Thoughts on Roth IRAs

A Roth IRA is a special type of retirement account. While most retirement accounts allow you to save on your taxes today and pay taxes during retirement a Roth IRA works the opposite way. With a Roth IRA you pay taxes on the money before you put into the account in the beginning. However, when you take the money out of retirement as are owed. You don’t have to pay any tax on the original investment because you already paid taxes on it. You don’t have to pay tax on any of the increase because that’s the special advantage of a Roth IRA.

The government likes this type of account because it means they get their tax money now. With a traditional IRA the government doesn’t see any income from taxes until you reach retirement which is often years in the future.

Of course the disadvantage is the fact that you will be taxed at your current tax rate. If you have made a tremendous amount of money this year the traditional IRA may look attractive because it allows you to shelter some of your income from taxes now. However, over all, most people expect taxes to be higher in the future than they are now. If taxes are higher in the future you may be much better off with a Roth IRA even though the tax burden now may seem very high. In addition the government has control over a hidden tax known as inflation. By manipulating inflation they’re able to effectively tax your money without having a tax on it simply by devaluing the currency. If you put money into a traditional IRA and it grows to 100 times its size you will have to pay taxes on all that increase when you go to withdraw the money. With a Roth IRA you will not have to pay taxes on the increase when you go to withdraw it during retirement.

What your retirement account will be able to buy you when you retire is greatly determined by the rate of inflation. While inflation will affect both the traditional IRA and the Roth IRA, a traditional IRA will have to pay taxes on the money. If the government allows  inflation to run unchecked it could push you to an extremely high tax bracket when you go to take the money out. With a Roth IRA you are protected from being put into a different tax bracket based on the withdrawals from your Roth IRA. Depending on what happens in the future this could be a very significant advantage. Even people approaching retirement years may find that the short-term expense of investing in a Roth IRA and needing to pay taxes now may be less than the risk that is mitigated by ensuring that you do not have to pay income tax on the funds when you withdraw them later.

Of course it’s possible the government will change the rules. However, it’s unlikely that they will out and out tax the money you pull out the of a Roth IRA with income tax. It is possible that they will institute some sort of national sales tax or value added tax as is common in Europe. If that happens you will be taxed when you spend the money you take out of your retirement account. However it’s important to note that this is likely to affect people who are taking money out of traditional IRA accounts, 401(k) accounts, 403B accounts, and Roth IRA accounts equally. If the government institutes a tax like this, it is unlikely to have any type of detriment by being in a Roth IRA. The only type of detriment that could be possible is if the government went to an entirely sales tax based system and do away with income tax altogether. In that case the Roth IRA would not perform as well as traditional IRA because you paid tax early and when you went to take the money out the income tax didn’t exist. Of course a sales-tax in lieu of an income tax seems unlikely at this point in time.  Plus the government likes fiddling with taxes too much. A sales tax would require them to stop mucking about  with creating different tax incentives whenever they feel like it.

All in all the Roth IRA seems to be a pretty good  investment strategy. This is especially true if you are investing in an IRA early in your career. There may be more advantage for someone in their 50s to put money into a traditional IRA in order to shelter income and stand lower tax bracket when their money has less time to grow before they will want to withdraw. Even then many people approaching retirement may want to consider a Roth IRA because of the flexibility gives you any amount of protection to give you from future taxes. As life expectancy increases it is possible that someone approaching retirement may have many years for their investments to grow even after they retire and the Roth IRA may present a great way to invest money for the future.

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Preparing for Retirement

Most people mean nine states are not putting enough money away for retirement. I think a lot of people are relying on Social Security, but most of them don’t understand that as people live longer their Social Security benefits are going to be less and less. The government isn’t going to vitiate social security away from everyone, but they will reduce the benefits in order to keep it solvent.

Because of this it’s increasingly becoming important to make sure you have some type of retirement plan. And one of the reasons that a lot of people don’t put money into their retirement accounts is because they may need it for unexpected expenses in the future. Obviously a diversified strategy will give you the best financial outcome. You need to put some money and your time accounts but you also need to keep money in accounts that you can access easily and quickly.

