May 21

More on the SEP IRA

Posted on May 21, 2013 by IRA Expert

Here’s a great read hailing the benefits of the SEP IRA:

There are few places investors can turn to for a guaranteed return. The very idea of a no-risk return sounds almost mythical in this era of volatility and uncertainty.

Stocks and bonds carry no such distinction. Neither do commodities or currencies. One of the few vehicles that comes to mind is a money-market account, carrying a paltry yield as low as 0.25% that doesn’t even keep pace with record-low levels of inflation.

That’s why I am such a big fan of tax shelters. Even though most people don’t think of tax strategies as an investment, that’s what they are. And there is one little-known retirement account that blows the usual tax shelters out of the water.

What is it? I’ll tell you in a minute.

Whether discussing an individual, small business or large corporation, taxes are frequently the No. 1 expense.

That means any investment in a tax-deferred entity and advanced tax strategies can have a huge impact on taxable income and the bottom line. And in an age when taxes continue to creep higher while interest rates remain at a record low, maximizing the benefit of tax-deferred accounts has never been more important.

But while the IRA (individual retirements account) and 401(k) are great vehicles for many investors, there is a little-known alternative that blows both of them away.

The current-year contribution limit for an IRA is $6,000 while the limit on a 401(k) is $17,500. But this super-charged IRA I am about to reveal leaves both in the dust with a whopping contribution limit of $49,000, or 25% of taxable income. What is it? It’s called a SEP IRA.

A SEP IRA is a type of traditional IRA for self-employed individuals and small-business owners. (SEP stands for Simplified Employee Pension.) Any business owner with one or more employees, or anyone with freelance income can open a SEP IRA for themselves or on behalf of their employees.

Tax-deductible contributions from the business on behalf of the participants are deposited into a SEP IRA and held in the employee’s name. Employees of the business are not allowed to contribute — that is the responsibility of the employer. Employees are eligible if they are at least 21 years old, have worked for the company in three of the last five years and received at least $550 in compensation during the year.

As an employer, a company is not required to make a contribution every year. But when an employer does decide to make a contribution, they are required to fund the SEP IRA of every eligible employee. Each individual SEP IRA contribution is then capped at $49,000 annually, or 25% of total annual income.

The value of this super-charged IRA account cannot be overstated.

At the highest level, it is a huge tax shelter and amazing retirement vehicle for the owner of a company and the employees. The robust contribution limits of the SEP IRA far exceed those of the regular IRA and the small-business 401(k), which is usually loaded with hidden fees that make them extremely expensive.

That means the robust contribution limits for the SEP IRA can have a huge impact on taxes at the end of the year. In an environment of record-low interest rates where the 10-year Treasury note is yielding 1.6%, reducing your tax bill is no different than putting huge, no-risk returns in your pocket. And with robust contributions limits, the SEP IRA is an unparalleled vehicle for reducing taxes to put money back into your pocket.

For the standard corporate tax rate of 35%, a company with a $100,000 profit would pay $35,000 in taxes. But with a 25% contribution to a SEP IRA, the company’s taxable profit falls to just $75,000, creating a total tax bill of just $26,000 and creating $9,000 in tax savings.

That is an immediate, no-risk return for any company, owner or employees taking advantage of the robust contribution limits of the SEP IRA.

In addition to significantly reducing taxable profits, a contribution to a SEP IRA can provide added savings by pushing companies and participants into lower tax brackets. Although regular C corporations pay a flat 35% federal tax, flow-through entities like an S-Corp and LLC have business owners paying corporate taxes at the personal-income level, creating an opportunity for small-business owners to fall into a lower tax bracket with a robust SEP IRA contribution.

Another great benefit of the SEP IRA is its wide offering of investment options. Unlike the 401(k), where plan participants are forced to choose from a narrow list of investment options that usually includes 15-20 mutual and target-date funds, SEP IRA investors can choose from a long list of individual stocks, commodities, currencies and ETFs (exchange traded funds).

Withdrawal limits on the SEP IRA look a lot like a 401(k) and regular IRA. Plan participants become eligible for regular distributions at the age of 59 ½. Minimum required distributions begin at age 70. Qualified distributions from the SEP IRA would be handled the same way as a regular IRA as taxable income.

