The Roth IRA: Everything You Need To Know

To open a Self-Directed Roth IRA, book a call with our team at Directed IRA where they can walk you through the entire process!: https://directedira.com/appointment/

Join us for Episode 1 of our new Roth IRA Mastery Course on Wealth Office Hours Live, where we break down why a Roth IRA is one of the most powerful wealth-building tools available. In this live session, we'll cover the benefits of tax-free growth, how small contributions can grow into significant wealth over time, common Roth IRA myths and misconceptions, Roth vs. Traditional IRA differences, contribution and income eligibility rules, funding options, investment opportunities inside a Roth IRA, and the key advantages that make Roth accounts so valuable for long-term investors. We'll also be taking your questions live throughout the show, so come ready to learn and get your Roth IRA questions answered.

Want me to answer your questions live? Ask me your questions here: https://matsorensen.com/ask-mat/

Sign up for my newsletter to stay up to date on new content, events, current news, & more!: https://matsorensen.com/

To get a comprehensive tax and legal plan get to my law firm KKOS Lawyers: https://kkoslawyers.com/

Don’t let your IRA stay stuck in Wall Street! Book a call with Directed IRA and start investing in assets you actually understand & believe in: https://directedira.com/appointment

Transcript

SPEAKER_00 0:07

Welcome everyone to Wealth Office Hours Live. I am your host, Matt Sorns, and excited to be with you back from vacation. Sorry, we do take vacations here. Now, this is a new season. This is season two of Wealth Office Hours Live episode one. And we're going to be talking about Roth maxing. That's right. We're talking about how to max out your Roth IRA. If you're going to max out anything in life right now, there's all that BS on social media. Max out your Roth IRA, some short-term pain right now that'll be long-term gain in the future. So you have a retirement. You're actually freaking looking forward to with a tax-free retirement account living off of this tax-free ATM you've built up. Now, I know some of you may be thinking, Matt, I do not have a retirement account. I've been terrible about this. Maybe I'm an entrepreneur. Maybe I just haven't contributed my employer 401k or even taken advantage of an IRA. I'm 30, 40, 50 years old. Matt, this just isn't for me. Isn't there some fast and easy way to just get rich? There are. The likelihood of those working are very low, though. I can tell you the certain way to become a millionaire is using a Roth IRA and having a little bit of discipline every month to sock money away. Now we have a guide I'm going to show you here. And let me just look at this chart. If you are 40 years old and you put $115 away every week, $450 a month, that's $5,400 a year, assuming a 12% rate of return, you'll have a million dollar Roth IRA when you reach age 67. Okay. If you're 50 years old and you're like, I'm a zero, Matt, or I'm really far behind, I only got a few thousand bucks, putting away 400 bucks a week, 1,600 a month, about 20,000 a year in a Roth IRA, maybe one for a spouse, maybe some 401k, you'll have a $1 million Roth IRA at age 67. So the value of the Roth is not this short-term get rich quick. The value of the Roth is I invest, this money is going to compound over time. I'm getting tax advantages because every dollar that I invest grows for my benefit. Nothing's going to the IRS. My 10% return doesn't turn into a 7% return because I had to pay taxes. You get to keep every penny of the return, and that compounding and growth matters for you when we're looking at investing over a 10, 20, or 30-year period. So we're going to get really deep into Roth accounts. This is going to be a three-part series. And today what we're going to talk about is specifically Roth IRAs. Next week, or in the next episode, I should say, again, this is season two, episode one, but we'll have a three-part episode for season two. But episode two will be about Roth 401ks. And then episode three is going to be about advanced Roth strategies. Bringing some of those topics together and getting to some more advanced strategies and things that you can do with a Roth account. So today, the topic de jour is the Roth IRA. We're going to go A to Z on it. I really want to make sure you understand all the facets of the Roth IRA. How to get money in? What are the rules? What are the ways I can max it out? What are some of the workarounds for some of the common roadblocks? How do I invest that money? How does that money come out? What if I need it before I'm 59 and a half? How does the money come out at 59 and a half? How does that account get treated when I pass away? Okay, we're going to walk through all those steps today. And the goal is by the end of episode one here of season two, I'm getting a little too much fun out of that. But the goal here is you're going to be a pro on Roth IRAs. Now, this is the most common retirement account out there, and there is a reason this sits at the forefront of investing and personal finance. Every guru out there, this is one thing they'll have consensus about is the power of a Roth account. So I don't feel like I have to like convince you much. Now I'm going to be going through a pretty detailed deck today. You're going to want to download this. If you click the link in the description below, you'll be able to download the deck, which is really a comprehensive guide on Roth IRAs. But I'm going to be referencing it as we go through today. So let's first look at the guide here. And I want to just show you this, these stats on putting money away in a Roth IRA, how that money can compound, and where even if you're 40 or 50 years old and you're at zero, having a little bit of discipline right now, even if you're starting from zero, you can get to a million dollars easily by age 67. Remember, it's the investing and compounding of this money. I've got a lot of other videos on just compounding and investing in general and the value of that. But I just want to point this out at the beginning. Our goal here is to maybe have a million bucks in a Roth IRA we can rely on. Of course, other assets that you're going to build and accumulate. But I love that Roth account. And by the way, that Roth account, when you're thinking of all of your wealth and accumulating it and getting to retirement, maybe it's at age 60, 65, 67, whatever it is, that Roth account is the last thing I want you to touch. Use all of your other assets. The Roth, let it keep being invested, stay invested. There's no required minimum distributions on it. You don't have to start pulling money out at 73 like other tax-advantaged accounts. Let's let that money stay invested as long as possible because the best asset you can pass on to a surviving spouse or to your kids is a Roth IRA. If your kids get it, they get an extra 10 years of a tax-free ATM. They can double that account in the next 10 years from when they inherit it, from that 1 million Roth IRA to a 2 million Roth IRA. So we're going to go over that and how that works. But I just want to emphasize the value of the Roth account. Now, before I get into all the detail, I want to bust a bunch of myths on the Roth account. Sadly, there's a lot of misinformation about Roth accounts. And so let me hit a couple things. First, you can have multiple Roth accounts and you can have traditional accounts. You can have a Roth 401k at work and you can have a Roth IRA. You can have a self-directed Roth IRA and a brokerage Roth IRA. You can have a crypto IRA, you can have five Roth IRAs. Okay, you can have as many of these accounts as you want. You can fund a Roth at any income level. This is probably the most misunderstood concept of Roth IRAs. A lot of people will read the first little line of the restrictions on Roth IRAs that says you must make less than 150 grand single or 220 grand married filing joint. If you're under that, you can contribute to a Roth IRA. Well, that's really a misconception because I can still get money into a Roth IRA every year, even if I'm high income and I'm over those income limits by using something called the backdoor Roth IRA. More on that to