Personal Finance & Investing : How Does a Roth IRA Work?
A Roth IRA is a type of retirement investment account that an individual can start withdrawing from at the age of 59 and a half without paying taxes on it. Open a Roth individual retirement account by visiting a local financial institution with tips from a futures and options floor trader in this free video on personal finance. Expert: Mark Griffith Bio: Mark Griffith has graduated in economics and philosophy at Clare College, Cambridge. He has been a futures and options floor trader at LIFFE (London International Financial Futures Exchange). Filmmaker: Paul Volniansky
Roth IRA: The New Rules (Part 1 of 2)
The rules surrounding Roth IRA conversions have changed significantly. Are you wondering if a conversion is right for you or your client? Learn more about these changes and the charitable giving options to consider in this two-part video featuring Marjorie A. Horwin, CPA, of Morrison, Brown, Argiz & Farra, LLP and Jeffrey A.Baskies, Esq., of Katz Baskies LLC in Boca Raton. The Community Foundation for Palm Beach and Martin Counties appreciates the expert advice of Ms. Horwin, member of the Community Foundation’s South County Professional Advisor Network and Mr. Baskies, Co-Chair of the South County Professional Advisors Network. Video produced by the Community Foundation for Palm Beach and Martin Counties and Stephen Leek Photography
Is a Roth IRA for you?
Assuming that you qualify for a Roth IRA, consider the pros and cons before you convert your traditional IRA. You can leave money in your Roth IRA as long as you live. Unlike a traditional IRA, there is no minimum distribution requirement attached to a Roth IRA. Contributions can still be made to your Roth IRA after you’ve reached age 70 ½, whereas you cannot continue funding a traditional IRA once you’ve reached 70 ½. Qualified distributions from your Roth IRA are not subject to either taxation or penalties after the plan has been open for five years. On the down side, the amount of money being converted from a traditional IRA to a Roth IRA is subject to inclusion in your taxable gross income. This will increase your taxable income and taxes due for the year in which the conversion is made. There are no penalties on this conversion as long as the full amount of the distribution from the traditional IRA to the Roth IRA is made. Otherwise the premature penalty of 10% of the amount not converted to the Roth IRA will apply.
Self Directed IRA
So what is a Self Directed IRA and how does it work?
A Self Directed Individual Retirement Account (SDIRA) is an IRA that requires the account owner to make investment decisions and investments on behalf of their retirement plan. The IRS requires that a custodian or a qualified trustee holds these assets for the IRA owner. Self directed IRA accounts can be held in a variety of assets including traditional investments of stocks, bonds and mutual funds, as well as other IRS-permitted investments. These permitted investment options include real estate (both domestic and foreign), private equity, tax liens, franchises and mortgages. A self directed IRA allows more investment choices. In most circumstances, the custodian/trustee maintains the assets and the records pertaining to all the self directed IRA transactions. They will issue account statements, file the required IRS reports, are an advisor to the owner on regulations pertaining to these transactions, and they perform the administrative work on behalf of the owner of the self-directed IRA for the life of the account.
Prohibited Activities, Penalties
Having a self-directed IRA allows investment diversification, since there are numerous investment options. If you are interested in a self-directed IRA, it is imperative that you educate yourself to be sure that the choices you make are in compliance with current IRS regulations. Your custodian/trustee will not be able to provide you with legal or tax advise. If you are 59 ½ years old or younger, there is a 10% early withdrawal penalty for distribution from your IRA. Be aware that some investments are not permitted within your IRA. These include life insurance, collectibles and prohibited transactions with disqualified persons as defined by the Internal Revenue Service in IRC 4975 (c) (1.) Real estate and other investment assets employed for personal benefit, other than for a return for the IRA, may not qualify and may become immediately taxable. A self-directed IRA will give you options for building a strong retirement fund and it’s up to you to know the rules and plan accordingly.
Limited Liability Company (LLC) Self Directed IRA Structure
Some self directed IRA investors choose to use a Limited Liability Company structure as a means of reducing fees and to streamline paperwork and transaction processing. The account holder manages the limited liability company himself, and directs the custodian/trustee to invest in the LLC, enabling him to execute transactions as the LLC without involving the IRA custodian/trustee. This is often done to bypass custodial fees and avoid transaction delays. Profits for the LLC have nearly identical tax-favorable treatment for the IRA with this scenario. Internal Revenue Code Section 401 does not require use of a custodian, and this structure is frequently referred to as ‘checkbook control” since the IRA holder likely has sole signing authority for the LLC. There has been discussion that the IRA LLC strategy was legitimized by a 1996 tax-court case, Swanson vs Commissioner, 106 TC 76, although some disagree with the validity of the case.
Types of Self Directed IRAs, Contributions and Limits
Contributions limits (2007, 2008) are $5000 under age 50, and $6000 age 50 and older. Traditional IRAs can be either deductible or nondeductible. A nondeductible is an option if you do not qualify for a deductible IRA or a Roth IRA. A deductible IRA allows you to deduct all or part of your contribution from your taxable income. If you are under 70 ½ years old and do not have a retirement plan at work, you can invest in a deductible IRA and deduct the entire contribution from your taxes. If you have a retirement plan, such as a 401K, where you work, you may fully or partially deduct your contribution if your adjusted gross income (AGI) qualifies. If you are not eligible to contribute to a deductible IRA, you may qualify for a Roth IRA. For the Roth IRA, your AGI should be below $114,000 if you are single, or below $166,000 married and filing jointly. The 2007 guidelines for eligibility on a deductible IRA are $62,000 or below for a single head of household, and $103,000 or less for married filing jointly. For those not covered by and IRA but with a spouse who is, an AGI below $166,000 may still qualify you for a full or partial deduction.
Choosing a Self Directed IRA
A nondeductible IRA is a way to grow your savings in a tax-deferred environment if you do not currently qualify for a deductible or Roth IRA plan. If you expect to be in a higher tax bracket at retirement than you currently are in, a Roth IRA will probably be your better option. Whichever plan you choose, you will be taking steps to fund your future and retirement years. The self directed IRA offers an investor the most hands-on control over retirement savings and investments in his/her individual retirement account.
Roth IRA
Maribel Aber, Better’s finance and career expert, recently sat down with me to demystify the jargon, and talk to us about the basics of the Roth IRA.
Roth IRA vs Traditional IRA
We received some follow-up questions to last week’s topic, when I said it would be a good idea to roll over the money in your 401K to an Individual Retirement Account, if your company allows it. Some were wondering if they could then convert that to a Roth IRA, and what the advantages would be to taking that action. Well, first, let me take you through the process. …
Atlanta|Self Directed IRA|Real Estate Investing
Invest in real estate using the money in your IRA|Self directed ira|roth ira|401k
