It's been a while since I posted here, but I have been involved in some things that limited me to how many places I could post. I was posting at a private site/forum with other traders, but most of the posts are now political posts. There are very few trading comments posted anymore, so I moved on.
I do a lot of short-term trading, but mostly I'm a Trend Trader.
So, on to my reason for posting today. First, what a year of extremes! I took a pretty good hit in one of our accounts at Vanguard in March, but have recovered nicely, and the funds that recovered are now tax free.
Which brings me to the point of this post. I'm getting close to 70 now, and since they moved the RMD out to 72 we decided to convert our remaining funds to a Roth IRA this year. We did it after the big selloff in March.
Why, because I think taxes are going up in the years ahead, and NO RMD with a Roth. I think my wife has above average chance of making it into here 90's. There are other reasons that might make sense to others and I will post that information below.
I have been converting my TSP funds into Roth IRA's for years now, and have completed all of my TSP funds now. I did it in small chunks over several years. So for those that are retired or close to it maybe this is something to think about.
Steven Kaplan wrote a series of articles about Roth IRA's in his updates, and I thought about TSPtalk, and maybe it might help or benefit some of the members here.
I asked for permission and he granted it to post this Roth series from his updates. I have been a sub with him for many years now.
So with all that said I will post the articles.... The series is in six parts, and very easy to understand. He is a Tax Expert and these articles, and all information is based on current tax laws. Anyway, it's something you might want to think about doing.
Take Care and Have a Nice Day! TGIF for those that are still working....
Part (1 of 6)
Today's main topic is Roth, part one.
One of the most underappreciated features of the tax code in the U.S. and Canada is the ability to put money into accounts which grow tax-free for life and where you generally don't have to pay any tax upon withdrawal. In the United States these mostly include Roth IRA, Roth 401(k), Roth 403(b), Roth individual (solo) 401(k), and similar accounts. For more than two decades I have been concentrating on moving the assets of myself, my Dad, and my clients into these kinds of accounts. Recent and likely upcoming legislation has made these accounts even more favorable than they had been relative to other kinds of accounts. I will discuss the main purpose of these accounts and how to get as much money as you can into them over the long run.
Roth accounts have existed since the beginning of 1998.
Until 1998 the only kinds of retirement accounts in the United States were those where you would get an income reduction by putting money into some kind of personal or business retirement account. You would then be required to pay taxes upon withdrawal, thereby making it a tax deferral rather than a true tax savings. A U.S. Senator from Delaware named William V. Roth Jr. came up with the idea of inverting this approach by creating an account where there is no up-front tax savings but then you get to keep all the money without having to pay any taxes upon withdrawal. The advantage to the government is that there is no immediate tax savings so the government doesn't receive lower revenue in the short run. The huge advantage for investors is that money which compounds tax-free is far more lucrative than money where taxes will eventually have to be paid on all the gains.
Many short-sighted investors underestimate the power of Roth accounts since they don't get an immediate tax savings.
It took time for Roth accounts to catch on, primarily since most people are far too obsessed with the short run. People would rather save a thousand dollars on their taxes this year than ten or twenty thousand dollars over a period of years. However, eventually financial advisors and analysts recognized the superior advantage of Roth accounts which has made them far more popular today than they were when they were originally introduced. Since their debut, Roth accounts now exist for nearly all other kinds of retirement accounts including Roth 401(k), Roth 403(b), and for self-employed individuals, a Roth individual 401(k) which is sometimes called a Roth solo 401(k). My wife and I have money in all of the above types of accounts, so it is worth examining the pros and cons of these accounts and how they compare with "traditional" retirement accounts. It is also a good idea to compare how retirement accounts in Canada have similar features to a Roth, especially the TFSA (for individuals) and Group TFSA (for businesses).
Not paying taxes on capital gains, dividends, and interest can compound dramatically through a period of decades.
The primary advantage of Roth, TFSA, and similar accounts is that taxes don't have to be paid on all gains in these accounts for the lifetime of the account holder and for ten years following the death of the account holder. Mathematically this ends up being an exponential improvement over an account where taxes have to be paid on gains, especially since combined federal, state, and local taxes can be substantial. In contrast, traditional retirement accounts can often be inferior to ordinary taxable accounts because in a non-Roth retirement account all gains will be taxed upon withdrawal as ordinary income. Thus, in a taxable account you get the benefit of a low federal rate for long-term capital gains and qualified dividends whereas in a non-Roth retirement account, even if you have these kinds of income, you will have to pay tax upon withdrawal at your marginal tax rate which will likely significantly exceed the federal tax-preferenced rate.
Roth accounts have numerous additional advantages.
Unlike traditional retirement accounts, Roth accounts have no required minimum distributions. You can contribute to them at any age. They can also be easily inherited, usually without increasing the tax burden of the heir. Roth accounts are often protected from creditors. Even minors can establish Roth accounts with an adult custodian which I usually highly recommend. Roth income of all kinds is not taxed in any U.S. state or locality. There are penalties for withdrawal prior to age 59-1/2 but there are many legal exceptions which allow you to avoid this penalty.
Money in non-Roth retirement accounts can be converted into Roth accounts with no limits.
In case you have money in non-Roth retirement accounts then you can convert that money into Roth accounts with no annual limit. Unfortunately you can't undo these conversions once they are done which used to be permitted under a method known as recharacterizations. I will explain the details of such conversions in part two.
You can contribute to two kinds of Roth accounts each year: personal and business.
In a Roth IRA each person can contribute six thousand dollars per year, or seven thousand if over age 50, along with another six or seven thousand dollars for your spouse. Even if your income exceeds the official maximum levels you can still make such a contribution through a two-step process known as a back-door Roth which I will describe in more detail in part two. In addition, each person can contribute a much larger amount into a Roth 401(k) or Roth 403(b) if you either own your own business or you are an employee of any company, non-profit or otherwise.
Qualified joint ventures are very powerful for married spouses who work for the same company which they own.
If you own a company with your spouse then each of you can contribute a maximum of 19,500 if you are under age 50 or 26,000 if you are age 50 or older, which means a total of 52 thousand dollars if both of you are 50 or older and you jointly own your company. This is most easily done with a company structure known as a qualified joint venture rather than a sole proprietorship or partnership or LLC. I dissolved my own LLC specifically to be permitted to contribute twice as much into Roth individual 401(k) accounts.
I will talk more about qualified joint ventures in part two of this topic which I will try to complete by Sunday.
The bottom line: Roth-style accounts are far superior to the alternatives.
You will grow your net worth much more quickly by gradually moving your net worth into Roth IRAs, Roth 401(k)s, Roth 403(b)s, HSAs, TFSAs and Group TFSAs(Canada), and similar accounts where you can grow your money tax-free and where you or an heir will not have to pay money upon withdrawal. Establish a long-term plan to contribute the maximum and potentially convert non-Roth assets each year into these accounts.
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