Welcome to ROTHtober!

Welcome to ROTHtober!

October 04, 2023

If Shakespeare was a Financial Advisor, he may ask:

To ROTH or not ROTH, that is the question?

Unfortunately, like most financial situations the answer is “it depends”.

ROTH accounts are an Individual Retirement Account to which you contribute after-tax dollars. While there are no current-year tax benefits, your contributions and earnings can grow tax-free.  You can withdraw them tax-free and penalty-free after age 59½ and once the account has been open for five years.  They were named for Senator William Roth and became a retirement savings option in 1998.

On answering the question about a ROTH account. The first point that we need to cover is: “Do you have to have earned income?”  Which basically means you are working and receive a W2.  Earned income is not rental income, Social Security, dividends, interest, etc.

If you have earned income, then the next hurdle is how much income did you have since there are income limits if you want to contribute to a ROTH account.  For a Married Filing Jointly household, the limit starts at $218,000 and for a Single household, the limit starts at $138,000.  If your income is over those limits, you would not be able to contribute directly to a ROTH account.

If you are under the income limit, then you should definitely consider a ROTH account.

The contribution limit for a ROTH account is $6,500 if you are under the age of 50 and $7,500 over the age of 50.  Or, as long as you had earned income over that amount. 

Now if you are working and your employer offers a 401k with a ROTH 401(k) option, there is no income limits and you can increase your contributions to $22,500 if you are under 50 and $30,000 if you are over 50.  Be sure to explore that option with Human Resources.

If you are not working there is still an opportunity for a ROTH account.  It is called a ROTH Conversion.  You can convert a portion of your traditional IRA into a ROTH account.  It can be any amount, but the downside is taxes will have to be paid today on the conversion amount.  You will then get tax-free growth going forward.  There are a lot of reasons to consider a ROTH conversion, but be sure you speak with your tax preparer and financial advisor before doing one.

This is the point of ROTHtober.  Take a moment and ask yourself....To ROTH or not ROTH?  We will be providing additional ROTH educational articles all this month.

On a personal note, I asked my three kids the question about celebrating ROTHtober.  They all had different answers.

History major in the real world...yes that seems like a good idea.  I will do something, but I need to pay rent.
Finance major in college.....I am MAXING my ROTH every year. (That's my boy!)
Senior daughter....you want me to take money out of my checking account for what?!?!

Still have some work to do there.

Have a great ROTHtober.