On this special episode, Karl welcomes guest Casey Keller, CFA to the podcast as they discuss all things Roth IRAs. Roth IRAs aren’t just for young low income earners. They explore the many ways Roth IRAs may be appropriate for you, including Roth IRA conversions, Mega Roths, and Roth 401(k)s.
Karl Eggerss: Hey everybody. Welcome to The Eggerss Report. It’s your investing playbook. Thanks for joining me this Saturday morning. Grab your cup of coffee, sit back. We’re going to do a little something different today. Instead of primarily talking about the markets, we’re going to shift gears a little bit, put on our financial planning hats, and we’re going to talk about Roth IRAs. These aren’t just for young folks.
Karl Eggerss: These aren’t just for people that don’t make a good income, so we’re going to give you a lot of different scenarios where they could benefit you, and also give you some tips on hopefully preventing you from making a mistake, because if done incorrectly, which we’ve seen before. If done incorrectly, you could face some big penalties and taxes and so forth.
Karl Eggerss: We’re going to welcome in Casey Keller, charter financial analyst, here in just a minute. If you want to go to our website, it’s eggersscapital.com. E-G-G-E-R-S-S capital dotcom. Our telephone number: 210-526-0057, and just a quick reminder, not only do we have articles on there, and the podcast is on there, the podcast itself is available on Apple podcasts, which is iTunes. You can do that. It’s also available on Overcast, on Stitcher, on iHeartRadio, on Spotify. We have a lot of Spotify listeners to the podcast. Just search for The Eggerss Report. You can find it there.
Karl Eggerss: Feel free to share the show with anybody you want to. Always happy to have them on board, and keep your questions coming. I can’t always get to them each and every week with every show, but keep the questions coming. You can all just email me directly at Karl, K-A-R-L, @eggersscapital.com, and we will try to answer it either via email or on the show. Sometimes, it may be a couple of weeks delayed if we have other things to get to on the show.
Karl Eggerss: All right, as we mentioned, I’ve got Casey Keller here in the studio with me. We’re going to be discussing everything Roth IRA, and if you think Roth IRAs are only for younger people, you might be mistaken because Roths could be used in all different situations, all different age brackets, and they can be used for single people. They can be used for married couples. They can be used for teenagers. So we’re going to cover some of the basics.
Karl Eggerss: But really, instead of telling you just basically what a Roth is today, we’re going to talk about some things that you may not know about, and also some things that you need to be aware of if you are doing Roths or Roth conversions, which we’ll talk about, because you may be doing it incorrectly, which could cause a stiff penalty from the IRS, so stay tuned for that.
Karl Eggerss: Real quickly, the Roth IRA was invented in 1997 by a gentleman named Roth, senator, I believe, and it’s gained popularity, and there’s lots of neat things you can do with it. But essentially, you put after-tax dollars in, and then those monies grow tax-free, not deferred like a traditional IRA, but tax-free. So, obviously, the younger you are, the more time it’s going to grow, the more time you’ll get tax-free benefits over the long term.
Karl Eggerss: In 2019, you can do a Roth if you’re married, filing jointly, if you have just a gross income of under $193,000, each person can do a $6000 Roth IRA. It can be invested however you wish. If you’re single, it’s 122,000. Then above those limits, it starts to phase out to where you can’t do it, and you’re ineligible. So, what’s happened in the last few years is people have figured out, “Well, why not just do what’s called a backdoor Roth?”
Karl Eggerss: Well, a backdoor Roth is essentially you put in a non-deductible IRA contribution, and then you convert it to a Roth IRA, and it’s a neat little trick, but there’s a real big caveat of who can do it and who cannot do it, so we’re going to talk about that with Casey. Before we do that, though, tell me a little bit about… Casey, first, welcome to the show.
Casey Keller: Yeah, glad to be here, Karl.
Karl Eggerss: So, first, tell me about the Roth 401(k)s, because I think that’s something that some people may not know what it is, and some people may not know what’s different about that versus a traditional Roth IRA.
