Unlocking the Power of Roth IRAs: Strategies for a Tax-Free Retirement

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Ever wondered why the Roth IRA is often hailed as the crown jewel of retirement planning? Join me, Rob Wolf, on this episode of the Wolf Financial Podcast as we unravel the secrets behind this powerful financial tool. Discover the unique benefits of tax-free distribution in retirement, and why Congress created Roth IRAs in the late 1990s to incentivize smarter retirement saving. Whether you're a high earner curious about income thresholds or a grandparent looking to start a Roth IRA for a younger family member, we cover the essential rules and strategies you need to know.

We'll also tackle some of the most common questions about Roth IRAs: How much can you contribute? What are the catch-up provisions for those over 50? And perhaps most intriguingly, how do the underlying investments impact potential returns? Learn about the two primary ways to fund a Roth IRA—direct contributions and conversions from traditional IRAs or 401(k)s—and get a clear understanding of how your choice of investment vehicles can make or break your retirement nest egg. Tune in for a comprehensive guide that aims to demystify the often misunderstood Roth IRA and help you make informed decisions about your financial future.

Learn more about Wolf Financial Advisory:
https://www.wolffinancialadvisory.com/

Disclosure: Robert Wolf, James Koenig, Sara Wolf, and Michael Rock are investment advisor representatives of, and securities and advisory services are offered through, USA Financial Securities. Member FINRA/SIPC. Additionally, Amanda Opulskas and Adam Wallace are registered non-solicitors of USA Financial Securities, A registered investment advisor. 6020 E. Fulton St., Ada, MI 49301. Wolf Advisory Services and Wolf Financial Advisory are not affiliated with USA Financial Securities.

The strategies and concepts discussed are for educational purposes only and do not represent specific investment, tax, or estate planning advice. Investing carries an inherent element of risk and it is in everyone’s best interests to consult a tax, legal, or investment professional. The opinions expressed herein are not meant to provide specific investment advice or serve as a prediction for future stock market performance. Past performance does not guarantee future results. Securities and advisory services are offered through USA Financial Securities, member FINRA/SIPC. A registered investment adviser. Wolf Financial Advisory and USA Financial Securities are not affiliated entities.

Episode Transcript

Voiceover (00:00):
The strategies and concepts discussed are for
educational purposes only and donot represent specific
investment, tax or estateplanning advice.
Investing carries an inherentelement of risk and it is in
everyone's best interests toconsult a tax, legal or
investment professional.
Past performance does notguarantee future results.
Securities and advisoryservices are offered through USA

(00:22):
Financial Securities memberFINRA/ SIPC, a registered
investment advisor.
Wolf Financial Advisory are notaffiliated with USA Financial
Securities.
Wolf Financial Advisory.
When it's important to you,it's important to us.
This is the Wolf FinancialPodcast.

(00:42):
Here's your host, Rob Wolf.

Rob Wolf (00:52):
Good day everyone.
Rob Wolf here with WolfFinancial Podcast, and today
we're going to be answering thequestion what is a Roth IRA and
why do people talk about it somuch?
Well, very simply, a Roth IRAis just an IRA that allows for a
tax-free distribution inretirement Oversimplification,

(01:12):
because there's a lot of rulesinvolving a Roth IRA.
Congress created Roth IRAs backin the late 1990s.
This was to provide incentivefor people to create more
retirement dollars forthemselves and to be able to
access those dollars tax-free.

(01:33):
It's one of the best gifts thatthe IRS, the Congress, has ever
given to us.
But we still find that RothIRAs is a very underutilized
strategy within people'spersonal financial portfolios.
So today, what is a Roth andhow does it work?

(01:56):
So, overall, there's two waysto get money into a Roth IRA.
You can contribute money into aRoth IRA or you can convert
existing traditional IRA or 401kdollars into a Roth IRA or Roth

(02:19):
401k.
Let's talk about the firststrategy.
I want to contribute money.
Well, originally, when thiscame about, congress put a limit
as to how much income you couldearn and still contribute to a
Roth IRA.
That is still the same intoday's world.

