Roth IRA Vs Individual IRA - How To Know Which Is Best

If you're the average person, you are probably aware of the significance of getting your financial house in order for retirement. The federal government makes it possible for individuals and spouses, to create retirement savings accounts with certain options for paying taxes. These options are the basis for the main difference between a Roth IRA vs Tradition IRA.

Contributions to a Roth are made by way of earnings which have already been taxed. Contributions to a traditional IRA are deferred until the account owner reaches retirement age and begins pulling out their funds. It is at this point that income taxes are levied against BOTH contributions and profits.

But given these facts, how is it possible to which type of IRA presents the best option?

Okay, the truth is, there is no way to be absolutely sure...that is until the time you retire and you can look back at your decision.

The closest you can come to making a good decision is to look at the tax bracket you fit into at the time of the IRA creation and make an educated guess about what tax bracket you will be in at retirement.

If you believe you are likely to be in the same or even lower tax bracket retirement time, then a Roth IRA will be the more sensible choice. But if you think your future tax bracket will ultimately be lower than your current tax bracket, a traditional IRA will be the more suitable alternative.

Something else to consider when trying to make the choice between a Roth IRA vs traditional IRA is your age and what stage you are at in your career.

Younger people, in early stages of their occupations, can safely assume their income will increase as time passes. In this situation, a Roth IRA may perhaps be a smarter alternative.

Furthermore, young people who are getting started in their adult lives may find themselves needing to take advantage of the ability to withdraw contributions, anytime, from a Roth IRA, without having to worry about being taxed or penalized. This withdrawal benefit is not available with a traditional retirement savings plan.

So let me give you an example of how this might work.

Let's imagine you're employed for an organization which offers their workers participation in a Roth 401k plan. As a participant, you come up with a $10,000 contribution for this account and then soon after decide to roll this sum over into Roth IRA. To this contribution you add another $5,000.

Now let's just suppose your $15,000 Roth account makes $5,000 because of some smart investments. Your retirement savings account is now valued at $20,000.

Should you experience some unexpected expenses, you would be able to take out the entire $15,000 contribution with no penalty and taxes. Now, you could also take out your $5,000 earnings, however, but you need to know you would definitely be forced to shell out applicable income tax and also a penalty of ten percent.

But the story doesn't end here. If you make consistent contributions to your employer's 401(k) plan, and your earnings continue to go up over the ensuing years, you could decide to split up your contributions rollover, fifty-fifty, between Roth IRA vs traditional IRA.

The bottom line is that making the choice between a Roth IRA vs traditional IRA takes some information, a little guesswork, and consistent contributions in order to hedge your bets on any income bracket you may find yourself in at retirement.

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Why You Should Invest in a 401K Plan

The excuses have all been heard before when trying to put off your savings for retirement. When is truly the "right time" for you to do so? Honestly, the "right time" to invest was probably years ago. But there is still hope. If you were to take a collapsible ruler from 1 inch to 60 inches, near the age of retirement, you can pin down when you should invest. At the age of 18, you probably have just gotten your first full time job where they offer you a 401K plan. But you are only 18, and you may not make a lot of money, and you probably want to spend it on personal items. You really don't have too many expenses compared to an adult, but you want to take advantage of that. So you can fold up the first section of your ruler.

Now you are 20 to 21 years old, and you have met someone nice in your life. You plan to propose and you will need any bit of extra money you can get to pay for the wedding expenses and to afford the new life the two of you will share. You put off investing once again. After the wedding, ahead a few years, you are now around the age of 25, but you are ready to take it to the next step and have a baby. With all the baby expenses, you cannot really invest in retirement right now, either. You can fold up the second section of your ruler.

Around the age of 36, you begin thinking about your child's future, what colleges you can afford to send them to, any extracurricular sports or expenses they may have. You need to save for things like this, without a doubt. You may say, "I'll invest when my child goes off to college and starts living on his or her own." So you have to fold up the third section of your ruler. Now you only have 2 sections of your ruler left, compared to the 5 sections you had in the beginning, but you just haven't had the "time."

Near the age of 48, you only have one section left in your ruler, and your children are finally out on their own. You can invest now, but you haven't had the time to really "live" or "splurge." You may put off investing for a few more years so you don't strain your finances, but you only have from 6 to 12 more years left to invest in your plan. When you do sit down and make that decision, the most you can invest at this time will only leave with from $12,000 to $24,000 in your 401K plan. If an 18 year old had got the 401k investment advice and started to invest, he would have about $84,000, investing the same amount or even less than you during each pay period. This is quite a significant difference, and the 18 year old will already be 100% vested, meaning they can walk away from their job with every bit of money that their company matched them at, while you will still need to continue investing for years before this happens. While incomes decline and rates of inflation rise, any extra bit of money during your retirement is needed to supplement the monthly income you are no longer receiving from a full time job.

401K investments come out of your paycheck tax free, and often do not even make a noticeable difference in your income. Because less of your paycheck is being taxed, the amount you invested in your retirement plan will often be larger than the amount that you are missing from your paycheck. While it is easy to argue that you need every bit of money you can spare to pay for your expenses or change of life events, the truth is that you can actually afford more than you think.

