7 Smart Ways to Boost your Roth Nest Egg

A Roth IRA (Individual Retirement Account) is a powerful investment tool that allows individuals to save for retirement while benefiting from tax advantages. One of the key benefits of a Roth IRA is the potential for tax-free growth and tax-free withdrawals once you retire. Having a portion of your Nest Egg in a tax-free Roth IRA may become increasingly important depending on where you believe tax rates are headed in the future. Because of the annual limits on contributing to a Roth, it’s important to consistently and regularly contribute over time while taking advantage of various strategies to increase your Roth savings. Here are seven smart ways to add money to your Roth IRA and supercharge your retirement savings:

1. Maximize Direct Contributions: The first and most straightforward way to add money to your Roth IRA is by maximizing your annual contributions. As of 2023, you can contribute up to $6,500 per year for individuals under 50 years old and $7,500 for those aged 50 and above. Due to Income Limits, the option for directly contributing to a Roth account may not be available for some individuals.
2. Consider a Roth Conversion: A Roth conversion involves transferring funds from a traditional retirement account (i.e. IRA or 401k) into a Roth IRA. This process requires paying taxes on the converted amount. Anyone can perform a Roth Conversion because there are no annual limits on conversions and no income limits.
3. Utilize the “Backdoor” Roth IRA: If your income exceeds the limits for Direct Roth IRA contributions, you can still contribute indirectly by using the “Backdoor” Roth IRA strategy. This method involves making a non-deductible contribution to a Traditional IRA and then converting it to a Roth IRA. While the initial contribution is not tax-deductible, the earnings in the Roth IRA will grow tax-free. If you have a large portion of savings in a pre-tax IRA this option can be complicated, and we would recommend speaking with one of our Certified Financial Planners.
4. Take Advantage of your Employer’s Roth 401k or Roth 403b: If you have access to an employer-sponsored retirement plan that allows a Roth option, be sure to take advantage of this benefit. These accounts operate the same as any other Roth IRA, but without any income limit. There is an annual limit on contributions, but it is much higher that the traditional Roth IRA.
5. You may benefit from a Mega-Backdoor Roth: If your 401k allows “after-tax” contributions, this is separate from your traditional 401k and Roth 401k contributions. Once you contribute the maximum $22,500 into your 401(k) ($30,000 if over 50), you can contribute after-tax dollars. If your employer also allows “in-service distributions,” you can begin to “rollover” these after-tax dollars into a Roth IRA.
6. Review the new rule on Catch-Up Contributions: Starting in 2024, the recent Secure 2.0 Act requires all individuals earning more than $145,000 to contribute the “catch up” portion of their savings into the Roth 401k option. Once you reach the age of 50, you are permitted to make an additional “catch up contribution” of $7,500 per year into your 401k. While the “catch up contribution” will no longer reduce your taxable income, it does bring greater opportunities to build your tax-free Nest Egg!
7. Tell your children about 529 to Roth Conversions: The recent Secure 2.0 Act also created a new opportunity, starting in 2024, to convert unused 529 Education savings into a Roth IRA for the student. There are several rules around how to convert 529 funds to a Roth so we encourage you to first speak with one of our Certified Financial Planners. The most important rule is that the 529 must have been opened for at least 15 years prior to conversion. This makes a great case for opening a 529 account for every young child to “start the clock” on this benefit!

These are all great options to build a robust tax-free nest egg. However, there are nuanced rules and restrictions on who may use which strategy. The key to maximizing your Roth savings is to be proactive, use the correct Roth option for your situation, and be consistent with regular contributions. We are happy to review these options and help you build out a personalized Roth gameplan. And now that you know all the Roth options, feel free to share this page and spread the word!

**This material was created for educational and informational purposes only and is not intended as ERISA, tax, legal or investment advice. If you are seeking investment advice specific to your needs, such advice services must be obtained on your own separate from this educational material.

Traditional IRA account owners have considerations to make before performing a Roth IRA conversion. These primarily include income tax consequences on the converted amount in the year of conversion, withdrawal limitations from a Roth IRA, and income limitations for future contributions to a Roth IRA. In addition, if you are required to take a required minimum distribution (RMD) in the year you convert, you must do so before converting to a Roth IRA.

A Roth IRA offers tax deferral on any earnings in the account. Qualified withdrawals of earnings from the account are tax-free. Withdrawals of earnings prior to age 59 ½ or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. Limitations and restrictions may apply.