Let's look at the only reasons to ever contribute a Roth IRA in this post. A Roth IRA is a tax-advantaged retirement account where you contribute post-tax contributions. The contributions get to grow tax-free and the withdrawals are tax-free too.
“Disadvantages Of A Roth IRA: Not All Is What It Seems” ignited a flurry of responses from people who have already been contributing to a Roth IRA. Anybody who followed my advice since the post was first published during the Obama administration has been rewarded handsomely. Income tax rates declined under the Trump administration.
With Joe Biden as President, at the margin, investors should be more wary because there's a likelihood that taxes will go up again. Taxes must be raised to pay for all the stimulus being spent to combat the virus. Further, Biden has said he will raise taxes on households making more than $400,000.
As a result, the relative appeal of contributing to a Roth IRA now has increased.
The income threshold to contribute to a Roth IRA for 2023 is $153,000 for singles and $228,000 for married couples. The income thresholds usually go up every year.
Hard To Trust The Government To Contribute To A Roth IRA
One of the main things people have learned is that the government manipulates individuals into forking over more money than they otherwise should due to gross mismanagement of their own budget.
Massive deficit due to record stimulus spending during a coronavirus pandemic? Let's announce this huge “benefit” to allow people to convert their pre-tax retirement funds into a Roth IRA! We'll raise the specter of higher tax rates to get more people to bite.
The reality is doing a Roth IRA conversion is probably a waste and time for most people. Because most people won't make more in retirement than while working, meaning future tax rates for most will go down, not up.
It's sometimes daunting to go against the government because they employ some of the smartest people on Earth to keep themselves in power while keeping the rest of us dependent on their largess. But I'm here to help you fight back and live a better life.
Know The Latest Tax Rates Before Contributing To A Roth IRA
If you contribute to a Roth IRA or convert your pre-tax retirement accounts into a Roth IRA, you aren't going to be damned to hell. You're just not maximizing your wealth over time if you are in a federal income tax bracket higher than 24% and contribute to a Roth IRA.
For those of you who already have a Roth IRA account, what you are about to read probably makes so much sense you might feel a little bad. But don't worry. The number one solution when you are in a hole is to stop digging and slowly climb out.
The Only Reasons To Ever Contribute To A Roth IRA
1) You've maxed out your 401(k) already.
If you've contributed $22,500 to your 401(k) for 2023, then go ahead and contribute to a RothIRA if you are eligible for tax diversification purposes.
Contributing to a Roth IRA is more tax-efficient than simply investing in a taxable brokerage account. Roth IRA money compounds tax-free and all contributions and earnings can be withdrawn tax-free once you've kept your Roth IRA open for more than five years.
Related: How Much Should You Have Saved In Your 401k By Age
2) You're in the 22% marginal income tax bracket or lower.
If you earn under $95,375 as a single or $190,750 as a married couple, you are in the maximum 22% marginal federal income tax bracket I recommend for contributing to a Roth IRA. A 22% federal marginal income tax bracket is a reasonable rate to pay up front.
Feel free to contribute up to $6,500 to a RothIRA now because you will be completely creamed by the IRS in the future as your income and marginal federal income tax rate increases.
If you're in the 24% marginal income tax bracket, contributing to a Roth IRA or converting to a Roth IRA will likely be a wash.
3) You're going to make over $153,000 or your spouse is getting a big raise.
After you make over $153,000 as an individual or $228,000 as a married couple for 2023, you can't contribute to a RothIRA. You can contribute the max if you earn $138,000 or less as an individual or $218,000 or less as a married couple. It is still unknown how the government comes up with such arbitrary amounts, independent of location.
Don't they know that San Francisco is much more expensive than Des Moines? Contributing to a RothIRA is particularly useful for those who are on the hunt for sugar mammas or sugar dads. If your prey actually proposes, then contribute as much as you can during the engagement before it's too late.
4) You think World War III is on the horizon.
If you think world leaders no longer respect the United States' might and plan to invade, conquer, and bomb neighboring countries around the world, you should consider:
1) Withdrawing all your money and keeping it under a mattress.
2) Making sure your savings accounts are no larger than $250,000 for an individual or $500,000 for a married couple to comply with the FDIC guarantee amount. Have multiple banking relationships to protect yourself from a bank run.
3) Selling equities and keeping cash or Treasury Bills for liquidity
4) Contribute to a RothIRA because the government will likely raise taxes on everyone to fund a long war.
I still think if you make under $200,000, you're relatively safe. However, with an expense as large as World War III, the government may have no choice but to raise taxes on people paying 25% or less.
