How to Fix 2024 IRA Mistakes
One of the most commonly discussed financial accounts is the Individual Retirement Account (IRA).
It’s an investment account that gives you tax benefits when you save money for retirement. No employer needed (unlike a 401(k)).
For 2024 and 2025, you can contribute $7,000 per year.
"But Chris, 2024 is over, I missed my window!"
Wrong.
You actually have until April 2025 to make 2024 contributions.
Let's discuss how to play catch up AND how to get it right in 2025.
When it comes to Traditional vs. Roth IRAs, experts generally recommend contributing to a Roth given young people generally have lower tax brackets.
It doesn’t give you a tax break now but allows your contributions to grow tax-free, and more importantly, sell tax free in retirement.
Hello 40+ years of tax-free growth.
As we discussed last week, tax-free anything makes a huge difference in your dollars.
If you didn’t touch your IRA in 2024, here are two ways to play catch-up:
1. Make less than $146,000 while Single or less than $230,000 as a Married Couple? Contribute Directly to a Roth IRA
This is the straightforward route.
First, open a Roth IRA with Fidelity, Schwab, or Vanguard.
Then, go to your IRA and contribute up to $7,000 to 2024’s contribution.
It will literally let you pick which year you are contributing to.
In this scenario, we’re playing catch up, so select 2024.
Put money in, choose an index fund to invest in, and you’re good to go.
Remember to invest the money once it’s in the IRA. Otherwise it will sit in there not earning much interest like a savings account.
Your IRA custodian (Fidelity, Schwab, etc.) can help make sure you’re properly set up and invested. Use them.
2. Make more than $161,000 while Single or $240,000 while Married?
Use the Backdoor Roth Conversion
Remember last week when I said the tax code is weird?
This is another example.
The government wants the great Roth benefits to be for those earning below a certain income level.
The government also created a dead-simple way to get around that income limit.
So simple it’s literally a button on your Fidelity app.
US Taxes are weird…
First, if you qualify for the backdoor conversion, congrats on being in the top 10% of US earners - take a moment to be grateful 🙂
After your moment of gratitude, here are the three steps to legally leverage a Roth IRA:
1. Open both a Traditional IRA and a Roth IRA
Just like a Roth, straightforward enough online.
2. Contribute up to $7,000 to the Traditional IRA
$7,000 is the 2024 limit. If you’ve got the cash on hand to do it, contribute as close to the $7,000 as you can.
3. Then, initiate a Roth Conversion
After your money makes it from your bank to your Traditional IRA (normally 1-2 days), start a Roth Conversion. There is a literal button on Fidelity (told you, it’s very easy to use tax loopholes)
That’s it!
Easy peasy.
When you do a Roth conversion, you will need to fill out Form 8606 on your taxes. Turbo Tax/ H&R Block will make it easy.
If you already have money in a Traditional IRA, there may be tax implications when converting to a Roth IRA.
I’m not a CPA so if you have money in your Traditional IRA already, give Fidelity or Schwab a call before you do the conversion to understand the potential tax implications.
Okay you caught up on 2024.
How do I automate this in 2025?
For those earning less than $150,000 Single or $236,000 Married in 2025: Contribute directly to a Roth IRA every single month.
For 2025, you can contribute $7,000 per year to an IRA.
That’s $583 per month.
Go to your account and set up automatic transfers from your bank account to your Roth IRA of $583 per month.
By the end of 2025, you will have maxed out your IRA.
For my higher earners, you’ll have a bit more admin work.
Set the $583 to go into a Traditional IRA. Then, each month go into your account and do the conversion to a Roth.
Though more work, converting to a Roth monthly instead of all at once in December of 2025 minimizes any taxes you’ll pay converting from Traditional to Roth.
"Chris, what does investing $7,000 per year actually get me in retirement?"
Well, $7,000 per year compounding at 8% for 35 years is $1.2 Million dollars.
Is $1.2 Million worth taking the hour to set this up?