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Great Returns With IRA Accounts - How To Find The Best IRA Investment Accounts!

When investing, one of the key things that you want are the best returns. When you want to earn money by investing, having the best possible returns on your investment can really help you to do so. IRA investment accounts are one of the most trusted, proven and consistent ways to invest online, and when you're choosing an IRA account to go with, you want to choose the best one possible so that you can have the most consistent as well as most profitable returns possible on your investment!

Here are just a few things to look for when choosing an IRA investment account in order to help you find the best returns that you can!

Consistent Track Record

When looking for an IRA account with great returns, you want to look for a consistent, proven track record. A consistent, proven track record can help you find the best IRA accounts possible and ones that have a record of giving consistent profits to their investors, whether those particular investors have started with a little or a lot.

A consistent track record can help you to decide whether the account is going to really help you earn money in the future or not as well. Many quarters of consecutive, profitable returns can help you choose a particular IRA Investment Account to go with!

Great Rates

Of course, when you're looking for investments you want something that offers great rates, and it's no different with IRA investment account, you want an option that offers you great rates and of course great returns on your investment. Having great rates can help you earn more money over the long term as well as over the short term and get you more money to invest back into the investment account is you choose to do so!

Look For Accounts That Let You Start Off With A Little Or A Lot

Many IRA investment accounts will make you start off with a lot, and this isn't always good. You want IRA investment accounts that let you start off investing in your account with a little. The main reason is because this let's you try out the account and decide whether you would like to keep it and whether you would like to invest more money! The best accounts and companies are confident that they can earn you money and therefore if you start out with a little, they're confident they can earn you a lot of money off of that and that you will likely invest more in the future!

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Easy to Understand Roth IRA Contribution Limits Breakdown

You NEED to know what your Roth IRA Contribution Limits are each and every year. Without knowing this, you will either under fund your IRA which may result in financial uncertainty, or you may contribute too much to your account which will result in fines. This article has all the information you need about your Roth IRA and will help you get the maximum benefit from your retirement account.

Roth IRA Contribution Limits Factors

There are 3 main factors that you will be assessed by when contributing to your Roth IRA; these are: your age, filing status, and your modified adjusted gross income.

Factor 1: Age

There are only two different categories for age in regards to your Roth IRA contribution limits, which are under 50, and over 50. If you are over 50, your potential maximum contribution will be larger than if you are under 50, it's a way to let people 'catch-up' if they got a late start to retirement savings. As of 2011, your maximum contribution is $6,000 if you are over 50, but only $5,000 if you are under 50.

Factor 2: Modified Adjusted Gross Income (MAGI)

Your MAGI is often referred to as your taxable income when discussing IRAs, and will need to be calculated in order to determine your maximum contribution.

In order to calculate your MAGI you will have to use your 1040 or 1040A tax form, a more thorough guide to determining your MAGI is given in the following article about Roth IRA Income Limits.

Once you have determined your MAGI, you will have to see what bracket you fall into. Every year the specific dollar amounts change, but here is the general structure:

Under $XXX,000: If you make less than this amount, no limitations will be placed on you, your maximum contribution will be based on age and filing status.

In-between $XXX,000 - $YYY,000: In this range which is between the lower and upper bounds, you are still allowed to make a contribution, but it will be a reduced amount.

Over $YYY,000: Finally, if you have a very significant income, you are not permitted to contribute at all to your Roth IRA, however, this does not mean that you can't contribute to your other retirement accounts.

Factor 3: Filing Status

This factor takes into account the status you put down when you file your taxes for the year. You have the option of putting whichever one of the four statuses down that fit your circumstances, all of which will affect your contribution limits differently.

Single or Head of Household: If you file as single/head of household, no limitations will be imposed on your maximum contribution; this is the ideal case when looking specifically at your retirement savings.

Married filing jointly: In order to file jointly and married, you will have to look at a different set of standards regarding your MAGI than presented above. You will be required to add both of your MAGI's together in order to get a combined taxable income amount. Once you have this amount, there will be a new set of income brackets that will determine your contribution amount.

Married filing separately: This is by far the most restrictive category when filing your taxes. You fall under this category if you have lived with your spouse at any time during the year in question; if you did not live together at all, you are permitted to file as 'single'. As of 2011, the income brackets for someone married but filing separately are:

MAGI between $0 - $10,000: Reduced contribution

MAGI over $10,000: No Contribution Allowed

As you can see, if you have a fulltime income it is very unlikely you would be able to contribute at all. The reason for this restriction is so people can't 'cheat' the system and try to file as single when they're married in order to contribute more, it's just unfortunate that this is the only way to ensure that.

Summary

This is a general overview of what affects your Roth IRA Contribution Limits; I encourage you to read whatever topics are of interest to you on this site, they will have much more specific details to their years.