(02:44):
Right now there's incomethresholds.
If you're single or marriedfiling jointly, you can only put
into a Roth IRA if you fallunder the income thresholds.
And so for married filingjointly, it's somewhere in the
low $200,000 that you would haveon a joint tax return before

(03:06):
you would be phased out of beingable to put money into Roth.
For a single person it's wellinto the $100,000 number before
you start getting phased out.
So in order to contribute moneyyou got to be under those
income thresholds and you haveto have earned income.
A lot of people ask me hey, canI start a Roth IRA for my

(03:29):
grandchild?
I ask well, how old is yourgrandchild?
They're seven.
I said it would be wonderful tobe able to put money into your
grandson's Roth IRA, but theonly caveat is that grandchild
has to have earned income.
If they don't have any earnedincome that they file on a tax
return, they can't do a Roth IRA.

(03:52):
So the limits right now $7,000.
If you're under 50, it's $8,000.
If you're over 50, there's acatch up provision where
Congress allows you to put in anextra thousand dollars as a
retirement catch up benefit forthose over the age of 50.

(04:12):
Okay, so many times I get thequestion well, how much does a
Roth IRA make?
Well, the Roth IRA in of itself.
There is no rate of returnassociated with the Roth.
The Roth is just how it grows.
From a tax angle, the underlyinginvestment that you put into

(04:35):
the Roth IRA dictates the rateof return expectation you should
get on the Roth IRA.
So, for instance, I could godown to the bank or credit union
and have a Roth IRA moneymarket.
Well, the underlying investmentvehicle is a money market.

(04:56):
So my expectation is that myRoth IRA, therefore, will be
earning anywhere from 2% to 4%.
Now, at the same time, youcould go down to the local
financial institution and theymay open up a Roth IRA and put
that money into a mutual fund orsome sort of stock portfolio.

(05:18):
Well, again, the overall rateof return on the Roth IRA is
going to be based on the actualperformance of the underlying
investment.
So you may hit the jackpot andhit Google or Microsoft at its
very infancy and have it go upthousands of percents, or you

(05:41):
might not hit the jackpot andyou may lose your entire
investment.
So the Roth in and of itselfdoesn't necessarily have a rate
of return.
The rate of return is based onthe underlying investment that
you choose to invest under theumbrella of the Roth IRA.
So that's something that needsto be clarified.

(06:06):
The other big benefit of theRoth IRA is that when you put
money into it, let's say as acontribution, regardless of your
age, you always have access toyour contributions no tax, no
penalty.
So I can have a 20-year oldperson just starting out making

(06:32):
some decent money they're making50, $60,000.
They want to put $7,000 in aRoth.
They do this for five years.
They end up putting $35,000 inthat Roth IRA and the Roth has
grown to $60,000.
At 25, they want to buy a house.

(06:53):
They have access to theircontributions.
In essence, $35,000, no penaltybecause the Roth is taxed FIFO.
First in, first out.
The first dollars in were yourcontributions.
You had already paid taxes onyour contributions so you could

(07:15):
take those all out tax-free,penalty-free.
Well, how about all the gains?
That's where it gets a littlebit more complex.
If I pulled out in this example, my $35,000 out of my Roth IRA,
I withdrew all my cost basis,my contributions, the balance of

(07:48):
the money, the extra $20potentially a penalty unless a
waiver of penalty applies.
So it's really important tounderstand how the tax nature of
a Roth IRA works before age 591⁄2 and after the age of 59 and

(08:09):
a half.
Because if I've had my Roth IRAopen for five years and I've
attained the age of 59 and ahalf and I put 100,000 of
after-tax contributions into itand it's grown to $400,000,
guess what, folks, I have accessto all $400,000 income tax free

(08:30):
.
Where else are you going to beable to get tax deferral and be
able to have access to thatmoney with no tax?
That's the miracle of the RothIRA.
It's one of the greatest giftsthat Congress has given us, yet
so few of us are reallyutilizing it and maxing out this

(08:55):
benefit.
The other way to get money intoa Roth IRA is by doing a
conversion.
You may have a couple hundredthousand dollars in a
traditional IRA that you rolledover from a former employer 401k
.
You decide that you want tostart taking some of the tax

(09:19):
liability off that traditionalIRA, so you choose to do a
conversion.
There used to be incomelimitations on conversions, but
there's not anymore.
I could be Donald Trump makingmillions and millions of dollars
, yet I could convert all mymoney, no penalty.

