Money Rehab with Nicole Lapin - The Secret Way to Snag a Roth

Episode Date: October 11, 2021

Roth IRAs are the MVP of the retirement account game. But not everyone qualifies for a Roth… or so you might think. Nicole explains how to get a Roth IRA the secret (but also totally legit) way. Learn more about your ad-choices at https://www.iheartpodcastnetwork.comSee omnystudio.com/listener for privacy information.

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money is working as hard as you do. So why overcomplicate your money? Keep it simple with Bank of America, your one-stop shop for everything you need today and the goals you're working toward tomorrow. To get started, visit bofa.com slash newprosmedia. That's b-o-f-a dot com slash n-e-w pros p-r-o-s media. bfa.com slash newprosmedia. Hey guys, are you ready for some money rehab? Wall Street has been completely upended by an unlikely player, GameStop. And should I have a 401k? You don't do it? No, I never do it. You think the whole world revolves around you and your money.

Well, it doesn't. Charge for wasting our time. I will take a check. Like an old school check. You recognize her from anchoring on CNN, CNBC, and Bloomberg. The only financial expert you don't need a dictionary to understand. Nicole Lappin. A couple of weeks ago, I had money rehabber Katrin on the show for a listener intervention.

You remember she was worried that she had over-contributed to her Roth IRA because of an unexpected bump in her earnings this year. One topic Katrin and I covered that we didn't have time to put in the final episode was a conversation about a pro move to open a Roth IRA even if you don't qualify for one. Here's a behind the scenes clip from that conversation. What I wanted to tell you in the beginning was how you can indirectly invest in a Roth IRA. Do you know about this? Is this the backdoor Roth IRA? Yes. Okay. That's as far as my knowledge goes. I know it exists, but I don't know how to approach it. And do you know anything else about it? Just that it's a champagne problem where

people who shouldn't or can't be investing in traditional Roth IRAs can use this to invest in a Roth IRA. So what the fuck is a backdoor Roth IRA? It sounds like it would be a retirement account run by the mob, one where you make your contribution and some Tony Soprano-like figure makes your taxes disappear. While the name sounds sketchy, a backdoor Roth IRA is a totally legit legal way to get into the Roth IRA game, even if you don't qualify. As we've mentioned before, the big benefit of a Roth IRA is that you pay taxes on your contributions when you contribute and then, ta-da, you are denso with taxes. You don't need to think about the big T word ever again, at least with a Roth.

So if you think you'll be in a larger tax bracket down the line, which if you keep listening to Money Rehab, obviously you will be, then Roth IRAs are a great option for you. Plus, taxes will probably go up across the board in the near future. So when you get the option to either pay taxes now or stick it to your future self, you should pony up now. But it's not quite that easy. In 2021, you are eligible for a Roth IRA if you make less than $125,000 a year as a single, unmarried, no-ring-on-it person. If you make more than that, first of all, yay, good for you, you're raking it

in. But second of all, the bad news, or at least as bad as bad news, is when you're making six figures, you can't set up a Roth IRA. Or so you may think. One way to get around this eligibility rule is, you guessed it, through the backdoor. Setting up a backdoor Roth IRA works like this. You create a traditional IRA, which has no income limits. You can sign up no matter how much you make. Then you convert that traditional IRA into a traditional IRA, which has no income limits. You can sign up no matter how much you make. Then you convert that traditional IRA into a Roth IRA, which actually isn't as tricky

as it sounds. You basically just need to sign some paperwork. Whatever institution you use to sign up for your traditional IRA can likely help you with that. However, here are some words of caution. This move comes with taxes galore. Here are some words of caution. This move comes with taxes galore. There is a chance you will be taxed on this money not once, not twice, but three times. If you do this backdoor move, you'll need to pay what are called conversion taxes. Before starting this process, you should estimate how

much you'd pay in conversion taxes and ask yourself, self, do I have enough money in my bank account to comfortably cover those taxes? You may be thinking, silly Nicole, I'll just take that money out of my IRA to pay these taxes. No, no, you're silly. That is a bad idea. If you're younger than 59 and a half, you'll face a penalty fee for taking the money out of your IRA early. Plus, the money you take out could be taxed yet again. Taxation round number two. The amount you choose to convert from your traditional IRA will be counted and taxed as income. Therefore, if you're teetering on the upper limit of your tax bracket, as is, having your converted IRA money count toward your income

may push you into yet a higher tax bracket. If you decide to opt for a backdoor Roth IRA, choose an amount to roll over that will not push you into a higher tax bracket. This is a totally fair move. You don't need to roll over everything in your traditional IRA into a new Roth IRA account. After all, why have one IRA when you could have two? Taxation round number three. If you've earned money on investments within the traditional IRA, you'll need to pay Capgain's taxes on the interest earned. Yep, that is a triple whammy. Here's today's tip you can take straight to the bank. One last disclaimer on backdoor Roth IRAs. Once you've rolled over your traditional IRA into a Roth IRA, you really can't

touch the money for the next five years. If you take money out earlier than that, you have to deal with, you guessed it, more taxes, plus a fatty 10% penalty. In general, if you aren't eligible for a front door Roth IRA and you can pay the taxes and make the five-year freeze work, then I recommend you take a closer look and even go for the backdoor Roth IRA. But if you're thinking you'll need to pull money out of your IRA within the next five years, You should definitely keep the back door closed. Money Rehab is a production of iHeartRadio. I'm your host, Nicole Lappin. Our producers are Morgan Lavoie and Mike Coscarelli.

Executive producers are Nikki Etor and Will Pearson. Our mascots are Penny and Mimsy. Huge thanks to OG Money Rehab team Michelle Lanz for her development work, Catherine Law for her production and writing magic, and Brandon Dickert for his editing, engineering, and sound design. And as always, thanks to you for finally investing in yourself so that you can get it together and get it all.