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Self Directed IRA Case Studies

The greatest benefit of a self directed IRA is that in addition to offering complete control for your retirement account, it also lets you invest in something you understand and enjoy. Here are two case studies that illustrate the benefits of a real estate IRAs:

Case study 1: Using non recourse lending for high returns on a self directed IRA real estate investment

A self directed IRA can be used to purchase or rehab real estate and invest in other assets. With real estate IRAs, it is also possible to get non recourse funding from lenders so that you can leverage your IRA funds. Non recourse lending means that the lender has a hold only over the asset funded, not the borrower. Once you've located a company specializing in IRA lending, be prepared to make a larger than average down payment as this offsets the risk for the non recourse lender.

John wanted to invest in real estate. Since he did not have enough funds in his IRA, he decided to go seek non recourse financing. He identified the property and found it needed repairs. He submitted his self directed IRA statements to the lender along with a credit application and a itemized budget of proposed repairs. His self-directed IRA was opened and funded. He then put the property under contract. He wanted to rehab the property and sell it quickly for a profit.

The proposed purchase price is $50,000 and total amount of repairs required is $30,000. The market value of the property once repaired is around $ 110,000. With $80,000 for a total cost, John would need to put down 50% or $40,000 as a down payment for the purchase and repairs. Once the property is resold, the $40,000 loan is paid off and the profit from the resale is put back into his self directed IRA. Now when he buys his next home, he'll have more money to invest with.

With the total loan amount at $40,000 and a 50% down payment, John's self directed IRA had to come up with $40,000. The balance amount was a non recourse loan, allowing John to leverage his IRA funds resulting in a much larger tax free return on his investment than he could have expected from his traditional IRA.

One thing to remember here is that you should discuss the UBIT tax implications with an advisor on capital gains from the property.

Case study 2: Diversifying your real estate IRA investment portfolio with non recourse lending

The IRS mandates that real estate purchases that use leverage with a self directed IRA can only be facilitated through non recourse lending. This is an advantage since any loan payment default will only require the property as collateral without any liability to the IRA or the individual. For investors who prefer to buy property with their self directed IRA but do not have the funds in the IRA, a non recourse loan is the best way to go. The borrower does not personally guarantee the loan. However, the property must be saleable and there are lenders who would finance up to sixty five percent of the cost of the property.

Ann is an investor who has about $80,000 in her self directed 401K. She would like to invest this money profitably over more than one property. As she explores her investment options, she identifies the ideal property on the market for $110,000. Knowing it was a good deal that would cash flow, Ann decides to invest. She put up $38,500 from her 401K funds and finds a non recourse lender to put up the $71,500 to finalize the purchase. Ann used the remaining funds in her account to invest in two more properties for higher returns, thus diversifying her portfolio and reducing her risk in case of any unforeseen market slumps. Thus, with her $80,000, Ann has three properties from where the rental income goes into her self directed retirement account.

With a self directed IRA, real estate is among the most common investments and opting for non recourse lending can help make possible purchases that would not otherwise be viable.

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What Are the Consequences of Participating in Prohibited Transactions?

With a self directed IRA there are a number of prohibited actions which are of vital importance to understand. If you do not follow the rules and regulations carefully you could find yourself in a tough legal situation.

Prohibited actions

The prohibited transactions are:

a) A transfer of plan income or assets to, or use of them by or for the benefit of, a disqualified person; b) Any act of a fiduciary by which plan income or assets are used for his or her own interest; c) The receipt of consideration by a fiduciary for his or her own account from any party dealing with the plan in a transaction that involves plan income or assets; d) The sale, exchange, or lease of property between a plan and a disqualified person; e) Lending money or extending credit between a plan and a disqualified person; f) Furnishing goods, services, or facilities between a plan and a disqualified person.

The consequences

If you, as an IRA holder, are found to have taken part in a prohibited transaction, then any money in your IRA will be considered fully distributed and your account will no longer exists. The following taxes and penalties which ensue will be heavy and will apply to any assets you owned from the beginning of the year that the prohibited transaction started.

The disqualified person involved with the prohibited transaction is expected to pay for the transaction plus a tax amount of 15% of the transaction amount for every year, or part of a year, that this illegal activity was allowed. A further tax of 100% of the amount is charged if the transaction is not amended within the time of the taxable period. Both of these taxes must be paid for by the disqualified person who took part in the transaction. If there was more than one person involved then each person might be expected to pay the full amount.

In terms of the taxable period, this begins when the transaction started and finishes on whichever day is earliest out of:

a) When the IRS posts a notice concerning the tax deficiency; b) When the IRS reviews the tax; c) When the transaction has been amended.

The amount that will have to be paid must be which is ever greater out of:

a) The fair market cost of the property supplied plus the amount involved in the transaction; b) The fair market cost of the property received plus the amount involved in the transaction.

A solution

It is important to follow the rules as specified when dealing with a real estate IRA. If you need further financing then there is a form of IRA lending available. Although a normal recourse loan is not permitted, it is possible to apply for a non recourse loan. This is because a non recourse loan places the financial security in your real estate as opposed to the IRA. Therefore, when considering IRA lending, a non recourse loan is by far your safest and easiest option as well as providing you with greater leverage for your account.

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