Money Guy Show – Episode Summary: "Don't Make THIS Common Roth IRA Mistake"

Release Date: March 19, 2025
Hosts: Brian Preston and Bo Hanson

Introduction: Avoiding Common Roth IRA Pitfalls

In this insightful episode of the Money Guy Show, hosts Bo Hanson and Ruby delve into a prevalent mistake many investors make with their Roth IRAs: over-contributing. They emphasize the importance of recognizing and rectifying such errors to maintain a healthy financial trajectory.

Ruby kicks off the discussion with a strong warning:

“[00:30] Ruby: Don't do it. Do not make this common Roth IRA mistake.”

Understanding and Correcting Roth IRA Over-Contributions

Bo Hanson provides a comprehensive breakdown of the over-contribution issue:

“[01:55] Bo Hanson: ...you can recharacterize, reclassify those contributions that had previously gone into your Roth IRA. You can recharacterize, reclassify them as a traditional IRA contribution. And the good news is, if you catch this before you file your tax return and you recharacterize, you get to move those contributions from the Roth into the traditional as well as the earnings attributable to those contributions.”

He further explains the consequences of missing the tax filing deadline, highlighting the potential taxes and penalties involved.

Optimizing Your Savings Rate with Variable Income

A listener named Aman (or Ammon) asks about incorporating overtime and rental income into his savings rate calculation. Bo advises saving 25% of your gross total income, ensuring that all income sources are accounted for to achieve financial independence efficiently.

“[07:20] Bo Hanson: ...you're going to save the right amount because we have a great resource. If you go to moneyguide.com resources, it's not called how much can 25% do for you? I think it's called how much should I save?”

Listener Q&A Highlights

1. Managing a Substantial Roth IRA Balance

JB shares his situation of having $300,000 in Roth assets at age 30. Bo commends his achievement and discusses whether diversification is necessary.

“[12:58] Bo Hanson: Do you think that it's time for you to diversify? I don't know. I need to know more about what your long term plan is. Is it okay that you have a ton in Roth and that amount of Roth is going to continue to increase? Yeah, I think so.”

2. Purchasing a New Family Car Without Guilt

Emily and Josh F. express guilt over spending saved money to buy a new car for their large family. Bo advises distinguishing between needs and wants, emphasizing that spending on necessities like a reliable vehicle is justified.

“[18:39] Bo Hanson: If you need a new car, that’s a need. I think that is something worth noting, worth thinking about, worth thinking through now...”

3. Navigating a 403B Plan Without Employer Match

JP inquires about managing a 403B plan that offers no employer match and has high fees. Bo encourages contributing despite subpar options due to the significant tax incentives.

“[30:19] Bo Hanson: ...even if the funds aren't great and the expense ratios are higher than I like, it's going to take a long time for me to eat up that 30% embedded rate of return that I'm receiving. So I still like doing it.”

4. Automating Roth IRA Contributions on a Tight Budget

JW116 asks for the best method to automate Roth savings. Bo recommends setting up automatic monthly contributions to ensure consistency and reduce the likelihood of budgeting errors.

“[37:17] Bo Hanson: The best way to set up... make it automatic and make it easy...”

5. Dollar Cost Averaging vs. Lump Sum for Roth Conversions

Steve W. seeks advice on whether to dollar cost average $1,000 a month or make a $10,000 lump sum Roth conversion amidst a market downturn. Bo advocates for dollar cost averaging to mitigate emotional decision-making and capitalize on market volatility over time.

“[40:20] Bo Hanson: One of the reasons we love dollar cost averaging is that it removes emotions from the equation...”

6. Considering IRMAA in Roth vs. Traditional IRA Decisions

Curly Q. questions whether to factor in IRMAA (Income-Related Monthly Adjustment Amount) when choosing between Roth and Traditional IRAs. Bo explains that while IRMAA is a consideration for those approaching Medicare age, the primary decision should hinge on tax rate projections.

“[46:10] Bo Hanson: I would let that be the determination of whether I should make pre-tax or Roth contributions.”

Key Insights and Recommendations

• Catch Mistakes Early: Identifying over-contributions before tax filing deadlines can save substantial taxes and penalties.

• Comprehensive Savings Strategy: Include all income sources, including variable ones like overtime and rental income, to accurately set and achieve a 25% savings rate.

• Roth IRA Growth: Continuously building Roth assets can significantly benefit from tax-free growth, especially when started early.

• Embrace Necessary Expenditures: Spending on essentials, such as a family car, should not induce guilt if it supports your lifestyle and safety.

• Maximize Tax Benefits Despite Limitations: Even with limited 403B options, contributing can yield significant tax advantages. Advocate for better plan options when possible.

• Automate Savings to Ensure Consistency: Automatic contributions reduce the risk of missed investments and enhance long-term growth.

• Strategic Roth Conversions: Dollar cost averaging for Roth conversions can leverage market fluctuations and mitigate emotional biases.

• IRMAA Considerations for Seniors: While important, IRMAA should be weighed alongside broader tax strategy considerations, especially in relation to future tax brackets.

Conclusion: Empowering Your Financial Journey

Bo and Ruby reiterate their commitment to guiding listeners through intricate financial decisions, emphasizing proactive planning, consistent saving, and informed investing. They encourage listeners to utilize resources available on moneyguy.com and consider reaching out for personalized advice.

“[53:50] Ruby: ...all of that lives on moneyguy.com resources...”

The episode concludes with a heartfelt acknowledgment of their mission to demystify financial strategies, enabling listeners to achieve financial independence and a fulfilling life.

Notable Quotes:

• Bo Hanson [01:55]: “If you catch this before you file your tax return and you recharacterize, you get to move those contributions from the Roth into the traditional as well as the earnings attributable to those contributions.”

• Bo Hanson [07:20]: “How much should you save?... How much should I save?”

• Bo Hanson [12:58]: “Do you think that it's time for you to diversify?... I think so.”

• Bo Hanson [18:39]: “If you need a new car, that’s a need...”

• Bo Hanson [30:19]: “...even if the funds aren't great and the expense ratios are higher than I like, it's going to take a long time for me to eat up that 30% embedded rate of return that I'm receiving. So I still like doing it.”

• Bo Hanson [37:17]: “The best way to set up... make it automatic and make it easy...”

• Bo Hanson [40:20]: “One of the reasons we love dollar cost averaging is that it removes emotions from the equation...”

• Bo Hanson [46:10]: “I would let that be the determination of whether I should make pre-tax or Roth contributions.”

Resources Mentioned:

• Money Guy Resources: moneyguy.com/resources
• Financial Order of Operations
• Money Guy Tumblers Giveaway: Email winner@moneyguy.com to participate.

Disclaimer: The hosts, Brian Preston and Bo Hanson, are partners with Abound Wealth Management, a registered investment advisory firm regulated by the SEC. The information provided in this episode is for informational purposes only and does not constitute financial, tax, investment, or legal advice.