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Playing in the deep end of the pool...

By: Ernie Neve

By now, nearly everyone knows the “secret” of the Roth IRA.  In essence, you pay the tax now on a Roth and later on a traditional IRA.  Which one is better? On the surface, of course, the Roth. Why?

Well, fundamentally, it’s because we KNOW what the taxes are going to be today, but tomorrow (or twenty-five years from now), who knows?  It’s easy to lose sight of the fact that for most of the last century – when traditional “income tax” has existed in the United States – those tax rates were astronomical for high-income individuals.

There’s a reason so many folks decided to pursue the “expat” life in the first half of the twentieth century. Try 94% in 1944 for those making more than $200,000 annually! (Roughly the equivalent of 2.5 million dollars a year today…)

So the idea of paying now and enjoying later is really just smart business.  But what else can you do with a Roth?

For starters, understand that Roth-style protection extends to a variety of savings structures. There are Roth Self-directed 401(k)s, Roth-styled Coverdell’s, Roth-based IRAs, and even Roth-structured Health Savings Accounts.

The thing to remember is all of these have contribution limits for the owner, but, if structured properly, you can actually place far more into each of these than the contribution limits.

There’s a catch, though, and here’s where I have to caution you it’s not an inexpensive game to play.

These Roth entities can own assets.

Income producing assets.

But with great power comes great responsibility, and that great responsibility means this is not a “Do It Yourself” job like that time you planted a garden or remodeled your kitchen. This requires professionals to make it work because one missed step and the IRS can come down on you hard, closing off the account, levying high fines, and forcing the sale of those assets owned by the Roth.

On the other hand, let’s say you, like many folks, owned some investment property. Let’s say you have two rental homes.  You can – legally – transfer the ownership of these into the Roth and the rent monies from them can simply be reinvested into the overall value of the Roth.  Instead of the usual annual contribution limiting you to $6,000, now, you are building that nest egg with each passing month … with other people’s money.

Are there challenges to this? Of course!  The upside, though, is that many Roth structures are bankruptcy-proof as a result of legislation enacted in the last twenty years.

As stated above, this is truly “the deep end” when it comes to investment and wealth management, but the money can be exceptional and the fact you’re compounding your contributions annually by using other people’s money means your overall retirement goals might be easier (and faster) to reach with the right investment strategy and structure in place. I know you’re thinking, “What’s the catch?” and it’s as simple as I just stated: it’s a game played only with professional assistance.  If you think you can play fast and loose with these monies and beat the IRS at its own game - enforcement – then you’d best not play. 

If you think you’re ready to play, then it’s time we talk about it, and don’t be scared, but we’re going to be digging deep into your goals, current strategies, overall plans, and a host of other things.  Let’s schedule time to do that, because you absolutely need to have all your ducks in a row before you go all in on this plan.