210 | Little Known Roth Hacks

Roth 401(k) Options

Navigating Roth 401(k) options can be complex, but understanding their nuances is crucial for effective retirement planning. Jonathan Mendosa highlights the importance of knowing when to choose a Roth 401(k) over a traditional 401(k), especially for those in higher tax brackets. He emphasizes the flexibility of Roth IRAs, where contributions can be withdrawn tax-free at any time, unlike Roth 401(k)s which follow the "cream in the coffee" rule, making earnings taxable and potentially penalized 1. Brad Barrett adds that rolling a Roth 401(k) into a Roth IRA can mitigate some of these issues, allowing for tax-free withdrawals of contributions 2.

Contributions can come out at any time, completely tax and penalty free, even if you're younger than 59 and a half.

--- Brad Barrett

This strategy is particularly beneficial for those under 59 and a half or who haven't held the Roth 401(k) for five years.

   

Roth IRA Eligibility

Understanding Roth IRA eligibility is key to maximizing retirement contributions. Jonathan Mendosa explains that individuals with a modified adjusted gross income (MAGI) of $196,000 or less for 2020 can contribute up to $6,000 per person to a Roth IRA 3. He notes that by maxing out contributions to a 401(k), individuals can effectively lower their MAGI, thus increasing their eligibility for Roth IRA contributions 4. Brad Barrett confirms that this strategy allows a couple to potentially earn up to $235,000 and still qualify for Roth IRA contributions.

You would potentially be able to make gross income of $235,000 in 2020 and still be able to contribute to your Roth IRA.

--- Brad Barrett

This approach provides a strategic advantage for high-income earners aiming to optimize their retirement savings.

   

HSA and Roth

Combining Health Savings Accounts (HSAs) with Roth strategies can further enhance tax efficiency. Jonathan Mendosa suggests maxing out both 401(k) and HSA contributions to lower MAGI, thereby qualifying for Roth IRA contributions 5. This tactic allows individuals to maximize their retirement savings while maintaining access to funds in emergencies. He cautions that withdrawing Roth contributions should be a last resort, as it eliminates the ability to contribute that amount for the year.

Although you can get your contributions back penalty free, there's no penalty. If you did decide to do that, you are now wiping away your ability to contribute that amount for the year.

--- Jonathan Mendosa

This strategy underscores the importance of intentional financial planning to preserve long-term retirement benefits.