Were you aware that Uncle Sam is your "Evil Twin Brother" when it comes to most retirement plans? Many investors quickly forgot about the tax liability on their company sponsored 401(k) and self-directed IRA's upon distribution, as it is easy to think this big bucket of money is tax free, but this just isn't reality. Unlike your home that will be "free and clear" when paid off, this is not the case with most retirement plans. Depending on your federal and state tax bracket, your potential tax liability could be close to 50% on your distributions in today's dollars and possibly higher in the future. While nobody can predict where Federal and State tax rates might be heading in the future, the general consensus is for higher tax rates in the coming years, and this will reduce your net amount even further.
One way to "Crack the Tax Code" is to consider setting up a Roth IRA. While Roth IRA's are not perfect, and nothing ever is, they continue to be one of my very favorite options for building real wealth. Your funds not only grow on a tax deferred basis while in the accumulation phase, but upon distribution, they are tax-free. What's not to like?
Contributions to a Roth IRA come from after-tax money and are not taxed on withdrawal. You must have earned income and the contributions cannot exceed your earned income for the year and there are certain limits and exceptions. Direct contributions (not rollovers or conversions) can be withdrawn at any time without tax penalty but not so for earnings. The assets must be in the account for at least five (5) years and you must be age 59 1/2 or older in order to withdraw them tax and penalty free. As stated earlier, there are a few exceptions to the rule.
The greatest benefit of a Roth IRA may be in transferring wealth to your heirs. A Roth IRA is not subject to minimum withdrawals (or a ban on contributions) at age 70 1/2 and may provide far more to a beneficiary than other plans. Assets in your Roth IRA account can pass to heirs without current income tax, which is a big plus. Non-spousal heirs who inherit a Roth IRA may have to take minimum distributions but can stretch them out over a lifetime, during which the IRA is enjoying tax-free growth. There are no longer income limits for converting traditional IRA's and to Roth IRA's.
While there are not many "gems" in the "Tax Code" these days, the Roth IRA is truly one of handful available to us. Remember upon distribution, Uncle Sam is your "Evil Twin Brother" on your IRA, 401(k), 403(b)'s, etc., because they are first in line when it comes to receiving Federal and State taxes. Your Uncle loves roaring bull stock markets and juicy returns for many reasons, which is good for everybody, but in the final analysis, larger accounts translate into greater revenue for the U.S. Treasury.
If you would like to find out if a Roth IRA or Roth IRA conversion makes sense for you, please don't hesitate to reach out to me and we can run a few "what if" scenarios for you.