Casey Keller: Okay, yeah, that’s a good question, and it really depends on the plan. This is something we’ve seen a lot more frequently, recently, which was where 401(k)s will allow you to make contributions. When they debit your paycheck, each pay period, normally, the old route or the traditional way was just a pre-tax 401(k) where you got a tax deduction-
Karl Eggerss: Up to 19,000 if you’re under 50. If you’re over 50, you’ve got catch-up of I believe another-
Casey Keller: It’s six. It’s 25.
Karl Eggerss: … 6,000, 25,000 in 2019.
Casey Keller: Exactly, yeah, so that’s why most people have done it, but now we’re seeing more and more plans that allow you to choose whether or not you want your contribution into the 401(k) plan to go into traditional pre-tax dollars, or Roth, or any combination of the two.
Karl Eggerss: This doesn’t affect your match.
Casey Keller: Correct. Yeah, the match will always be pre-tax no matter which you choose.
Karl Eggerss: But it’s also just on the dollars you’re putting in. So if somebody did all Roth 401(k) contributions, they would still get a match from their employer, so it doesn’t affect that.
Casey Keller: Correct, but the benefit to it is that the income rules, you just mentioned just a little while ago, don’t apply for 401(k), so-
Karl Eggerss: So if somebody’s making $300,000 a year, they can still do a Roth 401(k).
Casey Keller: And choose to contribute up to 19,000 or 25,000 depending on their age into their 401(k) Roth. Income has no bearing on that, or it doesn’t-
Karl Eggerss: And another big benefit is the limits, right?
Casey Keller: The limits in…
Karl Eggerss: Into the Roth 401(k).
Casey Keller: Right, right.
Karl Eggerss: Because you’re not limited to just the $6,000.
Casey Keller: Exactly, so you can put much more in it.
Karl Eggerss: Literally, if you’re over 50, you could put up to $25,000 all in a Roth 401(k).
Casey Keller: Which is a great benefit, so that is-
Karl Eggerss: Or split it, right? We have a lot of people we talk to, and they split it. In other words, if they’re going to put in $10,000 a year, they may choose to do 5,000 pre-tax and 5,000 Roth.
Casey Keller: Right, and of course, you are paying tax on that money, so you’re not getting the deduction, so that’s what you got to think about is that if you put all $19,000 or whatever amount you’re putting into, and you change it to Roth, well, you’re not getting the deduction you got the previous year.
Karl Eggerss: Yeah, so if you’re in the 20% bracket, it could cost you another $4,000 roughly in taxes.
Casey Keller: Exactly.
Karl Eggerss: And obviously, for somebody that’s 22 years old, just graduated from college, has their first job. They’re not making a lot of money yet. To do that Roth 401(k) makes a lot of sense-
Casey Keller: It does.
Karl Eggerss: … in addition to a traditional Roth. So that’s one thing. What I wanted to spend most of our time talking about today is Roth conversions. Now, we talked about a backdoor Roth, which we’ll get to in a minute, but Roth conversions is really just taking an existing IRA. You’ve never paid taxes on it. You’ve got all these deductions, and then you convert a portion of it. You pay taxes in that particular year, but then from that point forward, it grows tax-free. What are the benefits of doing that? Why would I pay taxes right now?
Casey Keller: The main benefit is that you’re going to get tax-free growth. It’s a time game to some degree where you’re looking at it and saying, “When I actually am going to need this money, is it going to grow enough to offset the taxes I’m going to pay to do this?”
Karl Eggerss: Yeah, or it could be in a low tax bracket.
Casey Keller: Well, and that makes it easier. So if you’re in a low tax bracket, and we’ve seen it before where somebody maybe retires before Social Security, before they start taking Social Security, and they may not have any income coming in.
Karl Eggerss: No pension.
Casey Keller: No pensions or something. If they have low income, they can convert. We know you can convert up to 24,000 if you’re married for nothing, for zero cost because the standard deduction is 24,000. Then even then, it could be very low cost. You may be five, 10% into convert some. So it may cost you very little to get money into the Roth, which then allows it to be tax-free growth going forward.
Karl Eggerss: We’ve talked about this. I mean, another great reason to do it is there’s no required minimum distribution. Like on a traditional IRA, you have to take some portion out starting at age 70 and a half. It’s not the case with a Roth. If you had all Roth IRAs by the time you’re 70 and a half, and you don’t need that money, it can keep growing tax-free and be passed down to your heirs. So that’s another real big benefit of doing conversions.
