The pile of IRS records recently revealed by ProPublica confirms that many have always been suspicious. Billionaires often enjoy significantly lower tax rates than the average American.
They do so by claiming losses and deductions that reduce taxable income and holding a lot of wealth in their investments. Investment is often not taxed annually.
Latest example From ProPublica’s report: PayPal co-founder Peter Thiel had the privilege of buying shares in the company in 1999 for a tenth penny per share.He bought 1.7 million shares for just $ 1,700, and he did so in a power plant retirement account known as Ross IRA..
Benefits of ROTHIRA
It’s no coincidence that Thiel chose Roth IRA to hold a stake in PayPal. Investing in RothIRA is tax exempt. In the case of Thiel, ProPublica says its investment has grown to about $ 5 billion.
Yes, that seems unfair. However, the typical American does not have to be Peter Thiel to take advantage of Los Angeles tax incentives.
Todd Scorzafaba, Certified Financial Planner and Partner of Eagle Rock Wealth Management in East Hanover, NJ, said:
So what are those rules? Above all, you have to wait until you’re 59 and a half years old to start withdrawing investment income from a Roth IRA. Otherwise, you may be taxed or punished. Your account also has an income limit, with an annual donation limit of $ 6,000 ($ 7,000 for people over 50). Those who follow the rules — technology millionaires or others — will earn a loss reward.
How Everyone Can Benefit from a Roth IRA
In traditional IRA, contributions are tax deductible. This means that your taxable income will be lower in the year you pay your contribution. However, severance pay distributions are taxed as ordinary income.
Roth IRAs are funded by already taxed funds, so there are no additional tax credits for donations. However, eligible withdrawals after retirement are tax exempt. This makes Ross IRA a particularly attractive option for long-term savers, says Scorzafava.
“Yes, tax credits can sound great now, but will they later outweigh the profits of Loss?” Says Scorzafava.
Think of it this way. Tax rates can be lower in the early and middle stages of your career. Therefore, it may make sense to contribute to loss early, says Scorzafava. Ideally, your investment will grow over time and you will be able to withdraw your retirement benefits tax-free.
A place for high-growth assets
Thiel’s Roth IRA PayPal stock has grown in a way that most of us can never see in our Roth. However, those with long investment timelines (when looking at investors in their 20s and 30s) can use Loss as a holding pen for aggressive, high-growth investments.
“It makes a big difference where you put your assets,” says Scorzafava. “Where do you want to own a high-growth company? I would like to own it first with a Roth IRA, because the expectations for returns should be higher, because it grows tax-free.”
Diversified portfolios usually have a mix of equities and bonds. Equities are high-risk assets and often generate greater returns. Bonds are low-return buoys that help reduce volatility. However, young investors who have decades to retire may want to stack their portfolio with most, if not complete, stocks and mutual funds. Roth IRAs may be the perfect place to park them.
By opening and investing in Roth IRAs, we are increasing our wealth over time. Your account balance may not have as many zeros as Thiel’s, but the mechanism for accumulating your own level of wealth is the same. Then, when you retire, you can take advantage of that accumulated wealth. That is, like the wealthiest people in the world, at least part of their income is tax exempt.
Is it too rich for Ross?
Roth IRAs have one major problem: income restrictions. In 2021, if you earn more than $ 140,000 as a single filer, or if you earn $ 208,000 if you file jointly, you will not be able to donate.
However, Scorzafava says Roth can be used even if income exceeds that threshold. There is a perfectly legal way for high-income earners to enjoy the tax benefits of Los Angeles. The most common is the backdoor Roth IRA, which requires converting a traditional IRA to a Roth account. According to Scorzafava, it’s best to have a financial adviser guide you through this process.
Your wealth probably won’t match that of Peter Thiel, but there’s no reason why you can’t take similar steps to reduce taxes on the money you’ve accumulated.
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This article was originally posted on the personal finance website Nerd Wallet. This content is for educational and informative purposes and does not constitute investment advice. Chris Davis is a writer for Nerd Wallet. Email: cdavis@nerdwallet.com..
Related Links:
NerdWallet: What is a Roth IRA? How Roth IRA works, donation rules, where to start https://bit.ly/nerdwallet-roth-ira
ProPublica: Lord of the Roths: How Tech Mogul Peter Thiel Turns Middle Class Retirement Accounts into $ 5 Billion Tax Exempt Piggy Banks https://www.propublica.org/article/lord-of-the-roths-how-tech-mogul-peter-thiel-turned-a-retirement-account-for-the-middle-class-into-a- $ 5 Billion Tax Exempt Piggy Bank