Roth IRAs versus tax-deferred IRAs: What difference does it make? To a lot of you, none at all, or at best, very little.
Previous articles written by me and others regarding IRC 408(a) have touted IRAs as the next best thing since sliced bread, so you may wonder how I can make so bold a statement.
For years now I have been singing the praises of tax-deferred IRAs, and since the passage of the latest tax-advantageous legislation, even more advisors have gotten on the bandwagon. The real truth though is the majority of the IRA account holders will not take advantage of the new law any more than they did the old law.
The old law has huge benefits: tax-deferment, deductible contributions, tax-exempt rollovers, and the really big one, self-direction. How many of you took advantage of all these benefits? Some took advantage of the tax-exempt rollover of their qualified plan into an IRA and then no longer took advantgae of the deductible contributions. Some set up their IRAs with tax-deferred dollars, yet took a distribution of their quialified plan directly, thereby negating the tax-exempt rollover. More important is the vast number of IRA acount holders who failed to self-direct heir plans. They left it up to their stockbroker/banker/insurance agent to direct the assets of their plans.
I work with many account holders who have increased their IRA assets consistently at a rate of 12 to 15 percent every year. I work only with account holders who have chosen to self-direct. That means the account holder, not the advisor, chooses what investment should be purchased by the IRA. It dramatically opens up the investments that can be purchased by the IRA. They are no longer limited to stocks, mutual funds, Cds and annuities. They now choose from all of those traditional investments, as well as real estate, limited partnerships in real estate, trust deed/note purchases, unsecured notes and a host of other available options.
So, if the investing public failed to capitalize on these benefits, which have been around since 1974 and 1986, what will they do with the new, improved IRAs? Same as before. The wise will take advantage; the majority will not.
The new Roth IRA has distinct advantages over the traditional IRA. The main advantage is that any gain you receive will go untaxed when you withdraw it. Invest $100,000 of your IRA in a project and double your money, and you now have $200,000. With the traditional IRA, you will still be required to pay tax, based on your tax bracket, on the $100,000 gain. So, if your bracket was 25 percent, you would net $75,000 and Uncle would get $25,000.
The result would be that your retirement lifestyle would be a little less than you had hoped.
Another aspect of the new law allows IRA contributors to establish educational IRAs. These IRAs will allow the account holder to use up to $10,000 per year for educational expenses of a family member. The new law will also allow account holders to withdraw money from their IRAs to pay medical bills that exceed 7.5 percent of their adjusted gross income and lalow them to take a distriubtion to pay expenses under certain situations of unemployment.
Who of you will take advantage of these new and dynamic changes to the rules?
You need to call you IRA advisor now and discuss what these new tax changes mean to you individually. This is not a garment labeled "one size fits all." It very much needs to be tailored to the individual. For some, the changes will be moderatley beneficial. For others, they will offer no help, and for the majority, the change will be dramatic indeed.
As always, let me caution you to seek the assistance of appropriate professional advice before accepting any investment advice for your IRA.

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