�The Wallet Doctor�
A financial newsletter for long-term investors!
Volume 1, Issue 5
Dr. Scott Brown, Ph.D.
WHAT IS THE ROTH IRA?
If you don�t know what a Roth IRA is then stop everything, print this article and read it carefully as this will certainly be the most valuable information you read this year. This next retirement account is to your net worth as what the light bulb was to electricity. Let me tell you about this wonderful financial invention called a Roth IRA!
The main difference between the Roth and the Traditional IRA is that with the Roth you pay taxes first and then make the contribution. This is absolutely fantastic if you make a lot of money in the stock market because you NEVER have to pay a dime in capital gains tax! There are a ton of other advantages to the Roth IRA. Unlike the traditional IRA you can be of any age and still contribute. You can also make a contribution to a Roth IRA at any time for a particular calendar year up until the due date of your tax return for that year. This means that if you want to make a Roth IRA contribution for 2005, you could make it anytime between January 1, 2005 and April 15, 2006. Another nice feature of the Roth IRA is that your spouse will also qualify for a contribution.
It may seem bad that there is no tax deduction for Roth IRAs contributions. Contributions are made with money that has already been taxed so there is no immediate tax break. Don�t fool yourself into thinking that this isn�t the best thing since the wheel because when Roth IRA money is taken out after you are 59� years old, it is a tax-free distribution! This type of IRA is ideal for individuals in a lower tax bracket now, but anticipate being in a higher tax bracket at retirement. In other words, if you are in a blue-collar or white-collar middle class family and are learning and practicing good savings and investment habits than this is your retirement life saver!
It gets even better; you may make contributions at any age, even after you reach 70�. Another absolutely incredible feature of the Roth IRA is that it is also judgment proof. If you get sued it can be very hard for lawyers to grab the money from you!
If you are a first-time home buyer or become disabled, you can take distributions earlier. You can also withdraw your CONTRIBUTIONS at any time penalty free as long as you don�t withdraw investment earnings. What many people don�t know who have a Roth allready is that they can withdraw the contribution for the account without penalty at any time as long as they don�t touch any stock profits. This is great if you get into a financial bind and need money because you don't get whacked like you would in a 401(k). With a 401(k) you are charged penalties AND, to throw salt in the wound, interest on your money to borrow your savings from yourself! All this is avoided painlessly with the Roth IRA!!!
Don't delay in opening your Roth IRA. If you exceed certain income limits you can neither contribute to nor roll over other IRA money into a Roth account. If you opened a Roth while you were under the income limits but then later earn more, your Roth account will still earn money tax-free that you can take out later without tax implications, but no new contributions are allowed. You must have your Roth account open for at least five years before you can take a penalty free distribution of earnings. Distributions of principal and earnings without penalty can be taken after age 59� but your better open the account well befor you reach this age. SO DON'T DELAY IN OPENING A ROTH IRA AS SOON AS YOU CAN AND PUT YOUR GOLDEN NEST EGG IN PLACE!
The Roth is kind of weird until you get used to it in terms of how much you can put in (contribute) each year depending on how much you earn (compensation). Because of this you really have two limits, one dealing with your compensation and the other dealing with your contribution. Let me explain.
The first Roth IRA limit has to do with compensation, in other words you have to be making some money somewhere. As mentioned, you must have some form of compensation to qualify to make a contribution, but there is also an income limit that says whether or not you can put money in; make a contribution. If your adjusted gross income exceeds these limits, you are no longer eligible to contribute to a Roth IRA. In 2004, the adjusted gross income limits were:
>>> If your tax filing status is �Married Filing Jointly� - $160,000
>>> If your tax filing status is �Married Filing Separately� (and you live with your spouse) - $100,000
>>> If your tax filing status is �Single�, �Head of Household� or �Married Filing Separately� (and you did not live with your spouse during the year) - $110,000
Now, here is a little known totally legal secret that is WELL worth your time reading this article. When I taught investments at the University of South Carolina I gave 10% credit of the course grade for the simple act of opening a Roth IRA. I was amazed when a few students would not open one because their parents had told them it was illegal to if they did not have a job. I told them that they were going nowhere fast if they could not think creatively enough to just go mow a lawn somewhere for ten bucks and put it into the account. I made it clear to them that wealthy people become rich by taking action immediately instead of just sitting around daydreaming about taking action they know they need to take!
The best application of this concept I ever heard was a real estate investor that wanted to open a Roth for his newborn son. The problem of proving that a newborn makes money in a job is a tough one even for my noodle but this fellow came up with a great idea. He took a photo of the baby and put it on the business card with the words; �Help my dad finance my education by buying a home from him because he is the best dad in the whole world!� Then he paid the baby, get this "modeling fees!" He put those fees straight into the account and filed a return for the baby with the IRS. I love that story! Talk about creative! This is the kind of "act now" person that is more likely to become wealthy. This is also the only newborn I have heard of with a tax free stock portfolio from earnings off his own job!
The second Roth IRA limit has to do with how much you can contribute to your account. Below is a table that outlines the contribution limits established for the next several years:
>>> 2004 - $3,000 ($3,500 if you are age 50 and above)
>>> 2005 - $4,000 ($4,500 if you are age 50 and above)
>>> 2006 - $4,000 ($5,000 if you are age 50 and above)
>>> 2007 - $4,000 ($5,000 if you are age 50 and above)
>>> 2008 - $5,000 ($6,000 if you are age 50 and above)
If you need more information about Roth IRAs, you should consult a tax professional, concerning your specific situation, such as a Certified Public Accountant or Certified Financial Planner. You can also get more information directly if you take a look at IRS publication 590 - Individual
Retirement Arrangements.
Using a Roth is the #1 best trading account to use while base invading in the stock market using the techniques to buy low and sell high that I teach you in my course �The Blue-Collar Base Bonanza � What the insiders [definitely] don�t want you to know!� You can get more information on my website at www.BonanzaBase.com.
OUR MISSION:
The mission of the Delano Max Wealth Institute is to guide investors toward a secure retirement with the peace of mind that comes from the elimination of fear of investing and recognition of abundance within us instead of perception of lack in the world outside of us. We are driven by compassion for our fellow sentient beings, not fear of them, recognizing the equality and self evident rights of all, and are committed to conducting business based on the principles of the golden rule. Because of this commitment, we promise the following: To teach our students in the most simple, plain language wherever possible. To teach our students how to save consistently in increasing increments with increasing wealth: To teach our students how to diversify: To teach our students how to avoid large losses as best we know how: To teach our students how to turn away anything that sounds too good to be true: To share every secret we know about investing with investors who participate in our trainings. Finally, the Delano Max Wealth Institute promises to lead the way with innovative courses and seminars, bringing benefits to all who are associated with us.
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