Monday, October 17, 2011

Financial FICTION #11: Roth IRAs Are the Best Known Tax-advantaged Vehicles Offered in the U.S. Tax Code

Financial FICTION #11: Roth IRAs are the best-known tax-advantaged vehicles offered in the U.S. Tax Code
Financial professionals overwhelmingly agree that it is a very smart move for retirement investors to pursue investment programs into which they can contribute after-tax dollars today, and be able to withdraw those funds (including all the gains) income-tax free later on. I wholeheartedly agree with this line of thought because it makes perfect sense in almost every situation I have witnessed to this point.

However, many financial advisors fall short by positioning Roth IRAs (and, more recently, Roth 401(k)s) as the absolutely best tax-advantaged strategy available to investors under current U.S. tax laws. Given the limitations associated with Roth IRAs, vis-à-vis what one could do within the confines of Sections 7702, 72(e), and 101 of the Internal Revenue Code, I don’t think anyone could argue otherwise that Roth IRA’s are not the absolutely best tax-advantaged deal out there.

For one thing, the maximum yearly contribution one can make into a Roth IRA is $5,000 for those younger than 50 and $ 6,000 for those who are age 50 or older – which means that under no circumstance can anyone contribute more than these limits, even if they wanted to.

Most folks are not aware of this, but not everyone can own a Roth IRA. Certain eligibility requirements which are generally based around Modified Adjusted Gross Income (MAGI) and tax filing status must be met to the satisfaction of the IRS in order to own them.

For instance, if your filing status in 2011 is single, head-of-household or married filing separately (and you did not live with your spouse anytime during the year), and your MAGI is more than $122,000, you cannot contribute anything to a Roth IRA. For those with a married filing jointly or qualified widow(er) status, the cut-off/disqualified MAGI figure is $179,000.

The situation gets somewhat worse for those with married filing separately status who lived with their spouse at anytime during the year, because they are completely disqualified from contributing anything into a Roth IRA if their MAGI goes over $10,000 (that’s not a typo – it’s $10,000).

The other thing is that, in general, the tax advantages of Roth IRAs will kick in only after waiting for at least five years after you make your first contribution into them AND until you, as the account owner, reach age 59½ OR you are deemed disabled (by IRS definition) OR you are going to use the gain to purchase your first home (with a $10,000 lifetime limit).

So, What Can You Do Within the Confines of Sections 72(e), 7702, and 101?

Basically anyone – irrespective of their MAGI – may contribute any after-tax amount. Unlike Roth accounts, there are no set dollar contribution limits in the real sense of the word. Rather, there are certain guidelines that must be followed. But you can effectively set your own contribution limit. The point is, the amount would be totally up to you, with the help of a truly savvy, well-trained, and out-of-the-box financial professional. In fact, without such help, you could create a disaster.

Another really nice thing is that these contribution amounts are “rolling,” in the sense that if for some reason you’re not able to make a contribution or to contribute the full amount in any given year, you can always catch up at a later time. Yes, they don’t expire! On the other hand, with a Roth, if you don’t make your allowed contribution in any given year, you lose that opportunity.

Then, all your after-tax contributions continue to grow, and you are able to access your money, completely income-tax free – including all the gains – without having to wait five years or to reach age 59½.

Upon your death, any remaining funds will transfer to your named heirs, again completely income-tax free!

Yes, I know it almost sounds unbelievable, right? At least now you may be able to understand why I’d argue that “Roth” options are not the absolute best for tax-advantaged accumulation and access.

Let me mention again that for you to enjoy these incredible tax advantages, you’d need to – and must – stay compliant. That’s why I strongly recommend that you hire a well-trained financial professional who’s very familiar with the tax requirements, as set out under Sections 72(e), 7702, and 101 of the U.S. tax code.
Contact a financial professional at Laser Financial Groupt today to schedule your appointment and get valid, relevant answers about the best tax-advantaged program for your circumstances. 877.656.9111 or

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