Casey Keller: Absolutely, yes.
Karl Eggerss: So with the conversions, it kind of dovetails nicely into backdoor Roth conversions. So, when we talk about backdoor, it’s because it’s kind of a loophole in the system. I mean, obviously, the IRS is aware of it, but it’s utilized, and all it amounts to is, as I said, let’s say you’re not eligible for Roth IRA because you make too much.
Casey Keller: Correct.
Karl Eggerss: If that’s the case, you can still put money into a nondeductible IRA. So, you put in your $6,000. You don’t get a deduction on it, and then you wait a few days, and you convert it to a Roth. You’ve already paid the taxes on it. So, it gets a Roth that way because there’s no limit on Roth conversions. There’s no dollar limit, and anybody can do it. So, a lot of people were doing that. What’s the problem with that? Because there’s a huge… what we’ve found, and we’ve seen people doing it incorrectly. So what’s the rules with Roth conversions?
Casey Keller: For that strategy to work, the main issue is that you cannot have other IRAs. So if you’ve ever changed jobs, and you’ve rolled over an old 401(k), and you have an IRA account, and then you create this new IRA account just for the purposes of doing this backdoor Roth, the IRS says you’ve got… They aggregate all of your IRAs together.
Karl Eggerss: So you’re not skirting the system because you’re opening a new IRA at a new brokerage house. The IRS knows every year how many IRAs you have and the total amounts of those IRAs.
Casey Keller: And how much is deductible versus nondeductible. So, if you open a new IRA account and just put $6,000 in it and say, “This is a nondeductible contribution,” and then you
Casey Keller: And then you convert that to a Roth. The IRS says, no, you didn’t just convert that $6,000 account, you converted a portion of your other IRAs, they group them all together as one.
Karl Eggerss: And now you’re going to get double taxed, essentially-
Casey Keller: Exactly.
Karl Eggerss: … because you already, you already made a non-deductible IRA contribution and now you’re having to take it out of an existing tax deferred account and get taxed on that.
Casey Keller: And you compromise the, basically what you’re trying-
Karl Eggerss: The whole reason.
Casey Keller: The whole reason you did it and you did a lot of work to do that, because there is a little bit of cumbersome-
Karl Eggerss: Now, not to get into a lot of the tax forms, but tell us quickly some of the numbers of these forms that the IRS sends you each year. Because the IRS, obviously people are keeping, the IRS is keeping track of this, just as you should be.
Casey Keller: Right.
Karl Eggerss: So each year, if you have an IRA, you get a, what’s the form?
Casey Keller: A 5498, if you’re making a contribution or you know, disclosing the balances of your accounts so the IRS-
Karl Eggerss: Yeah, so every year you get a 5498 and it just shows your balance and/or did you make a contribution that goes to the IRS from the custodian.
Casey Keller: Yes.
Karl Eggerss: You know, whether it’s a E-Trade, a Charles Schwab, a Fidelity, it goes to the IRS and you get a copy so everybody knows what your account’s worth. And then, if you took money out, you also get a 1099-R, which is a redemption, basically. But there’s another form.
Casey Keller: Yes, there’s a form 8606 that basically says if you made too much money and you’re doing your taxes that year, the IRS already knows that you made a contribution to an IRA. And then if you, when you’re doing your taxes, your CPA or you determine that you put in too much money, they’re going to say, okay, well that contribution is not deductible.
Karl Eggerss: Right.
Casey Keller: So now you need to fill out a form 8606 that basically says that $6,000 contribution is not deductible. And that’s how they start keeping track of the, the amount of deductible IRA contributions versus non-deductible. So they start to, it paints a picture for them how much, so when you eventually pull money out, use that same form, 8606 that says how much money came out of your IRAs and then they, you know, what proportion was, you know, taxable versus, or excuse me, pretax versus-
Karl Eggerss: Post-tax.
