Okay, we got Marcos, he's from Kansas City Missouri.
"Thanks for all the education that you provide on your podcast.
It's quite entertaining as well."
Thanks, Marcos.
"I'm a new listener and was listening to an older podcast episode 215."
Oh, episode 215, that was a pretty good one.
It's probably on real estate.
"The question asked by a listener related to Roth conversions.
Comments were made regarding Roth 401(k), Roth IRA, and income restrictions were mentioned.
Listeners like myself may have assumed that income limits apply to both Roth IRA and 401(k),
however, Roth 401(k) has no income limits, unlike the Roth IRA.
This perception could deter someone from contributing to the Roth 401(k) thinking that they made
too much.
Thanks for your time."
Marcos, God bless you.
My point exactly, Al.
These stupid retirement plans with all these stupid rules!
Let's get them coordinated so we don't have - every single different account has different
rules.
Roth IRA, you have income restrictions - if you make too much money you cannot put money
directly into a Roth IRA.
It's about $200,000 if you're married, $140,000 if you're single.
That's on the top end of it.
If you make more than that you cannot contribute to a Roth IRA unless you do a backdoor Roth.
But how about if I have a 401(k) plan?
No problem.
Oh, you make $200,000?
Who cares!
You put $19,000 in, $25,000 if you're 50 and older.
Wait a minute, my neighbor can't do one and I can do $25,000?
I thought I made too much money?
Well, you do for the Roth IRA.
You never said 401(k).
Totally different thing.
Marcos, I'm glad you mentioned that because I think Al and I get lazy a lot of times because
there are so many different rules with so many different plans.
And then we make the assumption that everyone understands what the hell we're talking about.
Because we do zero prep for the show. (laughs)
(laughs) If we did more prep we'd be tight.
When we talk about Roths, some people will tune out right away because they're like,
"No, I don't qualify.
That's not for me."
But anyone can open up a Roth IRA, you can convert into it if you have a retirement account,
there are no income restrictions for conversions.
But there are income restrictions for contributions to Roth IRA.
There is no income restriction for Roth 401(k) contributions.
Stupid.
Yes.
So let's go a little slower.
So Roth IRAs, no 401(k) Roth.
This is a Roth IRA.
Yeah, there's the income limitations, Joe, that you just mentioned.
But a Roth 401(k), which essentially is virtually the same thing except you do it through your
pay, through your employer.
There are no income limitations there.
You could make a million dollars, it doesn't matter.
You can max it out.
And right now that's $19,000 unless you're 50 and older, and then it's $25,000.
So it doesn't matter how much you make or how much your spouse makes or if your spouse
is in a retirement plan or not.
None of these things matter.
Unless you're a highly compensated employee with a top-heavy 401(k) plan.
It's bull- it's BS. (laughs)
Oh no, now you're going deep.
You're right, you're right.
And so in that particular case you could theoretically make the full contribution and after year
end when you're third party administrator runs all these actuarial calculations, they
got six people in the back office with glasses and computers and they come up with this:
"Oh, you did $3,000 too much" and you'd have to take that back and call it income the following
year.
(laughs) It's like why did they do this?
(laughs) I don't know.
But you're right.
When I teach these retirement planning courses, we talk about Roth IRA conversions, and then
it's like OK well here, let's say that your tax bracket is X and you can go to the top
of that bracket, which is Y.
And I say you can convert this much and let's just assume that's like $25,000.
And then people would be like, "well, I thought you can only put $7,000, $6,000 in the Roth."
Well no, that's a contribution.
"Well, I make too much money."
Well no that's a contribution, I'm talking about a conversion.
And then it's like, "well what's a conversion again?"
Well no, it's taking money from a retirement account and putting it into the Roth - you
pay tax on it.
Yeah.
Well, the two words sound similar - contribution, conversion.
I could see where it'd be confusing.
But the problem, and I think when Marcos is telling us is helping us out.
If you can explain things a little bit more - Marcos probably tuned out, but he's smart.
He knew the rules and he understood what we're talking about.
But he's like, "the average Joe probably shut your show off."
Right.
(laughs) Well, he Googled it to find out the real answer.
Or it's like this is a really good option for a lot of people but they automatically
might tune it out because they don't understand the rules or they might have heard the rules
of saying, "oh, I don't qualify for a Roth because I make too much money."
Yeah, how many times have we've been that people come into our office and we talk about
a Roth conversion and the person or the couple will say, "well, my accountant says I don't
qualify."
And then we have to say, "no, that's a contribution."
And then we have to explain.
So a contribution is taking some of your money from your savings and checking account, outside
of retirement, and you contribute it to a Roth IRA.
That's one way to get money to a Roth.
Another way is to convert it.
Now that's totally different.
That's taking money that's already in a retirement account that you got a tax deduction - usually,
maybe not always - and you convert that.
And when you convert it, if you got a tax deduction, you then you have to pay tax on
that conversion amount because that's what it would be when you take it out at retirement
anyway.
And then we get the thing about, well I'm not 59 and a half yet so I can't convert."
No, a conversion, it doesn't mean like you're putting the money in your pocket, you're just
changing from one kind of retirement account to another kind of retirement account.
You simply pay the tax, there's no penalty, but you can do it at any age whether you're
working or not.
So if I understand this correctly Al, if I make a contribution, that means it's after
tax, already paid tax on it.
And so I put $6,500 or $7,000 into my Roth IRA.
It's after-tax, already paid tax on the dollars, it goes into the Roth, it grows tax-free.
A conversion is let's say if I converted $7,000, I convert it and I pay the tax on the $7,000,
and then now it's in the Roth IRA.
Tax-wise there's no difference.
Right?
Right.
So why is a conversion legal with no income limitations, and there are income limitations
on contributions?
Makes no sense.
It doesn't make any sense whatsoever.
And I guess it used to be closer because it used to be you could only do a conversion
if your income was below $100,000, then they took that rule away and it's like, "OK well
that's nice that you took that role away, then let's coordinate the rules so they make
sense."
Because they set up these rules that might have made sense way back when.
And then they take limitations away to where it makes no sense whatsoever.
So there should not be an income limitation whatsoever on a Roth IRA contribution.
If we want to do the SECURE Pension Act, we should say anyone can do a Roth contribution
- anyone.
Anyone.