Ep 62: Demystifying Retirement Accounts: Traditional IRA, Roth IRA, Rollover IRA and SEP IRA

Jess: So Jesse, a friend I used to work with at Merrill told his barber about our podcast.

Jessie: Well, he recommended her to cut my son's hair.

Jess: And then he was like, you know what this girl does? Because he's one of those people that talk really nicely about me.

Jessie: Apparently, she asked him to explain what a Roth IRA was.

Jess: And naturally, since she's a business owner, he was like, no, you need a SEP IRA.

Jessie: Yeah, we have not talked about SEP IRAs yet.

Jess: We've been meaning to.

Jessie: No, we haven't.

Jess: We haven't really talked about the different types of IRAs or contribution types in quite some time.

Jessie: And maybe not in so much detail.

Jess: Yeah, I think maybe back in episode five, we talked about it in brokerage accounts.

Jessie: But yeah, we should really get into detail.

Jess: Can we talk about backdoor Roth contributions too? Because I cannot figure that one out still.

Jessie: And we have some questions about it sometimes.

Jess: So we need to make that one make sense.

Jessie: There will only be explanation.

Jess: That is our reputation.

Jessie: I noticed you wore a snake shirt today.

Jess: So I imagined it was for Reputation, Taylor's version.

Jessie: This is actually a Boy Harsher shirt, but Okay, you know, but I'll see what I see.

Jess: I'm going to start throwing in Boy Harsher references.

Jessie: Fine.

Jess: But the goal of today, so here's what we should do.

Jessie: We need to give our listeners the information they need to help them choose the right IRA based on unique needs because there are a lot of different IRAs.

Jess: Okay, let's do it.

Jessie: You're listening to Market MakeHer, the self directed investing education podcast that explains how the stock market works from her perspective.

Jess: That's us, we're her.

Jessie: And we believe the biggest investment you can make is in your personal education.

Jess: Because you can always choose what you want to learn about in this information age.

Jessie: And your knowledge is always yours and something that cannot be taken away from you.

Jess: We're here to help you learn about the stock market and investing so you can decide what you want to do with your money and make the best decisions for future you here for future you.

Jessie: We're your host.

Jess: I'm Jess and skip what we call the finance expert.

Jessie: I've worked in the self directed investing space for the past 15 years.

Jess: My job is to teach Jesse how the stock market works.

Jessie: And I'm Jesse, didn't we? My job is to ask questions you were thinking and then some because I am literally learning alongside you.

Jess: I want all of us to learn how to retire and make our money make money.

Jessie: We want you to not work for your money, but make your money work for you.

Jess: It's all about financial independence, which really means you have, let's call it forget you money if you know what I mean.

Jessie: But the ability to leave situations that you decide no longer serve you.

Jess: That's financial independence.

Jessie: That's right.

Jess: Okay, here's the agenda for today.

Jessie: Number one, we should talk about the difference between a retirement account and non retirement account.

Jess: This involves taxes.

Jessie: Two, we can talk about contribution limits and what to do if you over contributed.

Jess: Three, the account type.

Jessie: So there's traditional IRA, Roth IRA and SEP IRAs, SEP IRAs.

Jess: And I would like to break down eligibility, tax implications, when it's best for me for all the different account types.

Jessie: I like this agenda.

Jess: Very, very well put together there.

Jessie: We do need to remind our lovely listeners of one thing when we talk about these account types and get into tax implications.

Jess: Even though I personally was licensed for 10 years, I'm not now.

Jessie: I'm not a financial advisor.

Jess: Jesse's not a financial advisor.

Jessie: This is purely for educational and informational and sometimes entertainment purposes only.

Jess: I am not and have never been a tax advisor.

Jessie: Neither is Jesse.

Jess: This isn't tax advice.

Jessie: This is designed for a broad audience in the self directed investing world.

Jess: Financial and tax advice is personal.

Jessie: This is not that.

Jess: Disclosure, disclosure, disclosure.

Jessie: That's right.

Jess: We say that you're the architect of your life and you're building a dream home.

Jessie: The dream house analogy that we've talked about several times.

Jess: The foundation is the foundational knowledge that we teach you on this podcast.

Jessie: Yeah.

Jess: You've already done that if you're listening to this podcast.

Jessie: Good job.

Jess: Right.

Jessie: Lay the foundation.

Jess: And then we have separate levels.

Jessie: Level one is your retirement accounts.

