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The Roth Series I: The Roth IRA

Updated: Jan 3

The Roth IRA, Backdoor Roth IRA and Mega Backdoor Roth IRA are oft misunderstood and underutilized retirement savings strategies. In my Roth IRA three-part series this week, I'm going to break down each Roth IRA strategy, who is eligible to use them, and what you need to know when using them.

This article focuses on the center of the Roth universe: the Roth IRA.

You can find the other articles from the Roth IRA series here.

Who Is Eligible To Contribute To A Roth IRA?

The regular ol' Roth IRA is a fairly straightforward retirement savings vehicle. As long as you are under the preset income limits (reassessed annually by the IRS) and you have earned income equal to or greater than your contribution amount up to the maximum contribution amount (also reassessed annually by the IRS), then you have an opportunity to take advantage of tax free investment growth and completely tax free withdrawals on qualified distributions from your Roth IRA in retirement.

Roth IRAs have the same rules regardless of age, there is no minimum or maximum age to qualify, and there are no RMDs- the Required Minimum Distributions seen with Traditional (aka pre-tax) retirement accounts such as Traditional 401(k)s and Traditional IRAs.

Let's talk about those annual limits. For 2023, a full contribution can be made by those filing taxes as:

  • Married Filing Jointly with a MAGI up to $218,000, or a partial amount up to $228,000

  • Single with a MAGI up to $138,000, or a partial amount up to $153,000.

For 2023 the contribution limit on all IRAs for those under age 50 is $6,500. Those over age 50 can contribute an extra $1,000 as what's called a catch-up contribution.

Roth IRAs For Youth

Your children, nieces and nephews, or younger cousins may qualify for a Roth as long as they have earned income. The income must be reported, taxable income. If they earn $3,000 a year, for example, you can open and fund the account to that amount. If they earn $7000 a year, you can open and fund it to the regular $6,500 maximum on their behalf. Roth assets are most powerful when time is on your side, and so if they do qualify, this can be a really excellent savings strategy for their future.

My partner Sebastian and I don't yet have children, but we have made it a tradition to open Roth IRAs for our working nieces and nephews as a high school graduation present. Instead of giving the kids cash, we kickstart their Roth IRAs with a few hundred bucks, educate them on how they work, and encourage them to contribute small amounts from future paychecks to build the habit of "paying themselves first" (one of my favorite things- more blog content on this coming soon).

What You Need To Know Before Contributing To A Roth IRA

A few important points:

  • Roth IRAs are often a key part of building a balanced retirement withdrawal plan.

  • Your contributions are post-tax and can be withdrawn tax and penalty free at any time. All pre tax accounts are assessed both taxes and penalties unless you meet an exception. This provides a lot of flexibility over time and is a key advantage of Roth IRAs.

  • Roth IRAs are great, but do not come before things like building an appropriate emergency savings account, paying off high interest debt, or funding short-term needs or goals.

In Summary

Roth accounts are very powerful at a young age, the earlier the better, and these accounts are often recommendable to folks looking to increase retirement contributions in a tax advantaged way.

Here is an Investopedia article detailing the exact steps for opening, funding, and investing in a Roth IRA. Big emphasis on the latter step: investing. Don't get me started on how many clients I have talked to over the years who do their due diligence to open and fund a Roth IRA but don't invest the money- leaving the cash to sit there and weaken in purchasing power as inflation rises.. *cringe*.

All to say, the plain and simple Roth IRA is an incredible retirement savings vehicle when used appropriately. It is appropriate for many people, but not everyone; nothing works for everyone, and that's why it's so important to know what works best for you.

This article is intended as financial education, not advice. Speak to your advisor before making any changes to your retirement plan or other part of your personal financial plan.


Have general questions or a topic suggestion? Drop a comment on this post.

Need help building your retirement plan? Get in touch.

📌 Sage Financial Planning LLC helps young and mid-career professionals know and do better with their finances and work towards financial freedom. For more information on our holistic financial planning offerings, please visit our Services page.

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