By understanding the different types of retirement accounts and their tax implications you can position yourself for fast access to cash when necessary while minimizing your tax burden and doing your best to prepare for retirement.

Roth IRAs have some in damages but many people overlook. A Roth IRA allows you to put money in after tax and keeps the amount he grows as non-taxable income when you take it out in retirement. This has an interesting side effect. The money you put in originally into a Roth IRA is still available to you tax-free because you already paid taxes on it. Unlike a traditional IRA you can take out the money originally put in without triggering any type of penalty or fee. This can give you quite a bit of flexibility if you may need access to cash in the future but want to maximize your retirement investment. Not only do they give you the ability to get at a certain amount of money from your retirement funds without triggering any type of tax, it also put you in the best position for growth. If you’re investing early on the amount your retirement account grows is probably going to be significantly more than the amount you originally put in. This protects the larger amount from future taxes at the expense of paying taxes on the smaller amount now. For most people in the first half of their career this is a very good strategy.

There is one situation where you will not be able to get at your original mill investment in a Roth IRA without triggering any type of taxes or fees. When you roll money over from a traditional IRA to a Roth IRA there is a waiting period–you can’t take out the original amount for five years without generating some type of fee. Even though you pay taxes on the amount when you roll it over this is a special case where the rollover amount is not treated the same as it would be if it were money you put in directly to the Roth IRA.

This means that you expect to need access to your IRA funds at some point in the future you need to do the conversion from a traditional IRA to a Roth IRA five years in advance of the time that you will need the money. Honestly this type of planning is difficult to do so if there is ever any chance of you needing the money you may want to consider doing a traditional to Roth conversion as soon as possible in order to give yourself the flexibility five years from now.

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60 Day Loan From Your IRA

There is a little-known loophole that will allow you to take a 60 day loan from a traditional IRA without paying any type of taxes or penalties. Though most people will tell you that there is not a way to take a loan from an IRA. Technically they are right. The tax law simply for bid you from borrowing money from your IRA. However that same tax law allows YouTube rolled your IRA funds over from one account to another. The IRS recognizes that this may take some time and they give you 60 days to complete the transaction. Those 60 days can work as a 60 day loan from your IRA funds. This isn’t necessarily a recommended financial transaction and you must be very careful to understand the consequences of your actions if attempting this. However, it is an option and is something you should know about particularly if you are looking at deals that require large sums of cash that you do not have available in any other accounts outside of your individual retirement account.

When looking at borrowing money from your IRA for this 60 day period you need to make sure you understand the rules about giving the money back into an IRA account. When you withdraw the money from one IRA the clock starts ticking. You need to have another IRA ready to deposit the money in and you can’t have any type of mess up that will push you over the 60 day limit. For example if you incorrectly calculate when holidays fall, your broker sec, the check gets delayed a day in the mail, or you have an accident you could be liable for up to 45% in taxes and penalties for not having the money back in an IRA on time.

The worst thing you could do is wait until Day 60 in order to start trying to open an IRA account. A better strategy would be to have the to count open in ready to fun. That way on day 58 you can put the money back in. This gives you a few days leeway in case something takes longer to process and also ensures that the account is already open so there are no delays on that side of things. Also you will probably need to open the irony of account with a different financial institution. In some cases you may be able to open another account at the same institution but rules vary and you need to make sure you can open the account. Like you said you don’t want to get today for 60 and try to open account only to find out you need to go to a different bank that happens to be closed on that day, etc.

let me stress again that this is not a recommended financial transaction. It is something that is possible but use usually a very very bad idea. Most people who are looking at borrowing money from your IRA funds you really need to rethink things.

First of all, the chances of you not being in financial stress in 60 days are probably slim. Taking the money of the IRA may increase your financial troubles because not putting the money back in time will mean that you stand a good chance of owing the government a huge amount of money. If you’re having problems with creditors now, he deftly don’t want to I had the IRS to the list of people who are after you.

Second, retirement funds are usually protected during bankruptcies. If you leave the money in the IRA it will still be available to you if you do go through bankruptcy. However, if you take the money out and use it on other things and then go through a bankruptcy you’ll lost all that money and the IRS will be after you forward the taxes and penalties on the money withdrew. This means you’ll be in a seemingly worse position than he would’ve been had he left the money in the IRA.