Jess: And that's what IRA stands for, right? Individual Retirement Arrangement, actually.

Jessie: Arrangement.

Jess: That's right.

Jessie: I always think retirement account is IRA, but it's arrangement.

Jess: It is arrangement.

Jessie: You know, I say that too.

Jess: And when you're at brokerage firms, I will say that too.

Jessie: But if you go to the IRS.gov's website, it says arrangement.

Jess: So therefore, that is the creator of these.

Jessie: The source of truth.

Jess: Ah, well.

Jessie: Arrangement it is.

Jess: It's like the gif and jif or anyway.

Jessie: Yeah.

Jess: You convinced me on the right one there, which is gif.

Jessie: That's correct.

Jess: That's what it stands for.

Jessie: Yeah.

Jess: Anyways.

Jessie: So back to the house analogy, the foundation's financial literacy.

Jess: The first floor is the retirement floor.

Jessie: The second floor is the non-retirement.

Jess: That's where your taxable accounts are.

Jessie: The location, the neighborhood, wherever you choose to build this dream home is the brokerage firm you choose.

Jess: Today, we're going to focus on the first level, which is retirement.

Jessie: And do you remember that analogy we did? One of my favorite with the bouncer at the door? Mm-hmm.

Jess: You have like a guarded room with a bouncer.

Jessie: Yeah.

Jess: Who's only allowing certain people in and out.

Jessie: Exactly.

Jess: That's the IRS.

Jessie: They're the bouncer.

Jess: Okay.

Jessie: Oh, the IRS is the bouncer.

Jess: Okay.

Jessie: So there's limits of who can go in and out of the rooms.

Jess: When you have a retirement account, the IRS monitors how much you can contribute or how much money you can put into those rooms.

Jessie: And there's different tax situations.

Jess: Whereas your taxable account, you can put whatever you want into that room.

Jessie: You can put whatever investment you want in both of them, but the investments are taxable in the taxable account.

Jess: So your gains and losses, whereas your retirement account, you're not taxed on your gain and losses or any income that you make within the room.

Jessie: It's just going in and out of the room, which varies based on account type.

Jess: Okay.

Jessie: We're going to focus on the future you accounts, which are the retirement accounts.

Jess: We can have a whole nother episode on gains and losses, but that's the main difference is the taxable accounts are located on the second floor of an analogy.

Jessie: Anyone can go into those rooms, which means you can put in as much money as you want into those accounts, but you're taxed on your gain and losses.

Jess: That's the main difference.

Jessie: Okay.

Jess: So we're on the first floor talking about our retirement accounts that are tax deferred.

Jessie: And how do those work? I think we should start with contribution limits.

Jess: Okay.

Jessie: What you can put into that room.

Jess: So what the IRS is standing at the door, check in IDs.

Jessie: We're going to really build on this analogy.

Jess: Very excited.

Jessie: So we actually have the information for 2025.

Jess: They didn't make any changes, so we could just utilize the same information from last year, but contribution limits change all the time.

Jessie: Make sure you're checking the irs.gov site.

Jess: That's right.

Jessie: Yes.

Jess: So the contribution limits for tax year 2024 and 2025 is $7,000 if you are under 50 and $8,000 if you are over 50.

Jessie: And that's where all of your accounts combined for the year, right? That's right.

Jess: So you can have, and that's such a good question.

Jessie: You can have as many neighborhoods as you want.

Jess: You can have as many brokerage accounts as you want.

Jessie: It's just the certain amount you're limited to $7,000 across all of your IRAs if you're under 50 or $8,000 if you're over 50 to all of your IRAs.

Jess: It doesn't matter if it's 50 accounts.

Jessie: And IRAs are not the same as a 401k in this situation, right? That's right.

Jess: Those are going to be your employer-sponsored plans, completely different.

Jessie: That's like at your job, not at your neighborhood, like at your house.

Jess: Right.

Jessie: Now there's some intersections, which we'll talk about, but not yet.

Jess: And I think it's good to talk about taxable compensation.

Jessie: This is where they're checking the IDs, I suppose, or checking your tax returns, rather.

Jess: You must have taxable compensation or your spouse, if you file jointly, in order to contribute to these rooms, period.

Jessie: Meaning if you are making money off of your gains and losses on property, if it's dividend interest and income, that does not count.

Jess: It's working income.

Jessie: Okay.