come. Also, you can invest your Roth IRA not only in ETFs and mutual funds, the boring stuff, but you can also invest it into stocks. You can buy real estate, crypto, precious metals, private funds, startups. You could buy SpaceX stock before it went public. Okay? A lot of people think of the Roth IRA and they only think of a brokerage account. They only think of buying a mutual fund, an index fund, an individual stock. Well, that's what you can buy with a brokerage Roth IRA, but self-directed Roth IRAs, you can buy these uh private assets or sometimes called alternative assets. Next myth I want to bust. You can have a Roth at any age. You could be a teenager with a Roth. You could be helping your kids fund a Roth. If they have a summer job or they work in your business, they have earned income. That is one requirement to contribute to a Roth. You must actually have earned income. If you have earned income, you can contribute to the Roth IRA. Also, you could be 90 years old and you can have a Roth IRA and still contribute. The old rules were once you hit age 72, you could no longer contribute to a Roth IRA, but those were removed in prior retirement legislation called Secure 2.0 a couple years ago. So you can contribute to a Roth IRA at any age. All right. You just have to have earned income, which could be self-employment income. This could be working at a job, whether this is, you know, a job where you have a 401k, your own business, your kids working in your business. And we actually it directed, we have kids' Roth IRA accounts. All right. I've set up Roth IRAs for my kids. I was paying them through my business. They were cleaning the office every week. Literally, we'd go to the office every weekend. I would work for a few hours in there, and my kids cleaned the office for years. I wasn't paying them. I was putting money in their personal checking account and savings account and transferring it and funding their Roth IRAs. So at any age, you can have a Roth IRA. Also, even if you do not have earned income, let's say you're a non-working spouse, let's say you're at home with the kids or you do other household duties or you're just not working for whatever reason, and your spouse that you're married to works and they have earned income. Well, you can use their earned income to qualify as earned income for you, called this spousal rule here, and you can make Roth contributions. So, so we're really opening the door here to more people to be using Roth IRAs than you think. All right. So just know with a lot of these rules you'll hear out there, there's a workaround actually. That's why tax lawyers exist. This is half of my job, is finding the workaround around the typical rule that you might think is a roadblock. But from kids' Roth IRAs, the spousal contribution rule, backdoor Roth IRA for high-income earners, pretty much everybody can have a Roth IRA. All right. Um, so I want to get some of those misconceptions out of the gate. Now, I love Roth IRAs. I know there's a lot of debate between traditional and Roth. We're going to talk about that here in a second, but I love Roth IRAs because of tax-free growth. I know what I'm getting. I have zero uncertainty. I know that once I get the money in and I invest it, it's going to grow and come out entirely tax-free. That's the deal with the Roth. I know in a traditional, I put money in, I get a deduction, and I'm not having to pay taxes I build and grow it, but I have uncertainty on what taxes are going to be when I retire. I don't know what they're going to be. I don't know what tax rates are going to be. I don't know what Congress is going to do. I don't know what my income is going to be in retirement. Hopefully I have a lot of other investment income and other income. I might be in a higher tax bracket in retirement than when I'm working. I don't know that. But I do know for certainty with the Roth, it's going to be zero. All right. So if I take some little short-term pain, avoid the deduction, I know I get that tax-free growth. All right, now I want to make sure you're with me. Some of you might be like, Matt, what were you talking about there? Tax deferred, no tax on the Roth. Let's first compare the traditional and Roth to make sure we're on the same page. There are two different IRA account types out there. There's traditional IRAs and there are Roth IRAs. Now in each account type, you can put $7,500 in per year. And if you're 50 years older, you actually get to put an additional $1,100 in. So you can put $8,600 in per year into a Roth IRA or a traditional IRA. You can't do both. You can do one or the other every year. Now your spouse could obviously also do this. Again, so you could be doubling this up as a married couple if you have if you have a spouse. So the contribution amount is the same for traditional and Roth IRA. When I put the money in from a traditional IRA, though, I get a tax deduction now. So if I put $7,500 in to a traditional IRA, I get to reduce my taxable income by $7,500. So if I made $100,000, I'm not taxed as if I made $100,000. I'm only taxed if I made $92,500 because I got a deduction of $7,500. All right. So that deduction helps reduce my taxable income, which means I have less income that I have to pay tax on. All right. I like that. That is the whole reason people have done traditional IRAs. This was the first type of IRA account that even existed, it was just traditional IRAs. The government was incentivizing you to put money in by giving you a tax deduction. Now, the downside though on the traditional IRA is as you're growing that money and it's building up. We're not paying taxes on it. But when I start pulling it out at 59 and a half and I start taking distributions, the amount that I distribute to myself each year goes into my taxable income. So if I'm pulling 100 grand out of that account every year in retirement, I'm going to have $100,000 of taxable income later on in retirement. So that is the downside of the traditional IRA. I'm paying tax on all the growth later on, that's deferred, but I'm going to be paying it later in retirement. Now, if we contrast that to the Roth, when I put that $7,500 in a Roth IRA, the government's like, thank you. No tax deduction, though. If I made $100,000, I'm still taxed if I made $100,000. I'm not taxed if I made $92.5. Now that's not great. I don't love that now. But the benefit of the Roth, again, like the traditional, I invest it, I grow it, I'm not paying taxes, I'm building and reinvesting it over the next 10, 20, 30 years. Okay, you hit 59 and a half. But now when I start drawing that money out of the Roth, no tax on the way out. Now a lot of people, when they think about this, they're like, Matt, well, I like that idea of I'm paying tax on the 7,500 bucks I put in. I don't get a deduction. That had to go into my taxable income. So I kind of had to pay tax on $7,500. But this is really the seed amount of money I'm putting in the account. Is it's investing and growing all of that growth and that harvest, this larger amount I get to take out later in retirement, I don't have to pay tax on any of that. I'd rather do that. Now it's long-term gain, but you have short-term pain because you're not getting a tax deduction. So, and even myself, I am now all Roth. I tried converted all of my traditional dollars in IRAs and 401ks to Roth. It was a little painful. I bit the bullet. Um, but I had many years where I was chasing tax deductions. I wanted every tax deduction possible, so I was doing traditional dollars. And we can get caught up with that. And that's not bad. You know, you're safe some money on taxes now. Frankly, it might have given you more money that you could have invested. But because there's only so much I can put into a Roth account every year, I'd rather it be Roth dollars. I'd I'd rather just get as much in in that tax-free vehicle as possible. I know I got to pay tax on it, but I want that long-term benefit and that certainty of no tax on the way out. Now, if you're live and have questions, I'm gonna take questions here in a moment, so just hang with me. Um, but I want- I want to make sure I'm I'm moving along quickly. All right, other benefit of a Roth IRA, and I want to contrast this again to the