hey guys in this video we're going to talk about how to maximize your tax-free roth retirement
strategy as america's IRA expert ed slot says it's about moving assets from forever taxed to never
text in part three of my series how to create a 100 tax-free retirement income we learned what
the optimal amount is to having a traditional 401k and ira to create tax-free income in retirement
now let's learn the steps to maximize what is in my opinion the biggest advantage for retirement
planning in the tax code no matter what your income the current tax code offers tremendous
opportunities to create grow distribute and pass on assets tax-free let's get to it
Colin exelby will be here and i'm a certified financial planner professional and i provide
financial planning for business owners and their families that just makes sense i own the financial
advisory practice celestial wealth management and provide advice virtually to clients all over the
country before we get started this is as good a spot as any to point out important disclosures
the information in this video is for educational purposes this is not specific financial planning
or investment advice in addition everyone's tax situation is different you should discuss your
tax situation with a qualified tax advisor before implementing any planning strategy
let's talk roth everyone loves roth except maybe the government that created them more on that in
a minute so why does everyone love a roth IRA roth IRAs have become so successful for some
that the current government is looking at ways to cap access to them for certain people
and to force distributions for others so it's really important to be taking advantage
of this strategy if it makes sense for you why does everyone love a roth ira
in 1997 the roth ira was created to allow people to put away money and forego a tax deduction
in exchange you get tax-free growth and tax-free distributions and if anything is left over after
you pass away your heirs can withdraw those funds tax-free as well the government thought this was
a great way to incentivize saving for retirement as many pension plans were going away at the time
it also allowed them to collect some taxes right away but many people who qualified still didn't
contribute people believe that they will be in a lower tax bracket in retirement but that's a
myth many people are in a higher tax bracket in retirement given the combination retirement income
those increasing rmds that we talked about in episode 3 and social security but not everyone
can have these accounts when these accounts were created in the late 90s they were limited
to americans making less than a hundred and ten thousand dollars or a hundred and sixty thousand
dollars jointly and annual contributions were limited to only two thousand dollars well fast
forward to today and now if you make less than 144 000 in 2022 or 214 000 jointly you can contribute
up to 6 000 if you're under 50 and 7 000 if over 50. and if you do qualify in order to have those
tax-free and penalty-free distributions all you have to do is have the account a minimum of five
years and avoid taking earnings distributions until after age 59 and a half all of your roth
ira contributions can generally be accessed without penalty so they can also act as an
additional supercharged emergency fund remember in part two when we discuss the current tax brackets
they are significantly lower than in 2017 and many more people qualify for the lower brackets
because of the increased income thresholds it may make a lot of sense to forego the current income
tax deductions of a traditional ira or 401k deduction in favor of all the future tax-free
growth of a roth ira or roth 401k when traditional 401ks and iras were created back in the 1970s
tax rates were much higher in fact here are the married filing jointly tax rates back in 1978
that's the year i was born just look at how much higher tax rates were back then it made
a lot more sense to take the tax deduction then and just hope for lower rates it's exactly the
opposite now and is another reason allocating to roth iras makes sense what about when it's time to
withdraw the funds are there the same requirements as traditional iras and 401ks no roth iras are not
subject to a required beginning date or required minimum distribution you never are required
to take the money out if you don't want to in fact you can actually keep making contributions
past age 72 if you qualify and still have earned income but for many an ideal strategy is to
withdraw roth assets in retirement you know why well of course they're tax-free you know why else
they don't count as provisional income and do not make social security taxable this is one of the
key points to a 100 tax-free retirement income if you take away one thing from this video it should
be that roth ira distributions are tax-free and do not count toward the provisional income that
can make up to 85 of your social security taxable they are much more optimal to use in coordination
with your traditional ira distributions to keep your taxable and provisional income as low as
possible all right the second part of the raw strategy is to take advantage of the roth 401 k
wait roth 401k did you know that most employers offer both traditional pre-tax 401ks
and roth after tax 401ks while they are available to over 86 of retirement plans according to the
psca's most recent survey only 26 percent of participants actually make deferrals
are you a solo entrepreneur if you're making use of the solo 401k you can also have a roth 401k
many solo entrepreneurs or partnerships still use the old sep ira where the only option is pre-tax
