The Hidden Roth IRA

It might be sitting right inside your regular IRA...

Good morning, friends!

Guess what I figured out recently…

I’ve had a Roth IRA for the past 25+ years.

Which is interesting considering the Roth IRA was only created 24 years ago, in 1997.

Maybe you have a Roth IRA too.

Let me explain…

But first, to be clear, this isn’t tax advice. I’m not a CPA and can’t provide tax advice. Talk to your own accountant or CPA about this if you want to explore further.

OK, so back when I first started as a financial advisor, I wasn’t making a lot of money those first few years.

But I was a diligent saver from the start.

So I maxed out my 401k at the time, and even though I couldn’t deduct it, I made a non-deductible IRA contribution for a few years back in the 90s.

Elizabeth did too.

These non-deductible IRA contributions were recorded and tracked when I filed my taxes on IRS Form 8606. In fact, I’ve filed a Form 8606 with my tax return every year since.

And based on the fact that non-deductible IRA contributions are after-tax money, I discussed it with my CPA and last year I converted my “8606 money” to a Roth IRA.

Now, I only converted the exact dollar amount on my form 8606, and as a result, I didn’t pay any taxes to make this happen.

In the future, any growth and earnings on these dollars is tax-free and I can access the funds tax-free when taking the money out of the Roth IRA for future expenses.

Plus, there are no Required Minimum Distributions (RMDs) on Roth IRAs either.

As I’ve shared with you before, I’m generally not a fan of taxable Roth IRA conversions as they’re based on a lot of assumptions that may or may not turn out to be accurate.

But a tax-free Roth conversion?

Absolutely!

Only wish I’d done this sooner as I missed out on the opportunity to capture that tax-free growth on those dollars for many years.

So again, this isn’t tax advice. But you might want to check your 2020 tax return, and if you find a Form 8606 in there with some non-deductible IRA contributions, you may have a Roth IRA lurking inside your traditional IRA.

While I can’t give tax advice, I do help my client with tax planning, and looking for a Form 8606 is something I always do when I review my clients’ tax returns.

Just an FYI…

Lei Redding of Redding Private Client - Episode #18

I published the latest episode of my Women’s Retirement Radio podcast earlier this week.

I had the pleasure of speaking with Lei Redding who provides personal insurance (home, auto, liability, etc.) to high net worth individuals and families.

Of course, we also discussed retirement for women.

🎧 Give it a listen here 🎧

And there’s also a transcript for those of you who prefer reading 😉

Stay tuned for more interesting conversations with interesting people in future podcast episodes.

Long Term

In another worthwhile read from Morgan Housel, he discusses “How to Do Long Term.

In fact, he opens with a particularly timely (in retrospect) quote from Elizabeth Taylor.

The part of this article that struck me most is his first point:

The long run is just a collection of short runs you have to put up with.

I couldn’t agree more.

In fact, this is similar to my belief that financial planning for the rest of your life is really just one big (OK, REALLY BIG) project that lasts the rest of your life.

And within this lifetime project are a series of “sprints.”

These sprints (or sub-projects) could include buying a home, educating your children, making investment decisions, retirement, and more.

But each of the sub-project sprints informs the larger project of your financial life plan.

And while Housel, in his article, is discussing the importance of a long term mindset in the midst of a lot of short term noise, I think this idea of stringing together “short runs” in the context of the “long run” is pretty similar to project management thinking around ALL your financial planning and decision making.

Thoughts?

Thanks for reading this week’s letter.

Please get in touch if you have any questions, would like to discuss anything, or have any suggestions for future topics.

Until next Wednesday,

Russ

Retirement Planning for Women

Postscript: Want to share a video with you, but instead of indie music this week, here’s a video I created a while back talking about Social Security Spousal Benefits. Check it out, let me know what you think, and please feel welcome to pass it along to others (along with encouraging them to subscribe to this newsletter - The Wealthcare Weekly).

Disclosures