All about the Roth

ALEX ROCA: Hello, and thank you for joining Women Talk Money. My name is Alex Roca, and I will be your host for today's conversation. Today, we're learning all about the Roth-- what it is, the flexibility it can provide, considerations for choosing Roth versus traditional, conversions, and more.

We'll start by talking about the basics of how they work, clear up some misconceptions, and answer your questions about how they can fit into your plan. Please remember that Fidelity does not provide tax or legal advice, and you should consult with your tax advisor and/or your attorney regarding your specific situation. Now, today with me to have this conversation, I have two of my peers, Rita Assaf, Vice President of Retirement Offerings, and Amanda Petersen, a financial consultant. And we have a lot to cover today. So let's dive in.

We're going to start with the basics so that we're all coming from the same starting point. Then, we'll get into more complex questions that we get asked all the time. So, Rita, I'm starting with you-- can you kick us off by explaining what a Roth even is?

RITA ASSAF: Sure. I just want to back up for one second, though, because we know that everyone has many different goals. But the biggest you'll probably have is saving for retirement. And there are different account types that can help you towards that retirement goal. So, for example, there are employer plans-- think a 401(k) or 403(b), for example. There are also individual retirement accounts like IRAs. And then there are other options for those who are self-employed or might have a small business. And so there are different reasons why you would leverage some of those. But today, we're really going to focus on the tax treatment. And that's where Roth comes in. So Roth is a way to save for retirement where you get certain tax advantages.

So most of the time, what you're doing is making post-tax contributions with the potential of tax free growth and tax free withdrawals in retirement. So there are slight differences between Roth or traditional. And sometimes when we talk traditional, we usually mean tax deferred retirement. So if you hear just a regular 401(k) or traditional rollover IRA, that's what we mean by "tax deferred" retirement.

But one of the most popular strategies these days, and we've seen it in some of the questions that people have asked, is Roth IRAs. So with Roth, you contribute after tax. Your investments can potentially grow tax free. And then you can withdraw your earnings from federal income tax in penalty free withdrawals before age 59 and 1/2. But there is what we call an aging period that you have to meet, which is the account has to be funded for at least five years from the beginning of the tax year of your first contribution.

So there are some specific rules that you want to be mindful of so you don't make a mistake. On the other hand, with a traditional IRA, you typically contribute pre-tax-- and within a 401(k), you're contributing pre-tax. In a traditional IRA, you're thinking you can contribute and then get a tax deduction if you're contributing after tax. But that money grows tax deferred. Which means when you go to withdraw that money, you're actually paying the taxes at that point.

ALEX ROCA: Such a good clarification. Thank you for going over the different accounts as well. Now, Amanda, I'm coming with you because I want to talk about what some of the benefits of a Roth IRA account are.

AMANDA PETERSEN: Yeah, no, absolutely. And this is a big area where I spend time with my clients when we're talking about the benefits and seeing if it is a good option for them. And I think with a Roth IRA, you contribute money that's already been taxed. So while you don't get tax deductions today, your investments have the potential to grow tax free.

And then, on top of that, if you meet the requirements, you can withdraw both your contributions and earnings tax free in retirement, which is very beneficial. I think another thing is it offers some flexibility with your money. So one unique feature of a Roth IRA is that you can withdraw your contributions at any time without taxes or penalty. This can provide additional flexibility if you face an unexpected expense. There are also certain situations where early withdrawals of earnings may qualify for exceptions. And I think that leads perfectly into another misconception that I hear. A lot of people don't realize that you don't have to take required minimum distributions, or RMDs, from your Roth, where you do have to do that with your traditional IRA. You have to start that at age 73.

So Roth IRAs are different. As long as you are the original account owner, there are no required minimum distributions, allowing your money to continue to grow for as long as you choose. And I think probably the biggest point, and I think we're hearing more about it-- I'm sure Rita can attest to this-- is the tax efficiency piece of the legacy planning. A Roth IRA can be a powerful estate planning tool because qualified withdrawals are tax free. So it can help pass your assets to loved ones in a very tax efficient way. So, for many families, this can be a valuable way to transfer wealth across generations.

