The Beauty of the Roth IRA

Ah, the beautiful, magnificent, spectacular, glorious, majestic, (insert adjective here) power of the Roth! In the Retirement Vehicles post, we discussed the many options you may have in saving for your golden years. I probably should have put the Roth IRA section in triple bold font! 😂

Roth options in employer sponsored vehicles (401(k), 403(b), etc.) are less common, but are gaining steam and becoming more available to the masses. The Roth IRA, however, is available to the vast majority of us in one shape or another.

The Roth IRA is the single greatest vehicle for Americans to utilize for retirement.

I cannot stress this point hard enough to my fellow solos out there. Let’s review why this is such a powerful force in the overall view of one’s financial health, and how to best utilize.

The Roth IRA was created back in the 90s, as a part of the Taxpayer Relief Act of 1997. This bill alone included a number of provisions that changed the landscape of retirement savings as we know it today. The traditional IRA, which had been around since 1974, had (at the time) only been accessible to those without access to workplace retirement vehicles. This act, among many things, brought back accessibility to the IRA for most and introduced the Roth IRA (originally called the “IRA Plus”).

Senator William Roth of Delaware, a man among boys, is accredited as the driving force behind its inception in 1998. Always the fiscal conservative, and along with a great first name, Roth had a big impact on lowering taxes and offering tax benefits to the working class saving for retirement. The idea behind this crazy scheme would offer American citizens the chance to put after tax dollars to work right now, with the benefit of tax-free withdrawals after the age of 59-1/2.

Instead of tax deferred growth, which has its own benefits, Uncle Sam gets that tax money now and the citizen can watch this invested money grow, completely tax free, for decades to come! I call that a win-win!

The Roth IRA has had several changes implemented since its inception in the late 90s. Those feeling incredibly feisty might be inclined to read ALLLLL the way through the SECURE 2.0 Act of 2022. For the rest of us regular humans 🤪 I put together a few bullet points:

• Contributions are made with post tax dollars
• Original contributions can be withdrawn at any time for any reason without owing penalties or taxes (not investment growth on those contributions)
• People 59-1/2 years old or older can make withdrawals of contributions and earnings completely tax/penalty free as long as the account is owned for a minimum of 5 years
• No age limits, but the individual must have earned income supporting the after-tax amount contributed
• The individuals modified adjusted gross income (MAGI) must be less than the income limits put forth by the IRS to participate in any given year
• Going over the maximum contribution limits in any given year will result in penalties and fines
• There are no maximum amounts that can be held in a Roth IRA at any given time, and no required minimum distributions (RMDs) enforced

On top of ALL THIS GREATNESS, someone under the age of 59-1/2 has the ability to withdraw investment earnings without penalty/tax IF it is considered a qualified distribution. These might include a first home purchase, disability related expenses, having a baby/adopting, and education expenses. Be sure to understand the specific rules, or even consult a professional, before considering this since penalties can be hairy. The true superiority of the Roth IRA is that it grows tax free, so considering early withdrawals should be a last resort anyway.

You’ll notice there aren’t age limits on opening a Roth IRA account. No, you can’t shove money into your 5-year old’s retirement just because they are cute 😂. However, you can open a Roth IRA for a dependent of any age if they have some sort of taxable income. The contribution cannot go over the after-tax income they earned of said year. I’ve heard of parents doing this with income received from baby modeling, or in some cases with their working teenagers. IMAGINE what your retirement accounts would look like if they started shortly after birth??? These kids have a bright future! 😎

On the other end, there are also no age limits on RMDs as well. Among many other benefits, this is what makes the Roth IRA so valuable when it comes to legacy building. Since the taxes for these investments have already been paid, this account can be left as inheritance (in many cases) completely tax free. Generally, the beneficiary will then transfer this money to a Beneficiary IRA Account and have 10 years after your death to withdraw it all. The exact rules on this get pretty particular depending on your relationship with the beneficiaries, so be sure to get professional (in many cases legal) counsel before setting this up.

The first thing to keep in mind when considering the Roth IRA is that there are income restrictions on contributions. In 2025 anyone with a modified annual gross income (MAGI) of less than $150k can make the full $7k contribution to their Roth IRA. Phase out range is between $150k – $165k (meaning they can make partial contributions), and high earners with a MAGI above $165k cannot make standard Roth IRA contributions. Of course, the Savvy Solo in this situation would consider a backdoor Roth IRA, but more on that in a future post. 😉

Another big one to note is that exceeding the annual IRA contribution limits will result in penalties from the IRS every year until the situation is rectified. In 2025 this limit is $7k, or $8k for those 50+ years old. This rule goes for employer sponsored plans as well (usually a limit of $23.5k in 2025), it’s worth a call to the investment firm or HR office to see if contributions to that account will automatically stop after the annual limit has been reached.

As noted above, you cannot contribute more to a Roth IRA than your earned income. For example, if you somehow figured out a way to survive earning $5k in a given year, you would only be able to contribute the income post tax to this account. In this case you would probably have a tax rate of 0% thus making you eligible to contribute $5k.

