The benefits of a Roth IRA are legendary, but the benefits of an inherited Roth IRA are even better. One of the best legacies you can leave to your children or grandchildren is an inherited Roth IRA. By leaving a Roth IRA to your beneficiaries, you leave them with the ability to create a stream of tax and penalty free income for their lifetime, regardless of their age when they inherit the account. This is particularly powerful if the beneficiary of the Roth IRA is a young child.
The Roth 401(k) is here – and so is a way to retire rich using OPM (Other People’s Money) without paying taxes, ever! Those of you who read this publication regularly know that I often write about the tax that retirement plans, including IRA’s and 401(k)’s, must pay on Unrelated Business Income (UBI) and Unrelated Debt Financed Income (UDFI). This tax is paid by these plans when they own a business in the plan (UBI) or own debt-financed property (UDFI), either directly or indirectly through a non-taxed entity such as an LLC or a partnership. What most people don’t know is that 401(k) plans enjoy an exemption from the tax on UDFI for income from debt-financed real property in certain circumstances. Combining this exemption with the powerful new Roth 401(k) is one of the most exciting opportunities to build your retirement wealth since the Roth IRA came along in 1998.
In my last article on Option Strategies for Your IRA, I discussed option basics. In this article I will expand on the uses of options and how these strategies might be used to turn small amounts of cash into tremendous wealth in your IRA.
Good news! You can buy real estate in your traditional, Roth, SEP, or SIMPLE IRA, your 401(k), your Coverdell Education Savings Account for the kids, and even in your Health Savings Account. Even better, your IRA can borrow the money for the purchase or even take over a property subject to existing financing. What could be better than building your retirement wealth using OPM (Other People’s Money)? However, there are some restrictions which you must be aware of when using your IRA to purchase debt financed real estate. Below I answer a series of frequently asked questions regarding the purchase of debt financed real estate in an IRA.
Most people understand that an IRA is normally not a taxable trust and its income is not taxed until the income is distributed (or not at all, if it is a qualifying distribution from a Roth IRA). However, there are 2 circumstances when an IRA may owe tax on its income. First, if the IRA is engaged in an unrelated trade or business, either directly or indirectly through a non-taxable entity such as an LLC or a limited partnership, the IRA will owe tax on its share of Unrelated Business Income (UBI). Second, if the IRA owns, either directly or indirectly, property subject to debt, it will owe tax only on the portion of its income derived from the debt, which is sometimes referred to as Unrelated Debt Financed Income (UDFI). I will refer to either tax as Unrelated Business Income Tax (UBIT) in this article.
Many people find it very easy to see the benefits of self-directing their Roth and Traditional IRAs, SEP IRAs, SIMPLE IRAs, Individual 401(k)s, Coverdell Education Savings Accounts (ESAs) and Health Savings Accounts (HSAs) into something other than the same old boring stocks, bonds, annuities and mutual funds. The central idea of a self-directed IRA is that it gives you total control of your retirement assets. With a self-directed account you can invest your IRA funds in whatever you know best.
There is a lot of confusion over self-directed IRAs and what is and is not possible. In this article we will disprove some of the more common self-directed IRA myths.
I have a philosophy, which is that if you can create win-win situations you should always do so. My daughter, Briana, is 12 years old and has been invited to travel to Europe next summer to be a Student Ambassador through the People to People program (www.studentambassadors.org). One of the requirements I am making for Briana to go is that she must raise one-half of the finds for the trip. Since Briana needs funds for her trip, and my company, Entrust Retirement Services, Inc. needed help stuffing envelopes to send out our quarterly statements, Briana came to work for us to help stuff envelopes. This earned her money for her trip and at the same time reduced my taxable income – a definite win-win scenario.