 Hello and welcome to the session in which we will discuss Roth IRA. The first thing we want to know is why is it called Roth IRA? Well the senator that sponsored the plan William Roth, Senator from Delaware, it's after his name William Roth Roth IRA. Now when we discuss Roth IRA we have to compare it to a traditional IRA because we want to see the difference between a regular or traditional IRA versus a Roth. The traditional IRA contribution are deductible. The deductible means what? It means you can deduct them on your tax return. So if you contributed 6,500 which is the maximum for this particular year. The 6,500 reduced your taxable income by 6,500 so if your tax rate is 30% you will get tax savings of 1,550 in tax savings today. So that's the main benefit. One of the main benefit of a traditional is you get a tax deduction tax benefit now. Roth IRA guess what? Contributions are none deductible. In other words if you contributed 6,500 to a Roth IRA what do you get today in a deduction? Zero. No deduction. You might be saying okay why does it exist? We're going to find out why. Okay and how much can you contribute? Let's first find out how much you can contribute. The maximum allowable contribution is 6,500 usually the same as a traditional IRA or 13,400 spousal IRA. Same thing with traditional 6,500 or you can double it for spousal. Obviously you have to be making that money 100% of the individual compensation for the year. You have to make some you have to have some compensation and the contribution just like with a traditional IRA is that when I talked about the traditional IRAs for looking at year X7 you still have till April 14th year X8 to contribute for year X7. So they give you enough time to contribute. Now let's go back and discuss what's the benefit? So if you're telling me I'm not going to get a deduction what is the benefit of having a Roth IRA? Convince me. Well here's the case. Qualified distribution are tax-free. Remember you're putting money away today. You're putting money away today for the future. You're not going to get a tax deduction now but in the future if you have a Roth IRA and your distribution qualified distributions are qualified they are tax-free. It means you don't pay any taxes. You don't pay any taxes on the original amount. You don't pay any taxes on the earnings versus a traditional IRA. You get you get a tax benefit now but everything is taxed later the amount that you put in plus the earnings. But we need to know about the rules. How do we qualify for the Roth IRA and this is what we're going to be discussing in this session. Before we proceed any further I have a public announcement about my company farhatlectures.com. Farhat accounting lectures is a supplemental educational tool that's going to help you with your CPA exam preparation as well as your accounting courses. My CPA material is aligned with your CPA review course such as Becker, Roger, Wiley, Gleam, Miles. My accounting courses are aligned with your accounting courses broken down by chapter and topics. My resources consist of lectures, multiple choice questions, true-false questions, as well as exercises. Go ahead start your free trial today. Here's what happens if you have a Roth IRA and you hold the Roth IRA for at least five years so you open a Roth IRA you put money in it. A taxpayer can withdraw funds without incurring any tax obligation if they meet any of the following obligation. The first thing you have to do is wait until you are 59 and a half and obviously you have to open the account five years earlier so you can meet the first requirement which is hold at least five years. The distribution is made to a beneficiary or the or the participant's estate following the participant's death so if you have a Roth IRA and you die guess what your estate don't get taxed. The participant becomes disabled so although you did not reach 59 and a half but you pass away before that time also not taxable. It means it's a qualified distribution. You want a qualified distribution. The qualified distribution means no taxes on the original amount obviously because you already paid taxes on the original amount that you invested but also no taxes on the earnings and this is the benefit of the Roth IRA. And the withdrawal is used for qualified expenses or first time home buyer subject to attempt $10,000. Other distribution might be taxable. Okay so if you meet those obligations guess what you'll get your money out tax-free all of it tax-free. However if you have to take money earlier distribution first treat it as non taxable non taxable return which is return of capital to the extent of your capital contribution. So when you take money out of the Roth and you don't meet those qualifications the first thing they assume is you're taking money you're taking your original amount out which is good. The remaining distribution once you exceed your capital your contribution then it's taxable. Don't worry you would look at an