traditional and frankly other retirement accounts, there's a really unique aspect of a Roth IRA that you don't get in other retirement accounts, which is when I put my $7,500 in every year, you can always pull that contribution out whenever you want, penalty and tax-free. So if I put $7,500 in a Roth IRA every year for 10 years, and that's $75,000 of contributions, let's say the account now is worth $125,000 from the investment growth and the earnings. So I've had $50,000 of growth, but that $7,500 I put in, I can always pull that out whenever I want. Zero tax, zero penalty. Only the investment returns and growth in a Roth IRA do you have to wait until you're $59.5. Because of that, the Roth IRA becomes very flexible. It's an account you can have access to when you need it, so you should be very confident in making contributions. Even if your budget might be tight and you're like, ah, I might need that money next year, or maybe I want to take that out in three years to pay for a wedding or whatever it is. Okay, not a big deal. You can pull it out whenever you want. Let the earnings and growth ride. You can't touch that to 59 and a half, but whatever contributions you put in, just know you can get that back out whenever you want. And because of that, this is an account you should be maxing out. Even if you're someone that's not super high income, if you can budget and get that $7,500 in, get it into the Roth account because there's only so much you can get in every year. And if you need it, then withdraw it out. Again, the the contributions come out penalty and tax-free whenever you want. Now, if you contrast that contrast that to a traditional IRA or even a Roth 401k, you cannot do that. I cannot just pull money out of a traditional IRA, I put $7,500 in that. Oh, I want it next year. Good luck. Penalties and taxes to get it out. Even a Roth 401k. I got a Roth 401k, I put contributions in and I want to get it out next year. Nope. Tax and penalty to get that out too. So the Roth IRA is very unique in that I can pull the contributions out whenever I want. Required minimum distributions. When I have a traditional IRA and I'm and and I hit the age 73 now, and this adjusts year to year, but in a traditional IRA, I have to start taking the money out. Okay, and if you think about the way the traditional IRA works, Congress gave us a tax deduction to put the money in. But they're like, when you start getting to a certain age, we're gonna make you pull money out of that because you've never paid tax on this money. So we're gonna force money to start coming out at age 73, which you'll pay pay paying taxes on from a traditional IRA. This is the same with traditional 401ks as well. But in a Roth IRA, when you hit age 73, the IRS is like, take the money out, don't take it out, we don't care. You there's no requirement to take distributions from a Roth account. The only time you're required to take distributions from a Roth account is once you pass away and you have a child or a non-spouse inherit the account, they have to distribute it within 10 years. But they can stretch it out for another 10 years and frankly double the account. So the Roth has way more flexibility. You're in a position in control. It's limited scenarios of where you're forced to start distributing it. This is freaking after you're dead, okay? So don't worry about it. All right. Your family can even double it, like I said, because they get another 10 years, your kids. All right, so that's the main distinctions between Roth and traditional, and that tells us a lot about what we can do with the Roth account and the value of it as well. All right, now, in order to get money into a Roth account, you're gonna need to establish a Roth account. Now, most people have a Roth with the broker dealer, because that's the easiest types of investments to make. And particularly if you're new to retirement accounts, that might be where you start. You open a Roth IRA at a Charles Schwab or a Fred or a Fidelity or Robinhood, and you're putting the money you can afford and budget in. That could be, you know, a hundred bucks a month, that could be the 7,500 bucks, you're maxing it out each year. But whatever it is, you're getting contributions in and you're using those dollars. Another way to get to a Roth account is converting existing traditional IRA dollars or old traditional 401k dollars you might have from a prior employer. So if you have traditional IRA or 401k dollars, you can actually convert those to a Roth IRA doing something called a Roth conversion. So let's say you have a traditional IRA with 100 grand in it, and you're like, ah, I don't like the idea of trying to grow this 100 grand for the next 20 or 30 years and it being 500 grand or a million bucks when I retire, and now I'm paying tax on the million coming out. Maybe I can convert this and get it over to Roth now. You can do that. The IRS lets you do that using what's called a Roth conversion. So to convert those traditional dollars to Roth, you will submit a Roth conversion request to your IRA custodian. At my company directed IRA, we're doing Roth conversions all the time. And Roth accounts are the most popular account that we have at our company. But no matter who your custodian is, where your account is at, all of them allow you to do a Roth conversion. Now, when you do that conversion, let's say it's this $100,000 account, your IRA custodian is gonna send you a $1099R form in January of the next year with $100,000 of income on it that needs to go on your tax return. So the downside of the Roth conversion is whatever the value of the account that you convert from traditional to Roth, that goes into your taxable income. So I've got this $100,000 1099, I got to put on my individual tax return my 1040 return. If I'm in a 25% federal and a 5% state tax bracket, I'm gonna need to pay 30% tax or 30 grand because I did that conversion. Now, the benefit is that 100 grand is now growing and gonna come out entirely tax free later on in retirement, but I had to pony up 30 grand now in order to make that conversion happen. All right, so you can get to. Roth though from traditional dollars. I'm a big fan of doing Roth conversions and getting into that Roth structure. Also, many people will chunk those conversions over multiple years. So let's say rather than doing $100,000 in one year where you convert the whole account, maybe you do $50,000 in 2026 and then you convert another $50,000 in 2027. It might keep you from jumping up into the next tax bracket. So by breaking it up over multiple tax years, I can keep the overall tax cost of the conversion down. Now maybe you're like Matt, I'm always in the 37% highest bracket. And then frankly, it's just more of a timing of when you pay the tax, not how much. So it might not matter. But for a lot of clients, we've been a little more strategic in helping them chunk it over years and think about how to minimize tax that way. All right, let's talk about the contribution rules. There's important some important things here to know about getting the money into the Roth IRA. Remember, it is $7,500 for 2026. If you're 50 or older, you get to put an additional $1,100 in or $8,600. Now, I mentioned this at the beginning too. You must have earned income to contribute. Okay, this could be a job, this could be self-employment, this is not Social Security, this is not rental income. This is not investment income. Those sources of income are not earned income. Now, again, if you're a non-working spouse, there is a spousal contribution rule where you can count the working spouse's income as your income for purposes of making your $7,500 or $8,600 contribution. Also, the kids, we love the kids, Roth IR. I mentioned that earlier too. Again, they can have their summer job, they can have their part-time job, they're in high school, maybe they're working in your business, they're mowing the lawn at the rental property. Whatever. They got an I don't do kids have newspaper routes anymore? I don't know. I do get a newspaper delivered still, but it is not a kid, actually. I've seen the guy that delivers it. Someone's throwing it from a bike. No. I had a paper route. Okay. Did you have a paper route by any chance, Jordan?

