're gonna get it from me in some way.

It just doesn't matter. Oh my goodness, that is not true. That is just I'm not saying you're not gonna pay any tax. I'm saying there is a high degree of control that you have over what tax bracket you pay and when. So, for those who are listening to Eric talk about roth conversions, thinking, is this it's really a thing? Should I really be slowing down and thinking about it? Absolutely, especially if you are retiring and gonna not draw SOLI

security immediately. Okay, enough rambling about that. Just encourage you all. Talk to your financial advisors, talk to your accounts about this concept of lower marginal income tax brackets after you initially retire. But yes, coming back to your original question, Sean, you know, hey, how does this what does this mean for children and grandchildren? You know, should I be considering

roth conversions. If I care about legacy goals, and the answer is absolutely now, it doesn't mean you're gonna do it. It just means it should be an absolute consideration if you care about legacy goals for the children and grandchildren. The Secure Act now requires non spousal beneficiaries. And when I say non spousal, just mean it means anybody but your spouse. That they have to take out all the money from those retirement accounts when they inherit them, generally speaking,

within ten years. Okay, So imagine that I leave a pre tax traditional IRA to my children, say my wife has predeceased me. I leave money to my children and they are adults. If I leave them a million dollars in a retirement account that is pre tax, each one of my children has ten years to get all that money out. And if I leave it to them too early and they're working, what do we just talk about. When you're working, your highest marginal income tax bracket is

typically higher. And then I leave them this retirement account, I mean, don't mis hear me. That's great and all my children are going to really appreciate that. But the marginal bracket that they're going to pay income taxes on as they pull that money out over the next ten years. Yeah, it's going to be really high. So, as you can imagine, this leads to saying, well, could Dad have done anything different? Now, if Dad dies young and unexpectedly, then the answers generally know.

But if Dad would have been a little bit more strategic, and in this case, Dad is me in this, if Dad could have been a little bit more strategic, what Dad could have done is when he initially retired and his income was lower because he's just living off excess savings, and maybe if social securities turned on, but marginal income taxes have come plummeting down, Dad could have converted those traditional IRA dollars to wroth quote unquote, leveling out his

tax liability throughout his retirement, and then when he died he would have left the children Wroth money. Now, interestingly enough, Wroth money still has to come out of the Wroth irate to non spousal beneficiaries within ten years. So the same rule of it, I got to get the money out in ten years applies to my children. But what's

the difference. It's tax free, that's the difference. So That is the whole concept here of if I'm going to leave money to my children or grandchildren who might be in their peak years when they receive this inheritance, one thing I might want to really slow down and consider again. If legacy planning is one of my goals, and if I'm confident that I can leave money to to them, I may want to really slow down and consider doing a Roth conversion before before I die.

appointment at Loss Financial. It will be complimentary to you again their number six O eight four four two five six three seven talking this week with CJ. Closs and Eric Schwartz, and I mentioned the telephone number, went hold on to it because it's time now for the class quiz question. The week works like CJ. By the way, was there something you want to add there? I also I started talking like I think we CJ have somebody.

But then at seventy three or seventy five, typically these things called required minimum distribution kick on, which then jacks your income back up to those similar higher income tax brackets. So it is really in that range of if you retire before your require distribution age, or even if you partially retire and your income is way lower, it is in those years that often Roth conversions should come into play.

In final thought, here we have become so wealthy as a society that people like Eric and I sit around and talk about these tax maneuvers that are really great, really really really great. But if you are sitting here saying legacy goals, I'm just hoping to be able to

support myself, that's fantastic. God bless you and like and by the way, we work with tons of people who are not doing roth conversions, right, because really roth conversions are for those people who say, I'm probably pretty good here and I have so much that I'm gonna leave extra to my kids and grandkids. So just understand, you know,

kind of the lifestyle the rich and famous here. If that doesn't apply to you, don't feel guilty, and know that we work with a lot of people who do not do this because they're focusing on, you know, making sure they don't run out of money themselves.

four two five six three seven. If you are the first cost correct answer, you win this week's prize, which is a twenty five dollars gift cards to Texas Roadhouse. This week's coss quiz question the week is this true or false? A wroth Ira conversion means you are paying taxes on the converted amount now in the year of the conversion to enjoy tax free withdrawals later. Is that true or is that false? Telephon number six oh eight

four four to two, five, six three seven. If you are the first cost correct answer, you won a twenty five dollars gift card to Texas Roadhouse. And don't forget that's class Financials office right here in Madison at teleph number six oh eight four four two five six three seven.