Casey Keller: … non, nondeductible dollars
Karl Eggerss: Yeah, nondeductible. So That’s interesting. So you know, we’ve had two situations lately. So we have, we know one gentleman who’s a doctor, very high income earner, does not have any IRAs and does a backdoor Roth every year. Nothing wrong with that. Puts in a nondeductible contribution of $6,000, converts it to a Roth, and that’s how he builds his Roth. And it’s a perfectly legal way of doing it. They may shut it down at some point, perfectly legal. But the fork in the road is, and the question everybody should be asking is do you have another IRA? He does not. So he’s okay.
Karl Eggerss: We ran into another gentleman that does have other IRAs and has been doing it incorrectly. And by the way, this is somebody that does have a CPA. So just because your CPA’s giving you, doing your taxes and giving you advice, they may not be right. Now, maybe to that defense of the CPA, maybe the person didn’t disclose everything to them, right?
Casey Keller: Right.
Karl Eggerss: They’re not mind readers, but, so in their defense, but that is a real big deal because that person’s been making Roth, backdoor Roth conversions, and has other IRAs. So the IRS is probably going to eventually look at that and say, wait a second, this is not, you’re going to be taxed on that money, and perhaps a penalty.
Casey Keller: Right.
Karl Eggerss: So it’s really, really important to do that. And we’ve run into people that don’t know that rule. So it’s a weird rule and we understand why it’s there, but a lot of people have multiple IRAs nowadays. They have, you know, three or four different IRAs at different places. So the IRS does not care about any of that. They just care about how much total in IRAs do you have, what did you contribute, what did you convert? And all those forms tell them every day. So you know, that’s a really big deal. So make sure that you’re checking into that. Now if you don’t have an IRA, you can take advantage of this, which is a great, especially if you’re younger, it’s a great tool for extra savings. If you do have an IRA, there is another option, right?
Casey Keller: Yeah, there’s a workaround. If it’s really important to take advantage of this backdoor Roth, you can look and see if your current employer will allow you to move an IRA into your 401k plan. Because a 401k, even though you know, you kind of look at them as the same. They’re both retirement plans. The rules don’t apply to 401ks. It’s just IRAs. So if you can get that money back into a 401k plan, then it works. You can do this.
Karl Eggerss: Yeah, so, and obviously there’s pros and cons of doing that. I mean, to us, having an IRA gives you much more flexibility than having a 401k. But like you said, if you’re hell bent on doing it, you can, you can transfer your IRAs back into your new company’s 401k and now you have no IRAs and then in the next year you could be doing these backdoor Roth conversions. That’s, that’s perfectly fine as well.
Karl Eggerss: Now one other thing I wanted to talk about with Roths, and this is something, another thing that isn’t available to everybody, but it’s something most listeners should be checking on, called Mega Roth IRAs, which sounds really cool because it sounds big, right?
Casey Keller: Right.
Karl Eggerss: So what, what’s a Mega Roth IRA?
Casey Keller: So a Mega Roth is only available for those people whose 401k plans allow for after tax contributions. So that’s-
Karl Eggerss: That’s one question to ask your employer.
Casey Keller: Right. You have to, your plan has to allow for after tax contributions, which basically means that if you’ve maxed out your 401k, so then right now $19,000 if you’re under 50 or $25,000 if you’re over 50. If you put in $25, let’s just use over 50, if you’ve done the full $25,000 into either pre-tax or Roth, either one, and you still want to add more into the 401k, they will allow you to put in an after tax dollars. But it only, it’s always a 401k, by 401k, specific plan issues.
Karl Eggerss: Sure.
Casey Keller: So some, some allow it, some don’t. If the plan allows it, what the benefit is, so the IRS, there’s a rule that says no more than $55,000-
Karl Eggerss: I think it’s $56,000 in 2019.
Casey Keller: Okay.
Karl Eggerss: I think it just went up $1,000.
Casey Keller: Okay, you’re prob, you’re right on that. So $56,000 is the maximum that can go into a 401k in any given year. And that includes employer and employee contributions.
Karl Eggerss: It’s kind of a, and it’s actually, that’s kind of an aggregate amount. You know, you have a side business and you’re funding a SEP IRA and you have your 401k. It’s kind of an aggregate. One person can get in $56,000 into these plans this year.