ALEX ROCA: Fabulous. Thank you for that, Amanda. I actually want to build on that. What if you're not sure which one's the right one for you? If you're trying to consider whether you should choose a Roth or a traditional IRA, how do you know which one's right for you?

AMANDA PETERSEN: That is a really great question and something that does come up a lot. And I just talked about the benefits of a Roth IRA, but there are some aspects which may be drawbacks. And I think it's important that we discuss it, because it really is dependent on your situation.

So Roth IRAs have income limits to be able to contribute. So if your income is above the threshold set by the IRS, you might only be able to contribute a small amount to the Roth IRA, or potentially nothing at all. So there is a lot on this slide, and we are going to make it part of the downloadable resources for you to refer to later, because it has important information. And so there are also no tax deductions for Roth contributions like there can be for traditional IRAs.

In contrast, it's simple to qualify for a traditional IRA. So long as you have earned income in the current year, you can contribute. So even if you're already covered by a workplace retirement savings plan, you can still contribute to that traditional IRA.

That said, though, if your income is too high, you may not be able to deduct some or all of that traditional IRA contribution. So I think on this next slide, we're talking about deciding whether to open a traditional Roth IRA. You'll want to think about a couple of things. First, your current versus expected tax bracket and then withdrawal flexibility, now and in retirement. And you don't actually have to choose one or the other. As long as you are eligible, you can actually open both a Roth IRA and a traditional IRA.

There is a catch, and that is that you can only contribute up to a single IRA contribution limit across both accounts in a given year. So just because you have two accounts doesn't mean two separate contribution limits. So that's a key thing that I want to make sure we make note of.

ALEX ROCA: Absolutely, and such an important point to make, Amanda. There is a lot of excitement around Roth accounts. That doesn't mean it's your only option. So, again, staying with you, Amanda, do you have any stories to share about when contributing to a traditional IRA may actually be the better choice?

AMANDA PETERSEN: Yeah. So thank you for asking that. And I'm going to use myself as an example. I'm going to get a little bit vulnerable here with everybody. And my situation is actually a perfect example.

I'm a newly single mom with three amazing kids. And I am right in the thick of raising them. I'm actually, two weeks from today, moving my oldest daughter to college. And it's very exciting. But also, because I'm filing as a single taxpayer right now, it does make sense for me to take advantage of any tax deductions I'm eligible for. So in this stage of life, lowering my taxable income today is especially valuable to me.

Now, I think the big thing is that doesn't mean it will always be the best strategy for me. But, as my circumstances change, my retirement strategy may change too. And I see that with clients, where we're very relatable. We're all here living this life. So I think the key point is we're still saving. But I think that is a really great example of when you may have to make a pivot and it might not be a good fit in that moment of life.

ALEX ROCA: Absolutely.

RITA ASSAF: I love that point, Amanda, because that is really relatable. We've been seeing a lot of Roth going viral, and people are jumping in without realizing whether it's right for them. So there's a lot to consider, and we have a lot of great resources that can help you learn more. So you might see, on the screen, actually, if you scan the QR code, you can actually compare your options side by side.

And when you're ready to get started, remember that just because you contribute does not mean your funds are automatically invested in an IRA. So if you choose to invest, that's another step on its own. And that is actually one of the other common big mistakes that we see. People think that they're auto invested in an IRA, and they are not.

And there are several ways to do this. I know investing can sometimes seem a little scary or complex, but it depends on the type of investor you are. If you are more of a do-it-yourselfer, you can actually choose and manage your own investments in an IRA. That's a little different than what you see in a workplace employer based plan where the options are laid out for you. Or you can actually have someone do it for you. So we offer, for example, Fidelity Go Roth or traditional IRA. And that enables, basically, a robo or digital advisor to help manage your investments.

There also are a lot of other asset management options out there for you. So reach out.

