Empowering Your Financial Future: Understanding Roth IRAs

EP 130 - Empowering Your Financial Future: Understanding Roth IRAs

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Introduction to Roth IRAs: What You Need to Know

Have you ever wondered if a Roth IRA could be the right retirement savings option for you? What exactly is a Roth IRA. How does it work and who benefits the most from this kind of account? That's what we're talking about on the show today. See, you don't want to miss it.

Welcome to the Ask Ralph Podcast: Your Financial Wisdom Hub

Welcome to the Ask Ralph Podcast, where listening to an experienced financial professional with over 30 years of experience can help you make sense of confusing questions, current headlines, and industry trends about taxes, small business, financial decision making, investment strategies, and even the art of proper budgeting.

Ask Ralph makes the complex simple by sharing his real world knowledge from a Christian perspective with all things financial. Now here's your host, Ralph Estep, Jr.

Welcome to our tax talk Thursday show. I'm so glad you chose to join us. I just want to thank you for listening and supporting the program as normal. I'm coming to you from the Estep Farm and the beautiful Saggio Accounting studio. Let [00:01:00] me put on my podcaster hat and put down the overalls and let's move that adding machine to the side.

Exploring Roth IRAs: Benefits, Biblical Perspectives, and Eligibility

And let's get some financial wisdom from a Christian perspective today, we're going to explore what Roth IRAs are all about the pros, the cons, and whether it aligns with the biblical financial principles. Get ready to gain some excellent clarity.

Don't forget to subscribe to the show and join our email list. You do that at askralphpodcast.com you don't want to miss tomorrow show. For financial Friday, we're going to discuss long term care insurance. And why you might want to consider adding this valuable benefit. We're going to discuss the pros and cons and even get into some specifics about the cost of this valuable insurance.

Let's get into the word of God. As we start today, it comes from Proverbs chapter 21, verse five, and it says this. The plans of the diligent lead to profit. As surely as haste leads to poverty. That's a powerful message.

When it comes to [00:02:00] retirement savings, we want to follow wisdom. Planning prudently and storing up resources for the future is so vitally important. And one potential vehicle for investing in our later years is the Roth IRA.

So that's exactly what we're going to talk about today. Whether you're nearing retirement age, or just starting out building your career. You'll get tangible takeaways today on leveraging these Roth IRA.

So let's start with a basic question and that is Ralph. What is a Roth IRA? A Roth IRA is a special retirement investment account that offers some unique tax benefits. Unlike a traditional IRA, you contribute after tax dollars to your Roth account. This means you already paid income tax on the money before putting it into your Roth IRA. A little known fact is it Delaware's own former Senator is the namesake of the Roth IRA. His name was William Roth, and I had the occasion of meeting him several times here in my home state of Delaware. As an aside, he was known for bringing his loyal St Bernard dog on the [00:03:00] campaign trail with him.

So let's get back to the details. The key advantage comes down the road. Your money grows tax free over time and withdrawals in retirement are tax free. That's the key. This can lead to huge savings compared to taxable investment options. Pretty sweet perk. I would say. Now Roth IRAs do have income limits. So they're best suited for those currently in lower tax brackets. But expect that to change later on. We'll break down those specifics later in the show.

First let's quickly compare how Roth IRAs differ from those traditional IRAs. Traditional IRAs. Give you an upfront tax break contributions. Reduce your taxable income for that year. but withdrawals are taxed at your future income rates. So when you go to take that money out, yes, you got the benefit from that deduction when you put it in, but it's going to be taxed as income when you go to take that out. So if the tax rates go up, that might not be a good situation.

Roth IRAs don't lower your current taxes, but all [00:04:00] future growth and withdrawals are completely tax-free. If you follow the rules, the benefit really depends on whether you think you'll be in a higher or lower tax bracket in the future. And listen folks, this ties neatly into our biblical view on money and resource stewardship.

So let's talk about the biblical perspective on Roth IRAs. A key theme we see in scripture is the call to plan ahead wisely and store up resources for the road ahead rather than indulging in everything now. And I know that's tough, but you're putting away for tomorrow by sacrificing today.

So for example, Proverbs chapter 21, verse 20 says. The wise store up choice food and olive oil, but fool's gulp. There's down. Proverbs chapter six, verses six through eight. Say, go to the ant. You sluggard consider its ways and be wise. It has no commander. No overseer or ruler, yet it. Stores its provisions in summer and gathers its food at [00:05:00] harvest. Roth IRAs align very well with this forward-thinking approach. Sacrificing some spending now to fund a Roth IRA leads to a nice nest egg later without the burden of taxes. And for those currently in a lower tax bracket, the tax free compound growth in a Roth IRA can really add up substantially over 30 plus years. So if you start this out early in your career can really grow. Which takes us into the specifics now on who can benefit most from funding Roth, IRAs. So let's ask the next logical question.

And that's Ralph who benefits most from Roth IRAs. And here's the answer. If your income currently puts you in a lower tax bracket, Roth IRAs can make great sense to maximize tax free investment growth. Here are some examples of the prime Roth IRA candidates. Young professionals just launching their careers. Workers with lower salaries, parents supporting families on a single income. Retirees minimal withdraws from [00:06:00] other accounts. These are all prime candidates because of based on our lower tax burden. The effective benefits of traditional IRAs are diminished. Think of it like this. If you're in a 10% tax bracket. A traditional IRA deduction of $7,000 really only saves you $700. But if you were in a higher, let's say 30% tax bracket that same contribution will result in over $2,100 in tax savings. And that's just federal taxes. Those are just the facts folks.

Many expect taxes to trend higher over the coming decades, given growing national debt levels. And to be blunt, if you've listened to this show, the way our government spending money, taxes are going to have to go up just to cover the debt. That's been created. Another reason to favor Roth's if eligible are based on these income limits.

