Roth IRA Rules and Comparison

Since its creation in 1997, the Roth IRA has become a popular retirement solution for many investors. This popularity is largely due to the account’s unique advantages. While the Roth IRA isn’t the only way to plan for retirement, knowing its benefits can help you determine what kind of role the account can play in helping you prepare for your future.

Source: IRS.gov

 The first and foremost benefit of a Roth IRA is the account’s tax structure. A Roth IRA requires that contributions to the account occur with funds that have already had taxes taken out of them. This structure differs from a Traditional IRA gets funded with contributions be made with pre-tax funds. While you do have to pay taxes on funds that enter the account, any gains or earnings made by the funds in your Roth IRA are allowed to grow tax-free. Qualified distributions, funds withdrawn from the account after age 59.5 and after the account has been open for at least 5 years, are also tax-free.

Like a Traditional IRA, a Roth IRA can be funded through a contribution, transfer, or rollover. Unlike a Traditional IRA, the contributions made to a Roth IRA can be withdrawn at any time without penalties or taxes. These contributions are currently limited to $5,500 annually for individuals under age 50 and $6,500 annually for individuals over age 50. Income limits also apply to Roth IRAs. In order to be eligible to contribute to a Roth IRA, you must have earned income at least equal to the dollar amount contributed to the account. Individuals or married couples whose Modified Adjusted Gross Income exceeds certain IRS limits are also ineligible to contribute to a Roth IRA.

A Roth IRA can also be funded in a fourth way, through a conversion. This process involves taking a non-Roth retirement account- Traditional IRA, SEP IRA, SIMPLE IRA, 401(k)- and converting it to a Roth IRA by paying income taxes on previously tax-free account contributions. Currently, there are no limits on the amount of funds that can be converted to a Roth IRA. While converting non-Roth funds can help you take advantage of the benefits of a Roth IRA, this process does start a five-year requirement for qualified distributions on the converted funds. 

Beyond these benefits, the Roth IRA contains other advantages. Unlike non-Roth IRAs, you can continue to contribute to a Roth account after age 70.5. You are also not required to take a yearly minimum distribution from a Roth IRA after reaching age 70.5. Your Roth IRA can also help you purchase a home. The IRS allows a lifetime maximum of $10,000 that can be withdrawn tax and penalty free from the Roth account to purchase a principal residence for the account holder.

While the Roth IRA has many advantages, it is important to know how your current financial situation and retirement goals factor into the equation. Working with your financial team can help you determine how best to utilize a Roth IRA to realize your retirement dreams.

Holding Alternative Investments in a Roth IRA

The typical stereotype when opening an IRA account is that all underlying investments must be exchange traded stocks, bonds, and mutual funds. Stock market volatility frequently intimidates retirement investors to the point that they simply do nothing and forego crucial retirement planning. Roth IRA account owners will be pleased to know there is an entire spectrum of alternative investments unrelated to the stock market that can be held under a ROTH umbrella. 

Before opening a Roth IRA with the intention of holding alternative investments, be certain that your intended Roth IRA custodian is willing to work with you. The most common type of custodian allowing alternative investments specializes in what are called “self-directed IRA accounts.” Self-directed IRA providers are a small but growing niche. Let’s take a look at the applicable Roth IRA rules with regard to acceptable and prohibited alternative investments.

Acceptable Roth IRA Alternative Investments

A common alternative investment held in Roth IRAs is real estate. Just about any type of real estate can be held in a Roth IRA including single family homes, apartment complexes, and commercial buildings. It’s important to note that Roth IRA investments are not for personal use and must be held for investment purposes only. The funds used to purchase real estate must originate from a Roth IRA account but non-recourse financing opportunities are an option. Existing real estate assets cannot be transferred into the ROTH IRA account. Other broad categories of alternative investments include, but are not limited to: 

• Promissory Notes
• Private Equity
• Shares of a Business (Non S-Corp)
• Oil & Gas
• Precious Metals 

