I Make Too Much To Invest In A Roth Account

Summary

Episode Summary: "I Make Too Much To Invest In A Roth Account"

Podcast: Ramsey Everyday Millionaires
Host/Author: Ramsey Network
Episode: I Make Too Much To Invest In A Roth Account
Release Date: April 16, 2025

---

Introduction to Catherine's Financial Situation

The episode begins with Catherine from Bellevue, Washington, reaching out for retirement investment advice. At [00:14], host Dave Ramsey welcomes her to the show:

Dave Ramsey: "Hey, Catherine, welcome to the show."

Catherine, a 42-year-old nanny and house manager earning $170,000 annually, expresses her uncertainty about where to start building her retirement funds, especially since her employer does not offer a 401(k) or Roth IRA ([00:25]).

Exploring Retirement Investment Options

Dave Ramsey and Rachel Cruze delve into Catherine's employment status and income sources. Recognizing that Catherine is a W-2 employee without access to employer-sponsored retirement plans, they discuss alternative investment avenues.

Dave Ramsey: "If you were able to... you could do like a self-funded 401k or something for self-employed. But I don't think that would work with the W2." ([01:48])

Rachel Cruze probes further about other possible retirement accounts, highlighting the importance of maximizing available options.

Understanding the Backdoor Roth IRA

Given Catherine's high income, the conversation shifts to the feasibility of utilizing a backdoor Roth IRA. Dave Ramsey explains the concept and its legality, emphasizing its suitability for individuals exceeding the Roth IRA income limits.

Dave Ramsey: "If you make above that, you have to what's called a backdoor Roth IRA... it's completely legal, but it's just called the backdoor Roth IRA." ([02:00])

He outlines the process of converting a traditional IRA into a Roth IRA through necessary documentation and signatures, allowing Catherine to contribute up to $7,000 annually.

Formulating an Investment Strategy

The hosts recommend that Catherine allocate 15% of her income towards retirement investments. This includes maxing out the Roth IRA and investing any additional funds in growth stock mutual funds or index funds. Dave emphasizes the importance of diversifying investments beyond tax-advantaged accounts due to the limitations of the backdoor Roth IRA.

Dave Ramsey: "The key is 15% of your income is what you want to be investing. And so once you max out that Roth, and then I would look above that..." ([03:38])

Rachel Cruze adds that Catherine should consider consulting a SmartVestor Pro to tailor her investment strategy further, ensuring tax efficiency and optimal growth.

Projecting Retirement Savings

To illustrate the potential growth of her investments, Rachel Cruze uses the Ramsey investment calculator with Catherine's inputs. Starting at age 42 with no current investments, they project her retirement savings by age 67.

Rachel Cruze: "If you put away $2,000 a month in retirement... you'll have two and a half million dollars." ([06:21])

This projection assumes a 10% annual return, a conservative estimate that showcases the power of compound interest over 25 years.

Final Advice and Encouragement

The hosts conclude by reiterating the importance of intentionality in financial planning and the benefits of professional guidance. Dave Ramsey encourages Catherine to consult with a SmartVestor Pro to solidify her retirement plan.

Dave Ramsey: "I really encourage you to sit down with a SmartVestor Pro... and start investing. Excited for you, Catherine." ([07:05])

Rachel reinforces the need for proactive financial management, especially given Catherine's starting point and income level.

Rachel Cruze: "You do have the option to put more than that... the main thing here is intentionality with every penny you got." ([06:34])

---

Key Takeaways

• Backdoor Roth IRA: A viable option for high-income earners to contribute to a Roth IRA despite income limits.
• Investment Allocation: Aim to invest 15% of income towards retirement, prioritizing Roth IRAs and diversifying with index or mutual funds.
• Compound Interest: Starting investments early, even at 42, can significantly grow retirement savings over time.
• Professional Guidance: Consulting with a financial advisor, such as a SmartVestor Pro, can enhance investment strategies and ensure tax-efficient growth.

This episode underscores that with disciplined investing, even those without access to traditional retirement plans can build substantial wealth for retirement.

Transcript

[Catherine]

This episode is brought to you by SmartVestor. Connect with an investing pro near you at RamseySolutions.com SmartVestor all right, let's go.

