Announcer 0:11
Let’s get into it flying high above the metropolis. It’s the Roth guy with holistic wealth advisor Jude Wilson.

Marc Killian 0:23
Hey everybody, welcome into the podcast with Jude Wilson and myself here to talk investing, finance, retirement, the Roth guy with me. Once again, Jude, I’m going to put you on the spot and just have you break down the basics this week. We’ll go back to school, if you will, for folks who they may know this stuff, they may not, but either way, it’s a good refresher to just kind of understanding the basics of these kinds of accounts that we use when saving for our future. So we’ll talk about it this week. How you doing?

Jude Wilson 0:48
I’m doing excellent. Glad to be back.

Marc Killian 0:50
Always glad to have you here. So Roth guy, since you’re the wrong guy, you know, let’s just kind of start with the basic fundamentals of what is a Roth IRA?

Jude Wilson 0:59
Yeah, I think we should all have some understanding of it, because if you’re building toward your retirement or building your net worth, you need to know that these things are available to you.

Marc Killian 1:11
We hope you are anyway, right?

Jude Wilson 1:13
Yes, yeah, right.

Marc Killian 1:14
You need to be old. Old age is coming for all of us. So

Jude Wilson 1:17
It’s undefeated. That’s right. You know, when you when people talk to financial advisors, generally, they think of investing, and they’ve heard that old saying a million times, don’t put it all your eggs in one basket, diversify. You know, a true financial advisor, financial professional, is going to talk about more than just investing. They’re going to look holistically, and they’re going to talk about tax diversification in addition to investment diversification, and that’s something that really gets discussed. So So let’s jump into it from there, and we’ll circle around and bring in to account what the Roth really is. So when you when you think about where your money goes after you received your paycheck, your income from whatever source is really three filters, if you will,

Marc Killian 2:06
what you mean, besides, You mean besides to the gas tank and the groceries and absolutely, where else it goes. Okay, I’m with you. All right.

Jude Wilson 2:13
And anything FSU for me, but that’s a whole nother topic. All right, you’ve got your pre tax filter where you’ve received your income but you haven’t paid federal income tax on it. It goes into an account like a, 401 K, an, Ira, 403 B, some type of account that the money stays sheltered in, and that money can grow without any taxes on those dollars until you pull those dollars out, right?

Marc Killian 2:44
And most people, that’s what most of us do, right? Dude, that’s what we’ve been taught is, is for years and years and years, just kick that thing down the road. We’ll deal with it later, right?

Jude Wilson 2:53
And I love the way you said kick it down the road, because kind of like our national debt, if you keep on kicking it down the road that may cause a problem, and in future episodes, we’re going to talk about the problem that that really could cause for you. Because give you a hint. You and I don’t control where taxes are going in the future. No, I think they’re going up. What about you?

Marc Killian 3:14
Yes, pretty good chance. So yeah, and if you keep kicking it down the road, right, you don’t know what the tax rates are going to be. That’s the point. But I get it because nobody wants to play nobody likes paying taxes, nobody likes dealing with it. So we’re kind of taught. We hear Jude, hey, I’m making money. I’ve got income coming in, and I can deal with that in 30 years. Most people go, yeah, sign me up for that. I’ll deal with it in 30 years,

Jude Wilson 3:37
Exactly because they’re getting a benefit today, particularly if you’re paying a lot in taxes. Yeah, you’re putting this money away, and you’re you’re seeing a deduction for what you’re putting away, and it feels great, but you’ve got a hidden partner in that, in that account, who can change the terms of the deal later on. That’s right. And so we’re at historically low rates right now. But I you know, in fact, one of the future guests that we’re going to have says that tax rates could actually double in our lifetime. So if you’re reading all the periodicals that are saying, put all your money into these type of vehicles, yeah, maybe doing yourself a disservice. Very true. So that’s one, that’s one,

Marc Killian 4:16
Okay, so that’s the traditional IRA, that’s the 401, K, that’s the four, 3b. Right? Okay, so then we circle around to the Roth. And maybe the reason that the Roth has been obviously a forefront conversation for a while now, Jude, but it’s also much younger, right? It didn’t start until the 90s. They kind of got going in the 90s. It really didn’t get a lot of traction till mid 2000s and then, of course, recently, the secure hack changes the last couple of years have made it even more so, where people are like, all right, I need to take a look at this, right? They’re making a lot of changes to kind of push people towards the advantages of it. So what are they?