The Investing Answer: Setting up a SEP IRA could hardly be any easier. After SEP IRA participants have selected a brokerage firm that provides the right mix of support and service, opening a new account usually takes less than 15 minutes and can be done electronically without any in-person meetings. Then the SEP IRA account holder has a huge universe of individual stocks, ETFs, commodities and currencies to choose from while picking up huge tax savings in this little known retirement account.

If you have any questions about the SEP IRA or are looking to open one for your small business, contact the tax experts at the IRA Financial Group at 800.472.0646.

May 20

Inheriting vs. Assuming an IRA

Posted on May 20, 2013 by IRA Expert

It’s best when opening an IRA that you designate one or more beneficiaries. When you pass away, your IRA will then go to your beneficiary without having to go through probate. There are two ways that your plan can pass on to your beneficiary: inheriting it or assuming it. The difference depends on who your beneficiary is.

Let’s look at the difference between the two. When an heir inherits an IRA, he or she receives the assets in the plan when someone else dies. The decedent must have named you in writing as a beneficiary. The original IRA owner may have names more than one beneficiary so you may have to share the assets with others. If an heir assumes an IRA, he or she transfers the assets into his or her sole name. Thus, the IRA will be treated as if it had always belonged to you.

Only a spousal heir has the option of assuming an IRA and even they don’t always have that option. The option is only available if he or she is the sole beneficiary. Therefore, if the IRA is split among heirs, even the spouse does not have the option of assuming the IRA.

If allowed to assume the plan, you will convert the assets into an IRA in your own name. If you already have an IRA, you can transfer the assets directly into it. If not, you may open up a new IRA. Now that that the IRA is only in your name, you can contribute to it just as you would any IRA plan. The major advantage is that you don’t need to start taking distributions until you reach age 70 1/2.

If you inherit the IRA, you may not title it under your name. It must be titled as belonging to the decedent with you as a beneficiary. You may not contribute to an inherited IRA and you cannot roll it over into a new IRA. Further, you must take distributions based on your life expectancy or that of the decedent’s, as determined by the IRS.

Finally, if the inherited IRA is the Roth option, you have the option of taking out the money as a lump sum, taking the entire distribution within five years of the original owner’s death or take distributions based on your life expectancy. We’ll go deeper into this subject at a later date.

If you have any questions regarding this or any other IRA matters, feel free to contact the tax experts at the IRA Financial Group today!

May 20

Free Webinar on Retirement Tax Planning Opportunities for 2013 & Beyond on Wednesday at 7:00PM EDT

Posted on May 20, 2013 by IRA Expert

IRA Financial Group, the leading facilitator of Self-Directed IRA LLC and Solo 401(k) Plans, announces a new free webinar as part of its educational series on the area of tax planning opportunities available for individuals and small business owners with retirement funds. The free webinar will be aimed at offering investors an extensive array of facts and information involving using Self-Directed retirement plans to maximize retirement and tax benefits. “The free webinar is designed to provide investors with a detailed overview of the Self-Directed retirement plan topic being discussed,” stated Adam Bergman, a tax attorney with the IRA Financial Group. “The Retirement Tax Planning Opportunities for 2013 & Beyond webinar is designed to provide investors with the tools necessary to understand the tax rules involved in Self-Directed IRA and Solo 401(k) retirement plans and how they can maximize their 2013 tax return,” stated Mr. Bergman.

With a new Medicare tax and uncertainty over tax rates for high-income individuals starting in 2013, learn what planning opportunities may apply to you. The Webinar will focus on a number of tax planning opportunities available for individuals and small business owners with retirement funds for 2013 and beyond.

The Webinar will be given by Adam Bergman, Esq, a tax attorney with the IRA Financial Group. The webinar will focus on the following topics:

·    The current environment – uncertainty rules
·    Impact of the Medicare taxes as well as Congress’ actions with respect to the Bush-era tax cuts
·    Deferring income in the age of increasing tax rates
·    How your IRA or Solo 401(k) Plan can help you minimize tax on your 2013 tax return
·    Combating higher tax rates with a Roth IRA or Roth Solo 401(k) Plan
·    In light of higher income taxes – should I consider a Roth conversion?
·    Tapping into your retirement funds without tax or penalty
·    Retirement savings is the best answer to higher income tax rates

To sign up for the free webinar, please click on the link below:

https://www3.gotomeeting.com/register/989541182

The IRA Financial Group was founded by a group of top law firm tax and ERISA lawyers who have worked at some of the largest law firms in the United States, such as White & Case LLP, Dewey & LeBoeuf LLP, and Thelen LLP.