ALEX ROCA: Thank you for that. Thank you both for sharing. There are a lot of misconceptions about Roths. And I want to hear, are there any that come across your desk, Rita, that you particularly feel like debunking?

RITA ASSAF: Oh, I love this, because there's a lot. But I will say, just top of mind, what we generally see in people interpret is that Roth just means "tax free," period. They hear Roth-- it's just not true. Like when you make a contribution to a Roth IRA that is after tax, meaning you've already paid the tax on that money. But then people get confused when they get a tax bill, if they do, for example, a Roth conversion-- and that's because, in many cases, you're taking or converting pre-tax money and tax deferred earnings to an after tax account. So you will owe taxes on that conversion.

So that is a very common misconception. People are surprised by the tax bill and then the impact that has, for example, on your tax bracket. So you really want to be careful here, do your research, talk to a financial professional before opening a Roth account or doing a Roth conversion of any kind.

ALEX ROCA: Absolutely. And just because you mentioned it, for anybody who may not know, what is a Roth conversion? I'll keep this with you, Rita.

RITA ASSAF: Yeah. There's actually a few different types of what is a Roth conversion. But on its simplest form, a Roth conversion is when you take money from a tax deferred account-- and that could be, like I mentioned, a traditional IRA or rollover IRA-- but it can also mean a workplace account. So think of your 401(k), a pre-tax 401(k), and then you convert it into what we call Roth account. So that could be in the form of a Roth IRA or a Roth 401(k). And so when you convert those pre-tax amounts, it triggers a tax bill of what you're converting.

And conversions are appealing for a number of reasons. So, for one, it's a way for people to access Roth if their income limits don't allow them to directly contribute to a Roth IRA. And Roth conversions don't have an income limit, which is great.

You can also consider Roth conversion if you've reached your annual contribution amount. So it's not just for those people who can't contribute to a Roth IRA due to income. It could be that you've already contributed and you want to put more into that Roth bucket, you can actually do that through a Roth conversion.

Another piece that I would say is because of the tax implications, you want to make sure that you have the money available to pay the tax. But, in contrast, what you're going to get is that you have that flexibility from a withdrawal standpoint with tax free withdrawals in retirement. And you want to be comfortable with the time that it will take from when you convert and when you might need to withdraw, because there is that five-year aging period that you do need to meet with each conversion. So if you need the money before that five years, that's where Roth conversion wouldn't make sense for you.

So you just want to be mindful of that when you do convert pre-tax amounts, it could be a taxable event. It could move you to a higher tax bracket. And it could have unintended consequences. So you want to consult a tax advisor about your specific situation.

ALEX ROCA: Now, Amanda, from time to time, one of the things we like to do is we like to pull questions from the chat. So keep those questions coming, because, as you were talking about this conversion, one of the questions that came up was, what's the difference between an IRA conversion and a rollover IRA? So, Amanda, I'm actually bringing this one to you.

AMANDA PETERSEN: Yeah, of course. I can see where there might be confusion between the two. And I actually hear this quite a bit when I'm meeting with my clients. So a rollover involves transferring assets from an employer account like a 401(k), 403(b), into a rollover IRA. And it doesn't count towards your annual IRA contribution limit. So rolling your former workplace account into a rollover IRA instead of adding it to an existing IRA could make it easier for you to transfer it to your new employer's workplace account in the future.

You can also roll an old 401(k) into a Roth IRA. There are a couple of main ways to do that, and that's a Roth to Roth rollover and a Roth IRA conversion. So there are different rollover methods and considerations. And I think that's a big area where we partner with our clients to help break it down and support them through that process to streamline it and understand where is it going, what are the tax implications, making sure the accounts end up where they need to go.

ALEX ROCA: Amanda, in your experience, in addition to talking to a financial professional such as yourself, when does it make sense to bring in a tax professional? And how do you talk to clients about it?

