February 3, 2025 – Discover the secrets to maximizing your tax savings and retirement planning in our latest episode of Lifetime Planning. Financial Sense Wealth Management's Jim Puplava and Crystal Colbert reveal how you can still make impactful contributions to traditional and Roth IRAs, SEP IRAs, and Health Savings Accounts for 2024, even in the new tax year. Uncover surprising strategies like backdoor Roth contributions and learn how to leverage tax-free growth for your future. With compelling case studies and expert insights, this episode is packed with actionable advice you won't want to miss. Tune in to transform your financial planning and secure your tax-free income.
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Transcript
Jim Puplava:
Welcome everyone to another episode of Lifetime Planning. On today's show, we're going to talk about how you can still make contributions to things like traditional IRAs, Roth IRAs, SEP IRAs, and Health Savings Accounts for 2024. Even though we're in a new tax year, you still have up to a certain amount of time, depending on when you file, to make these contributions to get the deductions. Joining me is Crystal Colbert. And Crystal, for traditional and Roth IRAs, what is the one fact that most individuals are not aware of?
Crystal Colbert:
Yeah, so one of the cool things about traditional and Roth IRAs is that if, you know, most people aren't aware of, if they have a non-working spouse or say their spouse has one of the hardest jobs, which is a stay-at-home mom, you can actually still open and contribute to a traditional IRA or a Roth IRA in their name as long as you file married filing jointly. So just to kind of go over the contribution limit, so for 2024 you could contribute $7,000 to your Roth IRA, traditional IRA, and if you're over 50 years old, you can do an additional $1,000 catch-up. But the cool thing about having, you know, if you have a non-working spouse and you want to continue to build that retirement, you can actually make a spousal contribution to their IRA. So it's almost doubling that amount for your contribution.
Jim Puplava:
And what are the time limits for making these contributions? I mean, everybody, you're supposed to file your tax return by April 15. Sometimes people extend them, I think it's to September. So what about timelines for this?
Crystal Colbert:
Yeah, so you want to make sure that you still get it in by tax day, April 15th of 2025. If you're trying to contribute for 2024 and if you are mailing, you want to make sure that you get it postmarked and it's stamped saying April 15th because if it's one day later, you're not going to get it in. And I think, Jim, I think we were talking about the other day how we used to have clients slipping it under the door in hopes that it would get in.
Jim Puplava:
I remember those days well, April 15th and you get a little envelope underneath the office door. I want to talk about a situation. What if, based on your income, you don't qualify for a tax-deductible contribution? Can you still have an IRA even though you don't qualify for one?
Crystal Colbert:
Yes. So you can still make a non-deductible contribution to an IRA. And there are some fun strategies that if you don't want to keep it growing in the traditional IRA, you can actually do what's known as a backdoor Roth contribution. There are a lot of ramifications to doing this. So you want to make sure you're working with a tax advisor or financial planner like us to make sure you're doing it properly because you do not want to have any other pre-tax IRAs outside of the non-deductible IRA that you're making this contribution to, because otherwise the strategy won't work. But for a backdoor Roth, if you wanted to, you can make a non-deductible contribution to an IRA and then do a Roth conversion to actually get those funds into a Roth IRA to then grow tax-free for you. And you can do this for a spouse as well.
Jim Puplava:
So what if you are making a non-deductible contribution to an IRA, how is that handled and should it be kept separate?
Crystal Colbert:
Yes. So you want to always make sure, like I said, you want to keep pre-tax IRA assets at zero. So that way when you make, so an IRA account is at $0 or you open up a new IRA account, you make that non-deductible contribution and you actually file. When you do your taxes, you file a form called 8606. Your tax advisor will do it for you, but it reports that it is a non-deductible contribution. So then, so you've already paid taxes on it. So once you convert those funds into your Roth IRA, now your non-deductible IRA is at $0, you convert the $7,000 to your Roth IRA. Now that $7,000 is going to grow tax-free. And the Roth IRA, you report it on your taxes. So they know that it was a non-deductible and it just continues to grow tax-free for you.
