Roth IRA Archives | American IRA

Self-Directed Roth IRA or Solo 401(k)? Which should I Contribute To First?

April 14, 2017/in Articles, Blog, Roth IRA /by Jim Hitt

As it is so often in investing, the answer is “it depends.” Both the Self-Directed Roth IRA and the Solo 401(k) are very popular among investors who embrace the advantages of self-directed strategies. But they are not only taxed differently – they are also structured differently.

Consider prioritizing your Self-Directed Roth IRA first under the following circumstances:

You are relatively young, or have an extra long time horizon.
You want to pass a lot of money on to heirs
You are sensitive to a possible estate tax down the road. Roth IRAs have a lower estate tax footprint, since they move money that your estate will eventually have to pay in taxes out of the taxable estate.
Your income is lower now than it will be in the future.
Your tax bracket is lower now than it will be in the future. That is, would you rather pay your income tax rate now? Or would you rather pay the rate you’ll be in when you retire? If you’re probably paying a lower rate now, then emphasize the Self-Directed Roth IRA.
You’re in a state that provides a lot of creditor protection to IRAs in the event of bankruptcy.
You don’t want to have to worry about required minimum distributions down the road
You don’t own a company or have a lot of self-employed income you can contribute to a self-directed Solo 401(k)
You’re not getting a match from an employer’s 401(k) other than a solo 401(k) that you control
You have a weak 401(k) plan at work that won’t let you self-direct, and has lousy mutual funds and other investment options, or only offers high-expense funds.
You don’t expect to need to borrow money out of your 401(k) in the future.
You want the more flexible hardship withdrawal options that IRAs come with.

On the other hand, maxing out a solo 401(k) plan, or any other 401(k) plan that has your desired features may work best for you under the following circumstances:

You can pick up an employers’ matching funds.
You own a C corporation and would pay high taxes and double taxation on money that doesn’t go into a tax-deferred 401(k) plan.
You want to maximize the amount you can contribute and only run a single plan for the time being.
You want to be able to take a loan out of your Solo 401(k)
You want to retire early and be able to make early withdrawals. 401(k) rules let you take money out of your plan at age 55 without a 10 percent penalty if you’ve left the company. IRAs make you wait until age 59½.
You want to leverage, for example, to buy real estate within your retirement account with a mortgage. In an IRA, you’d have to pay an additional tax, called the unrelated business income tax, on income and capital gains attributable to other peoples’ money. In a 401(k), you may be able to avoid that tax. Speak with your tax advisor for more information.
You want extra protection against creditors, including the IRS. 401(k)s are much tougher for creditors to crack.

American IRA, LLC provides top-notch administration for owners of Self-Directed Roth IRAs or self-directed 401(k)s. Our services allow you to tap the tremendous tax advantages of using self-directed retirement accounts but also maximize your choices and options.

For more information, call American IRA, LLC today at 866-7500-IRA(472), or visit us on the Web at www.americanira.com.

We look forward to working with you.

The Roth IRA Advantage – Tips for Self-Directed IRA Owners

August 19, 2015/in Articles, Blog, Roth IRA, Roth IRA /by American IRA

The Roth IRA, under current law, is a terrific deal – especially for younger investors: You put money in now on an after-tax basis. Your account grows tax-free for as long as you leave the money in there. There’s no income tax, no dividend tax and no capital gains tax on anything left in a Roth IRA for at least five years. And when you take the money out, distributions are tax-free.

Furthermore, Roth IRAs, unlike tax-deferred traditional IRAs, 401(k)s and other tax-deferred investment or savings vehicles, are not subject to required minimum distributions in retirement. That’s great news for self-directed IRA owners who have large, illiquid and indivisible investments within their IRAs or other self-directed retirement accounts.

The Roth IRA, in short, is a terrific home for assets you can hold until retirement age or longer. Here are some advantages – especially for younger investors.

Your employer doesn’t control it. The IRA is a personal asset. You own and control your own IRA. Your employer cannot set limits on how you access or use the money. For example, some employers will restrict access to 401(k) funds for in-service workers. Some prohibit in-service withdrawals outright. You have to abide by the plan sponsor’s rules, and those may not be in your interest.
IRAs allow you to make penalty-free emergency withdrawals. In the case of a Roth IRA, if you’ve left the money alone in your account for five years, you will owe income taxes only on the investment gain, not on your original contribution (since you already paid taxes on it). You will not owe a penalty if you make the withdrawals for certain emergency expenses:
- You are deceased
- You’re disabled
- You are using the money to fund educational expenses for you or a family member
- You are a first-time home buyer making a down payment on a house for yourself or a loved one (up to $10,000)
- You are using the money to pay medical insurance premiums or avoid getting foreclosed on or evicted.
There are important advantages to heirs who inherit a Roth IRA as opposed to assets outside of an IRA. For example, your heirs can take advantage of a “stretch IRA” strategy, in which the IRA can continue to grow tax-free throughout the life expectancy of your heir, provided your heir continues to make required withdrawals.
You aren’t committed. You can make a contribution this year and skip next year with no penalty.