AMANDA PETERSEN: As a financial consultant and a certified financial planner, I am able to educate my clients about how different tax advantaged accounts work and how they might fit into your overall plan. But I am not qualified to give tax advice. So I'll usually meet with my clients, ask them about their goals and their situation, really understand their overall picture.

Then, I'll usually encourage them to reach out to their tax professional for them to share the tax implications today and for the future-- that's a big key piece, that future piece. And I think there's value in your financial consultant and your tax professional working together so everyone is on the same page. We really want to make sure you have all the information possible before making a decision, and that you understand the total impact of your plan as a whole, because they're pieces of a pie and they all link in together, just like your advisor. So that's where that tax professional can be really beneficial. And I look to them to partner with us.

I think a big thing, Alex, that is asked of me from clients is, who do you recommend? Where should I go? And the biggest thing that I tell my clients is go talk to your family, your friends, your neighbors, your pickleball partner-- who are they using to get some tax advice? That's a trusted source in terms of knowing and experience directly within your inner circle.

But the IRS also offers, on their web page, a search tool where you live to look for qualified tax professionals. So that's usually where I guide my clients. And I thought I would throw that in there because, again, that's a very common thing that I hear as an advisor from clients is looking for that additional partner in their life.

ALEX ROCA: Absolutely. And I appreciate you talking about the importance of bringing in those different pieces of the puzzle. But I want to back up just a bit, because, Rita, you mentioned something called a five-year aging rule. What is that?

RITA ASSAF: Yeah, there's actually two five-year aging rules. So I'll start with one, which is usually five-year aging means that you've had at least five years elapsed between the beginning of the tax year of your first contribution to a Roth IRA and then the withdrawal of any earnings. If you've taken a withdrawal before five years have passed, then the withdrawal that you're taking is actually considered a non-qualified distribution, and it can be subject to taxes, penalties, or even both.

And so for a distribution to be considered qualified, what we mean by that is you've hit that five-year aging requirement and you've hit either age 59 and 1/2 or another exemption-- example, disability, qualified first time home purchase, or even death. So this does apply to all Roth IRAs, including inherited Roth, which is when the aging period would be based on when the original owner made that first contribution. And then there's the second five-year aging period, which is actually related to conversions.

So each conversion that you make actually has its own five-year aging period. So the five-year usually covers any converted balances that you might have done from pre-tax accounts to your Roth. And the thing to remember here is that the clock starts again for each conversion that you make. And the IRS conversion rule really comes into play when-- it only applies, really, to 10% early withdrawal penalty to the taxable portion of a conversion.

If you had after tax contributions that were already taxed, they're not going to be taxed again once you actually have the conversion. And those are exempt from this penalty clock. So I know there's a lot of rules that can be really complex. And we are sharing a link to help with that five-year aging piece. But this is where Roth does have some nuance and some things you want to be knowledgeable about so you don't make a mistake.

ALEX ROCA: Thank you for that, Rita. I do have a follow-up very quickly on what you just said. For the five-year rule on the conversions, is that age specific? Or is that always?

RITA ASSAF: Well, the five year aging period for Roth conversions is always. But for you to be able to withdraw any earnings related to that Roth conversion, that is where the five-year aging period of when the account opens comes into play. So there are some things you need to consider. And that's where the 59 and 1/2 will come in is really the earnings portion. So that's where you want to be careful as well. But you could get a penalty from a Roth conversion if you withdraw too early-- before that five-year year aging period as well.

ALEX ROCA: But if I'm already retired and I decide to do a conversion, I have to be mindful that I still have to wait that five years.

RITA ASSAF: That's right.

ALEX ROCA: Even if I'm over the age of 59 and 1/2. Awesome. Thank you for that clarification. OK, so something that we want to keep in mind when we are planning our withdrawals is exactly what we're talking about-- all these different rules, making sure that you understand the consequences of any actions that we're taking.

So we talked about conversions from a traditional IRA to a Roth. Amanda, what are some other options if someone is maybe in a higher income and they are wanting to take advantage of the benefits of a Roth account? You talked something about income limits before. Can you talk more about this?