SPEAKER_01 24:07

No. Too small of a town.

SPEAKER_00 24:09

Okay. Ah, that's right. Yeah. Jordan lived in. Oh, Podunk. Yeah. Let's not talk about where Jordan is.

unknown 24:14

Okay.

SPEAKER_00 24:15

Did they even have newspapers in your town? Uh, not really. No. We just heard about them. Okay. Yeah. All right. So, um, but you're gonna have to have earned income, all right? Let's let's make maybe they have a YouTube channel, okay? Crap, I don't know. What what do kids have now for income? Um I uh my kids did work in in in um in college and high school too, so they they've had those jobs. But anyways, all right, we've got to have earned income. And remember, investment income, rental property income, that type of income is not earned. Also, if you're from for someone who's on social security, even though you can contribute to a Roth at any age, you still have to have earned income, and Social Security income does not count as earned income for purposes of contributing. All right, and this is a really important point I want to make next. You'll hear this from a lot of people, even your accountant that you might love and trust and that might otherwise be good, maybe even your financial advisor that's your best friend. Maybe it's just the dummy at the bar. I I don't know. You may have heard this. You make too much money to contribute to a Roth IRA. And even if you look at the IRS forms, go read the instructions for the 1040, or go read publication 590 A or B about retirement accounts, there's a chart in there that says if you make more than 153 grand and you are single, you can't contribute to a Roth IRA. Or if you make more than 242 grand and you're married filing joint, you can't contribute to a Roth IRA. And if you do, only a portion of it is deductible. You're restricted on how much you can actually put into a Roth IRA at those income limits. Now, there is half truth in that, but there's also a very common and the most popular workaround, the most popular loophole in the tax code that is used is the backdoor Roth IRA to get around this. And we'll talk about that in the advanced strategies in episode three here of season two. Um, so I'm gonna get to that in more detail, but just basically here for a moment. And by the way, I've got other YouTube videos on it. We should probably drop a link to the backdoor Roth IRA. Let me just say what it is short here for now. You open up a traditional IRA, you put your $7,500 in that. You don't take a deduction. You might be thinking, well, Matt, I'm high income, I have a 401k. I can't do traditional contributions that are deductible. We're not doing deductible contributions to a traditional traditional. We're doing non-deductible contributions to a traditional IRA. Then you're gonna convert those traditional IRA dollars over to your Roth IRA, day two, week two, whatever. And now those are gonna be Roth IRA dollars. Because you didn't take a deduction for putting the money in the traditional, the IRS is like, there's no tax on the conversion. And when Congress created the rules for Roth IRAs and then later amended them, they said there's no income restrictions on converting traditional to Roth. So this is the workaround, often called the backdoor rule on Roth IRAs, where I put the money in the traditional, I convert it to Roth, and I'm basically getting the money into the Roth IRA every year by using a Roth conversion strategy. So that's the backdoor Roth IRA. We'll have more on that, like I said, in uh episode three. But I want to note it here for any of you high-end come earners or people who have said you can't do a Roth IRA, I want to let you know you can. All right, once I got the money in the Roth IRA, I've contributed, we're putting money in it, you have a lot of investment options you can make. And the most common investment options would be index funds, mutual funds, ETF, stuff like that, maybe even stocks. But many of you who are you know subscribers of this channel and know our company-directed IRA that I found as CEO of $3.5 billion in assets, 25,000 accounts. We'll open 500 to 1,000 new accounts every month of people, IRA accounts that are investing their retirement account dollars into real estate, private funds, startups, venture capital, private equity, precious metals, crypto. They're buying these non-publicly traded assets with their retirement account. They're people who believe that they'd rather invest their IRA in assets they know and believe in, and they want to be able to invest their account and their dollars that are tax advantaged into the best investment they can find, period. Not just the best investment that's publicly traded on the stock market, which is what you get with the brokerage IRA. So just know with the Roth IRA, as you're investing it, there's many more things you can do with it than you might have thought. And I know many of you here that follow me or you've been on the channel, you're familiar with that. You've probably heard me talk about that before. Frankly, you can't get past me too far without me telling you about that because I love it. That's what I do with my own account. And it's been, frankly, my passion and life's work is working in this field and helping people use those dollars to invest in assets they know and believe in. Now, there's only a few things that an IRA cannot own. It can't own personal assets. So when I talk about real estate, like we're not talking about your IRA buying a home you're gonna live in. All right, that doesn't work. It can own a rental property as an investment asset where it's getting the rental income and it gets the gain and appreciation, but it's not owning property you benefit from. Also, you can't own collectible assets, you can't own life insurance policies with an IRA, and you cannot own S corporation stock. Those are the three things that are investment assets that a Roth IRA cannot own. All right, let's take a break here for a second, though, and maybe we'll come and see if there's any live questions. I've got a bunch of questions that came in, by the way, before that we're planning to hit here. Um I have 10 or so. So, but I want to get anybody that's got a live question, particularly if it's on Roth accounts. Let's take a break here for a second. What do we got? Anybody?

