The Roth IRA is a popular retirement account, and it’s incredibly easy to see why. Yes, you have to invest in this account with after-tax dollars, but your money grows tax-free and you don’t have to pay income taxes later on.
In case you missed that: TAX-FREE MONEY!!
You can also open a Roth IRA with any major brokerage firm with ease, and you can contribute up to $6,000 per year in 2022 if you meet income requirements (or $7,000 per year if you’re ages 50 or older).
The thing is, there are some hidden features of Roth IRAs that you may not even know about, including secrets that can help you build a portfolio of up to $5 billion in this type of account.
What are the biggest Roth IRA secrets? Read all the way to the bottom to find out.
#1: Access Contributions Anytime
First off, did you know that you don’t have to wait until age 59 ½ to access funds in your Roth IRA?
With a Roth IRA, you can take out contributions at any time without having to pay a penalty. This means you can take out whatever you have put in over the years, but that you typically have to leave any earnings in your account for continued growth.
This feature of the Roth IRA comes into play since you put in after-tax money to begin with. By and large, this gives you the ability to pull that money out for any reason, whether you need to pay off medical bills or you want to remodel your kitchen. If you invest the Roth IRA contribution limit of $6,000 per year for five years, you can take out $30,000 after that timeline without having to pay a dime in penalties and fees.
#2 Take Early Withdrawals Penalty-Free
While IRA stands for “individual retirement account,” you don’t necessarily have to use the funds for retirement. In fact, there are several strategies you can use to access your Roth IRA contributions and earnings without having to pay the 10% tax penalty you would normally face.
How and why does this work? When you dig around a little, you’ll find that the IRS has some special language in the tax code that allows you to pull out earnings from your Roth IRA without any fees in certain situations. Specifically, you can use this money if you need to pay for higher education expenses or come up with the down payment for your first home.
Other exceptions you can qualify for include death, disability, certain medical expenses and more.
Want to see me talk about Roth IRA secrets in the flesh? Check out my latest video for my Wealth Hacker YouTube channel:
#3: Roth IRAs for Non-Working Spouses
While most people need earned income for retirement, the Roth IRA has a third secret that comes into play here.
Are you ready for this?
Your spouse can also have a Roth IRA — even if they don’t have a traditional job.This is commonly referred to as a spousal Roth IRA.
For this strategy to work, the IRS only requires that you earn enough so that both of you can contribute. You also have to come in under the income limits set by the IRS for Roth IRA contributions.
In 2022, for example, couples who are married filing jointly have to have a MAGI of less than $204,000 to contribute the full amount. For incomes that fall between $204,000 to $214,000, contributions are phased out, and couples who earn more than that cannot contribute to a Roth IRA at all.
#4: The Tax Saver’s Credit
While Roth IRAs are known for their after-tax contributions and tax-free growth, it’s actually possible to get a credit for money you put into this account. In fact, the Tax Saver’s Credit lets you enjoy upfront tax savings of up to 50% of your contribution, although you can’t earn very much and still qualify.
If you’re a married filing jointly and you earn more than $41,000, for example, you do not qualify for the full 50% credit. However, you can earn more than that and still see some upfront tax savings.
In fact, married couples filing jointly can qualify for a Tax Saver’s Credit of 10% if they earn between $44,001 and $68,000. Meanwhile, those who earn between $41,000 and $44,000 can qualify for a 20% credit.
If you’re curious where your tax credit could fall based on your own income, this resource on the IRS website can help you find out.
#5: Backdoor Roth IRA
If you earn too much money to save with a Roth IRA, there’s another important secret you should know about — the backdoor Roth IRA. This move became an option back in 2011 when the IRS made an important adjustment to Roth IRA rules. Note: The backdoor Roth IRA is also referred to as a Roth IRA conversation.
Here’s how the backdoor Roth IRA works: Instead of putting money directly into a Roth IRA, you first start putting it into a traditional IRA, or a non-deductible IRA. Once the money is in there, you do a Roth IRA conversion, converting the funds into a Roth IRA.
That might sound really simple, and it is, but there is a catch. You have to pay taxes on the amount you convert. This means Roth conversions usually work best in years when your tax rate is on the lower side.
With that in mind, you’ll want to approach the backdoor Roth IRA with care. If you’re thinking about taking advantage of the secret, I would highly suggest you meet with your CPA or a tax professional to see if this makes sense.
