You may have heard about IRAs before, but the purpose of this course is to help you understand the best ways to leverage this tool within the construct of the Summerland Alerts.
An IRA Primer – choosing the right IRA
Congress seeks to encourage long term savings and has created the IRA to help in that endeavor. IRAs or Individual Retirement Accounts allow you to save some of your earnings in a tax advantaged manner depending on the type of IRA that’s implemented.
IRAs are like baskets. They can hold a variety of investments including mutual funds, stocks, bonds, ETFs, and more. Implement Summerland Alerts within an IRA and gain the tax advantages!
To figure out the best IRA for your needs, answer the following questions:
Does your employer sponsor a retirement plan, regardless of whether you contribute?
If your employer offers a retirement plan, you may be able to leverage a Roth IRA. Your income may impact eligibility.
Learn more about Roth IRAs here
Are you self-employed or a small business owner, regardless of being employed elsewhere?
You may have several options to evaluate including a SEP, SIMPLE, or Roth IRA
Learn more about a SEP here
Learn more about SIMPLE IRA here
Are you active-duty military and deployed or preparing for deployment to a combat zone?
A Traditional IRA or a Roth IRA may be appropriate depending on your situation.
Learn more about a Traditional IRA here.
More on Traditional IRAs
A traditional IRA offers the potential for immediate tax relief. If you meet the requirements, you can take an income tax deduction for what you contribute. The deduction rules are tricky, but they generally reduce to this:
If you’re not covered by an employer retirement plan, you may be able to deduct your contribution.
If you or your spouse is covered by an employer plan, you can only take a deduction if your adjusted gross income is within certain limits.
Once funds are inside the traditional IRA, you won’t be taxed on any earnings until you start making withdrawals. At that point you’ll be subject to income tax on your earnings and on the money you contributed on a pretax basis. Withdrawals made before age 59½ are generally subject to a 10% federal penalty and ordinary income taxes (subject to certain exceptions).
More on Roth IRAs
When you open a Roth IRA, contributions are not tax-deductible, but qualified distributions are tax-free if they’re made 5 years after you open a Roth and:
You’ve reached age 59½.
Your withdrawal is due to a qualifying disability.
Your withdrawal is made to cover up to $10,000 of first-time homebuyer expenses.
The withdrawal is made by your beneficiary or estate after you’ve passed away.
Roth IRAs have an extra favorable tax element. You can withdraw contributions any time and for any reason without owing taxes or penalties. Only the earnings on those contributions are subject to taxes and penalties if you withdraw them before age 59½.
There is an additional route to a Roth: If you have funds in a traditional IRA or a retirement plan with a former employer, you can move some or all of it into a Roth by completing a conversion. Conversions from a traditional IRA to a Roth are subject to ordinary income taxes. Consult with a tax adviser regarding your particular situation.
Get Good Help
Always seek professional advice as you evaluate retirement planning. Each IRA type has specific rules that you are obliged to adhere to as you construct a strategy that involves IRAs.
Nearly all online brokers offers a retirement department and they should be able to give you advice regarding the best path to incorporating IRAs into your strategy.
Even if you think you earn too much money, there may be IRA options available to you. Be sure to check with your adviser to understand your options.
The Real Power of an IRA
Regardless of whether you are utilizing a Traditional IRA to leverage its tax deduction power or whether you are taking advantage of a Roth IRA to avoid paying taxes on your withdrawals, both IRAs offer the ability to allow principle growth tax free.
As you invest your principle, whatever gains you achieve can grow without being negatively impacted by the taxes you would otherwise pay.
For example, if the typical annualized return of your investing methodology is 50% and you are subject to a 25% tax bracket, your actual return will be 38%. Over little time, taxes will have a significant negative impact on the growth.
Let's say you contribute $5,000 each year over 5 years, here's how they would grow over that time.
Contribution
Taxed @ 25%
In an IRA
After-tax Return
38%
50%
Year 1
$5,000
$6,900
$7,500
Year 2
$5,000
$16,422
$18,750
Year 3
$5,000
$29,562
$35,625
Year 4
$5,000
$47,696
$60,938
Year 5
$5,000
$72,721
$98,906
Now imagine this progression over the course of 10, 15, or 20 years. The ability to save taxes and achieve significant growth is magnified substantially by managing your investing within an IRA.
As you manage your investments, be sure you allocate enough capital in your non IRA account to allow for any expenditures as most withdrawals from IRAs are subject to penalties.
By using an IRA you can legally shield your assets and grow your wealth while avoiding taxes and improving your growth. If you haven’t ever considered an IRA, now is the time to get educated and find the right one for your personal situation.
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Back | Course 14: This simple trick can boost returns by up to another 50%!