Now of course if you think you can turn your financial situation around in 60 days this type of loan from your IRA may look attractive. However you’d have to be very honest with yourself and understand the chances of you turn yourself around financially. You’ll be taking an extremely large risk and you need to make sure that you understand the odds.

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IRA As Collateral for a Loan?

Can I use my traditional IRA as collateral for a loan? No you cannot. It is illegal for a bank to loan you money based on your IRA as collateral. This is part of the tax law and differs from the way 401(k) and 403B accounts operate. On one hand he doesn’t seem fair to the people who are using an individual retirement account instead of the company-sponsored plan. However their advantages that you have by investing in an IRA that are not available to people with a 401(k) account so in the long run it probably evens out. However, it is easy to roll your 401(k) over into an IRA if you should choose to in the future. It is not necessarily easy to roll your IRA over to her 401(k).

If you have a 401(k) and think you might want to borrow against your retirement funds at some point in the future you should be very hesitant to roll out money over into an IRA. This is something you must consider when looking at possible financial maneuvers in order to avail yourself of available cash that you have in your retirement accounts.

However if you roll the 401(k) over into a Roth IRA you will have access to the principle I’m now at the time of the rollover. However, to avoid any types of fees or penalties you will only have this at your disposal five years after the rollover. This means you need to be extra careful in planning if you want to get access to retirement accounts in order to make sure they are rolled over to Roth IRAs at least five years in advance.

Not only can you not use your traditional IRA as collateral for a loan, you can’t borrow money directly from it either. Many 401(k)s allow you to borrow money either against your account value or from your account value depending on how the rules work. With an IRA you cannot do this. As mentioned before the Roth IRA will allow you to take money out as long as it does not exceed the principle amount invested. And this is subject to a five-year waiting period on amounts rolled over from a traditional IRA. If you put the money directly into a Roth IRA then you will not be subject to the five-year waiting period.

However, if you roll the money over from a traditional IRA you will not be subject to FICA taxes like you would if you put money into a Roth IRA with completely after-tax dollars. This is something to consider in financial planning but it’s really if some the laws passed that will require you to pay FICA taxes on your entire income instead of being limited to roughly the first $90,000.

So while there is another way to use your traditional IRA as collateral, there are several things you can do to avail yourself of the cash in your retirement account. However all of this needs to be done with careful of ice from CPA or qualified tax advisor in order to make sure you’re not overlooking any side effects or other situations that may affect your tax status.

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Can I Borrow From My Roth IRA?

Many people wonder if they can borrow money from a Roth IRA. The answer is you don’t have to. With a Roth IRA the principal amount can be withdrawn without any tax consequence because you’ve already paid taxes on it. This means you can borrow the principle from a Roth IRA. The increase is a different matter. The amount that your IRA has increased is not available for withdrawal without paying certain types of taxes and fees. However the ability to withdraw the principle from Roth IRA if you find yourself in financial hardship is a very great benefit.

There is one case where you can’t directly withdraw the original investment from a Roth IRA. If you rolled the funds over from a traditional IRA into a Roth IRA the amount rolled over or may not be available for penalty fee withdraw for five years. So if you have a traditional IRA with $10,000 in it and in 2010-year-old that over into a Roth IRA, you will not be overtake out the $10,000 until 2015. This means if you think you may need to access funds you have a traditional IRA you may want to do a rollover as soon as possible in order to put yourself in a good position to have cash available five years from now.

Of course don’t forget that when you pull money out of her traditional IRA and rolled over to a Roth IRA you will have to pay taxes on it. The taxes are at your marginal rate and if you are doing a qualified rollover to a Roth IRA you will not have to pay any additional fees or penalties. By carefully timing to roll over to take advantage of your current income levels you may be able to benefit from a year or you have lower-than-expected income or when you have other types of tax credits that can help offset the taxes you would need to pay on the rollover amount.