#6: Custodial Roth IRA
For those who have kids or plan on having kids one day, you’re going to love this secret. This includes me; after all, I have four children ages 14, 11, 10 and seven. Even though all of them are minors, they all have their own Roth IRA.
Here’s how this works: For the most part, you have to be at least 18-years-old and have reportable income to have a Roth IRA (unless you’re using a spousal IRA, which we talked about earlier). However, the IRS offers exceptions for the custodial Roth IRA, which lets parents set up this account for their dependent children.
With a custodial Roth IRA, you are in charge of the money in the account until your children become a legal adult. With that being said, your kid has to have real income that is reported to the IRS — not just cash from babysitting or mowing lawns. We made this work for my family because I’m a small business owner with an online business. I do a lot of brand deals and sponsorship deals, and my kids are frequently included in various campaigns I work on. Talking with my CPA, it only made sense to add our children to our payroll.
If your child has any reportable income, whether you are the one employing them or not, you can use this secret to help them build long-term wealth. And with the power of time and compound interest on their side, this tip can pay off for your kids in a big way.
#7: Save $5 Billion in a Roth IRA
Are you ready to hear how someone can build up a $5 billion dollars Roth IRA? Get ready for this one.First of all, it’s important to know that the Roth IRA lets you invest into alternatives other than just stocks.
In the case of the $5 billion Roth IRA, we’re talking about an investor named Peter Thiel, who is the co-founder of PayPal. Thiel was also the first outside investor in Facebook, so I’m sure you can imagine how much wealth he was able to build.
In Peter’s case, he was able to invest into PayPal before anybody knew who PayPal was, and when the price per share was only $0.001 cents. Thiel was able to buy 1.7 million shares of PayPal back in the day using $2,000 of his Roth IRA funds.That PayPal stock is now worth over $5 billion and it’s tax-free.
You may not have access to a stock before it goes IPO like Thiel did, but there are other investments that you can place inside your Roth IRA. For example, you could put real estate, cryptocurrency, or private businesses in your Roth. The only catch is, you have to find a custodian that is willing to hold these types of assets.
So, if you’re opening a Roth IRA at Fidelity, Vanguard or Edward Jones, there is no way they’re going to allow you to hold these types of assets. You’ll need to look at third-party custodians that will set up a Roth IRA for you and hold alternate investments, which is how Thiel pulled off this crazy feat.
The Bottom Line
The Roth IRA is extremely powerful when it comes to saving for retirement, and that’s true whether you know about these secrets or not. You do have to invest after-tax money, so there are no tax benefits upfront. However, having tax-free income in retirement can be a huge blessing — especially if tax rates increase dramatically in the future.
If you’re considering a Roth IRA, you can open this account with an array of firms from Vanguard to M1 Finance and TD Ameritrade. Make sure to compare all your options, but don’t delay opening a Roth IRA if you don’t have this account yet. Trust me — your future self will thank you.
This article originally appeared on GoodFinancialCents.com and was syndicated by MediaFeed.org
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Top tax pros reveal their top tax tips
It’s safe to say that millions of Americans are breathing a sigh of relief now that the IRS has pushed back the deadline to file your 2020 taxes from April 15 to May 17.
But you might not want to celebrate just yet, as there is a major downside to the extension. Fraudsters who attempt to take advantage of Americans on Tax Day now have even more time to try to separate you from your hard-earned income.
To help ensure you don’t fall into any financial traps this tax season, we asked some industry experts to weigh in on ways to stay safe when filing your tax return. From spotting scams to concerns over stimulus repayments, these tips can help you avoid any unnecessary headache on Tax Day.
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Phishing, check and phone scams are not new. But what is new is how fraudsters are applying these scams creatively to our times. For instance, it’s known that fraudsters typically send fake tax refund checks. They follow this by a written notice claiming that they sent you a higher amount than intended and that you’ll need to send them a portion of the money back. But what we’re seeing now is that they’re sending these as a form of fake stimulus checks.
The best way to detect a tax scam is by remembering that the IRS will not contact you by phone, text or social media. If you receive a written notice in the mail, verify that it’s actually coming from the IRS. Letters impersonating the IRS will often contain fake contact numbers, so don’t contact the numbers on the letter. Instead, visit the IRS website and contact them that way.
One of the best ways to stay ahead of fraudsters is to file your taxes early. You’ll not only avoid potential tax-related identity theft but also long lines at the tax accountant’s office. Filing early is especially important if you know you’ve already fallen victim to identity theft.
