Always
start off investing with Roth IRAs from day one, never a Traditional
IRA, if you qualify. It is better to pay a little tax upfront, then
pay a lot of taxes decades later when you begin (and/or are required)
to withdraw from your IRA (even if your future tax bracket is lower)
when your investment has likely multiplied in value several times
(using long term stock market averages, a $1,000 IRA investment in
your 20s can grow on average to over $60,000 in your 60s – better
to pay the federal income tax on $1,000 now than on over $60,000
later) . Roth IRAs held over 5 years are NOT taxed at withdrawal, and
are not forced to be withdrawn, thus saving not only you but also
your heirs lots of taxes too.
If
your income is too high that the government will not allow you to
take out a Roth IRA, there is a work around method. Take out the
Traditional IRA. Next convert it to a Roth IRA and pay the taxes that
you would have paid anyway if you were able to take out a Roth IRA in
the first place. There is no limit on the number nor amounts of Roth
Conversions. Why does the government allow this? No one ever accused
our government of being smart.
Educate
your heirs if you are leaving them a Traditional IRA not to withdraw
all of it in a single year, but instead convert the entire amount to
an inherited IRA. Otherwise, up to 50% or more of their inheritance
may be lost in Federal and State income taxes. If they are under 59
½, then another 10% tax is charged. For really high inheritances,
the Estate tax could push that to 80% or more. A Roth IRA held 5
years or more avoids these tax issues. A Traditional 401K can also be
converted to a Roth IRA (usually after your retire or leave the
company). This is one time you may want to discuss with a good, tax
knowledgeable financial adviser. Like most government programs, there
are plenty of “rules” and mistakes can be very costly and
irreversible.
For
people with Traditional IRAs, there are two options to reduce Federal
income taxes through a Roth Conversion. The biggest tax break would
to become a General Partner for one year, then reduced to a limited
Partner, using non-IRA money, in a new oil or gas well project (you
can do that for as little as $20,000). You get to reduce your taxable
income by 80 to 100% of the investment principal. Personally,
I don't like the risk of that option
(look at how much the price of a barrel of oil has changed in just a
year's time recently and in the past). Also, though the chances are
remote, when you are a General Partner, you could be sued for
everything that you are worth (most partnerships of this type carry
lots of insurance to prepare for this relatively rare possibility)
A
more conservative option is to invest in income producing non-liquid
assets (non-liquid for 2-8 years) within a Traditional IRA. A few
months later, move it to a Roth IRA and get a “forecast market
valuation” of its worth at the time of the Roth Conversion. To make
it worthwhile, you need to convert in $100,000 minimum chunks each
year, but don't do so much as to raise yourself to the maximum tax
bracket ( or if on Medicare, exceed the maximum annual income limits
which could double your Medicare premiums the following year. You
will need a certified Financial Planner (not a stock broker) to help
you. They are generally affiliated with either Madison Avenue
Securities or VFG Securities.
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