Mullooly Asset Show: Episode 50 – Roth IRA’s – Transcript

Tom Mullooly: In episode 50 we’re going to cover the confusing world of Roth IRAs.

Welcome to the Mullooly Asset Show, I’m your host Tom Mullooly and this is episode 50. Happy to be here.

We keep getting feedback from people who say, “Where do you come up with these topics to talk about? They’re great.” We’re getting them from you. So keep those questions coming in, they’re terrific and we figure if one of our clients or one of our listeners has a question like this then there’s probably lots of other people who have the same kind of questions. So keep them coming in.

Tim, what are we going to be talking about today?

Tim: A reader from West Deptford New Jersey asks, “How should I contribute to my Roth IRA now that I’m married? My wife and I recently married and plan on filing our taxes jointly this coming season. Can I now contribute $11,000 to my Roth IRA or does she have to open her own which we can both contribute 5,500 each to?”

Tom Mullooly: Okay that’s a great question and thanks for writing in with that.

You can’t contribute $11,000 just to one account but between two married filers you can contribute up to $11,000. Now Roth IRAs can be a little confusing and so let’s just take a couple of minutes and walk through this.

If you’re over age 50, you can contribute $6,500, under 50 it’s $5,500 over 50 years old it’s 6,500 so let’s do a little quick math. A married couple over the age of 50 can contribute between the two of them 13 grand. You do that for five years, that’s not a little chunk of change. That’s $65,000. That’s a lot of money.

Why would someone put money into a Roth IRA? What people may not understand is that when you put money into a Roth IRA, that money grows without any kind of taxes. Just like the old traditional IRAs but here’s where it gets a little better. When you take the money out of a Roth IRA, no tax. So you’re not going to be taxed on this money. And you can actually pass it on to future generations. Unlike a traditional IRA where you have to start taking the money out at age 70 and a half. You have to take a required minimum distribution. There is no minimum distribution with a Roth IRA. You can just leave the money in there if you don’t need it and it grows without any kind of tax. That is a heck of a deal. It really is pretty good for the right people.

So it’s important to know the difference between traditional IRAs and Roth IRAs. There’s something that I have to kind of remind people though because they get confused about things like this question that came in. One of the things that you should always just keep in mind when it comes to Roth IRAs is that the money that goes into a Roth IRA, the money that goes in to a Roth IRA always, always, always, always, always after tax. I don’t know if I mentioned this but it’s always after tax. It’s going to be post tax dollars.

Sometimes with an IRA, you’re going to make a contribution, you may get a deduction for it. Let’s talk about with Roth IRAs sometimes we’ll sit down with clients and we’ll start talking about a Roth IRA and it’s kind of like that scene in ‘My Cousin Vinny’ where he’s starting to ask the questions of the guy on the stand and he’s going, “No, no, no, let me finish, let me finish. Let me get the question out.”

So sometimes we’re sitting down with folks and we’re talking about maybe you should consider a Roth IRA and we say, you know if you’re married and you’re a single filer, if you have modified adjusted gross income between 118 and $133,000, you’re eligible to contribute to a Roth IRA. And if you’re married filing jointly you have modified adjusted gross income between 186,000 and up to 196,000, 186 to 196, you’re eligible to put money into a Roth IRA.

We’ll be sitting with clients and we’ll be talking about, hey maybe you should think about a Roth IRA and they’ll say, “Aren’t there some kind of income limits?” And we’ll say, “Yeah, it’s 186 if you’re a married family.” And before I even finish they’re already shaking it. “Nah we make too much money, we’re not going to qualify.” Pay. Pay attention. It’s modified adjusted gross income. Do you know what adjusted gross income is? Look at the bottom, the bottom line on page one of your tax return. It’s going to say, adjusted gross income. That’s not the top line, that’s not revenue, it’s your adjusted gross income.

With a Roth IRA it’s modified adjusted gross income. So we add back in things like if your self employed, the self employment tax that you paid. If you made IRA, if you’re making IRA contributions and you get a deduction for that, if you have student loan interest you have to back that out. It’s modified adjusted gross income. And that trips up a lot of people. We’re finding that there are plenty of people who are eligible for Roth IRAs and they’re not doing it. It just doesn’t make sense. These are terrific vehicles for things to consider. Whether you’re putting additional money away for retirement or you want to put money away for someone’s college education, there’s lots of things that an advisor can talk to you about.

So this was a terrific question that came in. Thanks for sending that in and definitely get in touch with us if you’ve got questions like this, reach out. You may see it on a future video. So thanks for watching episode 50. Catch you on the next one.

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