deferrals i would think twice about that in fact i created this video that explains the differences
between a solo 401 k and a sep ira in more detail check it out the biggest difference between a roth
401k and roth ira is that the roth 401k doesn't have any income constraints attached to it
you can make a million dollars of income and still contribute up to twenty thousand five
hundred dollars in 2022 if you're under 50 and 27 000 if you're over 50 into a roth 401k that is a
quick way to accelerate your tax-free retirement savings since you can contribute much more than
the roth ira the best part is almost anyone can do it roth 401k contributions can also generally be
accessed without penalty so they too can act as an additional emergency fund a potential
much better way to have an emergency fund than sitting in a low yielding savings account
if you qualify are married over 50 and love this idea here is how you and your spouse could get
up to 68 000 in total contributions to this raw strategy in one year 2022 roth 401k contributions
you put in twenty thousand five hundred dollars plus six thousand five hundred dollars as a
ketchup and you get twenty seven thousand dollars for you and your spouse twenty twenty two roth
ira contributions six thousand dollars in plus a thousand dollars in the ketchup equals seven
thousand dollars each total that's 34 000 for each of you or 68 000 for both all in one tax year
mind blown but colin i'll be paying more in taxes now and those funds will not get to grow
for retirement they are permanently lost wouldn't i do better to take the deduction now and have
those funds grow pre-tax this is an extremely common question and i want to put to rest this
concern right now the number one factor here by a mile is taxes the difference between the rates you
pay now and the rate you will pay later if tax rates remain the same or increase in retirement
using the raw strategy will be better it's not about inflation earnings or the opportunity cost
it is all about tax rates if tax rates are the same at contribution and later in retirement the
end result would be exactly the same let's do the math here are the assumptions we're gonna start
with a ten thousand dollar contribution lifetime investment earnings of two hundred percent
and an assumed tax rate of thirty percent as with any financial planning we've always got
to start with these assumptions so that's why they're here all right here are the calculations
traditional 401k contributions you take a 10 000 contribution after 200 percent lifetime earnings
equals thousand dollars thirty thousand dollars times a thirty percent tax rate as you distribute
the funds is nine thousand dollars in taxes paid so the net after tax ira balance from
that initial ten thousand dollars is twenty one thousand now let's look at a roth contribution
you're gonna pay three thousand dollars in taxes up front right because you have ten thousand
dollar contribution going in times thirty percent so you pay the three thousand dollars in taxes
now you have seven thousand dollars to invest seven thousand dollars after two hundred percent
lifetime earnings grows to twenty one thousand dollars the exact same amount that is because it's
all about the taxes and the taxes you pay in the beginning versus the taxes you pay at the end joel
dixon vanguard group's head of enterprise advice methodology told the wall street journal in 2019
that the only factor to consider is current tax rates versus future tax rates with roth iras
and roth 401ks you will never have to worry about the uncertainty of what future tax rate increases
could do to your retirement savings and because distributions are tax-free they also can lower
your retirement income to a level where there is less of a chance of hitting the medicare premium
surcharge known as irma and it can keep your social security tax-free for most americans but
especially those who are in lower income brackets say 24 and below i think this is a significantly
underutilized benefit if future tax rates rise creating a balance between tax deferred balances
and tax-free balances gives you flexibility as you approach retirement i love flexibility i
would strongly consider an approach where you take advantage of both the pre-tax traditional 401k
and the post-tax roth 401k contributions you can actually figure out the ideal amount to contribute
to your pre-tax 401k in your post-tax roth 401k with some basic calculations to create your
optimal tax deferred retirement account use a future value calculator like one from this site
or good financial planning software like this one from wright capital that i use
you would input your current balance the amount of years until you reach age 72 your annual rate of
return and then try different annual contribution amounts plus employer matches until you reach your
optimal tax deferred retirement balance that you figured out in part three of this series
then you can subtract that annual amount your portion of it not the match from your
annual contribution limit to determine the amount that should go into the roth 401k side
once you've maximized this strategy if you qualify you would want to make your annual roth
ira contributions this can help you create your very own zero percent tax bracket in retirement
by taking advantage of today's low tax rates wow that is a lot of information that i just covered
but the raw strategy is so powerful i want you to understand it in order to maximize this raw
strategy you will want to watch this video next to learn how to optimize your roth ira conversions
with the most powerful way to build tax-free wealth get clear be clear
you