AMANDA PETERSEN: Absolutely. And this is another common misconception that I hear from clients, that they make too much money for any type of Roth strategy. And an additional option to consider if you're in a higher income bracket is something called a backdoor Roth IRA. And so here's how it works. You put a nondeductible contribution into a traditional IRA, meaning you won't get a tax deduction on that IRA. Then you immediately convert it or transfer it to a Roth IRA account. You do it right away so that there are no earnings.

And it is important that you understand any potential tax implications before you decide to do a Roth conversion or backdoor Roth-- so back to that tax professional being looped in. So I think the big difference in this strategy from what we've discussed thus far-- with backdoor Roth, you're subject to the limitation of a current year IRA contribution limit. And you potentially pay no taxes on the amount converted if the contribution is after tax, and you have no other pre-tax traditional IRA accounts with money in them, and only the earnings on the transfer would be taxable.

ALEX ROCA: Excellent. And I want to keep building on that, because I'm seeing on the chat, one of the questions is, hey, but there's something called pro rata. There's a pro rata rule. Can you talk to us a little bit more about what that means and how you talk to your clients about that?

AMANDA PETERSEN: Yeah, what a great question. And this is where it's going to get a little bit crazy fun here. And we have a great visual to share. But it can be complicated if you have both pre-tax and after tax money in an IRA.

So you should be aware of that pro rata rule where when you're doing a conversion of a backdoor Roth IRA. And it means that the taxable portion of your conversion will depend on the percentage of the conversion amount that has been previously taxed. A lot of words. So let's look at this image, because this is the example that is really helpful that I share with my clients.

So suppose you have a traditional IRA, has $92,500 of pre-tax money. You make a new traditional IRA contribution of $7,500 of after tax dollars for that potential Roth piece. Your now total traditional IRA assets are $100,000. $7,500 of that is after tax. That equates to 7.5% of the total value of that account. So if you convert that $7,500 that you just put in, that is tax free, that's going to be the tax free amount.-- 7.5% of that $7,500 is considered tax free. That means 92.5% is actually taxable. So most people expect the conversion to be completely tax free because they're converting that new money, after tax money, contribution right away. But all traditional IRA assets are actually pulled together.

So some percentage is pre-tax and some is after tax. Every conversion contains both. So for the backdoor Roth to be tax free or close to it, you'd need to have a $0 balance in that pre-tax contribution bucket and immediately transfer the after tax contribution. That's because any potential earnings are what's going to be subject to taxes.

Again, it can be very complicated. And I think that's why it's so important to seek out that tax professional to review your specific situation because it can be beneficial. But we definitely want to make sure you understand these moving pieces that aren't as clear as maybe some of the other aspects.

ALEX ROCA: Now, Rita, are there any other Roth options for those who want to save even more?

RITA ASSAF: There are. And it might be right in front of you, and you may not realize it. So look at your employer sponsored plan like a 401(k) or 403(b). You want to check with your employer to see if you're eligible to make Roth contributions to your plan.

And there are a lot of benefits to a Roth 401(k) or Roth 403(b) compared to a Roth IRA, which is there are no income limits to a Roth 401(k) or Roth 403(b). So you can make those contributions. And oftentimes, the contribution limits to a Roth 401(k) or Roth 403(b) are much higher than a Roth IRA. So that's definitely a benefit.

And in many cases, what you can do if you're too nervous to go completely down the Roth path is that you can take a combination approach. It will depend on whether your plan allows for it, but you could do, for example, 10% of your salary each year to your pretax 401(k) and then maybe 5% to a Roth and 5% towards your traditional contributions.

So that's just a great way to think about tax diversification and also filling different buckets. But you also want to check with your plan because you could be eligible for what's called an in-plan Roth conversion. So this is where you move pre-tax or after tax retirement funds within your employer plan and into a Roth account for that same plan.