Casey Keller: You’re right.
Karl Eggerss: And it’s, and like you said, it’s anything on your behalf. So it’s including your portion and your employer match. But usually that combination is still not $56,000, right?
Casey Keller: Right.
Karl Eggerss: So there’s room left over if you have the funds to save more.
Casey Keller: Right, exactly. Let’s say somebody put in, maxed out the $19,000 and they got a $11,000 match that year.
Karl Eggerss: Right.
Casey Keller: So they have $30,000, so they’re still $26,000 below that the cap. So what a, if the plan allows after tax contributions, and this person had the ability or means to be able to save an extra 26,000 in the year, they could save $26,000 additional dollars in this 401k plan as after tax dollars and then in, at the end of the year you can convert every bit of that into a Roth Ira.
Karl Eggerss: There’s a big if though, if the plan also allows in-service withdrawals.
Casey Keller: Correct.
Karl Eggerss: So there’s two things they I have to allow, after tax contributions, which probably a lot do. And then in-service withdrawals, which, it depends. Some will allow it, some will allow a portion, some will allow it starting at age 50, you know there’s all these rules. So you would just ask your employer, can I make after tax contributions and can I do in-service withdrawals. So that extra $26,000 you mentioned goes in the 401k and then you do an inservice withdrawal for that $26,000 and you can, you’ve already paid taxes on it, and you convert it to a Roth. You don’t pay any taxes because you already, you already paid it when you earned it and it goes in the Roth and that’s a way to fund a Roth and do it in a mega fashion.
Casey Keller: Exactly. We’ve even seen some plans where the custodians are already aware of this, so if a 401k’s held at a big custodian, like a Fidelity or Schwab or some of these places. They already have the infrastructure built to where you tell them, I want to do the Mega Roth strategy and you put in how much after tax dollars you’re going to do, and they’ll convert it automatically open a Roth and do everything for you. Like, pretty much on autopilot, every year, based on your direction of how much you want to put in after tax dollars. So some of these places have already built the infrastructure to do it. Others, you’re going to have to kind of direct them on how to do it year by year and that, so.
Karl Eggerss: Right, right. Yeah, and sometimes the HR department won’t know, so you may have to call the company where the 401k is held. So you have to do a little bit of research. But bottom line is Roth IRAs are, you know, initially a lot of people thought this was some kind of scheme for the IRS to get extra tax dollars, which it kind of is, but at the same time, there’s a lot of benefits to them and they’re just not right for every person.
Karl Eggerss: They obviously aren’t available to every person. If you’re a high income earner, you may be limited in even being able to do any of this. But they’re great for young people. They can be great for retirees, as we mentioned during these low income years. You know, again, if you retired at 58 and you’re not going to take social security for another eight years and you’d literally have no income and you’re going to live off your savings, your income may be zero. And so you can do a lot of Roth conversions and then now you’re your IRA grew all those years without any taxes.
Karl Eggerss: So doing Roth conversions during that time, so Roths are really flexible, but all of this, you understand, takes an enormous amount of planning because number one, you could be compromised in everything you’re doing if it’s done wrong. And number two, do you even need to do it? Some people are doing some of this without understanding what their taxes are going to be in future years and it’s not worth doing. It’s not worth doing it.
Karl Eggerss: So, you know, when you work with an advisor like us, we actually put all this stuff in and analyze all of it because there’s a lot of moving parts. And if you change one thing, it has an effect on something else, right? Whether it’s social security, whether it’s IRA distributions down the road, whether it’s gifting, charitable contributions, all these different things or factors. So you can’t just an isolation say, should I do a Roth or should I do a Roth conversion that that’s, that’s one question. And then we’re going to come back and ask you 15 other questions. And then we get a proper plan together and can say, this is how much money you could save over your lifetime by doing it this way and at this particular time.
Karl Eggerss: So our main warning was doing these Roth conversions incorrectly. That was our main warning today. It does bring up another interesting point, kind of off Roth IRAs is, and when you talk
Karl Eggerss: … about Mega Roth IRA’s and saving. If people have the extra money to save, we mentioned the example of 26,000, it doesn’t necessarily mean you should put it in your 401(k) and do these Mega Roth conversions. That may not be for everybody. You may be better off saving in just a brokerage account. You may be better off … there’s all kinds of ways to save, but you don’t have to necessarily save it in that form or fashion, right?