Prohibited Roth IRA Alternative Investments

With so many accepted Roth IRA investment alternatives you may be wondering what isn’t allowed? There are three such investment types:

• Collectibles. This category includes artwork, rugs, antiques, metals, gems, stamps, non-marketable coins, alcoholic beverages, and certain other tangible personal property. These types of investments are ruled out because valuations are often difficult to achieve on a regular basis and IRA rules demand regular account value reporting for tax purposes.
• Life Insurance. Because an IRA account is not a human being, it becomes difficult to own and administer life insurance and is therefore prohibited. 
• Shares of an S-corporation. S-corporations follow specific IRS taxation requirements and the tax-deferred nature of a traditional IRA or Roth IRA would go against those requirements. 

It is highly recommended that an investor keep on top of all applicable IRA rules when investing in alternative assets. One false step may result in IRS penalties which is why many self-directed Roth IRA owners rely on the guidance of their trusted custodian. 

How to receive an extra IRS tax credit for your retirement account

 There are numerous avenues for savvy spenders to explore when looking for a reduced tax burden. One such avenue is the Saver’s Credit, or the Retirement Savings Contribution Credit.

Available to 401(k)s and IRAs, the Saver’s Credit can be worth up to $2,000 for married couples who file a joint tax return. For single filers, the credit can be worth up to $1,000.

So how does it work? Who qualifies and how much will they get?

First, this tax credit is in addition to the tax benefits your retirement plan already receives. Think about it as an incentive to open a tax-free or tax-deferred account.

Eligibility for the credit depends on whether you’re single or married and how much money you make. Since the credit requirements change every year, let’s look at 2013’s numbers as a pretty good indicator for what 2014 requirements will be. You may be eligible if you are:

• Married filing separately or a single taxpayer with income up to $29,500
• Head of household with income up to $44,250
• Married filing jointly with income up to $59,000

Other rules apply for eligibility: you must be at least 18, you must have not been a full-time student the previous year and you can’t be claimed as a dependent on anyone else’s tax return.

Logically, another rule is that you must have contributed to a 401(k) by the end of the previous year in order to receive the credit, and to an IRA by the filing date of the current year (April 15).

To begin filing for the credit, access IRS Form 8880, which is the Credit for Qualified Retirement Savings Contributions. Tax software  (or a tax professional) will do this for you if you file your tax return online or with a tax service.

Keep in mind that the Saver’s Credit is just one benefit of retirement accounts. You can deduct money from certain accounts that you contribute to and the money you contribute to some accounts grows tax-deferred or tax-free. For more information on how to maximize your retirement account, call us at New Direction IRA or visit www.ndira.com.

Refer a friend to open a self-directed IRA account and save!

New Direction IRA, Inc. (NDIRA), an IRA administrative services provider, will give you a $50 credit if you refer a friend to open an account. The new account holder will get a $10 discount on the application fee.

NDIRA is a self-directed IRA provider that lets investors take control of their retirement funds. With an NDIRA account, you can invest your IRA in real estate, precious metals, private equity and more alternative assets.

Most IRA providers will choose your investments for you, or will require you to pick investments that the company has pre-determined. Typically, these investments are limited to publicly traded securities like stocks, bonds and mutual funds. However, an SDIRA puts the power back in your hands by enabling you to invest in what you know and trust.

NDIRA clients keep coming back and referring their friends and family because they are the best in the industry. We have unique technology that makes everything from buying property to collecting rent to exchanging gold assets for silver assets a breeze.

In the last year, NDIRA grew its client base more than 15 percent. That increase is largely because of the NDIRA’s innovation. By listening to investors, financial advisors and industry professionals, NDIRA has developed a service model of great technology and exceptional customer service that meets the unique needs of every partner.

Call us at NDIRA today to get started with alternative asset investing with self-directed IRAs. Whether your goal is to have a real estate IRA, gold IRA, health savings account (HSA) or anything in between, NDIRA can help.