example. At the age of 40 Adam opens a Roth IRA and consistently contributed $5,000 annually for two decades. Twenty years later the account has grown to 162,400. The amount contributed by Adam is 100,000 and the account the investments generated in additional 62,400. Now remember this is a Roth IRA. In other words Adam did not get any tax benefit when he made the contribution because if he got benefit let's assume he got its traditional IRA. If it's traditional IRA on average let's assume his tax rate was 25 percent he would have saved $25,000 in taxes overall without looking into the time value of money but that's not what happened with Adam. Adam used a Roth IRA means the money was taxed it's after tax money he contributed this money. Now Adam reached 59 and a half has fulfilled the five-year holding period. He's eligible to withdraw the entire amount tax-free that's great that is excellent. Now you can take all the money tax-free and specifically the tax-free amount is 62,400 no taxes he doesn't have any he doesn't have to pay any taxes on the earning of 62,400. So just to show you the benefit if his tax rate is 30 percent 62,400 times 0.3 he saved on his taxes 18,720 which is good and you might be saying but he could have saved $25,000 on the 100,000 but when you take the 100,000 under a traditional IRA you still have to pay taxes so under a traditional IRA he would have to go 162,400 times 30 percent so 162,400 times 0.3 he would have to pay taxes 48,720 if it was a traditional IRA and he took the money out because all the money 162,400 is tax-free taxable so all so what he did he said okay I'm gonna pay the taxes on the 100,000 then my earnings will be tax-free but the key is if this rather than 62 let's assume the earnings were 100,000 or 200,000 then all of it is tax-free it doesn't matter so you're upside you have really huge upside also the benefit of a Roth IRA is the government don't force you to take the money at 72 remember and in the traditional IRA you have to take start to take the money at 72 because you already pay taxes on the original amount they will wait for you to get your earning and what happened in the Roth IRA most people they keep it they die and they pass it to their family tax-free because they have money from other sources what they do they don't take the Roth IRA out they would say you know what let's keep it to our family and our family will get it tax-free as with the traditional IRA congress is generous to a point there's always a phase out for everything for the phase out the phase out will start at 138 of adjusted gross income it ends at 153 which is the range is 15,000 the range for married finance only start at 218 a little bit higher but the range is only 10,000 and for married finance separately it goes from zero to 10,000 and you would lose it let's look at an example Noah single wanted to contribute at 6,500 to a drop IRA for the year 2023 his adjusted gross income is 150 well here we go 150 is above 138 but below 153 so so Noah is within this range okay so we're gonna figure out what's the how much is inside the range because the range is 15,000 the range is 15,000 and he's 12,000 within the range 12 divided by 15 he's 80% within the range that means he cannot deduct 80% of his contribution so 12,000 divided by 50 because he wanted to contribute the full 6,500 times 80 50 200 cannot be contributed to a Roth IRA just simply you cannot put it in a Roth IRA you want to put it maybe in a non-traditional IRA if you want to that's fine but not in a Roth IRA so what's the benefit of non-traditional IRA well it will accrue tax-free but eventually you have to pay taxes on the earnings so non-traditional so let's see so this is so what what can he do the best next best thing is since I cannot so let's take 6,500 6,000 5 to 5,200 they will take this money and go to a non the next best thing non-traditional IRA and put that money there okay so what's the benefit the benefit is it will grow tax-free but the earnings once once Noah takes it when he's you know above 59 and a half the earnings the 5,200 already taxed so that's that's not taxable but let's assume he earned 15,000 on this month so he's going to end up with 20,200 the 15 the 5,200 as I told you tax-free the additional 15,000 that's taxable if he was able to put this 5,200 in a Roth IRA and it grew to 20,200 none of it is taxable because they already pay taxes on the 5,200 and I'm repeating this because it's very important to remember that how you put your money initially matters if you already pay taxes on it you're not going to pay taxes on it when you take it out but in a traditional IRA it's not taxed that's why you pay taxes on both very important now what should you do well you should do is you whether you are a CPA candidate accounting student or an enrolled agent Roth IRA is an important concept work multiple choice true false to help you understand this concept better good luck study hard and of course stay safe