A Roth account can be a great vehicle for increasing your net retirement assets. That’s because the account gets funded with after-tax dollars but then grows tax-free and can be withdrawn tax-free past age 59 1/2. While the specifics depend on your tax situation, that often means paying a little bit of taxes now to avoid a lot of taxes later.
Not everyone is eligible for a Roth account. Roth IRAs, for example, have income limits: Those who are married filing jointly would need a modified adjusted gross income of less than $218,000 (or less than $138,000 for single filers), in order to make the full annual contribution of $7,000 for 2024 (plus $1,000 in catch-up contributions for those ages 50+).
But what if you’re eligible yet don’t have the cash to max out your Roth IRA?
The Money Guy Show Weighs In
In a recent clip from The Money Guy Show, a listener asked hosts Brian Preston and Bo Hanson about whether they should pull money from a brokerage account to fund a Roth IRA. While technically you can do that if you meet the Roth IRA eligibility requirements, the question is more so whether it makes sense to move those assets.
As the hosts discussed, it might make sense to move that money to gain the tax advantages of a Roth, but it really depends on your situation.
Just because you have money in a brokerage account doesn’t mean that you should move it around mindlessly. For example, if you’ve experienced significant investment gains recently that would then be taxed as short-term capital gains if you withdrew funds, it might not make sense to move the money yet.
Another situation they discussed is that if the money in your brokerage account serves as your emergency fund, such as if you have that in a relatively secure asset like a money market fund, then you don’t necessarily want to drain that safety net to then fund your Roth IRA.
The Money Guy’s “Financial Order of Operations” suggests building up your emergency reserves before turning to Roth and Health Savings Accounts, so you might not want to move money from your brokerage account if that puts things out of order.
But if you can use a taxable brokerage account to max out your Roth without getting off course, then it could make sense to do that as a way to potentially save on future taxes.