Casey Keller: Right, because one negative to Roth is that you do have to wait five years before you can pull that money out or you’ll be subject to a penalty on that. That’s something to consider. There’s little rules and things to consider, everybody’s situation’s a little different, but that may be a factor where you go, if you have extra income you’re trying to save, Mega Roth may not work. It just depends.
Karl Eggerss: Well, and that’s why, again, a comprehensive financial plan is going to look at things like liquidity. Because like you said, if you have to leave it in there five years, if you were going to need that money, you may have been better off just putting it in a joint … that extra 26,000 just in a taxable joint account that you can get to whenever you need.
Karl Eggerss: Again, if you don’t plan for that, all of a sudden you’re in an illiquid position. We see a lot of people that do put everything they have in the 401(k)s thinking it’s the Holy Grail. Then they pay off their house because they don’t want any debt, and then they don’t have any free cash flow. Again, taking all of this into consideration on a comprehensive plan.
Karl Eggerss: Anything else on these Roth IRAs that people need to be aware of?
Casey Keller: No, but I think … I don’t know if we made it clear on the Mega Roth. I think one thing that’s interesting, if you think of the power of it, in that last example, if you maxed out your 401(k) in all Roth, so $19,000, plus you took advantage of the Mega Roth in excess of whatever the employer contribution, employer contribution wouldn’t count, but let’s just say the example you used earlier, $19,000 of Roth contributions, and then you got an $11,000 match, but you’re still allowed to do 26,000 in after-tax. So if you did 26 and 19, you could put in $45,000 into a Roth IRA no matter what your income is, if you’re eligible for this Mega Roth plan.
Karl Eggerss: Yeah, and you think, who would that be a good example for? It could be somebody that’s at the tail end of their career. They’re still working for a company, but maybe it’s on more of a consulting basis or they’re on the payroll, but maybe they’re working not the 40, 50 hours a week, and they’re still eligible for the 401(k), that’s when you could do that.
Casey Keller: Really ramp it up.
Karl Eggerss: Because now you’re in a lower tax bracket, you’re staring retirement in the face and you’re trying to cram as much money into Roth IRAs as possible, Mega Roths are … Really, the most exciting time in life for multiple reasons, is when you’re about to retire, because there’s a lot of unique things that can be done in that timeframe that can really impact you, because the last thing you want in retirement is a lot of taxes. If you plan in advance, it really helps. Obviously, Roth IRAs are a big way to do that.
Karl Eggerss: As we wrap up, I just wanted to mention a couple of quick things. Number one, that just because you do a 401(k), whether it’s a Roth 401(k) or a pre-tax 401(k), you still can do a Roth IRA outside of that. Just a separate Roth IRA. And you may be able to do a spousal Roth IRA. We won’t get into all details with that. There’s lots of ways to contribute to these and do multiple plans.
Karl Eggerss: Any other couple of tidbits from Roth IRAs in general before we wrap up?
Casey Keller: Yeah, a couple of things. There’s one thing that changed last year that was something that … It’s called recharacterizing. What people used to do is they would fund … Put money in a Roth IRA during the year, and then they would go fill out their taxes the next calendar year, they’d go file their taxes and go, “You know what, I didn’t save as much money. I’m going to have to pay a little bit more because I did that Roth.” They’d go, “You know what, I’m going to go back and change that and-“
Karl Eggerss: Make it deductible.
Casey Keller: Make it deductible, or change it to a … they would go fix it or unwind that. They don’t allow you to do that.
Karl Eggerss: That was from the new Tax Relief Act of 2017.
Casey Keller: Right. So once you put money into a Roth IRA, you are committed at that point. That’s one little-
Karl Eggerss: Okay, so that changed.
Casey Keller: That changed.
Casey Keller: The only other thing that comes to mind, Karl, is using a Roth for college savings is something that is … I want to say-
Karl Eggerss: In the kid’s name?
