Posts Tagged ‘Roth IRA’

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Roth IRA Discussion Overcoming Fears Part 1

November 2nd, 2011

Do you have a Roth IRA, yet?

If not, today I’m going to try to convince you to both open up a Roth IRA and to start contributing to it!

But before I start my discussion, do you meet the following basic requirements?

  1. Did you have earned income this year?
  2. If you are single was your income less than $107,000? or if you are married (and filing jointly, is your income less than $169,000)?  I’m ignoring the income limitations a bit and keeping it simple.  check the irs.gov site for more details if you are interested.
  3. I’m assuming that you work in the US and are an US citizen, if you are not, then the Roth IRA probably doesn’t apply to you (sorry)

Okay, on with the discussion!  The following are concerns from people who I have talked to during various points in time over the past few years.  Just to make this article flow more smoothly, I’m to orchestrate the following in a two person dialogue style, for simplicity.  So it will be me (MR) and my composite friend that I will call V.

MR.:  Why don’t you have a Roth IRA?
V….:   I don’t want to tie up my money in an account that I can’t tap into until I retire.  I might need that money.
MR.:   Actually V, the money you contribute can be taken out at any time without a tax penalty or other government fees.

V….:   What about the waiting 5 years and some type of complex distributions system or waiting until I am 59 1/2 rules?  Why 59 and 1/2 and not 60?
MR.:   I have no idea why 59 1/2, sorry very strange choice in my opinion, but what the rules identify for the 59 1/2 and 5 years and some type of complete distribution system, is on the earnings!  The “earnings” is the amount that your investments equals above the total amount that you deposited into the account (the deposits are called contributions in IRS lingo).

V….:   So you mean to tell me that I can deposit (contribute) the entire $5,000 limit for the year, then a month later pull the entire $5,000 out, let’s say for some type of emergency, and I’m not breaking any rules?
MR.:   Yep and let’s say that you contributed $4,000 for the last three-year for a grant total of $12,000 worth of contributions.  You can take that entire $12,000 without any type of government problems.  Sweat deal if you think about it, and it’s one of the reasons that I use my Roth IRA for a 2nd level Roth IRA emergency fund.  I’ll probably never need it, but it’s nice to know that it’s there.

Do you have a Roth IRA, and are you putting money into this great investment vehicle?

Cheers,

MR

 

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Roth IRA Benefits for Kids

July 26th, 2011

Because of  the wonderful Roth IRA benefits for kids, once my kids start to earn some income (aka get a job), I’m going to have them open a Roth IRA.  A small problem is that currently my kids are ages 7 and 11, so I many have to come up with a clever way for them to earn some money!

Unfortunately, I can’t afford to put the maximum allowed ($5,000 each) in both of their future Roth IRA accounts, at least without severely affecting the growth of my own net worth.  So instead, I intend to put one or two thousand in each of their accounts per year.  Of course, it depends on my own future income stream.

What Are Some Roth IRA Benefits For Kids?

  1. Money that is added to a Roth IRA will grow tax-free!
  2. Money that is contributed to a Roth IRA can be taken out any time both tax and penalty free.  Note, the earnings on the contributed money cannot be taken out without a incurring a 10% penalty and income tax on the earnings.
  3. If you put the money in stocks that yield dividends, the dividends also will be tax free!
  4. You can contributed the money from your account, but that amount you add need to be what they earned or less for that given year.
  5. You can take $10,000 of earning out for purchasing a home if you are a first time home buyer and qualify under certain rules!

The benefits listed above are powerful reasons to consider creating a Roth IRA for kids, but the real hidden advantage is that contributing to a Roth IRA starts a family tradition and habit for your kids!  If have your child go though the process with you every year, hopefully they will learn that the contribution process is just a normal, annual activity!  This can be a powerful tool for wealth creation for them.  Hopefully they will realize that you are paying into their Roth IRA for they retirement someday, so hopefully they will think twice before withdrawing it.

While you can use the Roth IRA for college expenses too, I prefer not to do this since the earning will be taxes (although the 10% penalty is waived for such expenses).  That said, they can still use the contributions from the Roth IRA tax and penalty free (but then again they can use the contributions for anything tax and penalty free).  Personally, I prefer to use a 529 plan.  The 529 vs Roth IRA route to save for college really depends on how much you make and is a topic that I’ll blog about in the future.