Jess: So you have to have like a W-2 or, and what about contractor stuff, like an I-9 or? Yeah, self-employment income is absolutely fine.

Jessie: Alimony even counts, taxable alimony.

Jess: Wages and salaries, commissions, that counts.

Jessie: You worked for it.

Jess: It's the main rule of thumb there.

Jessie: Makes sense.

Jess: So what else does that not include? Property, interest and dividend income, so that doesn't count.

Jessie: Rates, pension or annuity income, deferred compensation, income from certain partnerships.

Jess: Okay.

Jessie: So this is all available on the irs.gov site, right? That's correct.

Jess: Yes.

Jessie: And if you have questions on this, it means you probably have a complicated situation and need a CPA.

Jess: Yeah.

Jessie: Ask your accountant.

Jess: That's right.

Jessie: Stay with us.

Jess: We'll be right back.

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Jessie: See you then.

Jess: So this is for the Roth IRA, traditional IRA, rollover IRA, all the same contribution limits.

Jessie: Okay.

Jess: Now we can move on to the account types.

Jessie: Are you ready? Yes.

Jess: I think we should start with Roth first.

Jessie: Yeah.

Jess: We talked about the illustrious Roth IRA, and everyone I think has the most questions about that because it is kind of, if you can do it, one of the better ones to have, right? Yeah.

Jessie: And I think the reason why this one comes up a lot is because investing is such a trend.

Jess: And that trend started on TikTok with a younger generation.

Jessie: And that younger generation is younger and amazing, like in their teens and early 20s, which is when you're in a lower tax bracket because you're just starting out.

Jess: And so that's when it makes sense for you.

Jessie: That's why I think this question comes up.

Jess: Anyways, I digress.

Jessie: My rule of thumb, this is not advice, but if you're trying to say Roth IRA or traditional IRA, if you get a check back on your tax return, a Roth IRA probably makes sense for you.

Jess: Probably.

Jessie: But there are also rules with that.

Jess: It doesn't matter how old you are.

Jessie: It does matter, though, if you make too much.

Jess: Not everyone can contribute to a Roth IRA.

Jessie: And it's based on whether you are single or married filing jointly.

Jess: So if you're filing jointly with a partner you're married to, then you have to include the combined total.

Jessie: And if that's too high, then you cannot have one, right? That's right.

Jess: And the IRS is checking your tax return at the door.

Jessie: That's what the bouncer's doing.

Jess: Before you're allowed to contribute up to the limits, say, okay, I'm trying to go into the Roth IRA room.

Jessie: First question, are you single, head of household? Are you married? Are you filing jointly? Are you filing separately? Did you live with your spouse at any time? Then there is adjusted gross income limits based on your income.

Jess: So super high level.

Jessie: Again, these change all the time, but it's $228,000 if you're married and filing jointly.

Jess: No more higher income than that.

Jessie: Then you cannot contribute to a Roth IRA.

Jess: If you're single or head of household, $153,000.

Jessie: And if you're married and filing separately, but you lived with your spouse, it's $10,000.

Jess: Oh, wow.

Jessie: Difference.

Jess: It is.

Jessie: But if you're married, filed separately, and didn't live with your spouse at any time during the year, then it's that $153,000.

Jess: It treats you like you're single.

Jessie: So does it just go off of your previous tax year, right? What? No, no, no, no, no, no, no, no, no, no.

Jess: It doesn't.

Jessie: It goes off of that current tax year.

Jess: So what you're making this year is what allows you to have a Roth IRA or not.

Jessie: And are you able to open one, even if you don't qualify, like you have to be on top of this yourself? Absolutely.

Jess: That's where excess contributions come into play.

Jessie: Oh, yeah.

Jess: So you will get penalized if you open a Roth IRA and you're not supposed to? Kind of.

Jessie: Or is it if you're making too much and over-contributing? Well, so sometimes you don't know.

Jess: Say you got a really big bonus that added to your income.

Jessie: Well, then you're not eligible.

Jess: So you see what I mean? Things like that happen.

Jessie: And there are processes in place for it.

Jess: Yeah.

Jessie: Because what if I had one from years ago when I was eligible and I'm in a higher income bracket and I'm not eligible, I just can't contribute to it? Is that what it comes down to? That's right.

Jess: You contribute to a different account type.

Jessie: But you can still have that one sitting there from when you were able to contribute? Oh, yeah.

Jess: Okay.

