New and Improved 401(k)
Today's comment is by Larry Grossman, Certified Financial Planner, managing director of Sovereign International Asset Management Inc. and a member of The Sovereign Society Council of Experts.
Dear A-Letter Reader:
Now there's a retirement plan you can use to invest in virtually any investment, which will grow completely tax-free (on gains and income). You can even pass this retirement plan on to your kids tax free.
If you guessed I'm talking about a Roth IRA - you're partially right. But there's a twist.
Traditional IRAs and Retirement Plans are funded with pre-tax contributions, reduce your reportable income for the year, grow tax-deferred and are fully taxable when withdrawn.
Today, if you qualify for a Roth contribution the limit for 2006 is a total of $15,000, (with an additional $5,000 catch up for those over age 50) in aggregate between your Roth and your traditional pre-tax contributions.
For those of you who have wanted to convert your existing accounts to a Roth IRA but were unable to because you make too much money there is good news. Beginning in 2010 the income limitations to convert an account to a Roth account are being removed. (Currently the magic numbers are $110,000 single filer and $160,000 joint) And they are giving you a one time opportunity to do so on an even more tax favored basis as you can make the tax payments do from a conversion over a two year period, 2011 and 2012 for conversions made in 2010.
The good news is you can invest in almost any investment imaginable in your Roth account and let them grow tax-free. This includes precious metals, real estate (both U.S. and non-U.S.), offshore mutual funds and hedge funds, privately held stock and or corporations and much, much more. Remember, as I have said before, there are very few prohibitions and they are covered in IRS publication 590.
Collectables are one of the few items you can't invest in. However, the exception is U.S. gold or silver coins or other types of platinum coins and certain gold, silver, palladium, and platinum bullion.
And it has to be an investment for your future, not current use.
So as you can see there is very little you can't do. This means you can take advantage of all of the wonderful investments you have seen mentioned over the years in The Sovereign Individual and earn profits without taxes.
But wait there's more. You are NOT required to begin taking distributions by age 70 1/2 like a traditional retirement account. This means you may pass these wonderful benefits and your account on to your heirs income tax-free.
Remember as always the rules governing retirement plans are complex and expert advice should always be sought.
LARRY GROSSMAN, CFP, CIMA