Tax Free Wealth: Using IRAs and Roth IRAs to Build a Secure Future (Ep. 92)

Written By Courtney Grayson

What if I told you there's a retirement account that could help you never pay taxes on your income again? Hard to believe, right?

On this episode, we delve deep into how Individual Retirement Accounts (IRAs) and Roth IRAs can help you build wealth, save on taxes, and ensure a secure financial future.

Why IRAs and Roth IRAs Matter for Law Firm Owners

Many law firm owners are not saving enough for retirement, relying heavily on their businesses to sustain them through their golden years. While investing in your business is crucial, having a diversified portfolio, including IRAs, can serve as a safety net independent of your firm's performance.

What Are IRAs and Roth IRAs?

An IRA, or Individual Retirement Account, offers tax-advantaged savings specifically for retirement. There are two main types:

  1. Traditional IRA: Contributions may be tax-deductible, lowering your taxable income now, but withdrawals in retirement are taxed as regular income.

  2. Roth IRA: Contributions are made with after-tax dollars, meaning no immediate tax benefit. However, both withdrawals and the growth within the account are tax-free in retirement.

Contribution Limits

In 2024, you can contribute up to $7,000 to your IRA or Roth IRA, or $8,000 if you're over 50. You can split this contribution between the two types, but the total must not exceed the annual limit.

Traditional IRA: Tax Benefits and Considerations

  • Tax Deductions: Contributions to a Traditional IRA might be tax-deductible depending on your Modified Adjusted Gross Income (MAGI) and whether you or your spouse are covered by a retirement plan at work.

  • Tax-Deferred Growth: Your investments grow tax-deferred, meaning you don't pay taxes until you withdraw the funds in retirement.

  • Required Minimum Distributions (RMDs): At age 73, you are required to start taking RMDs. This age increases to 75 if born after 1960.

  • Inheritance Concerns: Beneficiaries must withdraw the entire account within 10 years and pay income taxes, potentially pushing them into higher tax brackets.

Roth IRA: Tax-Free Growth and Flexibility

  • Tax-Free Withdrawals: Contributions are made with after-tax dollars, but withdrawals in retirement are entirely tax-free.

  • No RMDs: There's no need to worry about mandatory withdrawals, allowing your investments to grow indefinitely.

  • Beneficiary Benefits: Inherited Roth IRAs don't require beneficiaries to pay taxes, making them an excellent estate planning tool.

  • Income Limits: Be aware of income limitations, but consider strategies like backdoor Roth IRA contributions to bypass these restrictions.

Why Start an IRA or Roth IRA Today?

Small, consistent contributions can grow exponentially over time thanks to the power of compound interest. For instance, if you start a Roth IRA at age 30, contribute $7,000 annually for 30 years with an average 10% return, your account could grow to over $1.4 million, and all of it would be tax-free!

Steps to Get Started

  1. Evaluate Your Tax Situation: Are you in a high tax bracket now or in the future? Use this information to decide between a Traditional or Roth IRA.

  2. Open an Account: If you don’t have an IRA, start one today, especially a Roth IRA.

  3. Work with a Financial Planner: Unsure about which strategies to implement? A financial planner can provide personalized advice tailored to your situation.

  4. Pay Attention to Deadlines: The deadline for IRA contributions is April 15th of the following year—make sure you don’t miss it.

Resources:

Courtney Grayson
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Turn Losses Into Savings: Tax Loss Harvesting Can Slash Your Tax Bill (Ep. 91)