Jessie: So you just sit there and you just don't contribute to it if you're making too much.

Jess: That's right.

Jessie: Exactly.

Jess: And contributions, they're made after tax.

Jessie: It's counted as income.

Jess: Taxes are paid.

Jessie: And that should make sense right there.

Jess: You are in a lower tax bracket.

Jessie: I'm going to pay my taxes now.

Jess: And then when I withdraw those funds later on in retirement, I'm not taxed.

Jessie: That's okay because you're doing that when you're at a lower tax bracket.

Jess: So that's the benefit.

Jessie: You're in a lower tax bracket.

Jess: That's why you're paying your taxes now.

Jessie: I mean, if you're in a higher tax bracket, then you'd have to pay more taxes anyway on it.

Jess: So it's better to do the Roth IRA when you're in the lower tax bracket, making less income.

Jessie: Yeah, exactly.

Jess: And that's why it's beneficial for younger investors, because you're expecting a higher tax rate later on in life.

Jessie: And you're in a lower one now, so take advantage of those early, which is great.

Jess: They don't have what's called a required minimum distribution, whereas traditional IRAs do, where you're required to start drawing from that account at some point.

Jessie: Roth IRAs, you can have it sit there forever, theoretically.

Jess: I did not realize that.

Jessie: I thought you had to start withdrawing from even a Roth IRA at a certain age.

Jess: You do not.

Jessie: Well, because it's already taxed.

Jess: Think about it that way.

Jessie: The reason why there's an RMD is because of the tax things.

Jess: Yeah.

Jessie: Wait, RMD is what again? Required minimum distribution.

Jess: Okay.

Jessie: And that just means there's a certain age you're supposed to start taking money out of that retirement account.

Jess: Okay.

Jessie: So that is not the case for Roth IRA.

Jess: You can just leave it there forever.

Jessie: Correct.

Jess: You sure can, because you already pay tax on it.

Jessie: Because the IRS is like, what's the point of you taking money out? I'm not going to get- That makes so much more sense.

Jess: I didn't think about it in terms of the IRS, duh, taxes.

Jessie: It's not logical.

Jess: And the Roth IRA has qualified distributions.

Jessie: You can withdraw sometimes your contributions.

Jess: There's a whole list.

Jessie: We can put a link actually in the show notes for that one.

Jess: Oh, okay.

Jessie: That'd be good to know.

Jess: Yeah.

Jessie: Yes.

Jess: So that is the Roth IRA in a nutshell.

Jessie: We did not talk about excess contributions.

Jess: This applies to any contributions that you make in excess of what you can't.

Jessie: It's not that you just withdraw it.

Jess: You're like, I over-contributed by $1,000 or whatever.

Jessie: No, it doesn't work that way.

Jess: You have to call your brokerage firm.

Jessie: There's usually a separate form.

Jess: You can sometimes even do it online where you just say it's an excess contribution withdrawal because it has to account for any gains.

Jessie: You have to withdraw that too, because if you invested it, you shouldn't have made those gains and those shouldn't be tax deferred.

Jess: Does that make sense? Sweet.

Jessie: That's- Like your brokerage firm.

Jess: If you over-contributed, you're saying, you put more than the 7,000 or 8,000, depending on your age.

Jessie: You call up your brokerage firm and they do what? It's called an excess contribution withdrawal.

Jess: They do everything for you.

Jessie: What they'll do is say that you over-contributed by $1,000 and you did it on July 1st is when you made that last contribution that put you over the threshold.

Jess: Then you didn't realize this until December 1st.

Jessie: They're going to take the account value of your account on July 1st and then a portion that's $1,000, see what it is on December 1st, and then do a calculation so you can withdraw the gains too, if there were any.

Jess: It does not make sense for you to invest $1,000.

Jessie: Say you put that in Nvidia and then you made $5,000.

Jess: Well, now you have $5,000 tax-free in a Roth IRA account that you weren't entitled to because you over-contributed.

Jessie: You have to withdraw all of the excess.

Jess: And you get taxed on that? You sure do.

Jessie: Yeah.

Jess: Okay.

Jessie: So don't try to cheat the system.

Jess: No.

Jessie: Yeah.

Jess: And don't just withdraw it.

Jessie: That won't work because that's going to be seen as a distribution and it would be seen as an early distribution and it's not going to be coded correctly.

Jess: So what do you do? You call your brokerage firm.