Jude Wilson 4:53
Absolutely people are hearing about the advantage and getting more excited about putting money away. I talk to everyday people, all. Time that, you know, five years ago, I was having these conversations, and people were asking, you know, what is a Roth? Now, people are like, well, I got a Roth in my at my job, within my 401, K, should I be? So they’re, they’re aware of it, but they may not know all the ramifications and the benefits. So what? What exactly is it? So the Roth is an account that, very much like your 401, K an IRA, you put money that you’ve earned into an account, you don’t get a tax deduction for that money, but that money is tax sheltered, and the big thing is it’ll come out tax free. Usually when you decide to retire, there’s a couple of other rules that may allow you to pull out some money before retirement. Don’t want to go get too deep in that right now. But the main thing that people should understand is that once that money is in the account, now you’ve got money that is sheltered and will never be taxable again upon the withdrawal, right, right?

Marc Killian 5:56
And so that’s an advantage. It could be an advantage again, if you’re talking about tax diversification buckets, if you will, then that could be an advantage in that way, and yet you’re not getting that, you know, reduction right off the top. But you know what the tax rates are right now, that’s, you know, a big part of the conversation as well. So what are some of the contribution limits for this year? Well, they change all of this stuff. Jude they change every year, right? How much you can put into it goes up and down. Well, usually just up each year on what you can put away. So what are the current limits for 2024

Jude Wilson 6:26
Great question. So just to make sure I have this right, I’m gonna read the numbers, because I don’t want to make a mistake here. This is too important. So in 2024 you can contribute 100% of your earned income, or $7,000 whichever is less, in 2024 now what people may get confused with that or say, Well, you know, I’d like to contribute more. How can I do that? Well, the Roth IRA has a cousin, the Roth 401 k. And with the Roth 401, K, you can contribute much more than you can in the Roth IRA, but that’s through your employer, or if you own your own company, you’ve set up that Roth 401, K, to have that capability to do that.

Marc Killian 7:15
Well, you know what? Let’s, let’s branch off on that for a second, because that is really, really new. The Roth 401, K, yeah, that’s something. And again, the secure Act changes of 2020 and, well, really the more recent one, which was what 2022 going into 2023 they made some more changes. Or maybe it was 23 going to 24 so you got to look it up sometimes. Either way, they made these changes where now, you know, a lot more companies are offering the Roth 401, K, and it gives you that benefit to where. Because a, excuse me, if I’m wrong here, but Jude on a 401 k, this year, you can put up to $30,000 away in a normal 401 k. So if you think about merging those, it’s kind of taking the best of both worlds, I suppose, and kind of smacking them together. Because a lot of times people who make a lot of money say, Well, I make too much to contribute to a Roth because there is income limits, right? So this is a nice way to kind of move around that, am I correct? There? Am I off?

Jude Wilson 8:08
You’re 100% correct. So when you’re looking at the Roth IRA, you start getting cut off at an 146,000 and completely cut off at 160,000 of personal income, adjusted gross income for the year. But with the Roth 401, K, there are no income limitations. So that’s why some people believe, well, I can’t contribute. But they don’t know that in a Roth 401, K, it takes away the income limits altogether and and that goes to another point. Knowing this information is one thing, but knowing the rules and regulation and how the to work with those to best suit your situation, right, is really best served to a financial professional to help you with that. Yeah, and that’s why we want to depart this information, and I want to, I want to clarify too, because those income limits are for people filing single, if you’re married, the income limit goes up greatly. It goes up to total cut off at 239,000 but here’s the thing, and I saw this recently with a new client came in the office. Was extremely proud of himself, and as well, he should be him and his wife, because he was contributing 100% to the Roth 401, K, and he was surprised to hear when I told him that you may want to back down on that, because when you retire, you’re going to have deductions that you can use toward income that you’re pulling out of these types of accounts. And so you can get the best of both worlds if you understand the balance and the mix of how much should go in a traditional 401 An IRA and get a deduction this year versus how much should go in a Roth 401, K, an IRA and have tax free income for the rest of your life. There’s a there’s a balance there, where you can get the best of both worlds, but most people don’t know the math behind that, and they don’t know that that actually is possible. So that’s in future, shows we’ll do a actual case study and go over that.

