Today's comment is by Larry Grossman, Certified Financial Planner, managing director of Sovereign International Asset Management Inc. and a member of The Sovereign Society Council of Experts.
Dear A-Letter Reader:
Now there's a retirement plan you can use to invest in virtually any investment, which will grow completely tax-free (on gains and income). You can even pass this retirement plan on to your kids tax free.
If you guessed I'm talking about a Roth IRA - you're partially right. But there's a twist.
This plan is called a Roth 401(k) (or Roth 403b). As the name suggests, it combines features of the traditional 401(k) with those of the Roth IRA. This new "hybrid" retirement plan will be offered by employers like a regular 401(k) plan.
The Roth 401(k) concept was introduced with the Economic Growth and Tax Relief Reconciliation Act of 2001 , which stipulated that employers could start offering these plans on Jan. 1, 2006.
But first, let me give you a little background on traditional Roth retirement accounts. A Roth account is different from a traditional retirement account, but it does have a number of similarities.
Traditional IRAs and Retirement Plans are funded with pre-tax contributions, reduce your reportable income for the year, grow tax-deferred and are fully taxable when withdrawn.
Just as with Roth IRAs, Roth 401(k)s and Roth 403bs, are funded with after-tax contributions and have no effect on your reportable income. While you won't get an upfront tax-deduction, the account will grow tax-free, and withdrawals taken during retirement are completely free of income taxes, provided you're at least 59 1/2 and you've held the account for five years or more.
Unfortunately, not everyone qualifies for a Roth contribution. If your filing status falls within the table below you won't qualify for a Roth contribution.
| 150,000 - $160,000 |
If your filing status is Married Filing Joint |
| $95,000 - $110,000 |
If your filing status is Single, Head of Household, or Married Filing Separate and you lived with your spouse at any time during the year. |
Today, if you qualify for a Roth contribution the limit for 2006 is a total of $15,000, (with an additional $5,000 catch up for those over age 50) in aggregate between your Roth and your traditional pre-tax contributions.
For those of you who have wanted to convert your existing accounts to a Roth IRA but were unable to because you make too much money there is good news. Beginning in 2010 the income limitations to convert an account to a Roth account are being removed. (Currently the magic numbers are $110,000 single filer and $160,000 joint) And they are giving you a one time opportunity to do so on an even more tax favored basis as you can make the tax payments do from a conversion over a two year period, 2011 and 2012 for conversions made in 2010.
But high-income individuals, who can't to contribute to a Roth IRA because of the income restrictions until now, can still apply for a Roth 401(k). There are no income stipulations for Roth 401(k)s.
In addition, Roth 401(k) accounts will be subject to the contribution limits of regular 401(k)s - $15,000 for 2006, or $20,000 for those 50 or older by the end of the year - allowing individuals to save thousands of dollars more in tax-free retirement income than they would through a Roth IRA.
But, let's move on to the really interesting things you can do with these accounts.
The good news is you can invest in almost any investment imaginable in your Roth account and let them grow tax-free. This includes precious metals, real estate (both U.S. and non-U.S.), offshore mutual funds and hedge funds, privately held stock and or corporations and much, much more. Remember, as I have said before, there are very few prohibitions and they are covered in IRS publication 590.
Collectables are one of the few items you can't invest in. However, the exception is U.S. gold or silver coins or other types of platinum coins and certain gold, silver, palladium, and platinum bullion.
And it has to be an investment for your future, not current use.
So as you can see there is very little you can't do. This means you can take advantage of all of the wonderful investments you have seen mentioned over the years in The Sovereign Individual and earn profits without taxes.
But wait there's more. You are NOT required to begin taking distributions by age 70 1/2 like a traditional retirement account. This means you may pass these wonderful benefits and your account on to your heirs income tax-free.
Remember as always the rules governing retirement plans are complex and expert advice should always be sought.
LARRY GROSSMAN, CFP, CIMA
E-mail: lgrossman@worldwideplanning.com
Web site: http://www.worldwideplanning.com