Jessie: But like you don't just, oh, you don't just withdraw it yourself.

Jess: They do it or do they roll it over into another account? They would ask you what you want to do.

Jessie: Send you a check.

Jess: So many things you can do.

Jessie: Okay.

Jess: So the important thing is what to do when you realize that happened is call your brokerage firm and will they alert you? Do you have to stay on top of that yourself? How else would you find out? You sure do.

Jessie: I mean, they're going to have the contribution limits and normally they have like a little scale.

Jess: You know how we have goals and you draw.

Jessie: It's like you're eligible to- What if you don't do it? Then what happens? Tax penalties.

Jess: And that would show up on your tax return? Uh, just get audited or someone flags it eventually.

Jessie: Yeah.

Jess: I'm sure the IRS is on top of things.

Jessie: I'm sure.

Jess: I'm sure.

Jessie: Well, okay.

Jess: That's the whole purpose that we say about quarterly check-ins.

Jessie: Look at your retirement accounts as well.

Jess: Make sure you're not over-contributing.

Jessie: That's right.

Jess: All right.

Jessie: Next one.

Jess: Traditional IRA.

Jessie: This one is very straightforward.

Jess: I think once we get past the Roth IRA, it gets a little smooth sailing.

Jessie: So the main difference in this one is this is before tax compensation mainly.

Jess: So you can contribute if you've got taxable compensation, like we talked about before.

Jessie: You've got that job up to the limits.

Jess: There was a recent rule.

Jessie: It used to be when I first started, you weren't allowed to contribute if you were over 70 and a half.

Jess: Now there is no age discrimination.

Jessie: You can contribute if you're working no matter what your age.

Jess: So if you're working at 90, you may contribute to a traditional IRA.

Jessie: Wow.

Jess: Obviously you want to save for future you.

Jessie: Yeah.

Jess: And people are living longer and probably working longer.

Jessie: Exactly.

Jess: But I mean, I used to work in a retirement community and there were some people that would work at Fresh Market and they're like, I just want to do this to have something to do.

Jessie: Oh, okay.

Jess: So yeah.

Jessie: I never think about that.

Jess: A lot of people come out of retirement and, you know, have a job because they're bored.

Jessie: So that makes sense if you want to keep putting money away.

Jess: Yeah, I definitely would have.

Jessie: Deferred way.

Jess: A job forever.

Jessie: I feel like doing something.

Jess: I don't know.

Jessie: Okay.

Jess: So the traditional IRA, so there's no contribution age limits is what you're saying, but there is still a contribution money limit, just like the Roth IRA.

Jessie: Same thing.

Jess: Identical to the Roth IRA.

Jessie: The same amount.

Jess: Identical is in the terms of amount.

Jessie: There isn't an income threshold for contributing.

Jess: There is an income threshold for the contribution to be tax deductible or not.

Jessie: That's the difference.

Jess: So if you are over the age of 70 and a half, you can only have a traditional IRA, not a Roth.

Jessie: There is no age limit on the Roths.

Jess: You can have either.

Jessie: Yeah, because if you're over 70 and you're like back into the workforce, you're just doing a part time fun job and you're not making that much, then you might be in a lower tax bracket too.

Jess: So you might want to reopen or open a new Roth at that age.

Jessie: Yeah.

Jess: Okay.

Jessie: Yeah, you could.

Jess: If you want.

Jessie: Cool.

Jess: I didn't know that was a thing.

Jessie: I didn't know you could do that later in life now.

Jess: Sure.

Jessie: Yeah.

Jess: Which is awesome.

Jessie: So it's all about freedom of choice, isn't it? So the contributions though, this is where the difference is.

Jess: There are limits on how much money you can make if those contributions become tax deductible or not.

Jessie: So there's a deductible or there's a non-deductible contribution.

Jess: So the Roth IRA, we paid our taxes already and we decided we're going to do that because we're in a lower tax bracket.

Jessie: We're younger and just starting out or maybe we're in a gap year or something like that.

Jess: Whereas the traditional IRA, we've graduated.

Jessie: We are paying taxes.

Jess: We don't get a check back from the IRS anymore, which means we need to do something about our tax situation.

Jessie: And so if we're within the income thresholds, then we could have a deductible contribution and it would help us with our taxes.

Jess: Okay.

Jessie: And they do this with a phase out.

Jess: So it's not as straightforward.

Jessie: So meaning if you're over the limits, then you can contribute a certain portion of the $7,000, not all of it.

