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:

• Schedule a Call with Darren
• Wurz Financial Services
• The Lawyer Millionaire: The Complete Guide for Attorneys on Maximizing Wealth, Minimizing Taxes, and Retiring with Confidence by Darren Wurz
• LinkedIn: Darren P. Wurz
• The Lawyer Millionaire Podcast and Book Club
  To connect with podcast guests and other law firm owners, discuss these topics further, and access our quarterly book club, join our LinkedIn Podcast and Book Club

Transcript:

Darren Wurz [00:00:00]:
What if I told you there’s a retirement account that could help you never pay taxes on your income again? Welcome to the Lawyer Millionaire podcast where we deliver financial planning and business insights for ambitious law firm owners so you can enjoy more time, more abundance, and less stress. Even if you’re still growing your practice as a law firm owner, your financial future may be entirely in your hands. Without a traditional employer sponsored retirement plan, are you truly saving enough for the lifestyle you want? Today, we’ll break down how IRAs and Roth IRAs can help you build wealth, save on taxes, and create a secure future.

Intro [00:00:46]:
We are on a mission to help lawyers and law firm owners maximize wealth and achieve financial independence. Welcome to the Lawyer Millionaire with Darren Wirtz from Wirtz Financial Services.

Darren Wurz [00:01:00]:
What if I told you there’s a legal way to never pay taxes on a portion of your retirement income? Or that you might be missing out on one of the easiest tools to build long term wealth as a law firm owner? Sounds too good to be true, right? Well over 40% of small business owners, including many law firm owners, are not saving enough for retirement. Instead, they’re relying heavily on their businesses to carry them through their golden years. And trust me, we get that here at the Lawyer Millionaire because we operate on a flat fee model. So we’re, we are, we are here to give you objective financial advice. So, and we are big supporters. We applaud investing in your business because we understand that growing your business is oftentimes your easiest pathway to wealth. But you still need to be investing. You still need to be growing a portfolio of money.

Darren Wurz [00:02:01]:
And I’ll show you and explain to you why that is. Well, today we’re diving into two powerful retirement saving tools, IRAs and Roth IRAs. Whether you’re a solo practitioner or managing a small firm, these accounts are designed to help you grow wealth, reduce taxes, and set yourself up for financial freedom. So let’s break it down. An IRA is an individual retirement account. Ah, look at that. And these are tax advantage savings accounts, specifically for you called it retirement. There are two main types, Traditional IRA and Roth IRA.

Darren Wurz [00:02:41]:
With the traditional ira, contributions may be tax deductible, meaning you can lower your taxable income now, but you will pay taxes on withdrawals in retirement. With the Roth ira, you pay taxes on the money you contribute. No tax deduction, but withdrawals and all the growth are tax free when you retire. And in 2024, you can contribute up to $7,000 or $8,000 if you’re over 50 to one. Both a combination whatever. Right. Maximum of 8,000. Okay.

Darren Wurz [00:03:20]:
So you could put four in each, you could put one in one and seven in the other. Right. As long as it all adds up to no more than eight or seven. If you’re under 50 now, why should you care? As a law firm owner, you don’t have a traditional 401 or pension plan that is handed to you. You may have built one or created one or set one up, but, you know, there’s no big Fortune 500 company that’s putting 10% of your pay in your 401k for you as a profit sharing arrangement. It’s just not happening. Instead, your financial future is in your hands. And IRAs and Roth IRAs offer a way to build a safety net.

Darren Wurz [00:04:00]:
A safety net that is independent of your law firm’s performance. Wouldn’t it be great if you didn’t have to worry about growing your practice? Ah, I have enough money. Let me explain how that can be. You. Let’s say you set up a Roth IRA at age 30 and you contribute $7,000 a year for 30 years. You get 10% interest. That’s the rough average, historical average of the s and P500. You get 10% compound growth.

Darren Wurz [00:04:30]:
Okay? So at the end of 30 years, at 30 times $7,000 a year, you have $210,000. Let’s say you started with 7,000 and kind of a, you know, at the beginning and then 7,000 a year after that. So let’s say you’ve got $217,000. Wow. You could have put that in your law practice. Yes, but wait for it. How much is actually in the account? You’ve invested $217,000. But what has it grown to.

Darren Wurz [00:05:03]:
At a 10% rate of return, you have over $1.4 million. Wow. I mean, sevenfold. Your money has grown sevenfold. I mean, you have $1.2 million of gain. And here’s the best part. It’s tax free because you put it in a Roth IRA. Look at that.

Darren Wurz [00:05:30]:
Yes, that’s pretty powerful. Now let’s get into the. Yeah, I’m getting. I’m getting inspired myself just going through this. I need to save more money. Let’s get into the nitty gritty of how these accounts function. Okay? With a traditional IRA, you may get a tax deduction. Let’s explain how that works.

