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The Big Advantage Of A Roth IRA

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What Are Roth IRAs?

There are advantages to having a Roth IRA. What are they?

We’ve talked about IRAs quite a bit, lets have a look at the advantages of a Roth IRA.

Well, maybe it’s better just to have a quick look at what a Roth IRA is, then have a look at the advantages.

IRAs, or Individual Retirement Accounts, were started by our government in 1974. In 1981 they were given tax advantaged status to encourage people to plan for their retirement without having their retirement funds chipped away bit by bit by taxes. So the money contributed to the IRA is tax deductible, and tax is only paid on income when the money is taken out of the trust for retirement. Capital gains are also taxed as income.

It’s a way to encourage people to provide money for their own retirement by means of offering tax incentives so that the government has less to pay in retirement pensions in the future.

Roth IRAs were created in 1998 and named after their sponsor Senator William Roth. There are a number of similarities and differences between Roth IRAs and traditional IRAs, and some advantages of a Roth IRA compared to a traditional IRA.

The big difference between a Roth and a traditional IRA is the way it is taxed. You can invest in your Roth Individual Retirement Account using after tax money. Ie money that has already been taxed, (subject of course to your contribution limit). And there is no income tax deduction when you contribute to your Roth retirement plan.

Why would you invest with after tax money rather than getting a deduction from your income tax when you invest? Good question, and the answer tells you one of the main Roth IRA advantages.

Because there is no more tax to pay on moneys earned by, or taken out of, your Roth IRA. Once you have paid tax and contributed to your Roth IRA that money stays tax free forever. Even to your descendents who may inherit.

So you pay tax on a smaller amount at the start, and get to keep a larger amount on retirement, tax free. It works to your advantage in the long term provided you invest well during the life of your Roth IRA. If you invest unwisely, and make a poor return, the tax free status of a Roth IRA is not as much of an advantage compared to where you invest well and make substantial returns.

There are, of course, specific Roth IRA rules, and we won’t go into all the details of the rules here, if you want to find out there are Roth IRA websites and Roth online guides, or the IRS website, which will fill you in on the details of contribution limits, minimum distributions, filing, adjusted gross income and more. It gets a little complicated but you don’t need to know all the details.

When you set up a Roth IRA you need to choose a custodian. A custodian is a trustee who holds the funds according to Roth IRA rules and IRS rules. Most people choose a traditional custodian like a bank, or broker, or insurance company. These custodians limit the range of investments that the investor can invest in, and often direct funds into their own products, for example their own mutual funds.

This usually results in less than spectacular returns to the investor, although of course the custodian is happy.

However it’s perfectly possible to set up your own self directed Roth IRA, or self managed Roth IRA. The advantages of a Roth IRA which is self directed are many. The investor can direct where they want the funds invested, and usually choose from a much wider range of investment vehicles.

If you’re setting up a Roth IRA make sure you set it up so that you can invest your Roth IRA in real estate. That’s the single best IRA investment you can make, even now.

And if you have a Roth IRA now held with a traditional custodian, and would like to rollover into a self directed IRA, and invest your retirement funds in real estate, then you can do so.

So as you can see there are significant advantages of a Roth IRA, provided you invest well and make significant returns. The best way to make significant returns is to invest your Roth funds in real estate. It’s the safest and most profitable long term investment vehicle.