Jim Puplava:
Let's move on to. We've been talking about people that let's say are an employee working at a firm. Let's move on to people that are self-employed, freelancers, side giggers. How can they save more with IRAs or pension contributions and still make that? I guess when it comes to certain pension documents you have to tax time to fund them, but you have to have the mechanisms in place prior to that. Let's discuss that.
Crystal Colbert:
Yes. So for self-employed individuals, you can take advantage of like a SEP IRA which has a higher contribution limit. So for 2024 you can still make your contribution. The cap is at $69,000 or 25% of your eligible compensation. So you just want to make sure you're aware of that. And one of the cool things about The Secure Act 2.0 is, it used to be where you could only make traditional SEP IRA contributions, now you actually can make Roth SEP IRA contributions. You just have to make sure that your financial institution has set it up and that the actual plan allows for it.
Jim Puplava:
Now here's one that most people don't think about. We've been talking about Roths. Is it possible, let's say you have a couple of kids. Can you make a Roth IRA contribution for a child?
Crystal Colbert:
Yes. So you can. You just have to make sure your child has earned income. So setting up, you know, a Roth IRA for your child could financially give them a significant head start for saving towards retirement. So remember that yearly amount is $7,000 for 2024. There's no catch-up because they're so young, but you can actually contribute up to $7,000 as long as they have earned income for that year.
Jim Puplava:
Well, let me throw this in. If you're a parent and you're thinking of setting up a Roth, let's say your kid is 13, they're a teenager, they have a job, they're a carry-out at a grocery store, whatever they're doing, or they're working at Chick-fil-A or something. If you put $7,000 a year at age 13, all the way up to age 67, you wouldn't be making contributions for 54 years. And assuming a 7%, 8% rate of return, Crystal, what do you think that amount would be by the time you hit age 67?
Crystal Colbert:
2 million?
Jim Puplava:
$6 million. You know, it's one of the things, the earlier that you make contributions, whether it's a SEP, a Roth, the earlier you make it and do it consistently over a period of time with compounding, it just works magic. If you're saving for retirement, what other investment accounts can you still contribute for? Let's say tax deductions for 2024.
Crystal Colbert:
Yes. So another great account is your health savings account. So as long as you had a high-deductible health insurance plan in 2024, you can actually still contribute that maximum into the health savings account. So you have to make sure you contribute it by April 15, 2025. But for 2024 for individuals, you can contribute $4,150 for the year. Or for a family, you can contribute $8,300 with a catch-up of $1,000 if you are age 55 or older. And then just so you're familiar with 2025 rules now, individuals can contribute $4,300 and a family can contribute $8,550. So a nice little increase there.
Jim Puplava:
Yeah. So even though we're in a new tax year for 2025, what we're trying to point out here, depending on your situation, you still have plenty of opportunities to get a tax deduction. So you know, time is money. So if you can save some money in taxes, why not? Crystal, why don't we move on and talk about some case studies to illustrate how this can work effectively for long-term planning.
Crystal Colbert:
So just since we were just on the topic of health savings account, first case study is Joe and Sally, who are a married couple in the 24% tax bracket. They want to make their contributions to their HSA for 2024. So as of for 2024 it's $8,300. So they make that maximum contribution and they decide, oh, for 2025, I also want to max that out. So at $8,550. So total contributions for today is $16,850 because they made their 2024 and then they're going to max out for 2025. So for 2024 they could save $1,992 in federal income taxes in 2025. So next year when they file, they can save $2,052 in federal income taxes. So total federal income tax saving of a little over $4,000. So $4,044. If you compound that interest over time and you don't touch those funds, you just set it, forget it. In 20 years with an annual rate of return of 8%, that account with no additional contributions would be $78,537 which can then be withdrawn tax-free for qualified medical expenses in their retirement. Now had Joe and Sally made that same investment in a taxable account, they would get no upfront tax deduction and they would have generated $61,687 in long-term capital gains. If Joe and Sally made the same investment in a traditional IRA and they got the tax deduction and it all grew, then that would all be ordinary income tax at whatever their future rate is in retirement. So you can kind of see the benefits of not only getting that upfront tax deduction, it grows tax-free and then you can withdraw it tax-free. So great position for Joe and Sally to be in come retirement.
