Mullooly Asset Management

Fiduciary Fee-Only Financial Planner | Investment Advisor in Wall, NJ

Roth IRA

Is a Roth IRA Ever Tax Deductible?

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No. The End.

Rather than have this be the shortest blog post ever, I want to refine my answer a bit. There is no deduction for Roth IRA contributions since money goes into these accounts after-tax. But there may still be a tax benefit to making Roth IRA contributions, aside from the potential for tax-free income in retirement.

The potential current tax savings for Roth IRA contributions can come from something called the Retirement Savings Contributions Credit or the Saver’s Credit.

The Saver’s Credit actually includes contributions made to traditional IRAs and employer sponsored plans, as well. The full list of eligible accounts includes IRAs, Roth IRAs, SIMPLE IRAs, 457 plans, and 403b accounts.

According to current IRS rules in 2019, you are eligible for the Saver’s Credit if you are older than 18, not a full-time student, and not claimed as a dependent by anybody else.

The Retirement Savings Contributions Credit ranges from 10-50% of contributions to retirement accounts depending on your adjusted gross income. The credit cannot be for more than $2,000 total per person ($4,000 if you are married and file together).

Retirement Savers Credit
https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-savings-contributions-savers-credit

Now, for an example involving a Roth IRA. Let’s say John is single, 28 years old, and has an adjusted gross income of $30,000 for 2019. John puts $3,000 away in his Roth IRA. While John does not get a DEDUCTION for his $3,000 Roth IRA contribution, John does qualify for a 10% tax credit. John’s 10% tax credit entitles him to a $300 reduction from his income tax bill in 2019. Pretty good.

There you have it. While Roth IRA contributions are not tax deductible, they may still yield some benefit via the Retirement Savings Contributions Credit.

**As always, nothing on this site is specific tax or investment advice. Always consult with your personal investment advisor and a tax professional before making any decisions.**

Be Like the Lannister’s: Always Pay Your Debts

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If you’re a fan of the hit HBO series, Game of Thrones, there’s one phrase about the Lannister family that you’ve heard time and time again.  A Lannister always pays their debts.  It’s one of the many things their family has been known for throughout the show.  Regardless of the amount, or how long it has been, a Lannister will ALWAYS repay their debts.  It’s probably the only Lannister quality you would want to have.

Tom, here at Mullooly Asset Management, recently wrote a blog post about a survey done on millennials.  In the survey, it was found that 6% of millennials thought missing a credit card payment would improve their credit rating.  YIKES.

In that same survey, it was found 29% of millennials have completely missed a credit card payment.  Again, YIKES.

Let me put it to you simply: if you can afford it, DO NOT MISS CREDIT CARD PAYMENTS.  Pay off those credit cards as fast as possible.  Being in debt is not something you want.  While that survey was focused on millennials, the same can be said for pretty much every generation.  For some reason, when it comes to credit cards, people tend to make very irresponsible decisions.

So as the Lannister’s would tell you: always pay your debts.  This phrase can help you in a number of different ways apart from just paying off your credit cards. Let me explain.

DP 01 GameOfThrones S07 920x584

We get a handful of questions each week from clients, potential clients, family and friends about their finances.  One main thing I’ve been able to grasp from some of the conversations is that everyone wants to feel SMART.

 

Every single person wants to feel smart, but sometimes thinking you’re smart and acting smart are two different things.

On a recent podcast (you can find the podcast here), Tom and I answered a question from an anonymous listener about his or her financial situation.  The question was “Is it wise to start a traditional IRA alongside a Roth IRA after I just got out of debt?”  However, the details go on to say the listener “just got out of debt” except for his student loan payments.

That IMMEDIATELY set off a red flag in both our heads.  This listener was under the impression that he or she was acting intelligently by saving for retirement and starting a Roth IRA and possibly a traditional IRA as well.

However, this listener was NOT out of debt.  Student loan debt is not something to be glanced over.  In most cases for young people, student loan debt is the most significant debt they have in their life.  To answer this listener’s question, I would first say to take the money being put towards a Roth IRA or traditional IRA and use it to pay off the rest of your student loan debt.

While it IS a smart idea to begin saving for retirement, it is an even SMARTER idea to make sure your debts now are paid off first.

Something I’ve found myself saying quite a bit around the office lately is:

Make sure ‘present you’ is set before you begin worrying about ‘future you’!

The last thing you would want to do is sock money away in a retirement account when you have current debts and interest piling up.  With some basic financial planning and cash flow management, you could easily reassess your situation and realize the money for retirement could be used in a better way today.

I sometimes hesitate to answer questions with “it depends”, but often times that is the right answer.  “Should I max out my retirement plan at work this year?”  Well, it depends.  Can you afford to have that money coming out of your monthly paycheck?  Would it be better served staying in your paycheck and being used to pay down student loan debt?  Do you have credit card debt that has a 19% interest rate that is currently piling up?