ALEX ROCA: Absolutely. And I know we're talking a lot about all this extra money. And it's a very privileged position that we're talking about and a fortunate space to be in if we do. And that's why we're covering all of it. But, remember, even just saving what you can is going to go a really long way. So thank you, Rita, for covering some of these additional options. Something else that we've been asked time and time again is about a mega backdoor Roth. So, Rita, how is that different from that in-plan Roth conversion you were just talking about?

RITA ASSAF: Yeah. I know Amanda touched upon what is a backdoor Roth. Now, you're hearing what's a mega backdoor Roth. And so mega backdoor Roth is related to an in-plan-- so your employer plan Roth conversion. And it's generally a strategy for people who've already maxed out their 401(k) contributions, including catch up contributions. And they're eligible to make what we're calling additional after tax contributions. So that's a different bucket-- after tax is actually different than Roth.

And it entails two steps. First, you make that after tax contribution to your 401(k) or any other workplace plan that you have. And then you do the conversion either to a Roth IRA or a Roth 401(k).

Now, not all plans allow these steps. So if you're considering trying to set one up for yourself, you really want to check the details of your workplace retirement plan. And it might be in your best interest to also consult a tax advisor or a financial professional to see if the strategy makes sense for you. We're also going to link an article in the chat in case you want to learn more about this.

ALEX ROCA: Absolutely. Thank you, Rita, for covering that. Because it is a difference, right? And they sound so similar. Now, I want to switch gears and talk about Roths in retirement. A question we get quite often is, is it too late for me to convert my traditional IRA to Roth? Amanda, can you tell me more about this?

AMANDA PETERSEN: Yeah, definitely. I'll take this one. Another strategy that is used at least weekly here in the office with my clients-- and I hear it all the time from clients, that they think Roths are just for young people. And that's not necessarily true. So early retirement before required minimum distributions, or RMDs, before they start, can sometimes be an opportunity for a conversion.

And one reason is because your income, once you retire, may be in a lower tax bracket than pre-retirement income. And that can be really beneficial and an opportunity where we could make some very efficient strategic moves to benefit throughout retirement. So a couple of things that I want you to remember when you're converting pre-tax funds is that five-year rule will apply to each conversion.

I think that is the biggest thing that I hear that is missed is with each conversion-- because I have some clients that will do four, five, six years of Roth conversions for planning for their future selves in retirement. And so each time we do that conversion, that five-year rule does apply. And you also pay taxes on that converted amount.

So, again, this is where making sure understanding those pieces, making sure you loop in that tax professional, because you will pay taxes on the converted amount each time you do it. And conversions often result in increasing your income. So that is reportable income on your taxes. So it could push you into that higher tax bracket.

So, back to a main key point-- really wonderful opportunities for all ages. But we want to make sure that you partner with your financial professional and your tax professional to determine whether this tactic is right for you or not.

ALEX ROCA: Absolutely. And I think that the main point, the reason why we keep talking about the five-year consideration, why we keep talking about all the nuances, is that whenever you're making any type of conversion, whether it's an in-plan conversion in a workplace account or in an IRA, there are tax implications. And we don't want that to catch you by surprise. It's important to talk to a professional and ask the questions about your specific situation so that you can feel informed about your options and you'll know what the consequences of those actions are going to look like-- what is that tax consequence going to look like?

Now, what's a benefit of having a variety of account types in retirement? Amanda, I'm staying with you on this one.

AMANDA PETERSEN: Yeah. Absolutely. So, here's the thing, we don't know for certain what our taxes will look like in 20, 30 years from now. And that's where it's easy to focus on the trees, the here and now. But we also have to take into consideration that forest, which we don't even know all that that is going to entail.

Even tax brackets at that point could be changing. Our cost of living could be higher than we expected. So retirement usually means no more paychecks, right? So we have to figure out, how do we make those paychecks happen now?

That's where we lean on withdrawing from your savings-- your retirement savings, your investment accounts, the different savings vehicles you have set up. And having different types of accounts with different tax treatments can help you have the freedom and the flexibility of choice. And we have this great visual that actually breaks down the three little buckets here.

