Rich Mans Roth:

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Are you planning for tax-free income in the future using a Roth IRA?

Let’s think again because there is a better way.

Let’s talk about why we use a Roth IRA, to begin with.

This type of asset is tax-free, or tax-exempt, meaning that you put the money in and then you don’t pay tax again, so the money is going to grow tax-free, and you’ll be able to use it in the future, tax-free.

Sounds amazing, right?

This is in contrast to two other types of tax treatment:

1) Taxable accounts: you pay tax on the money before you put into the account. However, every time that money grows, you have to put that year’s growth on your tax return and pay taxes. Might be comfortable enough in the early years, but as that account grows over time and your growth increases, you could have a huge tax bill that you’re looking at as your accounts grow.

2) Tax-deferred: Postponing the tax has become very popular but has significant limits as well. If you put money into a tax-deferred vehicle, you defer the tax today, decreasing your current year’s taxable income.

It’s not savings if it’s still trailing behind you like a ball and chain, and you’re going to get to the future at some point when you’re going to have to pay the piper.

So, what happens in a tax-deferred account? In the future the tax is going to be calculated based on the current year’s tax rate at that time.

You have no idea how much tax is going to be due, and therefore, using tax-deferred accounts causes a lot of uncertainty for the future.

Back to the Roth IRA, this is tax-free, that’s good.

However, there are three significant limits.

One is that you have restrictions on your access and control. What do I mean by that?

First of all, the money is not a guaranteed set value. It could fluctuate up and down with the stock market, leaving you with less than you expected, and decreasing that future income.

You also can’t access the money for whatever you want, whenever you want.

Now, sure, you can get to it tax-free after age 59 1/2, but what if you want the money before that?

You’ll need to wait five years, and then you can access what you’ve put in, but not the growth unless you want to pay those IRS taxes and penalties.

Secondly, there are limits on how much you can put in, so these are called contribution limits.

They typically rise a little bit each year, and in 2019, the contribution limit on a Roth IRA is $6,000 per year.

If you’re over 50, you can add $1,000 with a catch-up contribution, making that $7,000, but think about this. What if you wanted to put $20,000 aside? What if wanted to put $200,000 aside?

You could not do that in a Roth IRA, and if you think about the volume of $6,000 per year on average, even if you put that money in over 40 years, you’re not going to get anywhere near enough money to be able to withdraw the interest, preserve the principal, and live well in your future.

Even if you withdrew the full principal and drained the account entirely in the future, it’s not going to live up to the expectation of creating the same standard of living that you have today.

This brings us to the last limit of the Roth IRA.

Many people make too much money to even contribute in the first place.

If you’re married filing jointly, and making more than $203,000 per year, you cannot contribute to a Roth IRA.

If you make over $193,000 , the amount you can put in is reduced. It’s called a phase-out.

If you’re single, and making more than $137,000 per year, you cannot contribute either, and the phase-out for you starts at $122,000.

So, this is not a strategy that works if you’re a high-income earner and you’re trying to create a fantastic lifestyle in the future that matches your standards today.

What do we do instead?

There’s another tool that we can use for tax planning for the ultra-wealthy, but it works for everyone just the same.

This is called a rich mans Roth.

This is a place where you can put money tax-free or tax-exempt.

You don’t pay tax when you use the money, there is no limit to your access and there is not an income limit.

So, what is a rich person Roth? Well, you might have also heard it referred to as a richer man’s Roth, or as a cash-flow banking policy, infinite banking, or as a specially-designed life insurance policy.

We’re actually talking about a life insurance contract, and yes, it is IRS sanctioned to perform the same way as a Roth IRA, where you pay tax on the money that you put in in premiums, and then the money grows tax-deferred, where you don’t have to pay tax on the growth, and you’re able to use that money tax-free….(read more)

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Rich Man’s Roth: Avoid These 3 Roth IRA Limits

The Roth IRA has long been a popular investment option for individuals looking to grow their retirement savings tax-free. With its unique tax advantages and flexibility, it’s no wonder that the Roth IRA is a go-to choice for many investors. However, there are certain limits and restrictions that can trip up even the most sophisticated investors. Here are three key Roth IRA limits to avoid if you want to maximize your retirement savings:

1. Income limits: One of the most important Roth IRA limits to be aware of is the income limit for contributing to a Roth IRA. For 2021, if your modified adjusted gross income (MAGI) exceeds $140,000 for single filers or $208,000 for married couples filing jointly, you are not eligible to contribute to a Roth IRA. However, there are strategies such as the Backdoor Roth IRA, which allows high-income individuals to contribute to a Roth IRA despite these income limits. It’s important to consult with a financial advisor to ensure you are following the rules and maximizing your retirement savings potential.

2. Contribution limits: Another crucial Roth IRA limit to keep in mind is the annual contribution limit. For 2021, the maximum contribution to a Roth IRA is $6,000 for individuals under age 50 and $7,000 for those age 50 and older. It’s important to be mindful of these limits and to contribute the maximum amount allowable each year to take full advantage of the tax benefits and potential growth of your retirement savings.

3. Early withdrawal penalties: While the Roth IRA offers the flexibility of tax-free withdrawals in retirement, there are penalties for early withdrawals before age 59 ½. If you withdraw earnings from your Roth IRA before this age, you may be subject to income tax and a 10% penalty. It’s important to have a plan in place for your retirement savings and to only withdraw funds when necessary to avoid unnecessary penalties and taxes.

In conclusion, the Roth IRA is a powerful tool for building tax-free retirement savings, but it’s important to be aware of and avoid these three key limits. By staying informed and working with a financial advisor, you can navigate these limits and make the most of your Roth IRA investment. Remember to consider your retirement goals and consult with a professional to maximize your retirement savings potential.