For example, if you have a year where you have lower than average income but you are in a position to benefit from some non-refundable tax credits, during a rollover in that year may allow you to benefit from a tax credits where you would not be able to otherwise due to your low income. If you were to wait and do a rollover in a year when you have plenty of income the rollover amount will be taxed at your marginal rate which means it will be taxed at the highest rate at which you pay income tax. So the first portion of your income is taxed at 10% and, the second portion is taxed at 15%, and the third portion is taxed at 30% a rollover in that year will be taxed at 30% whereas a rollover in a year where you are only in the first two tax brackets would only be taxed at 15%. (I’m just making up numbers for different tax brackets here so don’t rely on these for tax planning. If you need another tax brackets check out IRS website or one of the many other sites that will help you calculate your tax bracket based on your income.)

So back to the original question. Can you borrow money from your Roth IRA? Yes you can. You can borrow from a Roth IRA as long as you are borrowing more than your initial contribution. In reality you are borrowing money from your Roth IRA–you’re simply withdrawing your original contribution that you’ve already paid taxes on. So it’s not really borrowing any more than it is borrowing to take money out of your own checking account. However, if you plan to put the money back for continued tenure to grow then you are effectively making a loan to yourself from your rock Aire account.

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Traditional IRA vs Roth IRA

It is very important to understand the difference between a traditional IRA and a Roth IRA. A traditional IRA allows you to put money into investments before paying taxes on it. When you later decide to take the money out during retirement you will be responsible for the taxes fund the original amount invested plus the amount it has grown. This can be a good strategy if you’re making a tremendous amount of money now and expect to make a lot less in the future. It also allows you to make your withdrawals at strategic times when your income is low and will have the greatest tax advantage. However if you are investing early in life your investments may grow significantly more than the amount of principal invested. This means the savings from not having to pay tax upfront may be insignificant compared to the amount you have to pay on the increase from your original investment.

A Roth IRA works the option of a traditional IRA. It requires that you put money in after you pay taxes on it. Since the taxes already paid the government allows you to take the money out during retirement tax-free. If you’re investing early in life and your money will have a long time to grow this is probably the best strategy. When you get ready to take your money out you don’t have to worry about any type of taxes as long as you’re a retirement age. If your money has doubled or tripled in size but thanks to making investments early on this can be a sizable savings.

In particular if you believe tax rates are going up a Roth IRA may be a better strategy. It allows you to pay taxes at the rate you are now and insulate you from taxes on the gains in addition to any higher tax rates in the future.

Of course it is possible that the government will change its mind and tax Roth IRAs in the future. It’s unlikely that they will release an out and out income tax on money removed from an IRA but they may institute some type of value added tax or federal sales tax that will basically capture money when you get ready to spend. However this scenario would also affect any money you try to spin from a traditional IRA so the Roth IRA still provide you with significant protection against increased income tax rates in the future.

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IRA Loan Strategy

Unlike a 401(k) the rules regarding individual retirement accounts or IRAs specifically forbid them from being used as collateral for a loan. Also unlike a 401(k) you cannot borrow money from your IRA. That’s just the way the tax laws are structured. It isn’t necessarily fair and gives an advantage to people who have company-sponsored retirement accounts, but that’s the way it is.

However there is a small loophole that will allow you to get a 60 day loan from your IRA by using the provisions that allow you to transfer money from one IRA to another. If you want to move your IRA to a different row grid’s the IRS gives you 60 days to complete the transaction. The clock starts ticking as soon as you take the money out of the original IRA.

What you do with the money during the 60 days is up to you. You can use it effectively as the 60 day loan. You just must be very careful to put it back into another IRA account before the 60 days expires. If you don’t you will have taxes due on the entire amount plus a 10% penalty. Depending on your tax bracket for the year this could wipe out upwards of 40% of the value of your IRA.

This type of financial maneuver is not highly recommended. They’re only a few circumstances where it would be worth taking money out to make a purchase like this. For example if you had the opportunity to buy some real estate where you need pay cash up front and were certain to be able to refinance within the 60 day period this type of loan from your IRA might make sense financially. However in almost every circumstance people looking at doing this can find a better option. The risk is simply too great of not being able to get the money move back in time to avoid the penalties and taxes.