Jim Puplava:
And the other thing that's really important as we're talking about these ways to save money on taxes when you're filing, but also down the road because take a look at where we are as a country where the deficits are, you know, by the end of Trump's second term, the deficit is going to be, or the debt will be over 50 trillion. So it's sooner or later it's more than likely the government is going to be raising taxes. They're going to have to because of the massive amount of debt. So the things that you can do that are legal. I mean the nice thing about a Roth, the reason we love them so much at our firm, is right now, if I was to go into the bond market, go into tax-free bonds, I'd maybe get 3 and a half to 4% tax-free if I have a Roth. And let's say there's a pipeline company that we own that pays seven and a half percent, well, seven and a half percent in a Roth, once it's qualified, that's seven and a half percent tax-free. I haven't been able to get seven and a half tax-free. I'd have to go back to the 80s. And so this is why things like an HSA account which grows compounds tax-free, things like 529 plans that grow and compound tax-free for college, or a Roth that grows and compounds tax-free for retirement. These are three legitimate vehicles that you should be using now no matter what your age, so that you will have some form of tax-free income down the road. All right, let's move on to a case study with Roth because it's one of our favorite tax planning vehicles that we use in retirement.
Crystal Colbert:
Yes. So I kind of wanted to take it back to that backdoor Roth approach. So remember, if you have anything in 401ks or retirement plans, that's fine. But if you have anything in traditional IRAs, make sure you work with an advisor or a financial planner to just make sure that you can actually do this strategy and move forward with the strategy. Because ideally you do not want an IRA or any pre-tax assets outside of your retirement plans with work, etc. But just to give a little case study of a backdoor Roth, so say we have Tom and Barbara, they're a married couple, same thing in the 24% tax bracket. They both turn 50 in 2024. So they make too much to directly contribute to a Roth IRA. So they decide to do the backdoor Roth approach. So they make their non-deductible contribution to each of their new traditional IRA accounts for 2024. They contribute $8,000 to each of their IRAs since they have that catch-up provision and they decide to max out their contribution for 2025 at the same time for $8,000. So total today they're contributing $32,000 between each of their IRAs. Shortly after they make those contributions, they do the Roth conversion. So now the funds are outside of the IRA. They are now in the Roth IRA and the funds start to grow tax-free. So remember that's $32,000 today that they're starting to grow those assets tax-free. So if they continue implementing the backdoor Roth process. So each year, you know, 2026, 2027, they contribute $8,000. A lot of the times they increase this, but we're just sticking with that $8,000 figure for the next 15 years. If they contribute and continue to do this at an annual rate of 8% between the two of them, they will have $535,943.23 of tax-free funds to use in retirement come age 65. So a great strategy to implement, you know, right now and have that additional tax-free income in the future in retirement.
Jim Puplava:
And on that $535,000, if that was all tax-free, we could get like close to 7% which would be almost $37,500 a year tax-free. I mean, that's incredible.
Crystal Colbert:
And that doesn't affect your Social Security taxes, your Medicare premiums when you're taking that income out. So it's a great vehicle to have your funds in and get income from.
Jim Puplava:
Well, what we're trying to demonstrate here, even if you're probably thinking about your taxes right now, depending on your situation, there are still moves that you could do right now to save taxes for last year and also save taxes for this year. The most important thing we would encourage you to do is start planning now. Start using the tax-free vehicles that we talked about, whether they're Roths, whether they're 529 plans, whether they're IRAs, things that you can use to shelter income down the road. Because sooner or later down the road, folks, we're going to be looking at higher taxes. The sooner you do this now and allow these accounts to compound over a period of time, the better off you're going to be financially. So if you are in a situation like this and you would like to talk to us about, let's say, how you can lower your taxes, how you can save for retirement, you can give us a call at 888-486-3939. That's 888-486-3939. And we'd be glad to talk to you about how we can show you how you can plan for retirement and lower your taxes and get tax-free income when you retire. In the meantime, on behalf of Crystal Colbert and myself, we'd like to thank you for joining us here on Lifetime Planning. Until we talk again, we hope you have a pleasant week.
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