Archive for category Roth IRA
Is a Roth IRA Good or Bad?
Like a knife, a Roth IRA is neither inherently good nor inherently bad. In the hands of a thug, a knife can be a deadly weapon. In the hands of a skilled surgeon, a knife is a life-saving device!
Roth IRAs are a special type of individual retirement account (IRA). When “traditional” IRAs were originally made available, it was on a tax-deductible basis. You could contribute up to $3,000 and if you were not participating in another retirement plan or did not make too much money, you could deduct the $3,000 on your tax return.
For 2010 and 2011, the amounts are $5,000 for people under 50 years old and $6,000 if you are 50 or older. If you are a participant in another retirement plan, you cannot contribute to a normal IRA if you make more than $109,000 in AGI (married filing jointly), or $66,000 (single). In a Roth IRA, you cannot contribute if you make more than $177,000 in AGI (MFJ) or $120,000 (single).
Under a Roth IRA, the difference is that these contributions are NOT tax deductible. The tradeoff is that if you meet certain conditions, such as holding the account for at least five years, then the increase in value of the account (interest, dividends, and capital gains) are ALSO not taxable!
Generally, the younger you are, the better it is to start putting into a Roth. The number of years of tax-free earnings will far outweigh the benefit of a traditional IRA. Conversely, the older you are, the less advantageous the few years of tax-free earnings will be. Your income tax bracket also comes into play here. If you are going from a high income tax bracket in your earning years and into a low one in your retirement years, perhaps the deferral is not as attractive.
In 2010, there was a big frenzy to convert traditional IRAs to Roth IRAs. The government was putting this forth as a taxing measure to offset some spending. If you converted to a Roth IRA, be sure to speak with a tax advisor to get the best tax treatment on the conversion. Read the rest of this entry »
Positive Aspects of Planning an Inherited Roth IRA
An inherited Roth IRA is a good estate planning strategy for people that want to lessen tax burdens for heirs. The account holder pays income tax when contributions are made; making funds tax-exempt when passed along to beneficiaries.
Proceeds earned from an inherited Roth IRA are subject to inheritance tax when they surpass allowable exemptions. It’s advisable for beneficiaries to obtain counsel from a tax accountant to determine if they should transfer money into a newly established account or accept lump sum cash.
Several changes have taken place regarding estate and death tax, with more changes taking place in 2012. Account holders may also want to consider talking with their estate planner to ensure funds are protected against forthcoming legislation.
It only makes sense that the longer contributions are placed into a Roth IRA account the more money will be available for beneficiaries. One simple way to illustrate how funds can accumulate was presented by a financial advisor I once knew. He referred to the method as creating ten dollars out of one dollar.
Contributions to IRA accounts can substantially expand over the course of time. When funds are secured for 20 or 30 years, the tax savings could easily amount to as much as ten times more than the original taxable amount.
For demonstration purposes let’s say the tax rate was 5 percent at the time the account was opened. For every $100 contribution, $5 is paid in taxes. Twenty years later, the tax rate has increased to 25 percent and for $100 contributions a tax amount of $25 is assessed.
Since the taxes were paid at the time of contribution, beneficiaries are only responsible for inheritance taxes against earned income, not the contribution amount. Using the example above, this saved them 20 percent in income taxes alone.
One benefit of Roth IRAs that is attractive to most people is that contributions don’t have to be withdrawn at a certain age. Traditional IRAs require account holders to take out their money at age 70-1/2.
Furthermore, account holders can keep on contributing to the Roth IRA for as long as they want. This provides the option to increase available funds and pass along more money to heirs. With traditional IRAs, account holders have to cease making contributions which decreases the amount of inheritance cash that can be gifted. Read the rest of this entry »
Your Roth IRA Investment Is Tax Free!
Planning for ones’ retirement is always a good idea no matter how old or how young you are. Obviously, if you are older your retire plan strategies will tend to be a bit different than if you start planning for retirement at age 25. However, one particular tool in planning for retirement that is extremely effective is by using a Roth IRA. An IRA stands for individual retirement account and there are actually two different kinds of IRA’s. The first is the standard IRA and the other is known as a Roth IRA. Named after Senator William V. Roth, this particular IRA differs some from the traditional individual retirement accounts and has been a popular means for retirement planning. The question that many people have is what makes a Roth IRA investment better than your average IRA investment.
While the expected rate of return on both a traditional IRA and a Roth IRA investment is typically around eight percent, give or take a few percentage points, where Roth IRA’s excel is that you can contribute more in a year, up to $6,000 per year as opposed to the $5,000 maximum on a standard IRA. The one drawback is that with a Roth IRA, the contributions you make to it are not tax exempt as they are with a regular IRA. You cannot use the amount you contribute to a Roth IRA as a deduction on your tax return. With a regular IRA your investment is tax deductible. In both cases you are not taxed for the value of your investment.
Another huge upside to having a Roth IRA investment is that unlike the standard IRA, there are much fewer restrictions as it early withdraws. With a standard IRA, an early withdraw could mean some pretty stiff tax penalties. While there can be some penalties associated with withdraws from a Roth IRA, they are not as extensive or limited as a standard IRA.
One important feature many overlook when considering a Roth IRA is the fact that you can invest in real estate, paper (debt instruments), gold, silver, own businesses like: LLC’s, Land Trusts, stocks, bonds, and a host of many other investments. I have personally owned real estate in my IRA and seen it go from investments of $100 to $1,000 in one single transaction in under 30 days. Online you can find many IRA companies that help you facilitate these types of transaction inside your IRA. The company I use is called Equity Trust Company out of Ohio. I have used them for years with my deals and not had any problems. Read the rest of this entry »