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All Things Roth: A Guide to Roth IRAs

When planning for retirement, understanding different savings vehicles can significantly impact your financial future. Among these, the Roth IRA stands out due to its benefits and flexibility. This blog post explores various aspects of Roth IRAs, including what they are, contribution methods, Roth conversions, and more advanced strategies like the backdoor Roth IRA and the mega backdoor Roth IRA.

What is a Roth IRA?

A Roth IRA is a type of individual retirement account that allows your money to grow tax-free. Unlike traditional IRAs, where contributions are tax-deductible, Roth IRA contributions are made with after-tax dollars. This means you won’t get a tax break in the year you contribute, but your earnings and withdrawals in retirement are tax-free, provided certain conditions are met.

Key Features of a Roth IRA:

– Tax-Free Growth: Earnings grow tax-free, and qualified withdrawals are tax-free once you reach age 59 ½ and have had the Roth IRA for 5 years.

– No Required Minimum Distributions (RMDs): Unlike traditional IRAs, Roth IRAs do not require you to take distributions at a certain age.

– Flexibility: Contributions (not earnings) can be withdrawn at any time without penalty.

How Can One Contribute to a Roth IRA?

Contributing to a Roth IRA is straightforward, but there are income limits to consider. For 2025, the contribution limit is $7,000 per year, or $8,000 if you are age 50 or older. However, your ability to contribute directly to a Roth IRA depends on your modified adjusted gross income (MAGI). Speak with your tax advisor or financial advisor to see if you are eligible.

What if you are not eligible to contribute to a Roth IRA?  What is a Roth conversion and how do they work?

A Roth conversion involves transferring funds from a traditional IRA or 401(k) into a Roth IRA. This process can be beneficial if you expect to be in a higher tax bracket in retirement or want to avoid RMDs.

Roth Conversion Process:

1. Evaluate Tax Implications: Converting funds is a taxable event, so assess the potential tax impact by speaking with your tax advisor and financial advisor.
2. Initiate the Conversion: Contact your financial institution to start the conversion process.
3. Pay Taxes: You’ll need to pay taxes on the converted amount in the year of the conversion, if they come from taxable IRA or 401k sources.

What is a Backdoor Roth IRA?

A backdoor Roth IRA is a strategy for high-income earners who exceed the income limits for direct Roth IRA contributions. It involves making a nondeductible contribution to a traditional IRA and then converting it to a Roth IRA.

Backdoor Roth IRAs are complicated vehicles that would require discussion with your personal tax advisor regarding your specific situation before taking any action or investing.  If this is of interest we can address the required steps with you and your tax advisor.

Conclusion

Roth IRAs offer a powerful way to save for retirement with the benefit of tax-free growth and withdrawals. Whether you’re contributing directly, considering a conversion, or exploring backdoor strategies, understanding these options can help you make informed decisions aligned with your financial goals. Always consult with a financial advisor to tailor these strategies to your individual circumstances.

Contributions to a Roth IRA may generally be withdrawn tax-free at any time. Earnings may generally be withdrawn income tax-free if the individual has held amounts in a Roth IRA for at least 5 years and the withdrawal is made after age 59 ½.  If the withdrawal is made before the 5-year period and age 59 ½, income taxes and an additional 10% federal income tax penalty may apply.  Other exceptions may apply.

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This article is being provided for informational purposes and should not be construed as investment advice or relied upon as a basis for any investment or financial decision. Past investment or market performance is no indication of future results.  Dollar-cost averaging does not assure a profit, nor does it protect against loss in declining markets. To be effective, there must be a continuous investment regardless of price fluctuations.  Investors should consider their financial ability to continue to make purchases through periods of low-price levels.

Duly-registered and duly-licensed representatives offer securities through Equitable Advisors, LLC (NY, NY (212) 314-4600), member FINRA, SIPC (Equitable Financial Advisors in MI and TN), offer investment advisory products and services through Equitable Advisors, LLC, an SEC-registered investment advisor, and offer annuity and insurance products through Equitable Network, LLC (Equitable Network Insurance Agency of California, LLC; Equitable Network Insurance Agency of Utah, LLC; Equitable Network of Puerto Rico, Inc.).  Beacon Wealth Partners is not owned or operated by Equitable Advisors or Equitable Network and there is no affiliation with Ritholtz Wealth Management.  PPG-7162859.1 (10/24) (Exp. 10/26)