Tax-Free Advantages of Roth Retirement Accounts

Roth Account Guide

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Investing with Roth AccountsAfter completing a successful real estate transaction, do you get tired of sending a large portion of the profits to the IRS for taxes? Do you ever dream about how many more real estate deals you could do or how many more properties you could buy if profits weren’t split with the government?

Well dream no more. Realizing tax-free profits on real estate and alternative asset investing is a reality.

Government-sponsored retirement plans such as Roth IRAs and Roth 401(k)s allow you to invest in almost anything, including real estate. The benefits these plans provide, such as tax-free profits, apply to whatever investment you choose.

Money for Retirement Do you fear retirement and the possible financial burdens that

come along with it?

According to the U.S. Department of Labor, less than half of

Americans have calculated how much they need to save for

retirement. That’s not all, many public finance experts agree

that today’s saving rate is too low to ensure the retirement

security of American families. If you’re not comfortable putting

your money in the stock market or don’t really understand

bonds or mutual funds, there is another option.

You can enjoy tax-free profits while saving for retirement

with investments you understand. Today, many investors just

like you are successfully investing in real estate and other

alternative assets, saving for retirement, and not paying taxes

on the profits.

What’s their secret? The self-directed Roth IRA.

Alternative Investing with a Roth IRA Many investors don’t know this opportunity exists because most IRA custodians don’t offer self-directed IRAs that allow Americans to invest in real estate and other non-traditional investments.

Often, when you ask a custodian or trustee, “Can I invest in real estate with an IRA?” they’ll say, “I’ve never heard of that” or, “No, you can’t do that.” What they really mean is you can’t do this at their company because they only offer stocks, bonds, or mutual funds.

Only a self-directed IRA custodian like Equity Trust (www.TrustETC.com) allows you to invest in all forms of real estate and many other investments as outlined by the Internal Revenue Service in IRS Publication 590.

Is investing in real estate with a Roth IRA legal? Yes. In fact, real estate and other alternative investments in IRAs has been legal since the IRA was created in 1974. IRS Publication 590 (www.irs.gov/publications/p590) states what investments are prohibited. These investments include collectibles, life insurance and S-corporation stock. All other investments, including

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stocks, bonds, mutual funds, real estate, mortgages and private placements among others are perfectly acceptable as long as IRS rules governing retirement plans are followed.

Now that you’ve been introduced to the possibilities of Roth IRAs, the following pages detail the benefits of investing in a Roth IRA, important guidelines to follow when investing, and how easy it is for you to get started on a path toward tax-free profits for retirement.

Imagine Having Tax-Free Profits with a Roth IRA Senator William V. Roth introduced the Roth IRA to the tax world in 1997 and a wide range of investors, including those interested in real estate, began to discover the benefits.

Only the Traditional IRA existed before 1997, which allowed tax deductions for contributions. Any profits earned in the account would be tax-deferred until withdrawn (penalty-free after 59½ years old).

A Roth IRA is similar to the original Traditional IRA, but with one powerful difference…

The investment profits in a Roth IRA are tax-free. Unlike a Traditional IRA, taxes are never due on the investment profits with a Roth IRA (as long as the account has been open for five years and you’re 59½ years old).

Imagine buying and selling land in your Roth IRA with a $44,000 profit and not having to pay any taxes. The money saved on taxes can be used to fund the next investment. Better yet, that investment profit could be waiting for you—tax-free—when you retire.

The following example illustrates the power of the Roth IRA

The benefits of a Roth IRA don’t stop with tax-free profits. In addition, there’s no required mandatory distribution when you turn 70½ as with a Traditional IRA. That means you can continue to build your savings if you have earned income well past 70.

Bill Investor, who owns a construction company, buys and fixes up homes as one of his side jobs.

While house shopping, Bill finds an older house in a well-established neighborhood. He decides to

purchase the house in his Roth IRA for $98,000 and put $13,000 toward home improvements. These

renovations were also paid with his IRA (Bill can’t pay for home improvements outside of his IRA).