Marc Killian 10:25
Okay, yeah. I mean, I think that’s the point, right? And it’s trying to impart some of this information and this wisdom. So, you know, for this guy, obviously, he was probably looking at you like you had two heads for a minute. He probably Absolutely, what,

Jude Wilson 10:36
Absolutely, because everything verything he read said, put all of your retirement dollars in a Roth you’re young, might as well let it grow, right? But you’re missing out on getting some tax deductions this year that you could benefit from.

Marc Killian 10:49
So maybe that. Again, balance, you know, looking for some of these different pieces, yeah, is important. So that’s why we want to kind of educate and try to provide some information. So again, if this episode is just kind of around the Roth, and what some of the you know, pros, cons, advantages, disadvantages, things of that nature. Let’s talk briefly about Roth conversions. That’s a whole episode into itself. We’ll do that probably here in the next couple of ones. We’ll probably do a breakdown on that as well. But people have probably heard the term, and I think what happens is they get confused between Roth contribution and Roth conversion. So what’s the difference?

Jude Wilson 11:23
Absolutely, I see it all the time. So wow, we use something at our firm called the tax efficient funnels. It shows you pre tax dollars, that’s one funnel, post tax dollars, that’s another funnel, and tax advantage funnels. And so pre tax Funnels is thinking about it as putting money away that eventually will be taxed at some point in time. Tax advantage funnels putting money away that in the future will never be taxed. And so you can move from that one funnel money that you’ve accumulated in that pre tax funnel, you can move it over to the tax advantage funnel, but any dollar you move from this funnel to the next, you’ve got to pay current income taxes on. And there’s so many misnomers about that some people feel that they can’t qualify to do a Roth conversion because their income some people don’t believe that Roth conversions are worthwhile because you’ve got to pay the taxes today. It’s all about doing the math and seeing it. Does it actually benefit you? And so Roth conversions are very powerful tool. In future episodes, we’ll talk about tax tax bracket bumping, making sure that if you’re going to do a Roth conversion that it doesn’t totally destroy you, as far as liability that you have to in taxes that you have to pay for this current year. So there’s some strategy around it, but today, what we really wanted to do is is give the audience an understanding that these things exist and that there are some real strategies around it that can help enhance what you’re currently doing

Marc Killian 13:05
Well and so many people have heard that, hey, do conversions? Do conversions? Because taxes are going up, and, you know, and you know, we even said it on our prior episode, as people hear it all the time, you have a partner, if you have a traditional 401, K, or if you have a traditional, you know, excuse me, IRA, and that’s the government, right? So let’s say, you know, everybody tries to say, I’m trying to get to the million dollars. I want to get to that sexy round number of a million bucks. It’s like, well, you don’t have a million bucks if it’s in certain kinds of accounts. You maybe have, you know, 750,000 or whatever, because Uncle Sam wants his and so people hear, well, then if you start converting that money right over to a Roth, well, then you won’t, you know, have that silent partner waiting to take it from you, but you do have to pay the taxes regardless. It is not a way. I’ve also heard people say, Well, let me do Roth conversions so I can get out of paying taxes. Really, what they want to do is they want to get out of paying their RMDs future, on, on some of these other kinds of accounts which are required minimum distributions. Look, you’re not getting out of paying the taxes. It’s just about being tax efficient, right?

