A box with notes on it that says roth ira and tax free.

Roth Conversions and Self-Directed IRAs

The hot topic of Roth IRAs has become even hotter, thank you, Peter Thiel. 

The hot topic of Roth IRAs has become even hotter, thank you Peter Thiel.  If you have not heard, Peter Thiel, co-founder of PayPal, and tech investor, has been in the news because of his Roth IRA.  While his privacy was breached, the focus remains on his earnings of 5 billion in a Roth IRA. The funds have grown tax-free and eventually will be tax-free income after age 59 ½.

This makes some people very upset, for reasons we will not be discussing in this article.  However, it is imperative that working Americans, savvy investors, and those who have retirement funds, understand that the Roth IRA is an investment tool for everyone to leverage.

If tax-free income is attractive to you, please read on.

If you have earned income (W-2 or 1099), you can open a Roth IRA.  The Roth IRA has an annual contribution limit of $6,000; or $7,000 for those aged 50 and over.  The contribution to a Roth is after tax, so not tax deferred. However, the growth in this account type is tax-free.  That is powerful.  

If you don’t have earned income or you make too much money, you can’t open or contribute to a Roth.  The definition of “too much” is known as the Modified Adjusted Gross Income limit, ( MAGI).  Enter the Roth Conversion.

A Roth Conversion is where you can convert Traditional IRA Funds to Roth IRA Funds.  Self-Directed IRA investors often use Roth IRAs and experience exponential growth.  They invest in things outside of the stock market like real estate, mortgage notes, tax liens, and even start-up companies.  

With the proposed tax legislation on the table, also known as the “SECURE Act 2.0”, the Roth Conversion may be eliminated.  It is a great time to talk with your tax advisor, CPA, or Financial Advisor to find out if a Roth Conversion is right for you.  

Keep in mind, the Roth Conversion is a taxable event.  For example, if you convert $50,000 of Traditional funds to Roth funds in 2021, $50,000 will be added to your Net Ordinary Income for tax purposes.  However, paying tax on the seed verses the growth, just like Peter, could make a lot of sense.

Be sure to download our Roth IRA Guide and Schedule your IRA Strategy now.

Finding your tax-free income could be the difference between the beachfront location and the 5-mile walk.

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