[Dave Ramsey]

To the phones and go to Kathryn in Bellevue, Washington. Hey, Catherine, welcome to the show.

[Catherine]

Hi, thank you for taking my call.

[Dave Ramsey]

Yes, absolutely. How can we help?

[Catherine]

I am looking for a little advice on building my retirement starting at 42 years old.

[Dave Ramsey]

All right, so great. Okay. What are your questions around it?

[Catherine]

Basically, I just don't really know where to begin. There's so much information out there and where to get started and I don't have any support at work as far as 401ks or Roth IRAs or anything like that.

[Dave Ramsey]

Okay, so your company does not offer a 401k.

[Catherine]

Correct, correct.

[Dave Ramsey]

Okay, so really? Yeah, the two. The two best streams. Do you own the business or you. You're an employee?

[Catherine]

I'm an employee. I'm a nanny and a house manager for celebrity up here.

[Dave Ramsey]

Oh, okay, that's great.

[Catherine]

Yeah.

[Dave Ramsey]

Okay. And how much are you making a year?

[Catherine]

170.

[Dave Ramsey]

170. Okay. Yeah. So for you, are you like a 10? Why am I blanking a 1049. 1099. Thank you.

[Catherine]

I collect the W2 every year.

[Dave Ramsey]

Okay. Okay. So. Yep.

[Rachel Cruze]

Do you have an LLC? Like would you apply for a SEP or is this just. You're just a W2 employee going right into your.

[Catherine]

I'm a W2 employee. Yep. It's a massive. They have a pretty massive network. So I'm one of probably 300 employees.

[Rachel Cruze]

Okay.

[Dave Ramsey]

Okay. Okay. Yeah, I was gonna say, because if you were able to. Yep. Get around that in any way, you could do like. Yeah. A self funded 401k or something for self employed. But I don't think that would work with the W2.

[Rachel Cruze]

Does your employer offer a 4:1?

[Catherine]

No.

[Dave Ramsey]

Okay. So, Catherine, if I were you, I would. Yeah, I would do the Roth IRA. You do? Yeah, because I think it's 121,000 this year or I'm not sure in 2025. If you make above that, you have to what's called a backdoor Roth ira. And so if you make above that income limit, what you do, you're going to have to just do what's called a backdoor Roth. And if you sit down with a smartvestor Pro, we can get you connected to one or at least look at options in your area after this call. But what you'll do is basically open up a traditional Roth and through all their fancy signages and all the things you kind of basically sign back over and you just basically turn it right into a Roth right there at that sitting. It just takes some signatures, and it's completely legal, but it's just called the backdoor Roth ira. So that's an option that you can do. You can put up to $7,000, thousand dollars in that. And then above that, I mean, from a tax perspective, there's not. There's not a ton you could do. I mean, I would be investing and so looking into just some good growth stock mutual funds and putting some money away. And so here, here's the key is 15% of your income is what you want to be investing. And so once you max out that Roth, and then I would look above that and say, okay, what's left of that 15%? And then I probably would. I would get, you know, you can do even an index fund or just a mutual fund, but when you sit down with a Smartvestor Pro, they can really help you with that because the tax advantage is not great. You will pay taxes when you take that money out at retirement, which the Roth you won't. You'll be paying taxes before that. And so that's. Yeah, that's kind of the sucky part of it. But I don't. I mean, I don't know any other great option when it comes to that. That's what I would do, though. But I would continue to invest that 15%. And do you have any debt?

[Catherine]

I don't have any debt.

[Dave Ramsey]

Okay, that's great. Yeah. So our formula, just so you know, Katherine, kind of what we say is match beats Roth, beats traditional. So you always want to start with the match of like a 401k. You don't have that. So that means you'll just jump over to the Roth, max out the Roth, and then anything else, you'll just go to any type of, like, kind of traditional account. But there's not really great in the retirement lane for you that I can think of. But again, I would sit down with a smartvestor pro and look at all of your options. But if I were you, I mean, even. Do you have a hsa?

[Catherine]

No, I don't.

[Dave Ramsey]

Okay.

[Rachel Cruze]

Any health insurance at all?