Jude Wilson 14:03
Yep, and there, you know, in this day and age, there’s financial advisors, financial coaches, financial influencers, everything, and I just don’t believe people are getting all of the information that they need to make an informed decision in one of the case studies that we’ll go over in future episodes. I had a client who was doing, very proud of himself. Engineer was doing Roth conversions every year on a hefty amount of money he had in an IRA. But when we did the math for him, we showed them that he was setting up, setting himself up for some future problems, because the more money that you convert, it counts as income for that year, and it could affect your Medicare in the future, and how much you’re paying for Medicare totally blew him away when we did the math and showed him what he should be converting versus what he was doing on an annual basis.

Marc Killian 14:58
Yeah, I learned it this way. People might be going, What are you talking about with the Medicare thing? And we’ll get into that on another episode, because there’s a ton of stuff for us to go. We’re already closing on 20 minutes. We want to kind of keep these short for but I was always taught there’s two people that there’s two, you know, you have an aunt and an uncle that have their hand in your pocket as you get older, and it’s Uncle Sam, which we’re used to, and then aunt Irma was the way I was taught about the other one, and that is the Medicare side, right? So

Jude Wilson 15:25
Now, you’ve been holding back. That’s a great analogy. I like that.

Marc Killian 15:29
Can you tell us what the IRMAA is real fast, just so people know what that is.

Jude Wilson 15:32
IRMAA stands for income related monthly adjustment amount, and it’s basically the additional premium that some pay on the Medicare Part B and D because of their hitting income limits. And so you know, this can cause a dramatic increase on on your Medicare premiums. And it could be avoided. It could be avoided if you just know the math and know the strategy.

Marc Killian 16:00
Yeah, back to that point of that guy you were talking about was doing all those raw conversions. He was kind of, you know, he was making aunt Irma a little happier, you know. So, Irma, yeah, she’s not giving you those nice butterscotches that some of your ants would have in their pocket, right? She’s,

Jude Wilson 16:13
she’s taking money out,

Marc Killian 16:15
taking money out, all right? Well, that’s gonna do it this week. We’ll wrap it up there. Well, we don’t want to get too far down the rabbit hole, you can see, folks how, you know, the big thing about all this stuff when it comes to financial strategy, whether you’re in your 30s, 40s, 50s or 60s, whatever is that one, you pull one lever and it affects another, right? And it does all these different kinds of things. So, so we don’t overload you too much and get to a convoluted we’ll wrap it up with just, you know, the basics of what a Roth is. Hopefully we covered those and didn’t get off on tangents too much. But that’s why it’s important to subscribe to the podcast so you catch future episodes, so we can talk, and we’ll continue to break down, and we’ll overlap on some of these conversation points as we go back and forth, because they overlap, right? It all kinds of play. It plays together. You know, Jude, basically you’re always building puzzles. Is what you’re doing is you’re assembling puzzles when it comes to this stuff, right?

Jude Wilson 17:04
And making the picture clearer as we go. In fact, last thing that I’ll say is, if people are like me, they’re more visual people, and they want to see what am I talking about? As far as the tax funnels, they can download the PDF, and we have a PDF that talks exactly about what the tax funnels are and what type of accounts are in each one of the files.

Marc Killian 17:25
There you go. We’ll put that in the show description. So just click on the Show descriptions folks, that way you can see it. And that’s the info at send trust fs.com that’s just where you basically shoot an email over to them and they’ll just send it out to you. But we’ll put that link to make it easy for you, and as always, check the show notes for different links that we may have if you want to go check out the tax time bomb.com Jude’s got a calculator on there you can run through and check out out from a tax standpoint. So we’ll put all that stuff in the show note. Links, don’t forget to subscribe to us on Apple and Spotify for the audio version, and, of course, YouTube for the video version. So make sure you check that out. Hit that little like and thumbs up. So you catch new episodes when they come out, and we’ll see you next time here on the Roth guy with Jude Wilson, thanks, buddy, thanks, my friend, always enjoy. We’ll catch you next time. Folks bye bye.

Announcer 18:14
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Transcribed by https://otter.ai