Answering a question with a question is something I do not like doing, but sometimes we just need more information on your situation before we can accurately answer the original question.

A general rule of thumb if you have any sort of debt piling up: be like the Lannister’s in Game of Thrones, always pay your debts.  Your future self will be grateful you did.

Now who’s excited for the Season 7 finale on Sunday night?!

 

Mullooly Asset Show: Episode 50 – Roth IRA’s

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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.

Roth IRA Contributions for Single Filers and Married Couples

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In my last post I covered the basics of the Roth IRA. However, figuring out Roth IRA contributions can be tricky due to the phaseout rule. In this post I will provide examples of how to calculate Roth IRA contributions for a single tax filer and a married couple filing jointly.

Single Filer

If a single individual makes less than $118,000 in 2017 he/she can contribute the full $5,500 to a Roth IRA.  After the $118,000 threshold, a phase out begins. The phase out range is between $118,000 and $133,000. So if an individual has a modified adjusted gross income (MAGI) between $118,000 and $133,000 they can contribute a percentage of the full $5,500 contribution.

Below is an example of how a single individual would figure out how much he/she can contribute. Assume this individual has a MAGI of $120,000 in 2017:

Roth IRA Contributions for Single Filer

If an individual has a MAGI of over $133,000 they will not be able to contribute to a Roth IRA that year.

Married Couple Filing Joint

If a married couple has a MAGI under $186,000 they can both contribute up to the max of $5,500. Once past the MAGI of $186,000, a phaseout begins. The phase out range is between $186,000 and $196,000. So if a married couple has a modified adjusted gross income between $186,000 and $196,000 they can contribute a percentage of the $5,500.

Below is an example of how a married couple would figure out how much they can contribute. Assume this couple has a MAGI of $190,000 in 2017:

Roth IRA Contributions for Married Couples

If a married couple has a MAGI of over $196,000 they will not be able to contribute to a Roth IRA that year.

An individual needs to be careful when figuring out how much he/she can contribute to a Roth IRA. The IRS makes it very confusing for people to figure out how much they can contribute to retirement accounts.

There are more rules and nuances that individuals have to take into consideration when contributing to retirement accounts. This post was written to provide some of the basics that people should understand. More posts will be coming out in the future that focus in on specific IRA topics.

 

The Basics of a Roth Individual Retirement Account – Roth IRA

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A popular way for individuals to save for retirement is through a Roth Individual Retirement Account or Roth IRA.

Who can open a Roth IRA?

Any individual who has earned income may open and contribute to a Roth IRA. Earned income includes any money earned from salary, wages, tips or commission. It does not include income generated from dividends, interest and rental property.

If an individual has too much earned income they will not be able to contribute to a Roth IRA. The 2017 limit for Modified Adjusted Gross Income (MAGI) for an individual filing as single on their tax return is $118,000. So if an individual earned more than $117,000 they will not be able to make the full $5,500 contribution.

The 2017 income limit for married individuals is $186,000. So if together the married couple earned more than $186,000 they will not be able to make the full $5,500 contribution.

Roth IRA for retirementWhat makes a Roth IRA different from a Traditional IRA?

The main difference between these two types of retirement accounts is the tax treatment of the contributions and distributions.

Contributions to a Roth IRA are NOT tax deductible. Meaning that the individual pays taxes on the money he/she puts into the account each year. However, Roth IRA distributions are NOT taxed.  In order for the distributions to be tax-free, certain requirements must be met.

Contributions to a Traditional IRA are tax-deductible.  Distributions from traditional IRA’s are taxed as ordinary income.

Another main difference is the required minimum distribution (RMD). There is no required minimum distribution for individuals with a Roth IRA. This is because the money is already taxed on it’s way into the account. The government has no preference when the money comes out of the account because the taxes have already been taken out.

With a Traditional IRA an individual must begin taking the money out of the account by age 70.5.

What are the similarities between a Traditional IRA and a Roth IRA?

In both a Traditional IRA and Roth IRA the earnings grow tax-deferred. This means the individual with the account does not pay taxes on the gains or losses each year. Tax deferral of earnings is one of the main advantages to opening either a Roth or Traditional IRA.

The amount an individual can contribute to a Traditional IRA and Roth IRA per year is the same, $5,500. Also both types of IRA’s allow for individuals over the age of 50 to contribute an additional $1,000 per year.

The Roth IRA is a great way for young investors to start out. Most 20 and 30 year olds will not be close to the income limits, so the full contribution will be able to be made in most cases.

Both types of IRAs have their advantages and disadvantages, it all depends on the individual’s personal situation. Either way the most important thing to remember when it comes to saving for retirement is to actually SAVE MONEY!