IRA Financial Group is the country’s leading provider of “Checkbook Control” Self Directed IRA LLC and Solo 401(k) Plans. IRA Financial Group has helped thousands of clients take back control over their retirement funds while gaining the ability to invest in almost any type of investment, including real estate, without custodian consent.

To learn more about the IRA Financial Group please visit our website at http://www.irafinancialgroup.com or call 800-472-0646.

May 17

Asset & Creditor Protection for Your Self-Directed IRA

Posted on May 17, 2013 by IRA Expert

RETIREMENT accounts have become many Americans’ most valuable assets. That means it is vital that you have the ability to protect them from creditors, such as people who have won lawsuits against you.

In general, the asset/creditor protection strategies available to you depend on the type of retirement account you have (i.e. Traditional, IRA, Roth IRA, or 401(k) qualified plan, etc), your state residency, and whether the assets are yours or have been inherited.

Federal Protection for IRAs for Bankruptcy

Like 401(k) qualified plans, The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (“BAPCPA” or the “Act”) effective for bankruptcies filed after October 17, 2005, gave protection to a debtor’s IRA funds in bankruptcy by way of exempting them from the bankruptcy estate. The general exemption found in section 522 of the Bankruptcy Code, 11 U.S.C. §522, provides an unlimited exemption for IRAs under section 408 and Roth IRAs under section 408A. IRAs created under an employer-sponsored section 408(k) simplified employee pension (a “SEP IRA”) or a section 408(p) simple retirement account (a “SIMPLE IRA”), as well as pension, profit sharing, or qualified section 401(k) Plan wealth transferred to a rollover IRA.

Traditional and Roth IRAs that are created and funded by the debtor are subject to an exemption limitation of $1 million in the aggregate for all such IRAs (adjusted for inflation and subject to increase if the bankruptcy judge determines that the “interests of justice so require”). It is understood that a rollover from a SEP or SIMPLE IRA into a rollover IRA receives only $1 million of protection since such a section 408(d)(3) rollover is not one of the rollovers sanctioned under Bankruptcy Code section 522(n).

Protection of IRAs from Creditors Outside of Bankruptcy

In general, ERISA pension plans, such as 401(k) qualified plans, are afforded extensive anti-alienation creditor protection both inside and outside of bankruptcy. However, these extensive anti-alienation protections do not extend to an IRA, including a Self-Directed IRA, under Code section 408. Therefore, since an individually established and funded Traditional or Roth IRA is not an ERISA pension plan, IRAs are not preempted under ERISA. Thus, for anything short of bankruptcy, state law determines whether IRAs (including Roth IRAs) are shielded from creditors’ claims.

Click here for a table that will provide a summary of state protection afforded to IRAs, including Self-Directed IRAs, from creditors outside of the bankruptcy context.

IRA Asset Protection Planning

The different federal and state creditor protection afforded to 401(k) qualified plans and IRA, including Self-Directed IRAs, inside or outside the bankruptcy context presents a number of important asset protection planning opportunities.

If, for example, you have left an employer where you had a qualified plan, rolling over assets from a qualified plan, like a 401(k), into an IRA may have asset protection implications. For example, if you live in or are moving to a state where IRAs are not protected from creditors or have in excess of $1million in plan assets and are contemplating bankruptcy, you would likely be better off leaving the assets in the company qualified plan.

Note – If you plan to leave at least some of your IRA to your family, other than your spouse, the assets may not be protected from your beneficiaries’ creditors, depending on where the beneficiaries live. IRA assets left to a spouse would likely receive creditor protection if the IRA is re-titled in the name of the spouse. However, you will likely be able to protect your IRA assets that you plan on leaving to your family, other than your spouse, by leaving an IRA to a trust. To do that, you must name the trust on the IRA custodian Designation of Beneficiary Form on file.