Darren Wurz [00:05:52]:
So anyone can put money in a Roth in a traditional Iraq. The question is, do you qualify for the deduction if you don’t take the deduction? It’s called an after tax IRA. Contribution. So in 2024, your eligibility to deduct contributions to your traditional IRA depends on your modified adjusted gross income, or MAGI. And these are not wise men. Okay. Your tax filing status and whether or not you or your spouse are covered by a retirement plan at work. So let’s start with you have no retirement plan at work.

Darren Wurz [00:06:33]:
So no 401k, no SEP IRA, no SIMPLE IRA, no pension. If that’s you, then you fully qualify for the deduction, no questions asked. But if one of you is covered by a retirement plan, there are some limitations. Okay? If you are covered by a retirement plan, if you’re single or head of household, the modified adjusted gross income cap 7,000. For the full deduction, there’s a partial deduction up to 87,000 and above $87,000 in modified adjusted gross income, there’s no deduction available to you. If you’re married filing jointly, you get the full deduction up to a modified adjusted gross or MAGI of 123,000 or less, partial deduction up to 143,000. And then above 143, there’s no deduction. If you’re married filing separately, you get nothing.

Darren Wurz [00:07:39]:
You know, you can get a deduction, but there’s only a partial deduction available to you. And the, the modified or the magi limit is $10,000. So if you earn over $10,000, nothing for you. Now, my professor in my master’s program, my tax professor, used to say, married filing separately gets crap. Now, things have gotten better as the brackets were adjusted, right? Right. But there are a lot of things you miss out on, and this is one of them. So those are the thresholds there. If your spouse.

Darren Wurz [00:08:21]:
Now there’s another situation, right? Let’s say you don’t have a retirement plan, but your spouse does. Okay? In that case, you’re married, filing jointly, you get the full deduction up to a MAGI of 230,000 or less. Then there’s a partial deduction up to 240, and then above that, no deduction. So those are the thresholds for whether or not you get the deduction. Now, there’s some other things you need to know. Your money in the traditional IRA grows tax deferred. And that’s a lovely word, isn’t it? Because it means you will have to pay the taxes later. So you don’t pay taxes while it’s in the account, while it’s growing.

Darren Wurz [00:08:58]:
You don’t have to pay any capital gains or dividends taxes. You do, however, have to Pay taxes when you withdraw funds in retirement. And those withdrawals are taxed as regular income. But it gets even better, or maybe worse. Once you hit age 73, the IRS requires you to start taking money out. These are called required minimum distributions, or RMDs, as we like to call them. And that goes up to 75 if you were born after 1960. Finally, it’s taxable to your beneficiaries.

Darren Wurz [00:09:36]:
So if you die, you both you, if you’re married, you and your spouse pass away, your kids Inherit the traditional IRA, they have to take all the money out within 10 years and pay income tax on it. Now, that can really mess things up for them tax wise. If it’s a large amount of money, because they could get bumped into a much higher bracket, their effective rate goes up and they might be ineligible for a lot of tax opportunities. So, okay, let’s contrast that with a Roth IRA. With a Roth IRA, it’s kind of the opposite. You do not get a tax deduction when you contribute funds. The money grows tax free as it’s in the account. And then when you reach retirement, you can take money out tax free as well.

Darren Wurz [00:10:30]:
So look at that. All the growth, the earnings, the money you put in, plus all the earnings, it all becomes tax free at that point. Let’s talk about your eligibility for a Roth IRA in 2024. Modified adjusted gross limits. If you are single, you make your modified adjusted gross is less than $146,000. You can do the full contribution. You can do a partial contribution up to 161, 161 and higher. No contribution.

Darren Wurz [00:11:01]:
If you’re married filing jointly, it’s basically double. Well, not quite. I take that back. The modified adjusted gross limit i s 230 and then partial deduction or partial contribution up to 240. 240 and above. No contribution and married. Filing separately again is $10,000 is the Magi limit. If your income exceeds those limits, however, you might consider a back door Roth IRA contribution. This involves contributing to a traditional IRA, then converting those funds to a Roth IRA.

Darren Wurz [00:11:37]:
But be aware that this strategy can have tax implications, and we’re going to talk more about that on an upcoming episode, so stay tuned and also consult your financial advisor. Okay, but there are some great, great benefits of the Roth IRA in addition to withdrawals in retirement being tax free. Number one, there are no RMDs, no required minimum distributions, which means your money can keep growing indefinitely. However, you know, not everyone qualifies. As we mentioned, that there are income limitations, but the Other really big thing to is there are no taxes for your beneficiaries. So your kids inherit your Roth IRA, they do not have to pay tax, which is kind of nice. Now, there are some exceptions I failed to mention. I want to go back to the traditional IRA, though, and the Roth IRA, the same deal.

