A Roth IRA can make you a tax-free millionaire.
But only 10% of Americans own one.
Here is everything you need to know about Roth IRAs:
But only 10% of Americans own one.
Here is everything you need to know about Roth IRAs:
Back in 2010, Max Levchin, the co-founder of PayPal & Yelp chairman, sold 3.1 million Yelp shares in his Roth IRA.
That was a ~$10.1 MILLION profit.
Normally, you have to pay taxes on your profit.
But Max won’t have to pay a penny.
That was a ~$10.1 MILLION profit.
Normally, you have to pay taxes on your profit.
But Max won’t have to pay a penny.
Max made a tax-free ~$10.1M profit because his money was invested in a Roth IRA.
As long as he doesn’t withdraw the profit before he reaches age 59.5, he won’t have to pay taxes.
So HOW can you legally avoid paying taxes on your profits?
It’s called the Roth IRA.
As long as he doesn’t withdraw the profit before he reaches age 59.5, he won’t have to pay taxes.
So HOW can you legally avoid paying taxes on your profits?
It’s called the Roth IRA.
What actually is a Roth IRA?
A Roth IRA is something anyone in the US can open (you don’t need an employer).
All you do is go to a broker and open your Roth IRA.
Examples of brokers include:
- Fidelity
- Vanguard
- Charles Schwab
A Roth IRA is something anyone in the US can open (you don’t need an employer).
All you do is go to a broker and open your Roth IRA.
Examples of brokers include:
- Fidelity
- Vanguard
- Charles Schwab
And here’s how Roth IRAs work:
You:
- Make a contribution (no tax deduction)
- Invest your contribution
- Let your investments grow tax free
- Make tax-free withdrawals (assuming you’ve followed all ROTH IRA rules – we’ll talk about that later)
You:
- Make a contribution (no tax deduction)
- Invest your contribution
- Let your investments grow tax free
- Make tax-free withdrawals (assuming you’ve followed all ROTH IRA rules – we’ll talk about that later)
Your Roth IRA contributions can be invested in the stock market.
And as the stock market grows, your investments grow.
Because your contributions are held in a Roth IRA account, that account name gives your investments a special tax status.
And as the stock market grows, your investments grow.
Because your contributions are held in a Roth IRA account, that account name gives your investments a special tax status.
The special Roth IRA tax status:
1. Your investments grow tax free
2. Your withdrawals are tax free
But as always, there are special rules…
1. Your investments grow tax free
2. Your withdrawals are tax free
But as always, there are special rules…
Some Rules:
1. For a tax-free withdrawal, money should be taken out AFTER 59.5
2. Contributions are limited to $6,500 (under 50) & $7,500 (over 50)
3. Withdrawals must be taken after a 5-year holding period
Otherwise, you’ll be given a 10% tax penalty ON TOP of any taxes.
1. For a tax-free withdrawal, money should be taken out AFTER 59.5
2. Contributions are limited to $6,500 (under 50) & $7,500 (over 50)
3. Withdrawals must be taken after a 5-year holding period
Otherwise, you’ll be given a 10% tax penalty ON TOP of any taxes.
And as always, there are exceptions…
1. Qualified Distributions
2. Backdoor Roth IRAs
3. Early Contribution Withdrawals
1. Qualified Distributions
2. Backdoor Roth IRAs
3. Early Contribution Withdrawals
Exception #1: Qualified Distributions
You won't face the 10% penalty (but may owe taxes) for:
- IRA Rollovers
- Death/disability
- Education costs
- First time home purchase (up to $10k)
- Health insurance premiums while unemployed
- Unreimbursed medical expenses > 10% of AGI
You won't face the 10% penalty (but may owe taxes) for:
- IRA Rollovers
- Death/disability
- Education costs
- First time home purchase (up to $10k)
- Health insurance premiums while unemployed
- Unreimbursed medical expenses > 10% of AGI
Exception #2: Backdoor Roth IRAs
You can make a contribution to your Traditional IRA & then IMMEDIATELY convert that contribution to a Roth IRA.
This is known as the Backdoor Roth IRA.
You can make a contribution to your Traditional IRA & then IMMEDIATELY convert that contribution to a Roth IRA.
This is known as the Backdoor Roth IRA.
Backdoor Roth IRA Steps:
- Open Roth IRA
- Open a Trad. IRA
- Make contribution to Trad. IRA
- Leave contribution in cash
- Move cash to Roth IRA, ideally on same day
- Invest $$$
- Record transaction for taxes
Note: Pro rata rules apply, so consult with a professional first.
- Open Roth IRA
- Open a Trad. IRA
- Make contribution to Trad. IRA
- Leave contribution in cash
- Move cash to Roth IRA, ideally on same day
- Invest $$$
- Record transaction for taxes
Note: Pro rata rules apply, so consult with a professional first.
Exception #3: Early Contribution Withdrawals
You can withdraw CONTRIBUTIONS at any time.
You won't owe a penalty or taxes.
That’s because your contributions were already taxed at the time of putting your money into the Roth IRA.
You can withdraw CONTRIBUTIONS at any time.
You won't owe a penalty or taxes.
That’s because your contributions were already taxed at the time of putting your money into the Roth IRA.
Here’s how you qualify to actually contribute to a Roth IRA:
1. You have to make “earned Income”
2. You have to earn LESS than a certain amount of money
1. You have to make “earned Income”
2. You have to earn LESS than a certain amount of money
Rule #1: Earned Income
To contribute to a Roth IRA, you must be making “earned income.”
Earned income is the money you are paid when you work for someone.
It includes:
- Tips
- Wages
- Salaries
- Bonuses
- Self-employment income
To contribute to a Roth IRA, you must be making “earned income.”
Earned income is the money you are paid when you work for someone.
It includes:
- Tips
- Wages
- Salaries
- Bonuses
- Self-employment income
Rule #2: Income Phaseouts
If you earn TOO MUCH money, you may be excluded from making Roth IRA contributions.
In 2023 you cannot contribute to a Roth IRA if you:
- Earn > $153k (single)
- Earn > $228k (Married filing jointly)
But there are exceptions (as always…)
If you earn TOO MUCH money, you may be excluded from making Roth IRA contributions.
In 2023 you cannot contribute to a Roth IRA if you:
- Earn > $153k (single)
- Earn > $228k (Married filing jointly)
But there are exceptions (as always…)
When is a Roth IRA a good option?
You are:
- Starting your career
- Expecting to retire in a higher tax bracket
- Ok paying taxes on contributions today
When you take $$$ out of your Roth IRA when you retire (and are presumably in a higher tax bracket), you'll owe no taxes.
You are:
- Starting your career
- Expecting to retire in a higher tax bracket
- Ok paying taxes on contributions today
When you take $$$ out of your Roth IRA when you retire (and are presumably in a higher tax bracket), you'll owe no taxes.
And THAT is how you can grow your retirement account and legally avoid paying taxes.
That's assuming you follow ALL the Roth IRA rules.
So make sure to consult a professional FIRST before taking action.
That's assuming you follow ALL the Roth IRA rules.
So make sure to consult a professional FIRST before taking action.
Thanks for reading!
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