Another thing to consider here is that you are taking the tax hit now, instead of in retirement when you may be taxed at a lesser rate. For example, if you are currently in the 35% tax bracket, you’ll have to earn $9,450 of income to contribute $7,000 to your Roth IRA. The same rules apply to contributions made to Roth contributions to employer sponsored accounts. $23,500 of tax-free money sounds pretty juicy, but it might not be the most effective tax strategy. Someone at the peak of their earning potential might consider putting contributions towards a tax deferred retirement account instead.

Some have argued that by contributing to a Roth, you are taking tax planning strategies away from your future self. In some regards, this might be the case… but let’s be real! Tax-free money in retirement is amazing! Who really wants to make a bunch of heavy decisions in retirement anyway?!? You know how the old saying goes: Two things are guaranteed in this world, death and taxes. Chances are unlikely that the future of income tax rates will be better than they are right now.

It would be easy to say that all young people should go full on Roth, and every older person should go completely tax deferred. Different people in different demographics are accumulating wealth at different points in their lives. I’ve stated multiple times that no one plan is right for everyone, it’s too simplistic.

Instead, I have a generalized “rule of thumb” which should be helpful for most based on current tax brackets. Again, this is not so much as a set of rules for everyone, more of a suggestion to consider while devising your own tax plan.

Under 25% Tax Rate

Utilize every Roth option you have!

Add up your federal income tax rate, state income tax rate, and possible other taxes you might be accountable for; is it under 25% of your annual income? Chances are unlikely you’ll be at such a low tax rate in future years of income potential. The best time to open a Roth IRA was yesterday, the next best time is today!

Get in contact with your HR department and see if you have the option of making Roth contributions to your 401(k). Personally, I would make extra efforts to cut spending and invest more during this time period in a total effort to max out all Roth retirement options. Future you will be happy you did!

Over 30% Tax Rate

Utilize tax deferred accounts, but still consider a Roth IRA!

For the employer sponsored account, I would go with the standard tax deferred 401(k), 403(b), or whatever you are offered and max that out. If you are being taxed this high, chances are high that you’ll be looking at a lower rate in retirement. This will lower your MAGI and might even put you in a lower tax bracket. From this point, you could decide to max out a traditional IRA (if you are able/qualified) for more tax deferred benefit, including an even smaller MAGI.

I would ask yourself a few questions here though. Do you think you have greater income potential in your future? Is the position I’m in leading to a heavier tax burden in the coming years? Am I considering relocating to a state with harsher tax rates? If yes to any of these, I would greatly consider maxing out the Roth IRA (or backdoor Roth if applicable) this year.

25% – 30% Tax Rate

Utilize a mix of both!

Employer sponsored plans that have the option for Roth contributions will generally let you make both Roth and tax deferred contributions in the same year. However, you have to be careful not to go above the contribution limit. Do the math and make it clear to your HR department what you are trying to do and figure out the best process to do so. Also, max out the Roth IRA.

What I would try to do is make sure my tax deferred contributions are putting me in the next lowest tax bracket and go full on Roth from there. If something gets a bit messed up, and you are cresting the higher tax bracket, don’t freak out! Because of the progressive tax system, only the dollars in that tax bracket will be taxed at the higher rate. What’s a few % points on a few dollars? Not enough to lose sleep over, that’s what.

Contribution Strat

I’ll cover the backdoor Roth method in a future post, but it’s a little easier to make standard contribution. For those in 2025 who know they aren’t going to be close to $150k MAGI, I would plan to max it out by setting up automatic monthly contributions. You can set up the Roth IRA account to automatically pull $583.33 ($7k / 12) from your checking account each month. If things are getting a bit tight, then do a little less for now, but try to make up for it in future months.

For those of you who are on the fringe of the income limits, set up one of the buckets in your bucket fund to be tagged for Roth IRA. Send the appropriate amount of money to it each month and see where you are at in December. If your MAGI is under the limit, awesome! Let’s get that money into the Roth account! If you are over, no problem! Time to implement the backdoor strat 😈.

The Roth IRA is such a powerful tool, it fully deserved its own post. Retirement planning comes with so many “what-if” scenarios. Having as many tax-free dollars as possible in your retirement years will help alleviate some of that pressure, and lead to a happier retirement in the long run.

When I see the word “Roth” I always think of one word: freedom. Will tax rates go up in 20-30 years? Most likely yea, but guess what isn’t taking the hit on that? Your Roth IRA. If you haven’t already been able to tell, I can’t shut up about it. I’ve been told this by a few compatriots 🤪.

Here’s why:

Less than 25% of American households, according to the ICI, had an existing Roth IRA in 2023! Given the fact that the vast majority of us had access to one and have been (at some point) in a lower tax bracket since the late 90s, this number should be closer to 80%. What’s crazier? In 2022, only 15% of all households actually contributed to a traditional or Roth IRA! Do only 15% of us need to save more to retire? Oh, it’s more than that? I thought so.

When the IRS puts both income and contribution limits on a product, you know this is juicy stuff! 🤤 Take full advantage of this magnificent opportunity!

Not sure if ol’ Uncle Bill will ever shut up about the benefits of the Roth IRA. If you read this far, you have no excuse, open and contribute to a Roth IRA TODAY!

Stay classy Solos! ✌️