For Millennial Self-Directed IRA Investors, the Roth is King
Are you younger than about 40? And starting to contribute to a Self-Directed IRA and other retirement accounts in a big way? Go Roth, young man, or young woman. Do not pass “Go,” and do not collect $200, unless you then use it to invest in a Roth IRA or designated Roth Account in your 401(k).
The reason: The tax-free growth that you can get from a Roth account, whether a Self-Directed IRA or a conventional one, for the rest of your life. As long as you can keep the money in your account for at least five years (qualifying for the Roth treatment and avoiding a 10 percent early withdrawal penalty on your own contributions), the Roth IRA compounds more quickly and generates more after-tax income for you, provided you were in a higher tax bracket in retirement than you were early in your career, when you made the contribution. And if you play your cards right, that should be true for most of you.
This is especially true for you Millennials. If you’re younger than 30 and reading this, congratulations! You’re way ahead of most of your peers, and reading up on information that most of our clients, successful as they are, wish they were able to act on earlier in life.
The younger you are, the more time the Roth advantage has to compound. If you meet the income eligibility criteria, you can contribute up to $5,500 per year to a Roth IRA. (Those ages 50 and over have a different kind of advantage: You can contribute an extra $1,000 in ‘catch-up’ contributions to your Roth IRA).
Roth IRAs, including a Roth Self-Directed IRA such as real estate or gold or precious metals IRAs, have other advantages as well:
Roth IRAs are not subject to required minimum distributions, or RMDs. They are therefore more suitable if you have other assets you can live on in retirement for a number of years beyond age 70½, or if you want to maximize the financial legacy you are passing on to your heirs.
Roth IRAs also provide a shield against income tax increases in the future. Any income you get in retirement from a 401(k) plan, SEP, 457 plan, traditional company pension, military/government pension, Thrift Savings Account or SIMPLE IRA or annuity is going to be subject to ordinary income taxes in retirement, and if Congress raises taxes, all these common sources of retirement income will be subject to ordinary income taxes.
Under current law, Roth IRA income is not subject to income taxes. While it’s technically possible that Congress could change this and tax some portion of Roth IRA income in the future, especially for owners of ‘jumbo IRAs of, say, $5 million or more. But that seems to be unlikely for the next several years given the makeup of Congress and the Presidency for the next four years.
Even so, the best strategy isn’t one that frets about possible taxes on jumbo Roth IRAs that don’t even exist yet; The best strategy is one that maximizes the likelihood of you becoming a ‘jumbo IRA’ owner in the first place!
American IRA, LLC specializes in helping clients execute Self-Directed IRA strategies, including self-directed Roth IRAs. Our clients frequently use nonstandard investment strategies and alternative assets, held within a Self-Directed IRA, to increase their diversification, increase their potential returns, lower overall portfolio risk, and concentrate their investment efforts on assets and strategies in which they have a tradable competitive advantage.
To learn more, or to get started, visit us at www.americanira.com., or call us today at 866-7500-IRA(472). We look forward to working with you!