The IRA Asset & Creditor Protection Solution

By having and maintaining an IRA, you will have $1 million of asset protection from creditors in a bankruptcy setting. However, the determination of whether your IRA will be protected from creditors outside of bankruptcy will largely depend on state law. As illustrated above, most states will afford IRAs full protection from creditors outside of the bankruptcy context.

Please contact one of the IRA experts at the IRA Financial Group at 800-472-0646 for more information.

May 16

Mistakes to Avoid with Your IRA

Posted on May 16, 2013 by IRA Expert

You’ve be contributing to your IRA, which is a good thing. But, have you been paying attention to it? Retirement plans come with lots of rules you must adhere to. Further, there are moves that just make sense. Here are a few things to consider in regards to your IRA plan.

For 2013, you may contribute up to $5,500, plus another “catch-up” contribution of $1,000 if you are at least age 50. One big mistake you can make is to contribute too much. You know you should contribute as much as you can each year, just make sure you don’t exceed the maximum amount permitted each year. The overage that you contribute will be assessed a 6% penalty every year you don’t fix it.

Next, you need to be careful about what you invest in. You cannot invest directly in collectibles such as artwork, gems and coins. You are allowed to hold some precious metals, like some gold and silver coins, but you cannot hold them yourself in a safe or safety-deposit box. Your IRA custodian must hold them. If you were to invest in a prohibited investment, the amount invest will be considered a distribution and you will owe applicable taxes and a 10% early withdrawal penalty if you are younger than 59 1/2.

You also must not engage in prohibited transactions. You aren’t allowed to borrow from the IRA, sell property to it or use it to secure a loan. One of the most common mistakes make in a self-directed IRA, is called “self-dealing”. Since you can invest in just about anything including real estate, small businesses and rental properties, many people take double advantage of their accounts. You (or immediate family members) cannot benefit from things in your IRA. For example, you cannot buy an apartment building and have your son manage it. Or, you cannot use a house in your IRA as your vacation home. If you do any of these things, your entire account may be taxed.

Restricted rollovers is another mistake investors make. You can make as many trustee to trustee transfers of your IRA plan in a given year. However, if you take possession of the money, you have sixty days to transfer it into another IRA. Failure to do so and your account will likely e fully taxable. Plus, you may owe the early withdrawal penalty.

Finally, don’t forget that once you reach age 70 1/2, you must start taking required minimum distributions (RMDs). These are set forth by the IRS so the government can get the taxes they let you defer. If you forget to take your RMD (or don’t take the full amount required), you will be penalized 50% on the amount that should have been taken. Note that if you have a Roth IRA, you do not need to take RMDs.

IRAs provide great benefits for saving for retirement, however, you must follow the rules or risk endangering your retirement funds. If you have any questions, please feel free to contact the IRA experts at the IRA Financial Group today!

May 15

You’re About to Turn 70 1/2…

Posted on May 15, 2013 by IRA Expert

If you invest in a traditional IRA, the year in which you turn 70 1/2 is a very important time in your life. You’ve taken your hard earned money and socked it away for retirement. The government has allowed those contributions to grow tax-free. However, once you’ve reached age 70 1/2, the government wants their cut. Here are some important reminders about your IRA when you hit this crucial stage in life.

You are now faced with what’s known as “required minimum distributions” or RMDs. This is an amount you MUST withdraw once you reach 70 1/2. As mentioned, you’ve had until this year to invest money tax-free. However, all good things must come to an end. You have until April 1 in the year after you turn 70 1/2 to withdraw this amount. However, each subsequent year you must take your RMD by December 31. For example, if you turn that age in 2013, you have until April 1, 2014 to withdraw the correct amount. Next year, you must take the RMD no later than December 31, 2014.

Just exactly how much do you need to withdraw? That amount is determined by the value of your IRA and your age. The value of your plan is determined on December 31 of the previous year. You then take that amount and divide it by your life expectancy. This can be found in a table provided in IRS Publication 590. Most times, you’ll use the Uniform Lifetime table. However, if your spouse is at least ten years younger than you, you would use the Joint Life and Last Survivor Expectancy table instead.

Failure to take your RMD comes with a severe penalty. If you do not withdraw the full amount that you are required to, you’ll be hit with a 50%(!) penalty. For example, if you were required to withdraw $10,000 and you only withdraw $5,000, you’ll owe another $2,500 [($10,000-$5,000)*50%)].