Another non-financial benefit is that this give your child exposure to stocks and other investments.  Is there a better way to learn about investments other than getting your hands dirty doing it?  I think this could be a great learning tool for them.

Well, you now know the benefits of a Roth IRA for kids!  If  you have any question please leave them in the comment section below or email me (via my contact page).

Wishing you the best,

MR

 

 

 

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Roth IRA Contributions versus Roth Investment Gains

October 21st, 2010

Roth IRA Contributions versus Roth Investment Gains

I have some friends at work that don’t understand what I believe are some very important aspects of a Roth IRA.  Some I’m going to identify an overlooked aspect of Roth Ira because of the unusual word “Contributions”. 

Yes we all know the definition of the word contribution, but it’s still a little foggy how it relates to Roth IRAs.  To keep this discussion simple and because it’s the most common type of contributions, I’m only going to talk about “Direct Contributions”

So what is a direct Contribution?  

These are contributions that you deposit into a Roth IRA from the earnings in your checking/savings account, and other already taxed income.  These type of contributions are NOT from rolling money from another IRA into it (if it were a transfer from another IRA, then it would be called a Rollover contribution)!

So think of direct Contributions as money that you deposit in your Roth IRA from the money you made from your job, in other words, your earned income…

The money portion of your direct Contribution into a Roth IRA can be withdrawn at any time both tax and penalty free!  It’s tax-free because it has already been taxed!  And it’s penalty free because with your contributions, there is nothing to penalize.

Here is an example to make it more clear:

Let’s pretend that MR has contributed $5,000 to a Roth IRA for each of the last 3 years.  He now has an emergency and need to tap into the Roth IRA, which is currently valued at, oh let’s say $20,000!

So three years of $5,000 means the total direct contributions comes to a total of $15,000 but since there is $20,000  in the Roth IRA, that would mean that the investment gains portion would be $5,000.

So if I had an emergency after 3 years, I can take out the $15,000 amount that I contributed to the account and do whatever I want with it.  However, if I try to take out the remaining $5,000 that is left; well that $5,000 would be taxes and my current income tax rate, and an early withdrawal penalty would apply!

I hope this example clears it up, if not please free to email me asking more, or leave a comment asking your question!

Tell me what you think of this great saving/investment vehicle?

-MR

One caveat!  After 60 days, you can’t put your contributions back into the Roth IRA account. While this is a bit of a bummer, it’s still an incredible investment instrument!

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Roth IRA – The Dividend Shield

October 13th, 2010

Yes, that is correct!  I’m planning on using my Roth IRA as a dividend shield (actually more of a dividend tax shield)!

You see, eventually the Tax cuts (from Bush’s Presidency) will expire in the future, and that means that for those of us that own shares in dividend stocks the following changes might happen (but these numbers are soft):

  • 25% fed income tax rate, our taxes on dividends could increase from 15% to 31%
  • 28% fed incometax rate, taxes on dividends could increase from 28% to 36%
  • 33% fed income tax rates and up could increase from 35% to 39.5%

Back in college, I learning that dividends are taxed twice, a process called ”double taxation“ (once at the corporate level, and then again at the shareholder level),  after understanding this double taxation, I have hated taxes on dividends since!  With such taxation of corporate earnings at both the corporate and personal levels, we just get a sliver of the real value of the dividends, and that just out-and-out sucks!

Well, not next year!  I’m going to put on my armor and donned my shield against the taxation of dividends!

So how am I going to do that?  I’m going to buy stocks that yield a dividend directly within my Roth IRA!

You see, if I buy the dividend yielding stock in my Roth IRA first, I can still receive the dividends minus the relatively high taxes on them!  That’s the beauty, once you put the money in the Roth IRA, the dividends are tax free too!

Now, what if you want that dividend money because you use it for something like my lunch experiment?  Well, it’s okay to take that money out as long as it’s contributions and not earnings!  As long as you subtract what you take out from the amounts that you have contributed into the Roth IRA!  That mean that you can take the dividend amount out by pulling that amount from the pool of money that you contributed over the years.  So you are really pulling out what you put in initially!