Let's say you're having a guilty conscience for not paying enough taxes because you either cheated on your taxes for years, run a cash only business with two sets of books, mooched off the government longer than you should have, or feel so bad taking advantage of all the loopholes, then go ahead and contribute to a RothIRA.
I've spoken to a lot of the 47% who don't pay income taxes during my time off from Corporate America. A couple have admitted they feel bad that 100% of the tax burden is paid for by only ~53% of the people. Some of my 47% friends have side jobs that are cash only and never pay taxes.
6) You're undisciplined and expect to have a lot of problems in your life.
You may have the best intentions of saving for your retirement, but you know that you have poor discipline when it comes to money. Perhaps your experiences as a relapsing cigarette smoker or drinking alcohol have given you doubt about never needing to raid your retirement accounts.
Maybe you've got outstanding debts that must be paid or else goons will visit you in the parking lot and break your kneecaps. Who knows.
The “good” thing about a RothIRA is that you can withdraw the money you put in penalty free, just not the earnings. The only times you might be able to get away with the early withdrawal penalty before 59.5 is if for college expenses, medical expenses greater than 7.5% of your adjusted gross income, or paying for a first-time home purchase (up to $10,000).
7) You have inside information knowing that RothIRAs will get favorable treatment.
Let's say you work in the US Treasury and overhear that the government plans to pilfer all 401(k) and traditional IRA accounts by raising taxes on withdrawal rates and extend the penalty free age of withdrawal from 59.5 to 69.5.
You've seen draconian measures executed with bank deposits in Greece in 2013 so you have no doubt America can do the same. You also hear that anybody who contributes to a RothIRA will get a one-for-one dollar match and get two votes to raise taxes on others to benefit yourself. Clearly you should contribute all you can to a ROTH IRA until the government changes its mind again.
Be aware the Tax Cut and Jobs Act that resulted in lower taxes will expire on December 31, 2025. Therefore, for tax diversification purposes, you may want to shift more assets from tax-deferred to the tax-now Roth IRA before January 1, 2026.
8) You live in one of the no state income tax states.
Federal income tax is one thing, state income tax is another. If you live in Texas, Washington, Florida, Alaska, Nevada, South Dakota, Wyoming, or New Hampshire, it is less of a sin to contribute to a RothIRA because you aren't paying any state income taxes.
Everybody else should figure out a way to retire in one of the seven no income tax states and then start withdrawing pre-tax retirement funds.
Related: States With No State Tax Or Inheritance Tax
9) Someone is paying you to promote a RothIRA.
Money makes people do anything. If some organization is going to pay you to promote the RothIRA then I guess you're better off than others who don't have the same money making opportunities.
If you can earn more promoting the RothIRA than what you can earn from the returns of your RothIRA, then you would be a fool to ignore all the wrong reasons for contributing to a RothIRA in order to pad your bank account.
Be especially aware of financial advisors or CFPs who aggressively push the RothIRA without providing other benefits besides tax free growth and gains. Make sure pitchmen practice what they preach.
10) You are an income tweener.
If yourincome is between the tax deductible IRA max ($68,000 income limit to contribute the max) and Roth IRA max ($153,000 income limit to contribute the max) and you can afford it, making a Rothcontribution could make sense.
For those over the Rothincome max, you can do a “backdoor” Rothcontribution – by making a non-deductible contribution to a traditional IRA and then converting it to a Roth.
11) You've got a working child.
If you've got a child who is working for someone else or for your business, then you might as well contribute to a custodial Roth IRA. The child will pay no taxes up to the standard deduction of $12,550. Further, your child will learn about the importance of saving and investing for his or her future.
There is no age limit to open up a custodial Roth IRA for you child. So long as your child is earning income doing work, he or she is eligible.
Contributing To A Roth IRA Isn't The Worst Thing In The World
Mathematically speaking, the most taxes you will pay on a $6,500 contribution is roughly $1,440 (24% tax bracket). You can't contribute to a RothIRA once you're in the 32% federal income tax bracket due to the $153,000 individual income limit threshold for 2023.
It is really unlikely that you will earn more in retirement than while you were working. Interest rates have plummeted, which means it requires a lot more capital to produce the same risk-adjusted income. Therefore, we should all lower our safe withdrawal rate in retirement to be more aligned with the times.
You will unlikely earn enough in retirement to pay higher than a 24% marginal federal income tax bracket. This would require an individual to make over $182,101 a year or a married couple over $364,200 a year in retirement to pay the 32% marginal federal income tax rate in 2023.
