Right Now

Carolanne Chavanne, CFP®

One of the real challenges we experience comes from working to understand and then implement the complex investment and savings choices that exist in the world today. There are so many offered that it’s hard to keep track of what is out there sometimes. When I think about the concept of building a nest egg, one of my personal favorites, and one that has grown in popularity for a variety of reasons, is the Roth Account. Having your retirement savings made available tax-free is a great thing, and the Roth is like the “Golden Egg” when it comes to making that happen.  

If you have been following our newsletters long enough, you know we like to use song titles that relate to the theme of the edition as our newsletter title.  This one might be a bit of a stretch, but some of us, when we hear the name “Roth”, think about the rock legend David Lee Roth, lead singer of Van Halen. (No, he had nothing to do with inventing the Roth account, but he is a man of many talents, nonetheless). In the Van Halen song Right Now, the band sings, “Don’t wanna wait ‘til tomorrow. Why put it off another day? One by one, little problems build up, and stand in our way.”  

Well, “little problems”, when it comes to financial health, could be a lot of things that add up over time, including taxes. This newsletter is focused on the benefits and choices available when it comes to Roth Accounts, and how to use them to keep some of those little problems from accumulating into big challenges. 

Carolanne’s Corner

It's so amazing to realize that another year is almost over. We hope it’s been a great year for you so far, filled with many great memories. Here at Prosperity Wealth Planning, we have had an amazing year as well. We continue to see our client's plans progress and flourish, which brings meaning and satisfaction to our days. Our business is growing, and we have been able to implement some new services that have helped many of you, including our Prosperity Planning Sessions, Tax Planning Sessions, and our soon-to-come Estate Planning Sessions. The markets have also played a role in all of us feeling a bit more at ease when it comes to our futures.   

We hope those of you in Texas had as much fun as we had at the event held there this past June and are very much looking forward to our Client Appreciation Event in California in November. We were also able to conduct several presentations and individual consultations at various Toyota sites (both in-person and virtually) over the course of the year and already look forward to some of the new opportunities coming in 2024. Speaking of 2024, next year marks our five-year anniversary, and we are looking forward to this milestone event.  

Reflecting on the lyrics in our theme song, the band also reminds us to not just “make future plans or dream about yesterday, but, hey, come on, turn this thing around!” Whether it’s making personal plans for 2024 and/or implementing the Roth strategies discussed here – now’s the time to get it done!   

To begin our discussion of Roth Accounts, let’s look at a visual representation of how saving for retirement has changed since the 1980’s -

Back then, as this visual shows, retirement savings options were a little bit simpler. There were essentially three forms of retirement savings: pensions, social security, and taxable investment accounts. Fast forward twenty years, and you can see that the number of employers still offering a fixed pension started to diminish. At roughly the same time, tax-deferred accounts like 401k’s & IRAs, and tax exempt/tax free accounts like Roth IRAs were introduced. Rather quickly, retirement savings shifted from being the responsibility of the employer to the responsibility of the individual employee. When you examine the financial landscape of today, it's easy to see how much more has changed. Pensions are now almost non-existent, tax-deferred and tax-free accounts have become a much larger piece of the puzzle, and health savings accounts are beginning to be considered as an important source of funding retirement expenses as well.  

Roth IRAs

One of the really noteworthy developments in the evolution of retirement planning was the emergence of the Roth IRA. The Roth IRA revolutionized the entire idea of savings because, like simple savings accounts, it is funded with money on which you have already paid taxes. The key difference is that when it comes time to make withdrawals, Roth IRA distributions are 100% tax-free. Take a moment to consider: instead of putting your savings in a bank account or CD, where you would still be subject to taxes on the interest you earned, consider contributions into a Roth, whereby when you take withdrawals, you'll pay no taxes.   

Of course, like anything else that almost seems too good to be true, there must be a catch. In the case of a Roth IRA, the catch is that there are limits on how much can be directly contributed based on an individual’s income level. For the 2023 tax year, filing taxes as a single person, your Modified Adjusted Gross Income (MAGI) must be less than $153,000 for you to be able to directly contribute to a Roth IRA. If you're married and file jointly, the upper limit is $228,000. And the maximum contribution for 2023 is $6,500 if you’re under age 50 or $7,500 if you’re age 50 or older.  

Backdoor Roth IRA Conversions

Following the introduction of the Roth IRA, Congress decided that it would be a good idea to tweak things a little so that some high earners could fund their Roth IRAs at a slightly higher level than the existing law allowed. And just like that, the "backdoor” Roth IRA conversion was created! This "backdoor” method changed the rules so that an individual can take after-tax funds (again, savings on which taxes were already paid) and contribute those funds to a traditional IRA. Those after-tax IRA funds could then be converted into a Roth IRA. This means that, even though your income would have disqualified you from contributing, if you have the after-tax funds in a traditional IRA, this “backdoor” method can be used to get around it and allow money to grow tax-free. One important thing to remember about this backdoor Roth – it requires that there are no funds within an IRA at the time it is used. The funds must be new to the IRA before the backdoor to a Roth can be used.