 

That’s the beauty of the Roth IRA!

You can take out the contributions at any time, both tax and penalty free!  If you ever get to the point where you dividend yield is greater than the amount you contributed then you can not pull out any more, at least not without it being taxed and incurring the penalty but still, wouldn’t that be great!  I would love it if my Roth IRA was pure earnings because I pulled all the money that I contributed over the years out!  Of course if it were pure profit, I wouldn’t touch it until it is time to retire.  The earliest I can touch the profits without taxes and the penalty would be when I’m 59 1/2 years old.

In fact, to be honest, I’m thinking of putting more money in my Roth IRA, so I’ll start contributing the full $5,000 to my account, and another $5,000 to my wife’s account!

What do you think of my strategy, and are you thinking about doing the same?

Cheers,

MR

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Sound 2010 Roth IRA Information

March 3rd, 2010

Roth IRA are fun like David Lee?

I think that everybody should have a Roth IRA! It is more fun that David Lee Roth! And by fun, I mean not paying taxes on the future earnings!

First the Basics:

The following is the “2010 Income Limits” range information. MAGI stand for “Modified Adjusted Gross Income“, and not Gross Income!
2010 Roth IRA Income Limits
(The Numbers below are MAGI number not Gross earning!)
Type of Filing Full Amt if Less than: Phase out range: Nothing if over this:
Married Filing Jointly $166,000.00 $166,000 to $176,000 $176,000
Single $105,000.00 $105,000 to $120,000 $120,000

What is the contribution (the amount you are depositing for the year) limit for 2010?

2010 Combined Traditional and Roth IRA Contribution Limits (taked straight from the goverment site: http://www.irs.gov/ )

If you are under 50 years of age at the end of 2010: The maximum contribution that you can make to a traditional or Roth IRA is the smaller of $5,000 or the amount of your taxable compensation for 2010. This limit can be split between a traditional and a Roth IRA but the combined limit is $5,000. The maximum contribution to a Roth IRA and the maximum deductible contribution to a traditional IRA may be reduced depending upon your modified adjusted gross income (modified AGI).

If you are 50 years of age or older before 2011: The maximum contribution that can be made to a traditional or Roth IRA is the smaller of $6,000 or the amount of your taxable compensation for 2010. This limit can be split between a traditional and a Roth IRA but the combined limit is $6,000. The maximum contribution to a Roth IRA and the maximum deductible contribution to a traditional IRA may be reduced depending upon your modified AGI.

Okay, now for the stuff I want to write about!

Why do I like Roth IRAs?

  • You can withdrawal your contributions at any time (but not your earnings without incurring penalties and taxes)
  • This is your discretionary income (take home pay), so this amount can be tucked into an Roth IRA, and it will grow without being taxed, since it was already taxed when it was your gross pay. Beats putting the money in a regular brokerage account and getting taxed every year on dividend, interest or capital gains tax.
  • It’s a perfect emergency fund! Since you can pull your contributions out at any time tax and penalty free. Just don’t pull out any of the earnings from the contribution amount, those would be tax at your current marginal rate, and also carry a 10% penalty hit!!!
  • You can pass this down to your children when you die and they won’t have to pay taxes on it!
  • You can use a part of the IRA amount to help buy a first time house.
  • You can create them for your kids, and make them potentially rich (as long as they have earned income) someday.

So how do I use my Roth IRA?

I use my Roth IRA for 2 purposes:

  • I use it as an Emergency fund. I don’t ever expect to need it, so this is the perfect vehicle for it in my opinion!
  • I also use a small portion of my Roth IRA to buy high beta stocks. This is good because if the stock appreciates like nuts and I have capital gains, I don’t get taken down by taxes on those huge gain. But if it’s bad (because of the economy), like it has lately, you can’t take the tax losses against your earned income.

Okay, that covers what I like about IRA’s!

Are there an additional aspects of the Roth that you can identify? Perhaps you use the Roth for something special? Or maybe I missed a benefit?

Anything you can add would be appreciated!

-MR

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