SPEAKER_01 30:04

Yeah, we've got a few. So uh TSC1 asks, does Social Security count as earned income?

SPEAKER_00 30:10

Sadly, no. Um it is income, and if it's over certain amounts, it's gonna be taxable. But the IRS does not consider that earned. Um, so earned would need to be um job, whether you're getting a W 2 or self-employment income, you're getting a 1099. Uh so sadly it does not count.

SPEAKER_01 30:33

Uh Smokers Haven FF asks, can I trade options in a Roth IRA?

SPEAKER_00 30:38

Absolutely. So the Roth IRA, you could be trading options typically through a brokerage account. Um absolutely. Now there's a little more advanced option trading strategies that some broker dealers will restrict in a Roth that you could do in a personal brokerage account. But otherwise, the lot of the more plain strategies with options you could do with a Roth IRA.

SPEAKER_01 31:01

Got a question from Chess 7885. Matt, is that $7,500 in total, or can I deposit $7,500 per Roth?

SPEAKER_00 31:09

Ooh, good question. I wish it was the latter. I wish it was $7,500 per Roth, and we'd open 10 accounts for you and put $75,000 in per year. But unfortunately, it is $7,500 in total for all IRAs, by the way. This is not just Roth IRAs, this is traditional IRAs too. So you can't double dip and do $7,500 in your traditional and $7,500 in a Roth. You're doing either one, and this is, you know, I guess you could have, you know, three Roth IRAs and you but did $2,500 in each one. You could do that for a total of $7,500. But it's $7,500 total per year in IRAs, period.

SPEAKER_01 31:48

Okay. Uh we have one more from Beaverse 307. Can you trade 4X currency market with a Roth?

SPEAKER_00 31:54

Yes, you can. You can also do 4X with the Roth account. So uh great question. Um and really this is retirement accounts. This is really interesting. When IRAs first came about, the number one investment asset for IRAs was certificates of deposits in CDs. And I always think that's super interesting because no one's really excited to invest in CDs now. And it's it's like less than it's a very small fraction of people, let's just say that, that will invest their IRA and buy a CD as their investment. But the reason that was the most popular investment when IRAs came about is because the primary providers of IRAs for the first five to ten years was banks. And what do banks sell? CDs. They go lend your money out and they are incentivized to get you to put money in their CDs. Then the broker dealer world came around. We're like, man, people are putting a lot of money in these. So they started letting you buy stocks and mutual funds. And so typically, you if you're looking to do options, Forex, you'll be using an IRA account with a provider that lets you do those. We at directed IRA, we have accounts that can be linked with certain broker dealers. We have a relationship with TradeStation, for example. If you want to do more advanced trading, but most people at our company, directed IRA, are buying a private, non-publically traded asset. They're not doing Forex necessarily. They're not doing options trading, though you could, um you'd be doing that through TradeStation if you were uh using us. But most people are buying real estate, private company, private fund, crypto. Those are the common assets uh that we're seeing. But the nice thing is big investment options. There's very little limited things you can't buy. S corporations, life insurance, collectibles, and kind of like personal assets. Those are the things that don't count.

SPEAKER_01 33:46

You got more? Well, yeah, one more, and just because it's Stormbreaker, okay. I feel like we need to recognize Stormbreaker uh as a as a recipient's.

SPEAKER_00 33:57

Yeah, we have some diplomas going out, by the way. So um I don't know if we have any other graduates on here, but um we have some diplomas we're gonna be sending out here. We already have them made. Um I'll be signing them. So we'll look for those in the next five to ten days.

SPEAKER_01 34:12

So Stormbreaker asks, can I combine Roth IRAs between my wife and uh my wife, myself, and kids uh to buy rental property?

SPEAKER_00 34:21

Yes. Okay, good question. Um now you would use what's called a multi-member IRA LLC. Maybe we'll in fact we're gonna hit this in episode three in the advanced uh strategies on Roths. But basically, just so everybody else is familiar with this, because you might be like, well, you just blew my brains there, is I can combine multiple self-directed retirement accounts, like at a company like ours, directed IRA, to invest into one LLC that's kind of like your holding company, and that LLC can go buy real estate. So I can put my Roth IRA, my spouse's Roth IRA, my kids' Roth IRA, I can put all three of our accounts and they can invest into an LLC, each putting in $7,500 and owning each account owns one-third of the LLC, and the LLC can then go buy the real estate. Now the LLC owns the real estate, it gets the rental income, it's paying the expenses, it gets the gain when the property sells, and then it distributes that one-third cash flow or the gain on the property down to each respective IRA that owns a third of the LLC. So that's a very basic explanation of it. It's called a multimember IRLC. In fact, we could probably drop a link. I'm sure I have a video on that too, or we've got some articles on that at least breaking out the multimember IRLC. But yes, absolutely, you can do that.

SPEAKER_02 35:39

Perfect.