When finished, Bill has invested $111,000 in the house.

Bill sells the house for $155,000 within five months because of the improvements and its location

in a good neighborhood. After making this deal, Bill’s Roth IRA has made $44,000 in profit without

paying taxes. How did he do this? Bill bought the house using his Roth IRA, which means his

profits and withdrawals are tax free (he can make withdrawals when he turns 59½ years old). If he

purchased the house outside of his Roth IRA, he would’ve paid 30 percent in state and federal taxes.

That adds up to $13,200 in taxes dropping the profit to $30,800.

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The Roth IRA and its Unique Features The table below highlights the differences between the Roth and Traditional IRA. The main differences include:

• Roth IRA contributions are never tax deductible and can be removed at any time free of income tax and the 10 percent premature distribution penalty tax after they’ve been in the account for five years.

• Roth IRA contribution eligibility is subject to modified adjusted gross income, or MAGI (addressed later in this report).

• Individuals can contribute to a Roth IRA after reaching 70½.

• Roth IRA owners are not subject to required minimum distribution (RMD) rules.

• Contributions are considered distributed before earnings in a Roth IRA.

Traditional Roth

Description

Government savings plan that offers tax advantages for individuals to set aside money for retirement. Contributions are made with pre-tax dollars.

Government savings plan that offers tax advantages for individuals to set aside money for retirement. Contributions are made with after-tax dollars.

Tax AdvantagesAccount balances compound tax-deferred until funds are withdrawn.

Account balances compound tax-deferred. BUT funds that are withdrawn are tax-free if account is five years old and account owner is over 59½.

EligibilityIndividuals must be under 70½ and have earned income*.

Individuals must have earned income* and modified adjusted gross income less than current limits (see www.TrustETC.com/contributions)

Tax Deductions on Contributions

Yes No

Penalties for Early Withdrawal10 percent penalty for withdrawals before age 59½.

10 percent penalty for withdrawals before 59½. (Note: Roth contributions can be taken out at any time without penalty.)

Exceptions for 10 percent Penalty

Yes Yes

Cut-off Age for Contributions 70½ No Limit

Required DistributionsYes. Minimum withdrawals begin after the age of 70½.

No Limit

* Earned income is defined as the salary or wages you receive as an employee. If you’re self-employed, earned income is your net income for personal services performed. Passive income such as interest, dividends, and most rental income are not considered compensation for the purpose of funding an IRA. Consult a financial professional to determine your earned income.

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Investing with a Roth IRA versus a Traditional IRA

Example: Traditional IRA If you contribute $4,000 into a Traditional IRA this year, and then another $4,000 each year for the next 15 years, while earning an annual return of 12 percent on that investment, your account balance will be $188,907.38. Now let’s say you’re in a 25 percent income-tax bracket. If you were to take a qualified withdrawal of all the money inside your Traditional IRA, you’d actually receive 25 percent less than your account balance, or $141,680.54.

To accurately figure your “net” benefit of using a Traditional IRA, you have to “add back” the income-tax benefit you’ve received from taking annual deductions on your Traditional IRA contributions.

Since you’ve contributed $4,000 a year for 16 years, and assuming you’re in a 25 percent income-tax bracket, you’ve received a $1,000 income tax benefit each year for 16 years, or a total income tax reduction of $16,000. If you add this $16,000 to your “net” after-tax benefit of $141,680.54, the total value of your Traditional IRA is $157,680.54.

Example: Roth IRA Now let’s take a look at the “net” value if you were using a Roth IRA. (Remember, Roth IRA contributions don’t qualify for income tax reductions each year.)

Assuming you contributed that same $4,000 into your Roth IRA this year, and then another $4,000 each year for the next 15 years, while earning that same annual return of 12 percent on the investment, at the end of 16 years your account balance would still be the same $188,907.38 as you had with your Traditional IRA.

If you decided to take a qualified withdrawal from your Roth IRA, the “net” value to you is your actual account balance. No taxes are EVER due -- on ANY qualified withdrawals you make.