And there's three categories-- taxable, traditional, and Roth. And we've talked a bit about these accounts and how they're taxed differently and as they grow and when you're withdrawing. And I think a big thing is we've talked about traditional accounts are subject to the RMDs, the required minimum distributions, while Roths and taxable accounts are not.

And both taxable and traditional accounts may trigger ordinary income taxes and may impact calculations like Social Security tax and Medicare premiums, another thing that isn't always thought about. So some key differences there. So figuring out which account to withdraw from and when can feel confusing and even sometimes daunting, overwhelming. And that's where we can really help build that strategy for you to build efficiency, make sure your needs are met here and now, but also planning for future self.

And so help is really here. And we're going to link another tool in the chat that you could utilize so you can lean on us and we can help with strategizing around those things.

ALEX ROCA: Thank you for that, Amanda. We have a couple of minutes. We have some extra minutes, so I'm actually going to pull a few questions from the chat if, Amanda and Rita, are you open to that? Yeah? Awesome.

OK, so one of the first questions that came through is, can I contribute to a Roth IRA and a Roth 401(k) in the same year? Do the limits cover both? Who would feel comfortable--

AMANDA PETERSEN: Yeah, I'll take that. Absolutely, you can. I think this is a huge benefit. Roth 401(k)'s haven't been around nearly as long as other accounts. And so they do fall into their own buckets. I think the biggest thing-- so with the Roth 401(k), you can contribute into that and maximize that through your employer. The limits are different. And they do change year-to-year. They tend to go up a little bit some years, and other years they'll stay. But they have different limits there.

Where an individual IRA, you have to make sure you fall within those income limits. So if you're over those income contribution limits, you might not be able to do that individual IRA. But I always encourage, if it works out, and you're able to do it, and you're able to contribute, you can actually contribute to both within their contribution limits.

So they each have their own threshold and how much you can put in, but you can absolutely do both each year.

ALEX ROCA: Thank you for that, Amanda. So earlier, you talked about how the traditional IRA and the Roth IRA are still beholden to that IRA limit of the $7,500 for the year. You're saying this is different because the 401(k) has one limit, and the IRA has a different.

AMANDA PETERSEN: Yes, exactly. So those rules that we talked about with the traditional IRA and Roth IRA on the individual side still apply. You still can't be going over those limits. But the Roth 401(k) really can look at as an addition to. And it has its own guardrails that you have to follow in terms of the amount and what you can put in there. But they are separate and looked at separately in terms of the taxation and the qualifications as well.

ALEX ROCA: I appreciate that. And one other thing-- and this is a triple back, Rita, so I'm bringing this one back to you because I know you covered it. But people are still asking, hey, wait a second, can we still talk a little bit more about that five-year aging rule? And does this still apply to people over the age of 65?

RITA ASSAF: It still does apply. So what happens with the five-year aging is, well, there's three ways that your money comes out of a Roth IRA. First, there's an ordering set. There's contributions, then it's conversions, and then it's withdrawals.

So contributions can come out penalty free at any time. And those taxes are already been paid. So you don't pay taxes. Conversions, you've converted the money. You've paid tax on that. But they do have their own five-year aging period.

And so if you happen to withdraw that conversion amount before those five years, you may have a penalty even if you're 59 and 1/2. And then there's withdrawals where you have what we call the first year five-year aging, which is when you first open the account, you have to make your first contribution, that is where that aging period comes in before you can actually withdraw any earnings.

But, to withdraw earnings, you still have to hit not just the five-year aging, but what we call qualified withdrawal, which is 59 and 1/2, or one of these exception events that we were talking about, like a first time home purchase.

ALEX ROCA: Or disability or any of the other stuff. So, Rita, if I'm hearing you correctly, then, when it comes to the aging rule, if I open my first Roth IRA at the age of 62, because I'm still working, I'm still making income, which was the biggest requirement-- if I'm opening my first Roth IRA at the age of 62 and contributing for the first time, I'm still beholden to that five-year aging period, even if I'm over the age of 59 and 1/2.