Finally, if you invest in a Roth IRA, you have nothing to worry about. You are never faced with RMDs. Why? The money you contribute to a Roth is already taxed. The government has already received it’s cut so there is no pressure on you to withdraw your money. Your Roth will continue to grow tax-free. As mentioned in previous articles, this is a great investment to leave to your heirs.

If you are nearing this important time in life and have any questions, feel free to contact the IRA experts at the IRA Financial Group @ 800.472.0646.

May 14

Why You Need a Roth IRA!

Posted on May 14, 2013 by IRA Expert

Here’s an older, but great, article about the Roth IRA from Kiplinger’s:

Smart young savers know to participate in their companies’ 401(k)s as soon as they join the workforce to benefit from as many years of saving and compounding as possible. But really smart young savers — including all of you who read Starting Out, obvi — should know to save via a Roth IRA, too.

Here are some of our favorite lessons to take away from the inaugural Roth IRA Movement:

1. You can open a Roth no matter how young you are, as long as you have earned income. Peter Anderson points out in his Roth IRA Movement contribution, 10 Reasons Why I Love the Roth IRA (And Why You Should Too): “There isn’t an age limit to have a Roth IRA, so even your children can have one!” They can, that is, as soon as they make money working, whether it be babysitting, lawn mowing, working retail or whatever.

2. You can withdraw Roth IRA contributions whenever you want, tax- and penalty-free. On his site, financial planner Tim Maurer writes about The Three Guarantees in Financial Planning, which he says are surprises, change and failure. And he says that the Roth IRA offers the liquidity you’ll need to deal with those three guarantees. “Roth IRAs are unlike any other retirement investment bucket, for lack of a better term, as you’re allowed to back money out of the account for any reason at any time at any age and without any tax consequences or penalties.”

It’s true — since you pay taxes on your money before it goes into the Roth, you can withdraw your contributions whenever you need to, tax-free. (If you withdraw all of your contributions and begin dipping into earnings before the account has been open for at least five years, however, that money would be taxed and, if you’re under age 59½, also hit with a penalty. There are exceptions — more on that in a minute.) Of course, we don’t recommend dipping into your retirement savings early for any frivolous reason. But in case of emergency, you’ll be glad to know your money is accessible.

3. Roth withdrawals in retirement are generally tax free, unlike payouts from traditional IRAs, which are generally taxed in your top tax bracket. This unique characteristic of Roth accounts is especially advantageous for young savers. When you’re just starting out, you can assume (or at least hope) that your income will go up and you’ll climb to a higher tax bracket in later years. So you’re better off paying taxes on contributions now rather than on withdrawals later. “The greatest wealth is created by paying taxes when the rates are lowest,” writes financial planner Michael Kitces in Roth vs. Traditional: The Four Factors That Determine Which Is Best. “If rates are low today and higher in the future — e.g., for the young worker, or someone in-between jobs — go with the Roth and pay taxes at today’s low rates.”

4. You can withdraw all of your contributions and up to $10,000 of earnings to buy your first house, tax- and penalty-free, once the account has been opened for at least five years. Personal-finance blogger Kevin Mulligan writes at FreeFromBroke.com, “Because the Roth has its own special tax considerations (you contribute after you are taxed), it also has special withdrawal rules, which could be very beneficial to you.”

After your account has been open for at least five years, you’re free to withdraw not only your contributions but also up to $10,000 of earnings income tax-free and without penalty at any age to buy your first home. Again, we wouldn’t recommend stealing these funds from your future self. But this kind of flexibility is certainly an appealing quality of the Roth.

5. Unlike a 401(k), Roth IRAs give you more flexibility to maximize your contributions to the account each year. While you’re still limited to $5,000 in annual Roth contributions, you get a 16-month window to fund the account. “Perfect for procrastinators like me, the Roth IRA account type allows people to contribute to their Roth IRA right up until tax day of the following year,” writes Anderson.

6. You’ll enjoy greater freedom of choice with a Roth IRA than with a company retirement plan. Anderson also notes that “a Roth IRA will usually have more investment options than your company 401(k),” for which your choices would be limited to the funds selected by your employer. You’ll be free to invest in stocks, bonds, certificates of deposit, mutual funds, exchange-traded funds and more, allowing you create an appropriately diversified portfolio.