SPEAKER_00 35:39

All right, let's hit some other Roth advantages I wanted to talk about, and then we'll come back for final questions. I've got some of the other questions that came in. Remember, you can download the guide that I'm referencing here. Go to the link in the description. You can download the deck. It's it's it's really more of a comprehensive guide, I would say, about um Roth accounts as much as it is a slide deck. So uh all right, let's hit a couple other advantages to the Roth. I want to summarize a couple things, some that I mentioned, some that I didn't. Um the benefit of the Roth account, that is this is these are unique things you do not get in other retirement accounts, is tax-free growth and withdrawals. Remember, growing and building that account, no tax on the investment returns or gains. As I pull the money out, once I hit 59 and a half, as long as you have the account for five years, that money's coming out entirely tax penalty free. I get to keep every penny of growth that I've had and I get to live on that in retirement. Second, no RMD or required minimum distributions, unlike traditional IRAs where you have to start pulling money out at 73. You don't have to in a Roth IRA. If you otherwise have sufficient assets or resources, let the Roth continue to build, build up that tax-free ATM. It's the best asset you could pass on to your kids, period. There is no greater asset that your kids can inherit than the Roth IRA, because when they get it, they get another 10 years to try and double it, which is very possible in a 10-year window. An 8% return, you can do it. At a 7.2% return, you'll do it. That's that's the rule of 72. So it's very possible for them to double that amount when they hit age, uh, when they get when they have it for another 10 years. All right. Now they got double that amount coming out entirely tax-free to them. Next, spousal rollovers. Um, when you pass away, you're surviving if you were married, your surviving spouse can inherit your Roth IRA and it's and it becomes a Roth IRA of theirs. It's not an inherited Roth IRA or a beneficiary Roth IRA. They just get it to call it their Roth IRA. Okay, this is the spousal IRA rollover rule, and they can access it when they hit 59 and a half if they want. They can continue to grow it, and then when they pass away, and it goes to your kids, perhaps, then your kids got another 10 years to grow this. So this Roth IRA can be growing and building and compounding for 50, 60 years. You might be 50 years old, but this thing might be going for another 50. I know you're thinking, well, I might keep investing in it and putting money into it maybe for another 10 years, but this thing could be growing and compounding for a long time. All right, so it's a great account to pass on to a surviving spouse and also again to your to your kids if you have either of those. And then last thing, again, very unique point to a Roth IRA, is the $7,500 you're putting in every year, your annual contribution, $8,600 if you're 50 year older. You can pull that out whenever you want. You do not have to wait till you're 59 and a half. Okay, I've had a lot of clients actually that their age, they're in their 50s, and they're like, I want to start pulling money out of my Roth. Go for it. You've put a bunch of money in over the years. Start pulling some money out now. I mean, maybe you've got 10 years of 7,000 bucks a year, 70 grand. Start pulling up to 70 grand out. Let's just don't get in take any more out until you hit 59 and a half. It's always investment returns and growth. Again, that you that's the only piece you have to wait until you're 59 and a half to pull out of the Roth. And that is the that is a very unique thing to a Roth IRA. No other account has that. There's no other tax advantage account, HSA, traditional IRA, Roth 401k, none of those accounts let you put the contribution in and take it back out next year, no penalty, no tax. All right, so unique benefit to solely for a Roth IRA. Okay, now we do have an account guide here with a lot more uh information. Make sure again you're downloading it in the link below to get this access to this. And we have a lot of our other slides as well. So if you're watching the other videos, a lot of those decks are available there. I want to make sure you're getting these resources. Of course, I think the video is great and everything, but I think these resources, which we put a lot of time in putting together, could be very valuable to you as a good takeaway to help remind you of some of the stuff we're hitting in these uh in these episodes. All right, let's hit some of the questions that came in and then see I'll come back to you, Jordan, in a second for any live questions. Um, this question came in from Traveling the World 1993. They said, I heard that if your tax rate stays exactly the same during your investing years as it does in retirement, so kind of like when you're putting the money into your Roth and investing it versus when you hit retirement, if I have the exact same tax rate, it shouldn't matter whether you choose a Roth or a traditional account. However, if the tax however, even if the tax rates are identical, wouldn't a Roth still be better? Since Roth withdrawals aren't counted as taxable income, they would prevent your Social Security from being taxed and help you avoid Irma surcharges. That's a great point. All right. So a lot of people will do the analysis, and I've ran the Excel spreadsheets, I've done the calculations myself. There is some truth to what Traveling the World 1993 is saying, and I should say there is truth into. If your tax rate, when you're putting money into a Roth and you're comparing it to doing a traditional and taking deduction, if your tax rate's the same today as it is when you retire and pull money out, those two accounts are kind of breakeven, actually. It's not a clear bet that Roth wins, but there's a lot of little unique benefits to the Roth on why the Roth wins, assuming tax rates are the same from when you're contributing to when you're in retirement. To me, me, the number one benefit is I have certainty. I know that it's zero on the way out. I don't know where tax rates are gonna be in 20 years when I start pulling money out of my retirement account. I have no idea. I don't know where my income will be at. It it could be the exact same. I'm in the highest tax bracket. It could be tax rates just overall just went up. Maybe the highest tax bracket is 47% in 20 years. I don't know. It could be less too, but I think it's if it's gonna change, it's probably gonna go up, unfortunately. But Traveling World brought up a great point that there are other downsides to having taxable income from a traditional IRA. And when you once you're at age 65 or you're taking Medicare, if you're a high income earner, you have a surcharge on how much, and it's really not even high income, I should say. If you have decent income, I should say, at age 65, you have to pay additional money to have Medicare coverage. This is this Irma surcharge that Traveling the World is mentioning. But someone living off of a Roth IRA and taking distributions, it doesn't affect you because the Roth distribution is not taxable income. But the traditional distributions are taxable income. And that can affect your IRMA, your income for purposes of qualifying for Medicare and whether you're gonna have Irma surcharges or not. Um I remember I had a CPA friend of mine who was about to hit retirement and he was doing all of these Roth conversions on his traditional accounts because of this. He didn't want to have to be paying Irma surcharged for the next 20 or 30 years. And he knew he was gonna live off his retirement account, so he's biting the bullet and paying the taxes now. He's chunking it over multiple years. Um, but it was about these IRMA surcharges. Okay, and this could be hundreds of dollars every month um that that could affect you. So so that's another little perk um as well of Roth over traditional. All right, question from Craig Dennis 70 says Don't you lose the deduction for traditional IRA if you are a high earner and get phased out? Yes. If you have a so there's kind of two phase outs. The Roth one is they say you can't contribute into a standard Roth regular contribution if you make the 150 or you know, the 240 married filing joint. And that's why you got to do the backdoor Roth IRA, traditional contribution, non deductible, no deduction, that you convert to Roth. That's the workaround for the Roth IRA. In a traditional account, if you participate in an employer 401k and you're over a certain income limit, similar to the phase outside For Roth, they don't let you take a deduction by putting money into a traditional IRA. Which is why when we do the backdoor Roth IRA, it's a non-deductible contribution, which frankly we don't care about the deduction because we're converting it to Roth the next day. So high income earners, specifically ones that have a 401k or an employer plan or your spouse does, high income earners should never be using a traditional IRA. You just shouldn't. You won't, because you don't get a deduction. But that doesn't mean you don't do it. That just means you do the backdoor Roth IRA. So we're putting the money in the traditional IRA, not deductible, because we're high income and we phase out for the deduction. And then we're converting it to Roth. So the backdoor Roth IRA is the thing to do. Okay, the next question is from Lucini Lou Sinsi. Sorry. I think that Lou Sinsi, 3922, says, is the backdoor Roth IRA limited to 7,500, or can I push more, like 70,000? Okay, good question. Because the backdoor Roth IRA, again, is this two-step traditional IRA, Roth IRA, we're limited by the annual contributions amount into the traditional IRA. So it's still the $7,500 or $8,600 if you're 50 year older that you can put into the traditional IRA. The $70,000 thing, there is something called a mega backdoor Roth 401k, where you could possibly be doing $70,000 a year Roth 401k dollars that can actually get rolled to a Roth IRA. But that'll be episode two. We'll talk about that in the next week about Roth 401ks. It's more of an advanced strategy on Roth 41Ks. We'll talk about it in the advanced strategy section as well. So but for the backdoor Roth IRA, it's going to be your $7,500, $8,600 if you're 50 more. That's all you'll do there. All right, Park Smash Act. Park, sorry, Park. That didn't come out right. Could have been worse. Okay. Park Smash asked. That's kind of a tongue twister. So I've been doing the backdoor Roth IRA via via my Vanguard account, but this year I decided to roll over all of my 401k in a Fidelity rollover IRA. Is this a new concern? Because this is considered as the whole IRA bucket, even though I didn't use any funds from the rollover to fund the Roth. Yes. We'll talk about this in the advanced section as well, but short answer for Park Smash is when you have traditional IRA funds and you're trying to do the backdoor Roth IRA each year where you put $7,500 in and you convert it to Roth, when you do the Roth conversion in the traditional account, there's a something called a ProRADA rule that says when you convert any dollars in a traditional IRA to Roth, we have to look at everything in your traditional IRAs, in all traditional accounts, traditional IRA accounts. And if you have any traditional IRA dollars that are deductible dollars that you took a deduction for, either in an IRA or you rolled it from a traditional 401k to a traditional IRA, you must convert a proportionate amount of those dollars as the non-deductible dollars when you do that Roth conversion. It makes the backdoor Roth IRA kind of complicated. Again, we'll talk about this in episode three, but yes, Park Smash, that does complicate things. It doesn't affect what you've already done. But now this year, where you've rolled that employer 401k of the traditional 401k dollars into traditional IRA, this is going to jack up your backdoor Roth IRA. Now you can obviously convert the whole traditional IRA to Roth to get around it. That might be a large account. I don't know how much we're talking about here in a big tax bill. It'll suck now. In 10, 20 years, you'll be glad you did it, and you'll be able to be doing the backdoor Roth right after. But I get it, it's a huge tax bill to consider. So lots to think about there, but that can be an impediment for the backdoor Roth. Again, we'll talk about that in later episodes. Okay, well let's see what we got live questions. I got some other ones here I want to hit, but let's take a break for anyone.