RITA ASSAF: That's right.

ALEX ROCA: Awesome.

RITA ASSAF: That's why we actually tell some people to start early-- as early as possible, so you can hit that five-year aging as quickly as possible. You don't have to worry about it later.

ALEX ROCA: Absolutely. Absolutely. OK, Amanda, you had said when we were talking about the Roth conversions and we were talking about some of the considerations for a Roth 401(k) contribution, you mentioned required minimum distributions. Can you talk a little bit more about RMDs and how they relate to Roth 401(k)'s? Let me know if that was clear. I'm sorry.

AMANDA PETERSEN: Yeah. No, so, just clarify asking-- because it's a 401(k) Roth, are they subject to RMDs?

ALEX ROCA: You got it.

AMANDA PETERSEN: Yes. So, no, they are not subject to RMDs. As long as you are the original owner of the account, when you retire, you're probably going to end up-- you have an option. You can keep it within that 401(k) Roth account, or you can roll it over, as we talked about earlier, roll it over into your individual Roth account.

Follows the same rules, no taxation, continues to grow-- still not subject to required minimum distributions. So, again, that Roth 401(k) option has not been around nearly as long as the other workplace type of plans. And so if you're able to start contributing into that Roth 401(k), you do have a higher amount that you can put in there, it is beneficial because it will not be subject to the RMD.

I think the biggest thing is just like our individual Roth pieces, it is going to be taxed money before it goes in. So it's handled differently. That's why if you're looking for that tax deduction, if your taxes are needing that or your tax professional recommends that, that's where it may not be as beneficial. But no RMDs on any type of Roth money, whether it's coming from a Roth 401(k) or your individual Roth.

ALEX ROCA: I appreciate that. Thank you for that clarification. And before we go to my last question, very quickly, just on time, Rita, I do want to cover, what is a Roth IRA for kids? Can you explain at a high level?

RITA ASSAF: Yeah. Just when you think you couldn't get enough Roth, there's Roth for kids, too. So the Roth for kids has a lot of the same benefits as a regular Roth. It's just geared towards children under 18.

It is a custodial account. So what that means is the adult maintains control of the account until the child is of age. That age is determined by your state. So it could be 18 or 21 and, in some cases, up to age 26. Now, the child still has to have earned income.

So usually, what we see this is with summer jobs, or mowing lawns, or my favorite is always someone's baby becomes a model-- they can actually start to contribute to a Roth for kids. It has the same contribution limits as regular Roth. So it's $7,500. But it can only go as high as the child's earned income.

So that usually limits people because, depending on how much they make, it's not always up to $7,500. And they can't contribute, then, that full $7,500. What this brings up usually is what we've heard recently is, well, how does this Roth for kids compare to other kids accounts? Most recently, Trump accounts, because that is a new product that has recently come out.

And we actually have a really great article that showcases what Trump accounts are. And we're putting that in the chat. But it also compares to a Roth for kids, a 529 or a regular custodial account. So you might want to look at those and see which, if any, help you towards your children's savings goals as well.

ALEX ROCA: Absolutely. Setting them up for success at a young age sounds like a perfect next step. Now, last question, and just in a few words, what is the takeaway that you would want to leave us with today? Amanda, I'll start with you.

AMANDA PETERSEN: Yeah. Really short and sweet-- a Roth IRA is about working towards tax certainty in an uncertain future. So the taxes you pay today may create tax free income, greater flexibility, and more control over your retirement tomorrow.

ALEX ROCA: Thank you. And, Rita?

RITA ASSAF: Roths are a tool in your retirement toolbox, but you want to make sure you understand the implications so you don't inadvertently make a costly tax mistake.

ALEX ROCA: Absolutely. And mine, as always, talk to somebody if you're just not sure what the next right step is. Rita, Amanda, this was such a great session. Thank you so much for chatting with me today. To all of you watching, thank you for joining us. And we'll see you again next month. Have a great day.