(09:40):
Okay, doesn't matter if you'reBill Gates, it doesn't matter
how much you make.
If you got IRA money, you wantto convert it, you have access
and the ability to do so withoutany penalty.
The main thing is whatever youconvert is going to be added
onto your income for the yearand you're going to end up

(10:01):
paying taxes.
You're going to get a 1099 fromthe IRA custodian and you're
going to have to add that toyour income and pay taxes on it.
So, again, those are the twoways to get money into a Roth
IRA.
You can either contribute.
In order to contribute, youhave to have earned income and
you have to be under a incomethreshold.
The other way is you couldconvert existing IRA money over

(10:24):
into a Roth.
Or, if you have a 401k, you canconvert some pre-tax dollars
over into a Roth 401k if yourplan sponsor offers that option
in your group plan.
So that's how a Roth IRA works.
The other big thing about a RothIRA there's never any required

(10:50):
minimum distributions on a RothIRA.
So, unlike your 401ks, yourIRAs, your 403bs when you turn
73, you have to start taking themoney out, even if you don't
need it.
With a Roth IRA, we can justlet that thing continue to grow.
So if you don't need it, youdon't have to pull it out.

(11:11):
You let it continue to defer,defer, defer, and the day you
die, that Roth IRA is worth amillion bucks and that money is
going to your kids.
Guess what?
Your kids don't pay any taxeson it either.
How nice is that?
In an uncertain environmentwhere they may not have social

(11:32):
security in the same way you had, where they may not have the
pension that you had.
The ability to leave money on atax-free nature to your loved
ones, the ability to set up aninherited Roth IRA where they

(11:56):
can defer those tax-free dollarsfor an additional 10 years.
That's the power of the RothIRA.
That's why I'm such a bigproponent.
Here's another thing for you allto keep in mind A Roth IRA is
not considered provisionalincome.
If you've listened to my otherpodcasts, I talk about
provisional income as incomethat can cause your social

(12:20):
security to become taxable.
Well, guess what folks?
Roth IRA money is notconsidered provisional income,
considered provisional income.
So if you do your planning well, you could be getting your
social security tax-free.
You can be pulling out justenough out of your traditional

(12:43):
IRA to stay within your standarddeduction and if you need some
additional money for your livingexpenses, you pull it out of
your Roth IRA, which doesn'tcause any additional tax
liability.
The key is you have to havedifferent buckets of money.
You need to have a tax-freebucket, such as the Roth IRA, to

(13:09):
be able to do that, such as theRoth IRA, to be able to do that
.
I see many, many, manysuccessful people over my career
and the biggest mistake that Isee consistently is they have
not tax diversified theirportfolio.
The entire portfolio, or 90plus percent of it, is all

(13:32):
subject to tax when they drawthe money out.
When you have 90% of your moneysubject to tax, guess what?
You don't have many options asto how to control your tax
situation if you need the money.
However, if I have a third ofmy money in pre-tax, a third of
my money in pre-tax, a third ofmy money in after-tax and a

(13:55):
third of my money in Roth, wellyou better believe I got a lot
of options as far as being ableto pull from different buckets
that are taxed differently totake advantage of whatever the
tax code may be in that givenyear.
The tax code may be in thatgiven year.

(14:16):
Big proponent of the Roth IRA.
I believe everyone should lookinto it and get educated on it
and seek a trusted financialadvisor that will be able to
help them through the process.
This is Rob Wolf with the WolfFinancial Podcast.

Voiceover (14:30):
Thank you for listening to the Wolf Financial
Podcast.
For additional informationabout our firm, please visit our
website, wolfadvisoryservices.
com.
The strategies and conceptsdiscussed are for educational
purposes only and do notrepresent specific investment,

(14:51):
tax or estate planning advice.
Investing carries an inherentelement of risk and it is in
everyone's best interests toconsult a tax, legal or
investment professional.
Past performance does notguarantee future results.
Securities and advisoryservices are offered through USA
Financial Securities memberFINRA, sipc, a registered
investment advisor.
Wolf Financial Advisory are notaffiliated with USA Financial

(15:12):
Securities, Member FINRA/SIPC, aregistered investment advisor.
Wolf Financial Advisory are notaffiliated with USA Financial
Securities.