[Catherine]

I do have health insurance, yes. I just don't have the savings account.

[Dave Ramsey]

Okay with it. Okay. Yeah. Because that's another option. You could put some money and let that grow and cash flow some medical expenses. That would be another avenue. But, yeah, okay. Yeah, that's what I would do if I were you.

[Catherine]

The combination of those two things, the backdoor roth. And the 15% will get me to the finish line in retirement?

[Dave Ramsey]

Yeah, absolutely it should. Again, I want you to run your numbers. I don't have computer. Right here. 42.

[Catherine]

I'm 42.

[Rachel Cruze]

How long do you think you're gonna make? 170 grand.

[Catherine]

There's lots of money to be made up here, so as long as I'm healthy and strong, I can do it.

[Dave Ramsey]

And you're single? Catherine, did you say yes? Okay, perfect. Yeah. If you go to ramseysolutions.com and just google Ramsey Solutions investment calculator and put that in. Put in your numbers. It's actually very encouraging. Compound interest will shock you more.

[Rachel Cruze]

I'll do it for you right now. What's your name right now? I mean, I'm sorry, What's your age right now?

[Dave Ramsey]

42.

[Rachel Cruze]

42.

[Catherine]

42.

[Rachel Cruze]

All right, let's pretend you worked until 67. How much do you have in investments right now?

[Catherine]

Nothing. I'm starting at zero right now.

[Rachel Cruze]

Starting at zero. Okay. So what's. Rachel. What is 15 years?

[Dave Ramsey]

Yeah, you'll get about 30.

[Rachel Cruze]

About 30 a year you put away.

[Catherine]

Yeah.

[Rachel Cruze]

Okay, so if you put away 30,000 and your annual return, let's just say 10% there.

[Dave Ramsey]

Put zero at that. Red.

[Rachel Cruze]

Oh, yeah, yeah, yeah. All right, so I'm doing this for you with the Ramsey investment calculator. Good gosh. If you put away. Is that right? $30,000 between now and 67 and your annual term is about 10%.

[Dave Ramsey]

It may be. Well, I guess 30 would be on 200,000. So put. Sorry, put 25 conservative.

[Rachel Cruze]

I'll put 20 just for fun. You'll have. If you'll put $20,000 a year and you make 10 return on that from 40 month.

[Dave Ramsey]

Is that monthly?

[Rachel Cruze]

Oh, monthly, Yeah.

[Dave Ramsey]

I was like, oh, my gosh, we're all going to be.

[Rachel Cruze]

Yeah, you'll have. You'll have two and a half million dollars.

[Catherine]

Oh, wow. Okay.

[Rachel Cruze]

Yeah, so that's, that's.

[Dave Ramsey]

If you put. That's pretty conservative.

[Rachel Cruze]

That's very conservative. You put $2,000 a month in retirement.

[Catherine]

Okay.

[Rachel Cruze]

And you put that away. And making 170 with no debt. You can put more than that. And if you feel comfortable doing a little catch up, we're okay with that, too. I would be a little bit paranoid being 42 with nothing. Right. So I'd want to see that quicker. So I might. If I have no bills and no expenses and I'm 170, plus a house manager, which means some of my meals might get covered. That means some of my bills might get covered. I might take that money and roll it over. But hopefully you hear the main thing here is intentionality with every penny you got.

[Dave Ramsey]

Yeah, for sure. And Catherine, I would really encourage you to sit down with a smartvestor pro. I do this once a year. My husband, I, to look at retirement, run these numbers. And again, they, I give them so much credit because I swear every time we go, there's some new thing that they're like teaching me and they're like, oh yeah, this, with this tax, you know, thing here and you can do this with your giving. I mean they're just, they, they, they live and breathe this stuff and they can be so, so helpful and just give you the confidence to know, okay, this is my plan. It doesn't have to be too complicated. It actually, you know, I, I can kind of set something up and I'm going to be great. So. So you're doing great, Katherine. You've done an excellent job up until now, so that's awesome. If you stay on the line, Katherine, I'll have Christian pick up and just make sure you get that website to our smartvestor pros and interview a couple there in that Seattle area and find one that you trust and that you love and start investing. Excited for you, Katherine.