SPEAKER_01 48:04

So uh one one more live question. Example of a business you can invest in from an IRA.

SPEAKER_00 48:09

Ooh, examples of a business. I don't know. One that's going to Mars, SpaceX, okay? Uh maybe one of these AI companies, OpenAI. Um, and there's a couple ways you can invest in this. I have a YouTube video coming out on this um shortly. You can invest directly in these private companies. You can invest in a venture capital fund that's investing in these startup companies. This could be a small business in your community, you know. I've had I have one client that that's done very well, has a very large account that's invested like it's a one-third owner of a Buffalo Wild Wings, you know, and it's done really well. Uh gets great cash flow and it's got a good value for that of that small business and just, you know, in their community. So um, but we've had clients, IRA's own professional shares of professional soccer team in Mexico. Uh go Mexico, it's game tonight, World Cup. Okay. I knew we I was trying to work that in. I just I just got I got lucky. I got lucky. All right. My team over here, Angel and Jared, are soccer fans, and they asked me who I was training for, and I said USA, and they're like, you know they're not very good, right? They're not gonna win. And I'm like, aren't we good at everything? No, we're not. Apparently, Mexico's not that great either. So I got a little education on uh it's Spain, I think, or Argentina or France. Favorites? I don't know. Okay, all right. I should say it with what I know. So let's talk. Let's maybe I should talk about Roth accounts more. Um all right, but any e-world cup fans. Uh let's you know, leave a comment. Who's gonna win? If you're on here, maybe you actually care. Actually, what you know what I want to know is what do you have a Roth account? Do you have a Roth IRA, a Roth 401k, or both? Let's get a comment about that. Actually, either one. Let me know if you're a soccer fan or you're more of a Roth fan. Maybe you're a fan of both. Okay, let's see. I want to see some comments, and I want to hear.

SPEAKER_02 50:05

Okay.