So the difference between these two accounts would be $188,907.38 (your Roth Net Value) less $157,680.54 (your Traditional IRA Net after Tax Value), or, $31,226.84. Using a Roth IRA puts an extra 20 percent into your pockets.

If you’re in a higher income tax bracket (higher than the 25 percent used in this example), the impact of using a Roth is even greater.

The chart on the right shows the differences between the two IRA accounts in this example.

Real Life Example: Roth vs. Traditional IRAAmount after 16 years of Contributions

$195,000

$190,000

$185,000

$180,000

$175,000

$170,000

$165,000

$160,000

$155,000

$150,000

$145,000

$140,000TraditionalRoth

Type of IRA

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How Investors Like You Can Benefit from Other Roth Retirement AccountsJust as the previous examples illustrated the benefits of using the tax-free benefits of the Roth IRA to make investments, there are other IRA options you can use to earn tax-free profits for your retirement. These include accounts for individuals and small businesses.

As a real estate investor, sole proprietor or business owner, you may qualify for Roth Solo 401(k) and Roth 401(k) plans. While some of the plans seem only appropriate for small businesses, it’s important to note that real estate investors, like you, may qualify for these plans in addition to the Roth IRA.

Roth 401(k) Highlights Higher contribution limits. Roth 401(k) participants may make the maximum contribution allowable under 401(k) rules. As an added benefit, Roth 401(k) participants may still have and contribute the maximum allowable amount to a Roth IRA in addition to their Roth 401(k) contributions.

Tax benefits. Roth contributions may be withdrawn tax- and penalty-free as long as the participant is at least 59½ years of age and has held the account for at least five years.

The Roth 401(k) is open to anyone who has a regular 401(k) or Solo(k). This is an advantage to higher-paid employees who may be excluded from having a Roth IRA account because of its income limitations. Individual 401(k) participants can modify their plans to include Roth contributions. Previously established 401(k) or Solo(k) plans can easily be modified to allow for Roth contributions.

Contributions are irrevocable. Once the money goes into the account, it falls under all of the IRS rules and penalties for 401(k)/Solo(k) accounts. Participants may not later decide to move the funds into their regular tax-deferred account.

Distribution requirements. The Roth 401(k) has the same distribution requirements as the 401(k) or Solo(k). Participants must begin taking minimum distributions by age 70½. This contrasts with the Roth IRA, which does not have distribution requirements. Account holders can avoid this distribution requirement by rolling over their account into a Roth IRA.

Rollover options. Participants can roll over Roth 401(k) contributions to a Roth IRA upon retirement or termination of employment.

The only difference between the Roth Solo 401(k) and Roth 401(k) plans is who qualifies. The Roth Solo 401(k) is for small business owners and the Roth 401(k) allows employees to qualify.

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Is a Roth Account Right for You?Remember, with a Roth IRA taxes are paid on your contributions, so you won’t get an income tax deduction each year for those contributions. However, your retirement savings grow tax free and qualified withdrawals are tax free. That said, the No. 1 reason to choose a Roth IRA is if you believe your marginal income tax rates will be higher when you retire, compared to today.

Additionally, if you convert an existing retirement account to a Roth IRA, you’re only eligible to contribute to the account if your annual income totals less than the current income limit set by the IRS (see www.TrustETC.com/contributions).

15 Minutes Can Potentially Save You ThousandsCall now at 855-673-4721

for a FREE Consultation with an Equity Trust Senior Account Executive.

It’s Time to Open a Roth Account Today As you’ve learned, the Roth IRA and other Roth accounts provide a great opportunity to direct your financial future. The Roth IRA allows you to avoid becoming one of the Americans who didn’t plan for retirement. You can use your knowledge to successfully invest in real estate and other alternative assets for retirement—while enjoying tax-free profits on all of your deals.

Don’t delay in getting started. Contact Equity Trust to help decide which self-directed Roth account is right for you.

Equity Trust is Your Best Choice…

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