IRA’s With Alternative Assets And The IRS Crackdown

You may have seen headlines recently about proposals to crack down on IRA’s with large balances and alternative assets. More specifically, Paypal founder Peter Theil has really been in the spotlight with his ROTH IRA balance of $5 billion due to the appreciation of his Paypal stock and then subsequent investments.

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The FIRE Movement – Or choices?

Let’s start with what FIRE stands for—Financial Independence, Retire Early. Isn’t this what everyone wants? I have a theory about how this movement started. There has been a lot of research in the financial planning space and trying to figure out how much you need in investment assets and how much you can take out over the course of your retirement (safe withdrawal rate) without running out of money.

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What Happens To Your Accounts At Death?

Typically, all retirement accounts have named beneficiaries and do not go through your will. That being said, you do have to name the beneficiaries. If you do not have named beneficiaries, then most likely, the account will pass by your will. If you do not have a will—then the state you live in dictates what happens.

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ROTH IRA’s – Why the Hype?

There has been a lot of talk in the media recently about ROTH IRA’s, Backdoor ROTH IRA’s, and Mega Backdoor ROTH IRA’s? The biggest reason for this is because we are in such a low tax environment. Do we know what the tax landscape will look like when we need the money? No, but we do know that now we are dealing with low rates, and we can choose to pay these low rates and deal with what we do know.

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IRA vs. ROTH IRA

Whether you are preparing your income taxes yourself or you have hired someone to do them for you, you will most likely be seeing the question asking if you contributed to an IRA or ROTH IRA for the previous tax year.  By the way, you have until April 15th to make that contribution for the previous year-just make sure it is reported in your filing!

IRA’s

  • Tax Deferred—you get a tax break on the money you contribute.  You will pay tax on all distributions.  If you withdraw before age 59.5, there is a 10% penalty on top of the taxes unless you qualify for an exception.
  • Tax-Deductible Eligibility—If you and your spouse are not covered by a retirement plan at work, then your contributions are tax deductible.  If one or both of you are covered by a work retirement plan, then there are further income tests to determine if the contribution will be tax deductible.
  • Contribution Limits—For 2020 and 2021, the higher of your Earned Income or $6000 ($7000 if age 50+). 
  • Required Minimum Distributions—you are required to start taking money out of your IRA’s every year starting at age 72.   The government gave you a tax break all of these years, now they need some revenue.

ROTH IRA’s

  • After tax contributions—you contribute after tax money.  As long as the ROTH IRA has been open for 5 years and you are 59.5, then your distributions are TAX FREE.
  • Contribution Limits—the same for IRA’s above ($6K, $7K for age 50+).
  • Contribution Eligibility—there are income limits to be able to contribute to a ROTH IRA
  • No Required Minimum Distributions while the owner is alive, however, a beneficiary will be required to take minimum distributions but no tax will be due.

Let’s say you aren’t eligible to contribute to an IRA or a ROTH IRA, but you really like the idea of this ROTH IRA—because who doesn’t like TAX FREE MONEY?! If you have an IRA account you can do what is called a ROTH Conversion.  A ROTH Conversion is the process of converting your IRA account to a ROTH and paying the taxes now.  There are some other things to consider when doing this, so you should consult a professional.

Financial Journey LLC is a registered investment advisor offering advisory services in the state of Virginia and in other jurisdictions where exempted.  Information provided is for educational purposes only and not, in any way, to be considered investment or tax advice.