So was not recommended it still is useful to understand your options. Knowing that there is indeed a way to get a short-term loan from an IRA may allow you to look at some potential deals that would be unavailable to you otherwise. It also may allow you to put more money in your IRA then you’d be comfortable doing without understanding this IRA loan. When you understand the IRA loan you know that there is a way to get money out and do something with it if it becomes absolutely necessary–it’s just for a very short period of time.

Once again this is not a recommended financial strategy. However it may give you some peace of mind in knowing that there is a way to get access to your money for sure. Time if you need it. For example, eat have assets that you can liquidate but require 30 to 45 day lead time, you may be very hesitant to keep a great deal of your money in an IRA because of the amount of time it would take you to liquidate your other assets. However this IRA loan strategy may make it more feasible to invest more heavily in an IRA because you know you can give yourself a short-term loan that will cover the amount of time it takes you to liquidate or other assets.

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Roth Rollover FICA Saving Tax Strategy

Rules regarding a from a traditional IRA to a Roth IRA heaven interesting side effect. They provide you with a mechanism to avoid paying FICA and Social Security tax. When you put money into higher rate can be done before taxes. There’s a particular true if your company puts money into an IRA for you. Money put into the IRA is tax-deductible to the company and is not taxable to you. This means that there are no FICA or so security taxes paid on the amount put into the IRA. Further it means that the employers portion of these taxes are not paid on that amount as well.

Once the money is in a traditional IRA a can be rolled over to a Roth IRA and taxes must be paid on it. However the rules up here to only charge income tax on the amount rolled over. You are not subject to fight for Social Security tax on the amount rolled over. Even if you were it appears that the company portion of these taxes would not be charged. For many people this amounts to about 15% of the total amount so it is significant.

Here’s the trick though. When you roll money over from a traditional IRA to a Roth IRA you pay taxes on the amount but to roll over. With a Roth IRA that you contribute to directly with after-tax dollars you can immediately turn around to withdraw the amount originally invested. However when the funds were rolled over from a traditional IRA there is a five-year waiting period in order to withdraw the money without any sort of fee.

If your company contributes $5000 to a traditional IRA on your behalf in 2010 and you roll it over to a Roth IRA in 2011 you can take the $5000 out in 2016 without any sort of tax or penalty. If you plan your income wisely you may be able to roll the traditional IRA over to a Roth IRA in years when you have less income and us pay less taxes on the rollover amount. Either way when the $5000 is free for you to take back out you will be saving approximately $750 in taxes that would need to be paid otherwise.

Obviously this is a long-term strategy and you should talk to your accountant or CPA to make sure you understand all of the ins and outs. However it does give you a way to save money on taxes on at least a portion of your income if you make under the amount it requires your entire income to be subject to FICA tax.

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Borrow From An IRA

Can you borrow from an IRA?  Most financial advisors will tell you it isn’t possible.  When Congress made the laws about individual retirement accounts, they specifically didn’t want people to be able to pull the money out or borrow it like you can with a 401k and some other retirement accounts.  So from a legal stand point, you can’t borrow from an IRA.

However, like many things there are some ways around the law.  In the case of borrowing from an IRA, the trick is to use something you can do in order to get a loan from the retirement account. In this case, the trick is to use the roll-over rules in order to get a short term loan.  You can legally move money from one individual retirement account to another.  When you do this, there is a period of time where you have the cash in hand and can use it for whatever you want.

The caveat is that you must have it back in an IRA before the rollover period expires.  If you don’t you’ll have to pay taxes on the money you took out as if it was earned in the current year.  Worse you’ll have to pay a 10% early withdrawal penalty on the funds.

The cost of not getting the money put back in is very high.  For that reason, it usually isn’t a good idea to try to borrow money like this.  However, it is an option and there may be certain situations where borrowing money from your IRA in this way may make sense.  It should be your last resort though and you need to really understand what you are doing to pull something like this off.

Make sure you understand the time period you can keep the money.  Also be sure you know how long it will take to open a new account.  In most cases you’ll want to have the account already created before you put the money in it.  You don’t want to forget about a holiday or have a brokers sick day mess up your plans and make you subject to the fees and penalties.

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