Casey Keller: No, it’s still in your name. You use it in your name, because you have to have earned income to open an account. So the kids, if they’re working, they could…
Karl Eggerss: Yeah, let’s start with that. So if the kids … You can do a custodial Roth, but let’s just assume the kid’s 18, has earned income, they can open a Roth up to that amount of earned income. If they had 6,000 of earned income, they can do a Roth for 6,000.
Casey Keller: They could, yeah.
Karl Eggerss: But you’re talking about-
Casey Keller: Parents. Young parents, or parents have young children that are considering whether to do a 529 for college savings, which is fine, that’s one option. But you don’t get any tax benefits to put money into, up front, to put money in a 529-
Karl Eggerss: A deduction.
Casey Keller: A deduction.
Casey Keller: But you get tax-free growth if it’s used for college. Well, the Roth, you also won’t get an upfront tax deduction, but it’s tax-free whether you use it for kids’ college or for your retirement or whatever you want to use it for, as long as you wait the five year rule.
Casey Keller: That is an option to consider, especially if you get into the Mega Roths and other options where you’re just looking for ways to get savings and you can say, “I want to put it in the Roth,” and you’ve got at least that option to go, I want to use it for the kids’ college. Great. If not, it’s for retirement. You can go either way. It’s just something to consider. It wouldn’t be necessarily the first option, but if your retirement bucket is covered, especially let’s say the Mega Roth option, you’re going, “I’ve already fully funded my retirement, now I’ve got some extra money we were going to put into 529s or what have you.” If you’re allowed to do the Mega Roth, then you could do that instead of the 529. You’re accomplishing the same thing, with the, also the out that if you don’t use it for college, you could use it for your own retirement.
Karl Eggerss: Just for clarification, I think I know what you meant, but I want to fill in a couple of gaps. You’re not saying somebody can do a Roth 401(k) at their job and then when their kid goes to college, they can just take that money out to go use for college because it’s in the 401(k). There’s a middle step, right?
Casey Keller: Well, maybe, maybe not. More than likely, unless you end employment there or if they don’t allow in-service withdrawals, that may not be an option. I was mainly talking about if you’re doing Roth contributions outside of a 401(k), or you’re doing the Mega Roth, which we described earlier, because the Mega Roth goes into a Roth IRA account outside of the 401(k) each year.
Karl Eggerss: Yeah, I just wanted to clarify so if somebody’s doing regular Roth 401(k) contributions, you can’t take money out of your 401(k) and go fund college. That’s not what you’re talking about.
Casey Keller: Most of the time not. There are some exceptions to that.
Karl Eggerss: Now, if you leave, right, if you leave, or like you said, the plan’s terminated, or what have you, but you were talking about a separate Roth IRA or the Mega where you convert some of it, you get it out of the plan and you convert it to Roth. That’s where you take it out of. It gives you more flexibility than the 529, and investment options too.
Casey Keller: Oh yeah, didn’t even think about that. Yeah, exactly.
Karl Eggerss: Then if you decide, “Hey, you know what, kids’ college is covered through scholarships or cash flow, whatever, I still have a Roth for my own savings.”
Casey Keller: Exactly.
Karl Eggerss: Okay, very good.
Karl Eggerss: All right, Casey Keller. Thank you very much.
Casey Keller: My pleasure.
Karl Eggerss: I hope that answers some of your questions, guys, on Roth IRAs, because there’s a lot of nuances with them. Our main thing we want you to take away, though, is there’s a lot of planning that takes place to do a Roth, where does it fit? Convergence, Backdoor, Mega, all these terms, all these forms to file. It has to be done the right way.
Karl Eggerss: If you have any questions, we’re always happy to help you out with your Roth IRA questions or concerns at EggerssCapital.com. Have a wonderful weekend, and we will see you back here next week on the Eggerss Report, your investing playbook.
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This show is for entertainment only and information provided by the hosts, guests, and this station should not be deemed as advice. You’re investment decisions should be based on your own specific needs. You should do your own research before you make those decisions. As president and CEO of Eggerss Capital Management, Karl Eggerss may hold securities mentioned in this show for himself and his clients. Just don’t buy or sell anything based on what you get from radio or TV. Use your own judgment or get yourself a trusted advisor.