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4 Ways to Fund Your Roth IRA Tax-Free

Updated: Jan 1, 2019


Today's Growth Quote, "It does not matter how slowly you go so long as you do not stop." - Confucius

I’ve seen many great arguments on why you should prioritize either your Roth IRA or 401k, read about the tax advantages of both, and have come to the conclusion that there’s no single right answer for everybody. I’ve also ready how an HSA is the ultimate retirement vehicle because the money you put in it is tax-free, it grows tax-free, and is withdrawn tax-free. I wanted to find some creative ways to fund our Roth IRAs tax-free so that they have the same tax benefits as HSAs!


Here’s what I came up with:


1. For low-income families and tax optimizers, an easy way to fund your Roth IRA tax-free is to use your tax refund check. As explained in a previous blog post, we anticipate receiving a tax refund check between $9k-$10k this upcoming year. This last year, we received over $8k. With the new Roth IRA limits of $6k/person (with earned income or spouse of someone with earned income), we could fund Mr. Sim’s Roth IRA and at least half of mine. Tax refund payments are not taxed as income, so the funds will be contributed tax-free, grow tax-free, and disbursed tax-free. Win win win!


2. Something that anyone can do, regardless of income, is take advantage of credit card sign-up bonuses. ChooseFI refers to this as travel hacking and has a great compilation of credit cards and their bonuses. However, if you aren’t much of a traveler or don’t plan on travelling in the near future, most bonuses have cash bonus options. For example, using the Chase Sapphire Preferred card, if you meet the minimum spend of $4,000 in the first 3 months, you receive a bonus of 50,000 points, worth $0.01/point. So you can redeem these points for $500 cash, tax free. Throw that in the Roth IRA!


3. A much more complicated solution to the win win win situation with your Roth IRA is to use a Roth Conversion Ladder. Essentially, you slowly move traditional IRA funds over to the Roth IRA at a rate where the conversion won’t be taxed. You need to have a low income in order to pursue this successfully.The Mad Fientist does a much better write-up on this than I could do, so take a look!


4. The fourth way is very unlikely to fully fund your Roth IRA tax-free, but every bit counts! I like to use apps like Ibotta because they give out real cash rewards. For Ibotta, you just need to scan your receipts after purchasing items that have special deals. I once bought a $3.50 jar of mayo and got a $4 reward from Ibotta! My husband and I have earned over $200 since we started using the app this summer. The rewards aren’t taxed, and you can get the rewards sent to your PayPal address and deposited to your bank account. Then just send that free money over to your Roth IRA!


Mr. Sim and I plan on taking advantage on methods 1, 2, and 4 this coming year and method 3 once we begin our early retirement. By utilizing these methods, you don’t need to neglect the Roth IRA or the 401k! Over decades, you could literally save tens if not hundreds of thousands of dollars by funding your Roth IRA with untaxed dollars. What other (legal) ways have you found to fund your Roth IRA tax free?

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