Over 50? Here Is What You Need To Know About Roth Accounts

There’s a really big misconception out there that the only people who should be saving in a Roth are young people. That that’s not true. If you are over 50 there are plenty of compelling reasons to continue to save or even start saving in a Roth if you haven’t been doing so. [inaudible] hi there. My name is Ashley Micciche, CEO of True North Retirement Advisors where we specialize in retirement and exit planning for business owners.

So, in today’s video I’m going to talk about why you should still consider saving in a Roth if you’re over 50 and especially if you have access to a Roth in your 401k plan for your work, it’s even more compelling.

Okay.

So, the first thing I want to emphasize with this is there’s this huge misunderstanding out there about who can contribute to a Roth. Roth Ira accounts are capped, there’s an income cap on what you can contribute in any given year. And right now, if you’re married, it’s right around $200,000 a year.

So, if you make more than about $180 to $200,000 a year, you’re locked out. You can’t contribute to a Roth IRA. But the rules are different with Roth 401ks. So, if you have access to a 401k plan through your work, you’re a business owner, and you have a 401k plan, it is very compelling to put money into a Roth 401k because those income limits do not apply.

It doesn’t matter if you make $20,000 or 2 million, you could potentially maximize your Roth 401k contributions by putting as much as $25,000 into a Roth 401k, if you’re over 50.

A lot of people are like, well, I don’t get a tax deduction for that. They don’t, they don’t put the money in their Roth 401k. They want the tax deduction this year. So think about that. Once that money, once your contribution for that year is inside of the Roth, it’s not taxed again.

So, from that point forward, it grows tax free. And I’m going to come back to why that’s important. But the second reason why the raw, especially the Roth 401k is a compliant choice for you high income earners that are close to retirement. Is that what you usually hear is you’ve researched Roth or Roth IRAs, Roth 401ks is that whether or not you should contribute to a Roth really depends on what are you thinking future tax rates are going to go. Okay.

It’s the worst, ridiculous most garbage advice I’ve ever heard regarding retirement accounts because no one can predict, especially no one can predict tax rate and what they will be in the future and given the fact that taxes are very low right now by historical norm, it makes a lot of sense to put more money into a rock. Especially since I know most of you watching this video, if you are older, if you’re closer to retirement, you probably have very little in terms of your overall net worth in a Roth already and you have probably way too much inside of the traditional Ira or 401k relative to what you have in the Roth.

Do not let the conventional advice about what tax rates are going to be in the future drive your decision about what you should do today. A lot of people as they get closer to retirement, they’re told don’t contribute to a Roth because you can’t start taking the money out, you know, within the next like three, five years unless you want penalties and things like that associated with it.

Okay?

That advice is very short sighted and here’s why. Let’s say, let’s say you have $1 million, so $500,000 is in a traditional IRA 401k account. The other $400,000 is in a taxable account. Let’s say you’re married, you and your spouse has a taxable account and let’s say that the rest is in Roth, and then your spouse has maybe a little IRA. That’s a pretty common makeup, large IRA, smaller IRA, decent sized joint account, and then a little teeny tiny bit in our Roth.

What ends up happening when you transition into retirement, assuming that you’re going to start taking money out of your retirement accounts right away, as soon as you transition into retirement, you are not going to touch the Roth because you want to let that money continue to grow tax free for as long as possible.

So even if you’re going to retire this year, it still makes sense to contribute to a Roth because the likely scenario is unless you are in dire circumstances financially, you will not be touching that Roth for years down the road if ever. So, um, conventional wisdom would say, okay, if you’re going to retire then you’re going to start first drawing money out of your taxable accounts or your joint account. Let’s say that you have with your spouse.

Okay, great.

Then either when that’s exhausted or you’re forced to start taking mandatory distributions from your Ira 401k account at 70 1/2, then you start taking money out of there as well. And then once that’s taken out, then you go into the Roth. So again, it can be 20, 30 years, maybe never until you touch the Roth. And so, every penny that you put into the Roth, but whether it’s through an IRA or a Roth 401k can continue to grow for years and years, even in retirement. So don’t listen to what anybody tells you that because you’re close to retirement, you should forgo the Roth.

It’s bad advice. Well, hopefully that helped you understand what you need to know about Roth accounts, what you need to know in order to make a good decision about whether or not you should contribute to a Roth 401k or a Roth Ira. Especially if you are close to retirement and especially if you are over 50. So, if you want to go do a deeper dive on this topic, really want to figure out why this might be a good choice for you, why you should do a Roth, at least some portion of your retirement savings into a Roth, in the One Minute Retirement Tip podcast, which you can find on iTunes lives in the Ibison or on Amazon Alexa.

I devoted an entire week’s worth of tips, um, to this very topic.

So, thank you so much for watching.  We put out new videos every single week, all around exit planning and retirement planning, particularly topics that are interesting to business owners nearing retirement. Again, thank you so much for watching.

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