What Is A Roth IRA?

Your first question may be what is an IRA? Simply put an Individual Retirement Arrangement (IRA) is a type of retirement account that has certain tax advantages for individuals.  This is not a new concept.

How long has the IRA been around?
IRAs were originally introduced to the public in 1974. However, the Roth IRA was introduced to the public in 1998.

Named after its sponsor, William Roth, the Roth IRA was the result of the Taxpayer Relief Act of 1997. You are able to hold the same types of investments inside the Roth that you can inside the Traditional IRA. These investments are most typically assets such as:

• Stocks
• Bonds
• Mutual Funds
• Certificates of Deposits

You have to have a custodian hold the account for you. 

What is different about the Roth?

There are a few differences between the Roth IRA and the Traditional IRA.

1. Contributions to the Roth are after tax dollars
2. Earnings grow tax free

What do you mean Contributions are after tax dollars?

With a Roth IRA, unlike the Traditional, you are not able to take any tax deductions for the annual contributions. 

Does the money really grow tax free?

Yes. The funds that you place into the Roth grow tax-free. You do want to leave the money inside the account in order to take full advantage of this tax-free growth. In a Roth you will be required to leave the earnings inside the account for 5 years and until you reach the age of 59 1/2 before you will be able to remove the money both tax-free as well as penalty free. However, do not be discouraged this is for your retirement. You want to leave all your retirement money alone and allow it time to grow.

Do I need a Roth or a Traditional IRA?
Your current tax situation may be the determining factor in answering this question. You want to schedule a time to talk this over with your financial advisor. There are a lot of things to consider when making this decision. You may need to look at your current tax situation, what do you think will happen to taxes over the long term, will they increase or decrease and many other factors.

While the decision may need to be made on if you need a Traditional IRA or a Roth IRA the truth is you need one of them. You have to take control and become involved in your retirement to ensure that all your financial goals are met. Your plan needs to include several different things. An IRA is a must!

Real Estate inside an IRA

What are your investment options in a self-directed IRA?

We recently had this discussion with Tom, a client, who we met through an online discussion forum. His story may sound familiar or similar to yours. He was invested in traditional stocks and bonds through a long time friend and broker. Over the past two years, his account had not preformed badly considering the economic conditions; however, he wanted to take some of his retirement portfolio and diversify into some non-traditional assets.

You may be asking yourself, what is a non-traditional asset?

Great question!

A non-traditional asset could include, but is not limited to: Limited Partnerships, Limited Liability Companies, Promissory Notes, Precious Metals, and Real Estate.

Tom was interested in using his retirement account to purchase real estate. He was very familiar with the real estate market in his area. While he was comfortable with the real estate market in his area, the idea of using his retirement funds for real estate investments was completely new to him.

We discovered Tom’s questions about the process on a discussion board. We were glad to take time to answer his questions and eliminate his concerns.

Simply put, the process is no different than buying real property personally.

Tom opened an IRA with MyRA and moved $225,000.00 from his brokerage account to his newly established MyRA self-directed IRA.

Tom had been working with a local real estate agent to find rental property. He made the decision that he would like to have a multi-family unit.  His real estate agent located a few different duplexes and quads for Tom to consider.

During the review of the cash flow, location, and conditions of the units, he discovered a duplex that was a must have. The owner had to sell the property. One unit was vacant and one was rented for $700 per month.

Tom discovered that with $5,000 to $10,000 he could make improvements to the units, and, based on the market, both could be rented at $900 to $1,100 per month.

Tom, excited at the possibility, discussed this opportunity with his real estate agent and determined that the asking price on the duplex was $206,000.00. Knowing that improvements were going to be needed, he instructed his agent to offer the seller $190,000.00.

After negotiation, Tom and the seller agreed on a price of $195,000.00, but Tom had to close in 10 days. No problem, thought Tom. His IRA was set up and funded. His $225,000.00 was just waiting for this deal.

He sent a copy of the purchase agreement to MyRA and instructed us to execute the agreement and send the down payment of $5,000.00. At the same time Tom located a local contractor to complete the property improvements. Tom is very capable of completing all the improvements on his own, he is a contractor as well, but he learned through his conversations with the staff at MyRA that he is not able to perform these improvements since this property is held inside his IRA. The updates are quoted at $7,500.00.

Two days prior to the closing date, Tom provided MyRA with all the needed documents and instructed MyRA to fund the remaining amount of $190,000.00. On closing day, MyRA had the closing documents signed and faxed to the closing agent and wired the remaining amount of $190,000.00. That was it!!!! Tom now owned his first piece of property inside his IRA.

Tom’s contractor began the needed improvements and in one month Tom was able to rent out the remaining side of the unit. He kept the rent at $700 for the existing renters and rented the second unit for $1,000 per month. He has every intention of raising the rent for the occupied unit but decided to do it in small increments.

Tom received the invoice for the improvements and sent that into MyRA with instructions to pay the invoice. Tom is excited to review his transaction.

Purchase amount                     $195,000.00

Improvement cost                    $7,500.00

Total Investment                      $202,500.00

Monthly Rent Proceeds           $1,700.00

Property Mgmt Fee                 $170.00 (10%)

Monthly Expenses                   $510.00 (30%)

Net Monthly Income               $1,020.00

Annual Income                        $12,240.00

Annual ROI                             6%

6% returned backed by real estate is not bad at all in a tax-deferred account. But Tom converted his Traditional IRA to a Roth IRA. His financial advisor and he decided that this was a good time for him to  convert.  Because he converted in 2010, Tom will be able to split the tax burden over two tax years, 2011 and 2012.

His 6% is not tax-deferred it is now growing tax-FREE.

Be Sure to FINISH!

Well it was clear again tonight while I was watching the Finale for the Ultimate Fighter that you can never leave anything up to a Judge or a referee.

It never seems to amaze me how bad judges can be at times. Trust me, I do understand that humans tend to error from time to time, but how can it be that a judge watches a complete different fight than what everyone else  was watching. It is the job of the judge to be skilled and exactly that, judging a FIGHT.  The Nevada Athletic Commission should be embarrassed.

Fight Commentator, Joe Rogan, hit it right on the head when he indicated that the Judges for the Garcia vs. Phan fight were merely incompetent. The judges of this fight robbed Phan of a victory. With the crowd voicing their displeasure with the outcome Joe conducted his post fight interviews with both fighters.

There is a lot to be said when the fighter that wins looks surprised by the decision. However, as Garcia stood in the middle of the ring next to the referee he had a defeated look on his face until he heard his name called out as a winner by split decision.

Well, I guess that is why as a fighter you have to finish the job before the bell rings and never leave it in the hands of the judges.