[tweetthis twitter_handles=”@iraexpert” hidden_hashtags=”#RothIRA”]The Roth IRA, in short, is a terrific home for assets you can hold…[/tweetthis]

Legislative Risk

At the beginning of this article, we wrote that the Roth IRA is a great deal under current law. But the reality is that the tax benefits of tax-free growth and tax-free withdrawals are all in the future, while you will have already paid tax on dollars you contribute to an IRA this year. In effect, the government has pledged to pay you Tuesday for its hamburger today… but it has no obligation to do so.

What the government giveth, the government can take away. It is possible that Congress will eliminate, limit or means-test the tax benefits of the Roth IRA in the future. However, this is speculation. Under current law, the Roth IRA is a great deal for anyone who wants the tax-free growth available under the Roth IRA banner, and who expects to be in a higher tax bracket when they retire than they are in, currently.

Do you need some help choosing between a Roth IRA and a traditional IRA or other investment vehicle? Call American IRA, LLC at 866-7500-IRA (472). Or visit us at www.americanira.com. We are among America’s premier administrators of self-directed retirement accounts, and we’re looking forward to hearing from you.

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Want a Self-Directed Roth…Don’t Forget the “Back-Door” Option

February 4, 2015/in Articles, Blog, Home Link, Roth IRA, Roth IRA, Roth IRA /by American IRA

Imagine…taking income from a portfolio of real estate investments, tax-free. From a Self-Directed Roth portfolio that’s grown – tax free.

Imagine doing the same from a portfolio of stocks, bonds, annuities, mutual funds, or nearly anything else you can imagine! Now imagine your heirs stretching those withdrawals over the course of a lifetime – also tax-free. Imagine not just passing on that gift to a child but a grandchild who may outlive you by 70 years or more. That’s generations of tax-free growth in a ‘stretch Roth IRA’ And it’s a powerful concept indeed.

But some people make too much to make a Self-Directed Roth contribution. Currently, the IRS sets a maximum income threshold on contributing to a Roth IRA at 114,000 for singles or $181,000 for married couples filing joint returns for 2014 contributions. You have until April 15, 2015 to make your contribution for tax year 2014.

If you made more than this amount in 2014, though, all is not lost. You are not permanently locked out of eligibility to take the Self-Directed Roth IRA option.

Instead, you can take the “back door” into the Roth. Here’s how it works:

Make your contribution into a traditional IRA. With your income, you’ll have to do it on a nondeductible basis. But you wouldn’t get a deduction with a Roth IRA going in directly, so it’s a wash.
Execute a conversion.

See, in contrast to contributions of new money to Roth IRAs, the IRS sets no income limits on conversions. Congress removed the limits beginning with tax year 2010. You can execute a conversion at any income level. The IRS is happy to take your tax money this year, rather than potentially having to wait until you start taking RMDs.

Since then, the back-door Roth IRA has become extremely popular with higher income taxpayers – especially ones who can take a ‘long view’ with regard to passing on wealth to the next generation, and who are sensitive to estate tax concerns at both

Generally, doing a conversion is as easy as filling out a few forms – and paying some tax you would have paid anyway.

The potential tax savings are significant. According to research by Vanguard, “an investor who continues to contribute the maximum amount beginning at age 30 could accumulate almost $460,000 in an IRA by age 65. However, if those contributions stayed in a nondeductible traditional IRA, more than 15% would go to income taxes. By age 90, such an investor could lose more than $250,000 to taxes.”

If you took a tax deduction for your traditional IRA in prior years, and you want to roll that account over, you will have to come up with some additional taxes. Essentially, you will pay income tax for any amount you convert on which you haven’t already paid taxes. If you want the benefits of the Self-Directed Roth IRA, though, it’s likely worth the cost – particularly if you can pay the tax with money outside of the IRA.

You can pay taxes from within the converted IRA, too – but that lowers the amount of money that will be growing on a tax-advantaged basis. It still may be a good idea, but the most tax-efficient solution, long term, is to convert the full amount in the original traditional IRA, and then pay the taxes with money from outside the retirement account.