Many Americans are worried about having to pay back the money they’ve received from stimulus checks once they file taxes. However, this isn’t true. You’ll need to report the money you received, but the IRS states that “there is no provision in the law requiring repayment.
-Alexa Serrano, CAMS, Banking Editor at Finder.com
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In 2020, scams intensified due to coronavirus tax relief. According to the most recent IRS “Dirty Dozen” list, an annual list of the most popular tax scams, some of the most notable include:
- Phishing – A scammer sends emails, letters, or text messages and impersonates the IRS with the goal to steal taxpayer personal information. They may also create dummy IRS websites with the same goal.
- Threatening Phone Calls – A scammer calls claiming to be with the IRS and threatens arrest or deportation if the victim doesn’t pay a fake tax bill.
- Refund Theft – This is a form of identity theft. A scammer files false tax returns under a victim’s name or diverts refunds to wrong addresses and bank accounts.
- Unscrupulous Return Preparers – These scammers will refuse to sign the return (ghost preparers), ask the taxpayer to sign a blank return, or promise a large refund before looking at taxpayer records.
There are so many factors that can lower or zero out a tax refund. It depends on your tax situation. Contrary to popular opinion, it’s not ideal to have a large tax refund.
When you withhold too much in taxes, you’re giving the IRS an interest free loan, which means less money in your pocket throughout the year. Ideally, your goal should be to get as close to zero taxes owed or paid as possible.
-Melanie Bledsoe, CPA at Bledsoe Consulting Services
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File your taxes electronically if possible and have your refund directly deposited instead of taking a paper check. If you owe taxes, pay your taxes on the IRS Direct Paysite so that you can keep a record of them having your payment on time.
Also, if you are hiring a tax professional, make sure that they are using an encrypted/secure portal to transmit your tax documents as these documents should not be freely exchanged over email since the tax documents contain sensitive and private information.
The stimulus checks will have some impact. If you did not get a stimulus check, but your income falls under the threshold ($75K and under if you’re single, $150K and under if you’re married), you can still receive those stimulus payments as credits, which is refundable.
The credit can be used to increase your refund or reduce your tax liability. If you already received the stimulus payment, you will not be taxed on your tax return at all; however, you have to report the amounts received.
-Eric Pierre, CPA, Chief Executive Officer, Owner, and Principal at Pierre
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These tax preparers will end up getting more money from you if you allow them. Ensure that the tax preparer you’re in contact with has an IRS Preparer Tax Identification Number or PTIN. Do your due diligence by asking for their qualifications or credentials before transacting with any tax preparer. Lastly, do not sign a blank return or give any information if you aren’t entirely sure of who you’re dealing with.
-Paul Sundin,CPA and tax strategist at Emparion
The IRS will always mail you a bill if you actually owe taxes. You will also have an opportunity to defend yourself and appeal the amount you owe. Anyone who contacts with a demand for immediate payment via debit card, gift card, or wire payment is a fraudster.
A smaller refund can occur when you have income that is not subject to withholding such as self-employment income, interest, dividends and capital gains. It can also occur if you have reduced your withholding by making adjustments to your W-4.
-Eric Bronnenkant, CPA, CFP and Head of Tax at Betterment
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If you already received both stimulus checks, then your tax return shouldn’t be affected. However, if you had some substantial changes in 2020 (reduced income, having a baby, etc.) then consider filing as soon as possible to receive the highest amount you can when they send the third stimulus check.
I recommend using your tax refund to pay off debt, boost your savings or invest in your future. Depending on the amount you receive, you can use that money to really free up your finances so you’re in a better place in the months to come. 2020 was a difficult year for most people, so this is a great opportunity to pay off high interest debts or replenish your emergency fund.
– Jacob Dayan, CEO and Co-founder of Community Tax and Finance Pal
Kameleon007/istockphoto
Since the IRS communicates through the mail, it can be difficult to discern what is and isn’t a scam. Fortunately, few hackers have the skills to successfully imitate the IRS. If you’re issued a letter, it’s a good idea to review how the sender requests payment.
The IRS only accepts online payment through their official website and their electronic federal tax payment system. If the sender requests money through another site, it’s a giant red flag.
-Kristen Bolig, Founder at SecurityNerd
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originally appeared on Finder.comand was
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