7. Leave your money to grow in a Roth your whole life long. With a 401(k) or traditional IRA, you’ll typically have to make annual required minimum distributions (RMDs) once you turn 70½. Not so with a Roth IRA. “With my Roth IRA, I’m in control of when I make withdrawals,” writes blogger Britt Gilette at Your Roth IRA. “I’m not forced to do anything. In fact, if I want to let my money compound tax-free until I die at age 100, I can do so.”

8. Even when you’re gone, your Roth IRA will still be doing good. You can pass your account funds on after you die, and “heirs get to receive this money in annual or lump-sum distributions in the same tax-free way that you would have,” writes financial planner Frances St. Onge at All Things Financial Planning Blog. “By contrast, if they receive your 401(k) or IRA as an inheritance, they will have to pay taxes on the amount withdrawn each year, just like you did.”

If you’re looking to open up your own Roth IRA or simply have a question about them, contact the tax experts at the IRA Financial Group today!

May 13

Due to Bank Crisis in Cyprus, Clients Look to Gold in Their Self Directed IRAs

Posted on May 13, 2013 by IRA Expert

Self-Directed IRA investors looking to protect themselves from a U.S. banking crisis similar to Cyprus experienced in 2013 turning to Gold investments.

IRA Financial Group, the leading provider of self-directed IRA LLCs, has seen a growing number of retirement investor looking to protect their retirement funds from a Cyprus type banking crisis that could wipe out their retirement savings. “We have seen a growing number of retirement investors looking to hold gold and IRS approve coins, such as American Eagles, personally,“ stated Adam Bergman, a tax attorney with the IRA Financial Group.

Cyprus, which has been a member of the European Union since 2004 and the Euro zone since 2008, was recently on the brink of financial collapse. Its two major banks, the Popular (Laiki) and the Bank of Cyprus were abruptly closed on March 15, 2013 until further notice. “A large number of U.S. investors took notice what occurred in Cyprus and turned to holding gold and American Eagle coins personally in a self-directed IRA LLC, “ stated Mr. Bergman. “Holding gold personally in a self-directed IRA has offered retirement investors a safeguard against a U.S. bank crisis akin to what occurred in Cyprus in 2013, ” stated Mr. Bergman.

Unlike precious metals, the Internal revenue Code and the legislative history does not include a requirement that IRS approved coins be held in the “physical possession” of a U.S. trustee. When it comes to coins or metals, Internal revenue Code Section 408 is generally the provision that applies. In general, collectibles such as artworks, rugs, stamps, certain coins, beverages and antiques, etc. are not allowed within a Self-Directed IRA LLC pursuant to Internal Revenue Code Section 408.

Internal Revenue Code Section 408 is specific as to what defines a collectible. Some notable exceptions are allowed for certain gold (such as American Eagle) and silver coins and any coins issued by a state. Legislation in 1997 further liberalized the rules for IRAs by making reference to specific definitions of acceptable coins in USCS, title 31; IRC sections 5112(a), (e) and (k); the Commodity Exchange Act; and IRC section 408(m)(3).

“Holding gold coins personally in a self-directed IRA LLC as provided a number of poor clients with comfort that their retirement funds will be protected in the case of a domestic banking crisis,” stated Maria Ritsi, a paralegal with the IRA Financial Group. IRA Financial Group does recommend that its clients hold IRS approved gold and coins at a depository or IRS approved trustee.

IRA Financial Group is the market’s leading provider of “checkbook control” self-directed IRA LLC structures. IRA Financial Group has helped thousands of clients take back control over their retirement funds while gaining the ability to invest in almost any type of investment, including real estate without custodian consent.

To learn more about the IRA Financial Group please visit our website at http://www.irafinancialgroup.com or call 800-472-0646.

May 10

Choosing Between a Roth & Traditional IRA

Posted on May 10, 2013 by IRA Expert

There is one important difference between a traditional IRA and a Roth IRA: when you pay taxes. To fund a traditional IRA, you use pre-tax dollars. This is known as deferred taxes. You do, however, pay taxes when you start taking distributions (withdrawals) during retirement. Roth IRAs, on the other hand, are funded with post-tax dollars. Distributions are generally tax-free. Here are a few things to weigh when choosing which plan is right for you.