However, to generate $182,101 / $364,200 a year in income from your retirement portfolio at a 4% rate of return would necessitate having $4.55 – $9.1 million.
Yes, I do believe many personal finance readers will become multi-millionaires in retirement. But most Americans will not. The retirement numbers don't lie.
If the choice is between not saving anything at all and saving in a RothIRA, then definitely save in a Roth IRA even if you haven't funded your 401(k). But the best sequence is to max out your 401(k) and traditional IRA first before paying more taxes up front.
Diversify Your Retirement Sourcs
Today,I have come around to contributing to a Roth IRA because I'm now a father of two kids. So much of one's perspective changes after becoming a parent.
When I reflect back upon my time working minimum wage jobs as a teenager and then working jobs in college and a year after college, I regret not contributing to a Roth IRA. If I did contribute a Roth IRA back then, I would have over $100,000 in a Roth IRA account today.
I plan to put my kids to work at some point, pay them the Roth IRA contribution limit, teach them about online entrepreneurship, and also teach them about the importance of saving and investing for the future. Being able to pay 0% tax to contribute to a Roth IRA and then withdraw the money tax-free in the future is a no-brainer.
Joe Biden and Kamala Harris are likely going to raise taxes for higher income earners and keep taxes the same for the rest. Pay attention to tax laws and tax rates going forward.
For those of you in a marginal tax bracket above 24%, doing a Roth IRA conversion to try and save on taxes when you're in retirement is probably not going to save you money. But if you are in the 0%, 10%, 12%, and 22% marginal income tax brackets, it's not a bad idea.
Diversify Your Investments Into Real Estate
If you want to dampen volatility and build wealth at the same time, invest in real estate. Real estate is my favorite asset class to build wealth.
The combination of rising rents and rising capital values is a very powerful wealth-builder. By the time I was 30, I had bought two properties in San Francisco and one property in Lake Tahoe. These properties now generate a significant amount of mostly passive income.
In 2016, I starteddiversifying into heartland real estateto take advantage of lower valuations and higher cap rates. I did so by investing $954,000 withreal estate crowdfunding platforms. With interest rates down, the value of cash flow is up. Further, the pandemic has made working from home more common.
The Two Best Real Estate Investment Platforms
Fundrise: A way for accredited and non-accredited investors to diversify into real estate through private eFunds. Fundrise has been around since 2012 and has consistently generated steady returns, especially during volatile times. For most people, investing in a diversified eREIT is the easiest way to gain real estate exposure.
CrowdStreet: A way for accredited investors to invest in individual real estate opportunities mostly in 18-hour cities. 18-hour cities are secondary cities with lower valuations and higher rental yields. They also have potentially higher growth due to job growth and demographic trends. If you have a lot more capital, you can build you own diversified real estate portfolio.
Invest In Private Growth Companies
In addition to diversifying into real estate, consider investing in private growth companies through an open venture capital fund. Companies are staying private for longer, as a result, more gains are accruing to private company investors. Finding the next Google or Apple before going public can be a life-changing investment.
Check out theInnovation Fund, which invests in the following five sectors:
- Artificial Intelligence & MachineLearning
- Modern DataInfrastructure
- Development Operations(DevOps)
- Financial Technology(FinTech)
- Real Estate & Property Technology(PropTech)
Roughly 35% of the Innovation Fund is invested inartificial intelligence, which I'm extremely bullish about. In 20 years, I don't want my kids wondering why I didn't invest in AI or work in AI!
The investment minimum is also only $10. Most venture capital funds have a $250,000+ minimum. In addition, you can see what the Innovation Fund is holding before deciding to invest and how much. Traditional venture capital funds require capital commitment first and then hope the general partners will find great investments.
Recommendation To Build Wealth
Finally, whether you have a RothIRA or a traditional IRA, I would sign up for Empower to run your retirement funds through their Investment Checkup tool for free.
You'll get a snapshot of how much in portfolio fees you're paying a year and how you can optimize your portfolio based on your risk tolerance. I found out I was paying $1,700 a year in fees I had no idea I was paying!
Run your numbers through theirRetirement Planning Calculator. It uses real data that you've linked to produce as realistic a future financial scenario as possibleto see how you're doing.You can adjust the various expense and income variables to see the different results.
Check out a sample output below and see if you can get to excellent shape as well!
The Only Reasons To Ever Contribute To A Roth IRA is a Financial Samurai original. Financial Samurai has been around since 2009 and is one of the leading personal finance sites in the world. Join 60,000+ others and sign up for his free weekly newsletter to never miss a thing.