You can do the same concept with self-directed IRAs, too. The only difference is if you have assets in a self-directed IRA that are highly illiquid, it could be difficult to pay the taxes from within your IRA even if you wanted to. In these cases it’s more important to have some liquidity outside the IRA, or in other accounts, that’s available to pay the tax bill.

American IRA is a leading authority on Self-Directed IRAs and the rules that govern them. We work with independent-minded investors in all 50 states. If you have questions or would like to explore whether a self-directed IRA or conversion is right for you, call us today at 866-7500-IRA(472), or visit us online at www.americanira.com.

How We Finally Stopped Worrying and Learned to Love the Self-Directed Roth IRA

December 26, 2014/in Articles, Blog, Roth IRA, Roth IRA, Roth IRA, Roth IRA /by American IRA

With the recent resounding GOP victory in the mid-terms, the chances of the repeal of the essential promise of the Roth IRA – that future Congresses would respect the pledge that in return for foregoing the immediate tax deduction, investors would enjoy the tax-free growth of Roth IRAs seem a lot lower.

President Obama is probably the most progressive President we have seen in generations, whose base is likely the most willing to tolerate or even endorse tax hikes on retirement account owners in generations – but the chances of any such policy making its way through the Republican-dominated Congress for the next two years appears vanishingly small. And it is unlikely a future president will be as progressive as this one for a while.

So a big part of the downside risk of the Roth IRA – that Congress would break its promise to the American people and start taxing Roth distributions – seems to have largely evaporated for garden-variety IRAs.

We still see some risk for inherited IRAs and “jumbo” Roth IRAs of over, say, $5 million in value, however.

So this calls for a renewed consideration of the value of Roth IRAs and whether they deserve a place in your portfolio.

We believe that for most, the answer is “yes.” Here’s why:

Tax-free retirement income. This is valuable stuff for a couple of reasons. First, it’s, well, tax-free retirement income! But above and beyond that, it doesn’t affect Social Security income. Too much taxable ordinary income and half of you Social Security benefits become taxable. But as long as the money you’re living on isn’t ordinary income, it shouldn’t affect your Social Security tax.

Mitigation of Legislative Risk. Yes, people have worried about the risk that future Congresses would start taxing Roth income for some time. Why? They were worried about legislative risk! But the very same dynamics that could have led Congresses to taxing Roth IRAs are the same dynamics that may lead future Congresses to increasing ordinary income tax rates in the future. That is, the Treasury needs cash, and income taxes are perceived as the most efficient and fairest way to raise it. The Roth IRA is a crucial tool in hedging against the possibility that the government will increase personal tax rates on ordinary income.

No Required Minimum Distributions. This is a biggie – especially if you are relatively well off and may well not even need the money to live on. An inherited Roth IRA is one of the best ways to pass wealth on to future generations, although the old advantages of the “stretch” Roth IRA have vanished.

Friendly to Self-Direction. If you like to steer investment assets into relatively long-term, illiquid investments, then having to worry about RMDs every year can be a little problematic. By eliminating RMDs, you are eliminating a major headache in retirement once you turn age 70½: Scraping up the cash from your illiquid investments in, say, raw land, tax liens, tax certificates, some rental real estate and the like can be a problem when you’re scrambling to meet your RMD deadline. Roths don’t have RMD deadlines!

Mitigates Effects of Estate Taxes. Planning on dying wealthy? If you are sitting on a big traditional IRA, 401(k) or SEP balance, converting that money to a Roth IRA and paying taxes on that money will reduce the size of your taxable estate by whatever you pay in taxes. That increases the net amount you can pass on to your heirs.

You can make contributions longer. Not ready to hang up your spurs at age 70½? If you’re a fan of this great George Jones song, you may want to reserve the right to keep making money and keep squirreling money away into an IRA for longer. Traditional IRA rules don’t allow you to keep contribution money to them after you turn 70½. But Roth rules do! All you need is earned income.

Is a Self-Directed Roth IRA in your future? American IRA, LLC is America’s leading authority on Self-Directed IRAs as well as 401(k)s and other retirement accounts. Our offices are in Asheville and Charlotte, North Carolina, but we work with investors from all 50 states – especially with issues arising from self-directed accounts. Visit us today at 866-7500-472(IRA) or download one or more of our exclusive guides to self-directed IRA investing at www.americanira.com. We look forward to hearing from you!

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Archive for category: Roth IRA

As it is so often in investing, the answer is “it depends.” Both the Self-Directed Roth IRA and the Solo 401(k) are very popular among investors who embrace the advantages of self-directed strategies. But they are not only taxed differently – they are also structured differently.

Imagine…taking income from a portfolio of real estate investments, tax-free. From a Self-Directed Roth portfolio that’s grown – tax free.

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