Jess: We will link to that little worksheet.

Jessie: It's super easy to look through.

Jess: Yeah, that's right.

Jessie: Okay.

Jess: But it's different income limits.

Jessie: So how much you make, depending if you or your spouse, if you're married, are eligible for a retirement plan at work.

Jess: If you're eligible for a retirement plan at work, the income that you have to make in order to have a deduction is much lower.

Jessie: If you're not eligible for a retirement plan at work, then the income threshold for the deduction is much, much higher.

Jess: It makes sense because if you have a 401k, there's higher contribution limits.

Jessie: It's sponsored by your employer.

Jess: It's part of your benefit package.

Jessie: And that also helps your taxes.

Jess: So it's like, we're not going to let you help your taxes too much here by contributing to your future accounts.

Jessie: Does that make sense? Yeah.

Jess: Okay.

Jessie: You put funds into the account.

Jess: Normally it's going to be a tax deduction.

Jessie: So it's your before tax dollars because it's going to help you tax wise.

Jess: You haven't paid taxes on the contribution, but you do pay taxes when you withdraw.

Jessie: And normally in retirement, you're going to have a considerably lower tax rate.

Jess: So you want to withdraw at a lower tax rate.

Jessie: Okay.

Jess: When we're talking about the differences between Roth and traditional IRAs, it makes sense to have the Roth when you're younger because you're in a lower tax bracket and you're paying the taxes on your contributions upfront, like when you contribute.

Jessie: But in a traditional IRA, you don't pay any taxes on what you're contributing.

Jess: If you're already in a higher tax bracket, you'd have to pay a lot more on those contributions.

Jessie: Right? So it becomes a tax deduction.

Jess: So it reduces your income, your taxable income.

Jessie: Oh, okay.

Jess: But it gives you a tax benefit.

Jessie: Yeah.

Jess: And that's the purpose of it.

Jessie: You're in a higher tax bracket.

Jess: You need a tax benefit.

Jessie: Right.

Jess: Whereas in the Roth, you can get...

Jessie: Exactly.

Jess: Now you may make too much money to get that tax benefit.

Jessie: And then you're going to make what's called the non-deductible contribution.

Jess: And this is how people do that backdoor Roth IRA.

Jessie: Oh, okay.

Jess: Yes.

Jessie: And then one more thing before we talk about backdoor Roth IRAs.

Jess: Since you are taxed when you withdraw these accounts, because you're not taxed on the gains and losses, you can buy whatever you want inside that house.

Jessie: You can buy stocks, bonds, options, mutual funds, ETFs, CDs, treasuries, other things.

Jess: Some of them don't make sense to do, but I digress.

Jessie: You have options.

Jess: You are required to have minimum distributions.

Jessie: And that starts after the age of 73.

Jess: The IRS is like, hey, you haven't withdrawn from this account yet.

Jessie: And we need some revenue, tax money.

Jess: Yep.

Jessie: They've got their hands out and you've got a minimum account.

Jess: And your brokerage firm does that for you.

Jessie: There's a calculation for your RMD.

Jess: You could set it up with automatic distributions.

Jessie: You can even do distributions of stock from your account.

Jess: It doesn't have to be cash.

Jessie: There's so many creative ways to withdraw.

Jess: Wait, what do you mean distributions of stock? How does that work? You can put a say.

Jessie: In other accounts? Let's fast forward and say that we're 73 and everything is AI and this is virtual.

Jess: I don't know.

Jessie: And I held onto those Nvidia shares in my IRA because I do have Nvidia shares in my IRA.

Jess: This is an example, not advice.

Jessie: And those Nvidia shares, I never sold.

Jess: And now after splits galore, I've made $100,000 on it.

Jessie: But my cost basis after splits galore is $5 a share.

Jess: Okay.

Jessie: Because it's split so much.

Jess: Okay.

Jessie: And so now it's time for me to take my required minimum distribution and is trading at $100 a share.

Jess: That's a $95 gain.

Jessie: I'm not taxed in that because it was on a tax deferred account, but I'm taxed as income.

Jess: So I could take a distribution of Nvidia at $100 per share.

Jessie: So say I withdraw $10,000.

Jess: So that $10,000 is taxed as income, but my new cost basis for that is now the current price at the time of distribution, or usually the closing price of that day, $100 per share.

Jessie: And then I could put that into my taxable account.