SPEAKER_00 50:06

People are commenting. I need to know this. I'm just curious. Okay, did you have a question? I got off track.

SPEAKER_01 50:12

Oh, we did. I think we got it. Did I answer the business you can invest in? Oh, okay.

SPEAKER_00 50:16

All right, that was it. I talked about the professional soccer team in Mexico, not coming distracted. Okay. Um that was a fun one. Pretty much anything. Anything except what's restricted, which is collectibles, life insurance, and S corporations. So IRAs can invest in LLCs, they can invest in C corps, which every publicly traded company is a C Corp. So, but it doesn't have to be publicly traded. Okay, it could be startup, it could be a private equity fund, it could be small business. Now you can't work in it, or you personally can't own 50% or more. That's another restriction. Again, we have lots of videos on that. So I'm investing that IRA is an investor in someone else's account. Did we have anybody say USA is gonna win?

SPEAKER_01 50:58

We we actually did Chaz 78, 80. Oh, we had Go USA, Roth and USA.

SPEAKER_00 51:03

Roth and USA.

SPEAKER_01 51:04

That's what a great American American things ever.

SPEAKER_00 51:06

That's that's that's like you know Apple Pie and baseball. Yeah. It's you know it's Roth and soccer. Uh U.S. soccer, though, you know.

SPEAKER_01 51:16

We have 77 T Adams, Spain.

SPEAKER_00 51:18

Spain. That's uh that's what I heard. Uh that's the country has like the 19-year-old superstar? Okay. All right. See, I I you know I picked up I listened. I listened. Listened. Okay. Uh all right, let me get some other questions that had came in in advance. Um, this is a question from Life with Kimberly XOXO. Interesting, I like that. Okay. Um what if you need to pass your Roth IRA down to three different kids? How does that work? All right, when you when you open up an IRA, Roth IRA, 401k, you're gonna list the beneficiary of the account when you die. Now, if you have three kids, you could just lease each three kids to get one third of the account. And that is how the account's gonna pass down. Now, if you have a will or an estate plan, what you put in your will or estate plan doesn't matter. And I know a lot of people are like, well, Matt, that's the document that says who gets what I own. Not for your retirement accounts, not for your bank account or investment account, not even for your life insurance. It's what's listed on the account as the beneficiary designation. Now, by the way, I'll just a little side note, in my law firm KQS Lawyers, we're doing estate plans right now. It's our estate planning special. You can get a discount over there, maybe drop a link for KQS Lawyers. So when you're thinking about passing assets down, and you know, the number one asset you're passing down is like your home, your business for any of you small business owners, but retirement accounts are the big one. That is passing down based on your beneficiary designation. So you want to make sure that your trust and your will, we recommend most clients have a trust, is coordinated with your retirement accounts. All right, so just make sure your beneficiary designation, Kimberly, make sure that that is updated to state your three kids. Now, there's a lot of different ways it could happen. It could be they could each, you pass away, they could each do an inherited IRA. One of them could cash it out, the other two could do an inherited IRA and keep investing it for another 10 years. Okay, they're they're each gonna have the choice of what to do, put their one-third share of your Roth IRA. Okay, do we have any live questions pending?

SPEAKER_01 53:28

You're all set?

SPEAKER_00 53:29

Okay. All right, did anybody go for France?

SPEAKER_01 53:31

No France. No.

SPEAKER_00 53:33

Okay. A lot of US. Did anybody have a Roth 401k?

SPEAKER_01 53:38

They did they didn't specify. No, we we just got a lot of Roths. Okay, all right, Roth and Roths. Non-specific Roths.

SPEAKER_00 53:45

Okay, all right. Okay. Um, not the Roth 401ks or the France over the World Cup, but just curious. I wasn't trying to put those two together. Okay. Um, two other questions here. We'll hit these quick. Um, this is from Anthony Goodrich, 1779. Says, at what minimum age can a person have a directed Roth IRA in the context of my children? Um, so really it's at what age do they have earned income? All right, now my kids, when I did Roth IRAs for my kids, they were teenagers. Um, and again, I gave you an example. They were working at my office, cleaning the office literally 52 weeks out of the year. I've had my kids work events, they sold my books, and you know, they some have done some bookkeeping and some social media, there's other stuff they've helped me with here and there, but primarily they freaking clean the office. So, and I couldn't pay them $7,500. I couldn't max it out. They were they weren't doing enough work to to that with it counted for that. So you need to pay them what's the reasonable amount you would pay someone. So if you have a small business, rental property, you can pay your kids from your business. But if you have a five-year-old, it's gonna be hard to justify paying them. Now we do get the clients, it's always the dentists, they're always the most aggressive. I don't know why. They're like, but Matt, my kids on my website, and they're in my brochures, and they're in my social media, and they're like my model when I'm doing something about kids, and then maybe I'm even a pediatric dentist or whatever. Okay. But is your kid, you're not paying them like model rates are like they're a professional, are you? Like, what would you have really had to pay them? It probably wasn't $7,500 to do that. Maybe it was $1,500, I don't know, and you could justify that. So just be reasonable there and don't get too carried away. Um, but really the answer, Anthony, is it just depends on when they have earned income. Okay, so it could be at any age, it's just at the age they actually have some earned income. All right. Let's end with that. There's another question there, but I think that's best for the advanced strategy section because it's a little technical. Um, thank you everybody for tuning in. I'm just making sure we don't have a pending question. Looks like not. Uh, please subscribe to the channel. If you are still watching now and you are not subscribed, hook us up. Give us subscribe already. I mean, we're desperate over here, okay? I'm begging you. We we have got to hit our KPIs on subscribers, and it's been a rough week. It's just like what you know. I don't want to guilt you into it, but we could use the help. So please subscribe. Okay, we come live, I would say every Thursday, most Thursdays. We might need to update this. We're live most Thursdays at 4 o'clock Pacific time. If you subscribe, we're gonna notify you and you'll get and turn on notifications so you know when we're going live. Thanks everyone for being here. Thanks for all of you live in particular for all the questions and go USA. See you next time.