The most important factor is the tax implications. Your best bet is paying off taxes when you are at your lowest possible tax bracket. If you are younger and just getting started in your career, your tax rate is pretty low. As you work longer and your salary increases, so does your taxes. Opting for a Roth earlier in your career is a smart move. However, if you’re in the prime of your working career and earning a high salary (which puts you in a higher tax bracket), you may be better off waiting until you retire to pay taxes. Further, you don’t know what the future brings as far as your situation and national tax rates will be. One way to combat this is to diversify and invest in both types of IRAs.

The next factor concentrates on early withdrawals. While it’s never recommended to withdraw money from any of your retirement accounts (including your employer-sponsored 401k plan), you may need to dip into them in an emergency. If you withdraw any money from a traditional plan before you reach age 59 1/2, you are hit with a 10% early withdrawal penalty. Plus, since you haven’t paid taxes on your contributions, you will be taxed at ordinary income tax rates. If you have contributed to a Roth IRA, you can withdraw those contributions at any time without penalty. Note that, if you withdraw earnings, you will owe the penalty on that amount. There are exceptions to avoid the penalty such as disability, medical insurance and first time home buying.

Then, there are required minimum distributions or RMDs. Once you reach age 70 1/2, you have to start withdrawing money out of your traditional IRA. This is in place because the government wants their cut. They’ve let you defer taxes, now it’s time for you to pay the piper. If you plan on using your IRA to subsidize your retirement as soon as possible, this is not necessarily a bad thing. However, if you don’t think you’ll need the money right away or plan on leaving it to your heirs, a Roth would be the better choice. As stated, you’ve already paid taxes, so there are no RMDs for these types of plans.

Finally, a couple of last reminders. For 2013, the maximum you can contribute to an IRA is $5,500 if you are under age 50 and $6,500 if you are 10 or older. There are income limits to contributing to a Roth IRA, although you can do what’s known as a backdoor conversion. You would contribute to a traditional plan and then immediately roll it over into a Roth.

If you still can’t decide what’s right for you or are looking to open up one or both types of plans, give the tax experts at the IRA Financial Group a call at 800.472.0646 or visit their website today!

May 09

Investing with Your IRA

Posted on May 9, 2013 by IRA Expert

As you know, IRAs are tax-deferred retirement accounts, meaning you fund the account with pre-tax money and don’t have to pay taxes until you start withdrawing money from the account during retirement. These tax-advantage accounts will leave you with more money to invest with. Since you pay taxes on any distributions you make, you are better off with investments that are subject to income tax rather than those that have tax benefits built in.

The most important thing you can do when investing with your IRA is to contribute as much as you can. The maximum you can contribute for 2013 is $5,500 if you are under age 50 and $6,500 if you are 50+. Since your contribution is sheltered from taxes, you’ll have more money to invest with which will equal higher returns. For example, if you’re in the 25% federal tax bracket and pay 5% in state taxes, that $5,500 would turn into $3,800 after taxes. That’s an extra $1,700 that would be working for you in an IRA.

Next, there are interest bearing investments. “Because IRAs don’t benefit from preferential capital gains treatment when you pull money out, it makes sense to put interest-bearing investments like certificates of deposit or corporate bonds in your IRA”, add writer, Solomon Poretsky. They’ll see tax-free growth and you’ll pay the same taxes when you withdraw. Higher yielding investments should be in your IRA, while lower ones should stay out. The more you make, the better a tax deferral is!

Real Estate Investment Trusts (REIT) own buildings or mortgages and distribute profits to shareholders. They usually play high dividends but they are not eligible for special tax treatment that “qualified dividends” are. When REITs are in your IRA, you get the profits without having to pay taxes on it every year. When you do pay taxes on them, you don’t face a higher tax rate that you would see on long term capital gains on stocks.

Finally, it’s not always a smart move to put stock in your IRA since you could end up paying more tax on them when you sell after holding it for more than a year. Says Mr. Poretsky: “While long-term capital gains are taxed at a special rate outside of an IRA, short-term gains are taxed as regular income, just like IRA distributions are. As such, stock that you’ll be turning over is a good match for your IRA.”

There’s a lot to invest in with an IRA and even more so if you have a self-directed IRA. If you have any questions, contact the IRA experts at the IRA Financial Group today!

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