Mega Backdoor Roth 401(k) Conversion

For fans of sequels, there is also something known as a “Mega Backdoor” Roth 401(k) Conversion, and it can be a great tool to enhance your Roth account funds. The catch this time is that it’s only available for people with a certain type of employer-provided 401(k) plan, and it’s also pretty complicated. Because of the many moving parts and the potential to get hit with unexpected tax bills, this is one that requires some consultation with an expert – your financial planner (that’s us!) or tax professional – to help put it together. Below is a visual representation of how the strategy works:

If you go through all the steps shown above and determine that you do have an opportunity to use the Mega Back Door, you are given the option to choose whether the final destination of your mega contribution is a Roth 401(k) or an outside Roth IRA, whichever works out better for your own situation. Note that, prior to beginning this savings strategy, you must maximize your salary deferral limit of $22,500 ($30,000 for those over the age 50). 

Retirement and Withdrawals from Roth Accounts

When it comes to any withdrawals in retirement, an important rule to follow is to leave these Roth IRA and Roth 401(k) accounts untouched until all other sources have been tapped. The big reason for doing so is precisely because the money in Roth IRAs or Roth 401(k)s is not taxable when it is withdrawn. This means that it is to your advantage to let it continue to grow over time, knowing that no taxes will be coming due when you do use it — as long as you follow the rules. What rules, you ask? These withdrawal rules state that you must be 59½ or older and have held the account for at least five years. Withdrawals are also tax-free for your heirs, regardless of their age, if the original account was opened at least five years before they inherited it. The IRS requires any Roth conversion to have occurred at least five years before you access the money; otherwise, you may be charged taxes or penalties for withdrawals. 

Regular Roth Conversions

If your retirement has already happened, and you find yourself without any of these tax-free funds, it is still possible to convert portions of tax-deferred accounts to a Roth account. To do so, you’ll have to pay income taxes on the amount converted for that year. For a lot of folks, it’s worth it to have those tax-free funds in retirement. There is no limit to the amount that can be converted in any given year, but it usually makes sense to make this exchange over several years to soften the tax blow. Convert too much, and there is a possibility that you might push yourself into a higher tax bracket.

Questions on any of these Roth ideas?  We are here to help.  Schedule a meeting or quick call to discuss here. 

News and Upcoming Events

Charles Schwab/TD Ameritrade Integration 

The integration between TD Ameritrade and Charles Schwab was officially completed over Labor Day weekend. You should have received an instruction package from Schwab that outlined what you need to do to be able to access your account information going forward. If you have not yet created a Charles Schwab login and password, go to Schwab Alliance and select "New Schwab User", then follow the prompts. The package should have also provided a new eight-digit Schwab account number that will replace your old TD Ameritrade Institutional account number. Please contact us if you are having any issues with the move to Charles Schwab. 

Fall Prosperity Planning Sessions

The Fall Prosperity Planning Sessions are well underway. As a reminder, these sessions include a financial and investment plan review, contribution and distribution check-up, beneficiary updates, estate plan analysis and tax-loss harvesting discussion. Where it’s applicable, we will also look at maximizing your contributions and Roth conversions. If you have not yet booked your session appointment, click here to schedule while space is still available.

California Client Appreciation Event  

As we mentioned earlier, we are looking forward to getting together with all of our California-based friends at our annual Client Appreciation Event on Thursday, November 16th, at La Traviata in Long Beach, from 5:30 p.m. – 8:30 p.m. Be on the lookout for your invitation to an evening with friends, food, music and good times.  

Coffee with Carolanne

The last Coffee with Carolanne of the Year will be held on Thursday, November 9th, from 5 to 6 p.m. PT. Our featured topic will be "Year End Planning." Join us for an hour of good conversation and say hi to some old friends.   

Articles of Interest  

Roth Conversions: What You Need to Know
Roth vs. Traditional IRA: Which is Better for Me? 
Trying to Supersize Your Retirement Savings? A Mega Backdoor Roth IRA Conversion Could Come in Handy  
Can I Make A Mega Backdoor Roth Contribution?

When it comes to finances, our golden rule is to make a plan and stick to it. The golden egg (in the ‘not having all your eggs in one basket’ adage) is the Roth Account, so we are glad to present this timely information to you right now. If you have questions about Roth IRAs or Roth 401(k)s (or any other financial planning issue), I urge you to reach out and set up a meeting so we can share our expertise in this area. Finally, I want to personally thank each of you for your continued support and trust, and pass along my wishes for you all to enjoy a wonderful holiday season.  



By Carolanne Chavanne, CFP®

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