Understanding Roth IRA Contributions and Income Limits

So let's talk about what those income limits are for 2024. Here are the modified, adjusted, gross income phase out threshold to contribute to a Roth IRA. Now, listen, I knew that was a lot to speak, but basically what I'm talking about is your total adjusted, modified [00:07:00] gross income. Now here's what it is for single filers. You can make that full contribution up to an adjusted gross income of one hundred forty six thousand . But here's the thing you need to know. There is a phase out. Once you reach $146,000 of income up to $161,000, once you reach that $161,000, you're not eligible for a Roth IRA contribution. Now for joint filers, that full contribution can be made up to $230,000. And that phase out starts at $230,000 and goes up to $240,000. And once you reach that $240,000, you can no longer qualify for that Roth. Contribution. So that's why there's an income limit here.

If your income is too high for direct Roth contributions, you still may be able to fund a Roth via what's called the back door method. This maneuver converts after tax assets from a traditional IRA into a Roth. The rules here, get a little complex. So you want to consult with a tax pro. If you're interested, you'll find a previous podcast on that topic on our website, which reminds me. I want to let everyone know that when you [00:08:00] visit askralphpodcast.com . There's a search feature. Where you can search our past episodes for a specific topic. We now have over 400 episodes in the catalog. So make sure you check that out And revisit some of our past episodes. It's really simple. Just go to our website and click on the little magnifying glass icon and a search window pop up, and you could just type the topic in there.

So let's discuss the maximum annual Roth IRA contributions. So assuming you meet the income limits, we talked about those a few minutes ago. Here are the current Roth IRA contribution limits. The maximum contribution for those who are under age 50 is $7,000. Now, if you're over age 50, you can do that. Catch-up contribution, which is a total of $8,000. It's generally best to aim, to fully fund your annual Roth allowance each year. If possible, even setting aside just a hundred dollars or $200 a month can really add up over 30 plus years, given the tax-free compound growth of it. You know, you start off small, but it grows.

Choosing the Right Roth IRA Provider and Overcoming Downsides

So let's talk about where to [00:09:00] open a Roth IRA account. I get that question sometimes you've got a lot of choices on where to establish a Roth IRA account. From full service brokerages to online discount platforms. I personally use and recommend your local credit union. For their combination of low fees, great service and easy to use website and mobile apps. Other top providers include Vanguard, Charles Schwab or TD Ameritrade. All offer $0 minimums to open a Roth IRA with a diverse selection of no fee mutual funds and ETFs to invest in. I don't give investment advice, but these people will help you. It only takes about 15 minutes to open an account online and start funding your tax-free future today with that Roth.

Let's chat about the downside to Roth IRAs as with anything, there are good things and bad things. I'm a huge fan of Roth IRAs for the most part, but I want to share a few potential downsides to consider as well. Contributions are not tax deductible. Like we talked about it, traditional IRA, no tax benefit today. So if you're in a middle to [00:10:00] upper middle class, your tax brackets, There may be a reason not to fund a Roth IRA until you've maxed out your other pre-tax options. Yes. You may be able to fund both with some limitations.

You must wait until age 59 1/2 for tax-free withdrawals. Now there are some exceptions that apply to that. Income limits. As we discussed, maybe restrict higher earners from contributing. But for the most part tax-free growth in withdrawals and retirement. Make Roth IRAs, very appealing retirement savings vehicles.

So, let me give you some action steps.

Actionable Steps to Start Your Roth IRA Journey

I always try to bring you actionable items. If your income permits, I strongly encourage you to start building some retirement funds in a Roth IRA this year. This is the best time to start even small, regular contributions. Create substantial tax-free growth, potential over time. So here are a few key next steps. Number one, review the Roth IRA limits to confirm you're eligible. If you're eligible. Then decide how much to contribute regularly. Set that aside each month, every little bit counts.

Open a [00:11:00] Roth IRA with an established low cost provider. And here's one of things I definitely recommend enroll in automatic contributions from your paycheck or your bank account. That way just goes there.

Next thing you're on need to do is determine your investment mix. You have to talk to the broker or to the credit union or whoever you're working with to figure that out. And do me a favor. We've covered a lot today. Please share this episode. If you know someone who could benefit from learning more about leveraging these Roth IRAs.

Recap and Closing Thoughts: Empowering Your Financial Future

So let's quickly recap what we've covered today, and I know we've covered a lot. You can always go back and relisten to this. If you want to. What Roth IRAs are and how they differ from traditional IRAs. Why Roth IRAs align well with biblical financial wisdom. Key groups who can benefit most from funding Roth's, current income limits to qualify for contributions annual contribution amounts allowed and where to open your account. We also talked about some Roth IRA downsides to consider.

Thanks for joining me here on the Ask Ralph podcast.

My prayer is that you feel equipped and more importantly, [00:12:00] inspired to steward your finances well. Remember Proverbs 21:20. Store up choice food for the future. Roth IRAs can be a strategic part of building that storehouse for retirement. I appreciate you all. And as I always say, stay financially savvy and may God bless you abundantly.

Thank you for joining us on the AskRalph podcast. And with a simple click to subscribe, we'll invite you back to our next episode. And remember, financial issues don't have to be complicated. Just AskRalph. The information contained in this episode of AskRalph is based on data available as of the date of its release.

Saggio Accounting Plus and AskRalph Media Inc. is under no obligation to update this content if changes occur. Applying this information to your specific situation requires careful consideration of all facts and circumstances, and any information provided is not to be considered as financial, tax, or legal advice.

Please consult your tax advisor or attorney before acting on any material [00:13:00] covered.