Planning for retirement? Consider a Roth IRA
Having our own businesses is great, but at some point, you're probably going to want to retire. Having a long-term retirement investment in place is key for this. Plus you can utilize it to be a good tax strategy and today I'm going to talk about one of those strategies: Roth IRAs.
I'm sure you've heard about IRAs, but there's a difference between Roth and Traditional. Let's break it down. With a Roth IRA, you're contributing to it after already paying taxes on it. Then once you go to withdraw you DON'T pay taxes on it. So basically you pay taxes on it now instead of later. With a Traditional IRA, your contributions are tax-free, but then you pay taxes on it once you make withdrawals later. In short, you don't pay taxes now but you do later.
So here's where the strategy comes in and why I typically recommend Roth (as always, talk with your tax strategist to see what would be the best option in YOUR situation-it's not one-size-fits-all). Roth IRAs are your best option if you expect to be in a higher tax bracket later (which is almost everyone). Why? Because you're paying the taxes on it now, while you're in a lower tax bracket, therefore paying lower taxes on it. With traditional, that's your best option if you expect you'll be in the same or lower tax bracket.
In 2024 you can contribute a max of $7,000 to a Roth IRA if you're under age 50, and $8,000 if you're over age 50.
However, there are income limits to if you can contribute to a Roth IRA. There's ranges of eligible, partially eligible, and not eligible but if you're filing as a single individual, you can't contribute if you're making over $161,000. If you're married filing jointly, you can't contribute to a Roth if you're making over $240,000.
That being said, there's a backdoor option if you're making over the income cap amount but you still want to contribute. Here's what to do:
Contribute to a Traditional IRA
Instead of taking the tax deduction, file Form 8606 which shows that you're not taking the tax deductions on it (and you ARE paying the taxes on it)
Transfer or convert your contributions from Traditional to Roth
It might seem a little silly to go through all those hoops to contribute to a Roth but in my opinion, it's absolutely worth it to have your Roth IRA grow (and be withdrawn later on) tax free. Once again, this is my personal opinion and recommendation, and I always recommend talking with your CPA or financial planner to get started! If you want us to talk more about this topic or have any questions, reach out on Instagram or via email at hello@profitpriority.co!