Darren Wurz [00:12:32]:
You can’t take money out, except for a few exceptions. You can’t take money out before you’re 59 and a half. Otherwise, you pay income tax and penalties, both on the Roth. And so that’s a double whammy for the Roth. Right? Because you didn’t, you didn’t pay any tax when you put the money in. You might be taxed on earnings. You’re going to pay tax on earnings, plus penalties, penalty of 10% and all counts as income. The earnings count as income.

Darren Wurz [00:13:01]:
Same thing for the traditional ira. Now, the Roth IRA has a kind of a unique caveat. With the Roth ira, you can take out your contributions at any time for any reason. So let’s say you’ve been contributing to your Roth IRA for many years. You’ve contributed $20,000 over the last few years. You have $30,000. You can take up to $20,000 out of your Roth IRA without any tax implications. Cool.

Darren Wurz [00:13:32]:
But you gotta make sure that you keep good track of your records, right? Make sure you keep track of what money you’ve, how much money you’ve put in. Not all custodians keep track. And if you’re not keeping track, the IRS can’t prove. You can’t prove to the IRS, hey, I put $20,000 in here. Right? So make sure that you’re keeping track of that. There are some advanced things that you can do with Roth IRAs. There’s first, the Roth conversion. We’re going to talk about that on an upcoming episode.

Darren Wurz [00:14:03]:
The backdoor Roth ira. We mentioned that one. And I also want to emphasize that these are separate from your employer plans, so you can max out both. I get this question all the time. You can put the maximum in your IRA and your 401k. You can have both. They don’t affect each other in terms of eligibility as long as you meet all the other eligibility requirements. All right, so what can you do today to get started? First, evaluate your tax situation.

Darren Wurz [00:14:39]:
Are you in a high tax bracket now or do you expect to be in a higher bracket in retirement? If you’re in a high bracket now, and this is unusual, you feel like you’re going to be in a lower bracket in the future, you might want to go the traditional IRA route and get the tax deduction. If, however, this is a lower income year for you or you feel like your income is going to grow and you’re going to be in a higher tax bracket in the future, then the Roth IRA would be the better bet for you. It’s about the timing of income. That’s what we call it. So evaluate your tax situation. Number two, open an account. If you already have an IRA or if you don’t have an ira, start one today, especially a Roth ira, and we’ll talk about why when we get to Roth conversions. But you want to make sure you get a Roth IRA started, put a dollar in it, just get it going right.

Darren Wurz [00:15:27]:
Then there’s a good reason for that and a good reason to stay tuned to future episodes. Number three, work with a financial planner. If you’re unsure about Roth conversions or backdoor strategies, we can help you with that and make sure you’re paying attention to the deadline. So the deadline for your IRA contributions is the same as your tax deadline, April 15th of the following year. So for 2024, you have until next April to make those contributions. So here’s my challenge to you. Get a Roth IRA started. I think that’s the biggest thing, right? If you don’t have one started, get one started.

Darren Wurz [00:16:04]:
You’re going to need it in the future. There’s a, there’s a five year time frame that’s, that begins on when you actually start a Roth IRA. And we’ll talk about that later. Set one up. Make sure you have it set up and start putting some money in one or both, whichever one you are eligible for. It might not seem like a lot, you know, the maximum amount you can put in. But as I illustrated, small steps can lead to significant results over time. Remember, as a law firm owner, your wealth isn’t just your business.

Darren Wurz [00:16:39]:
I mean, your business is critical. It’s a critical component of your wealth. But you need to build wealth in some of these other buckets as well. It’s really, really important. The power of compound growth in the markets is exceptional. And that can be a key component to creating lasting financial freedom for yourself and your family. At the Lawyer Millionaire, we believe your financial strategy should work as hard as you do. And we can help you figure all of this out and create a winning strategy for you.

Darren Wurz [00:17:08]:
If you’re unsure about how all this fits into your financial picture, don’t worry. That’s where we come in. Take the first step today. Schedule a call with me. You can do it right now. The link is in the show notes and I’ll help you map out your retirement savings strategy. Also, connect with me on LinkedIn and let’s keep the conversation going and get more tips on building your financial future. This has been the Lawyer Millionaire podcast.

Darren Wurz [00:17:37]:
I’m your host, Darren Wirtz. Thank you for joining me on this journey to expand your business, maximize your profits and secure your financial future. I can’t wait to connect with you again next time. Until then, take care and keep pushing forward

Outro [00:17:57]:
Thank you for listening to the Lawyer Millionaire. Click the Follow button below to be notified when new episodes become available. This content has been made available for informational and educational purposes only. This content is not intended to represent investing or tax advice. Always seek the advice of a qualified investment or tax advisor with any questions you may have regarding your own financial circumstances.