Jess: And then that's my new cost basis.

Jessie: And if that gains or loses, it'll start generating taxes, right? Okay.

Jess: And so that might make sense for you if you're still trying to keep those investments.

Jessie: You don't want to just have to cash them out or whatever.

Jess: Yeah.

Jessie: Or hopefully you're in a great place in your retirement where you're like, oh man, I have this required minimum distribution.

Jess: I don't actually need that income.

Jessie: Let me just give it to charity.

Jess: And then you can give them your shares of Nvidia and something like that.

Jessie: Let me give it to my kid.

Jess: There's so many things you can do.

Jessie: Yeah.

Jess: So many things.

Jessie: Makes sense.

Jess: Yeah.

Jessie: But most of our audience is not over the age of 73, but we do actually have a couple.

Jess: So I want to make sure we cater to you.

Jessie: And you just need to know this for future you anyway.

Jess: That's right.

Jessie: That is right.

Jess: All right.

Jessie: Oh, we can talk about the backdoor if you'd like as well.

Jess: Yeah.

Jessie: So backdoor means I want funds in a Roth IRA.

Jess: So what you would do is you would have a non-deductible contribution.

Jessie: It needs to be marked as non-deductible.

Jess: Call your brokerage firm, so they do it for you.

Jessie: That's a really smart idea.

Jess: Okay.

Jessie: And then you can do what's called a conversion, where you convert your funds in your traditional IRA into the Roth IRA.

Jess: And this is different from a rollover IRA, right? Yes.

Jessie: Literally.

Jess: That's why I love the house analogy.

Jessie: You got past the bouncer.

Jess: You could not get past the bouncer in the Roth IRA room, but you did get past the bouncer in the traditional IRA room.

Jessie: He was like, okay, yeah, you can make a non-deductible contribution.

Jess: So you put in $7,000 into the traditional IRA room.

Jessie: But there's a little backdoor between the traditional IRA room and the Roth IRA room.

Jess: And your broker's in there.

Jessie: He's like, yo, you want to do a conversion? And then you slide me the money and I'll do the conversion for you.

Jess: I mean, there's no fee for it.

Jessie: And so then they convert your $7,000 contribution into the Roth IRA room.

Jess: And it's still gross tax deferred because you're on the same floor, but then you withdraw from it.

Jessie: It's not taxed.

Jess: Your gains are not taxed.

Jessie: Wait, but how are you able to do that? Do you have to, was there some qualification you're talking about for that? No, but there are little nuances, which we could talk about.

Jess: There's something called the account aggregate rule.

Jessie: So for example, I personally am not eligible to contribute into a Roth IRA.

Jess: It's mainly my husband's fault.

Jessie: And I can do a non-deductible contribution into a traditional IRA.

Jess: However, I have a lot of money in my rollover in traditional IRAs.

Jessie: The account aggregate rule would say, okay, if you're going to put, say I do a non-deductible contribution of $7,000 into my traditional IRA, but I already have a ton of money there.

Jess: It's going to take that $7,000 in a percentage versus my entire account value.

Jessie: Like what percentage is it of all of Jess's traditional and rollover IRAs all together? It will create a bigger tax event for me.

Jess: That's what I'm saying.

Jessie: It doesn't make sense.

Jess: As I was going to say, why doesn't everybody just do that? Some people do, but if you have a traditional or a rollover IRA already, it's not going to be a good idea for you.

Jessie: There's no point.

Jess: So we can clear it up real quick.

Jessie: A rollover IRA is something you have maybe between jobs where you had a 401k at an old employer.

Jess: You can put that 401k, you don't want to leave it at the old employer.

Jessie: You can take that 401k and put it into something called a rollover IRA until you decide what you want to do with that next.

Jess: Or maybe you get a new job and put it into a new 401k.

Jessie: Yeah, exactly.

Jess: Beautiful.

Jessie: That rollover IRA, it's identical to a traditional IRA.

Jess: They actually work exactly the same.

Jessie: It just has a little different name and a label above the door, I would say.

Jess: Because you could take your 401k and put it in your traditional IRA.

Jessie: There is no problem with that.

Jess: It can happen, sure.

Jessie: Even if it's more than the 7,000 contribution? Yeah, that's not a contribution.

Jess: Because what's in that room is what's in that room.

Jessie: That's not what matters.

Jess: What matters is the additional money you're putting into it each year.

Jessie: Right..