Tax Avoidance

Roth IRA

The first thing that we need to learn about is what a Roth IRA is.  You may know what a traditional IRA is, which stands for an individual retirement account, is an account that you can grow tax deferred and is self-direct. Many people transfer or “roll” their old 401K into an IRA after they have left their previous employer.  The main advantage of an IRA over a typical 401K is that you have more options and more control.  Now when it is a Roth IRA you even have more advantages.

The Roth IRA is the best gift the government has ever given to the American taxpayer.  You are able to build a retirement account to an enormous size and remain free of income tax forever; the only catch is that you have to pay the income tax up-front.  The money will also pass on to your heirs’ tax-free outside of probate.  Most people have been taught that it is better to grow money tax- deferred and avoid the Roth option, for those of you that still believe that I suggest that you look under the “Inconvenient Truths” button on the home page. For the rest of you that actually want to get Uncle Sam out of your retirement plan, read on.

Now there are limitations on the amount that you can put into a Roth on an annual basis, and some people do not qualify if they make too much money.  The rules and the limits change annually, however Roth contributions are permitted without regard to age, so if your child has a summer job, they can fund a Roth IRA based on their earnings.  You can also continue to fund a Roth IRA after the age of 70½, which you can’t do with a traditional IRA.  You will have to hold the Roth IRA for 5 year before you can access the growth without taxation, however you can withdraw your original contributions at any time for any reason.  So I suggest that you get one started as soon as possible.

Roth Conversion

This is the second best gift that the government has given to the American taxpayer.  However this is one you have to take advantage of before the opportunity runs out at the end of 2010.  This conversion is an the opportunity to convert a traditional IRA to a Roth IRA right now, and let it grow tax-free from that point forward.  However there are rules in order to do the conversion. 

One of the most important rules is that you have to pay the taxes on the amount that you are converting to the Roth IRA.  This up-front tax payment is the biggest roadblock for most people, however, in this case it is either pay it now or pay more later to Uncle Sam.  The good news is if you do the conversion in 2010 you can divide the tax payment up over the next 2 years, making them due in 2011 and 2012.  Which really means the taxes are not due until April 15th 2012 and April 15th 2013.  That’s like getting an interest-free loan to build a tax-free saving account.  The good thing for you is that at Coastline Financial Solutions we have a couple of different ways to help you get the money you need to pay the conversion taxes without causing a large impact on your life financially.

One of the really great things about the Roth Conversion is that there is no limit on the amount of money you can convert as long as you are willing to pay the taxes.  You could convert 10 million if you wanted, of course that would cost you 3.5 million in income taxes, but if you have 10 million 3.5 should be easy.  Now all of the growth on the converted amount is limitless and all tax free.

One of the other rules we have to make sure that we follow is the 5 year rule.  This means that if you convert to a Roth IRA you will have to hold it for 5 years before all of the growth is tax-free.  However if you already have a Roth IRA the 5 year rule starts when you originally started a Roth IRA.  This is why it is very important to get a Roth IRA open as soon as possible so the time clock can start ticking.

Remember, a Roth conversion is going to cost you money up-front in order to reap the rewards later in life.  With the outlook of taxes going up in the future and the fact that we are at historic low tax rates currently, now is the time to move.  Let us at Coastline Financial Solutions show you how to do the conversion.

Equity Indexed Universal Life 

Here is a product that most people do not think of when it comes to saving for their retirement, but this is one financial tool that covers many different areas of wealth protection all rolled into one.  Using this policy will protect your money against loss if the market goes down, you will capture the upside of the market when the market is up, or you can just grow your money in a fixed account if you want a guarantee.  All of the gains in the account are tax-free, you can access the money tax-free and in the unfortunate event of your death it will blossom into a larger sum and pass on to your heirs tax-free.

An equity indexed universal life policy can be funded on a monthly basis like a 401K, or it can be funded with large amounts of money like a CD.  Which ever way it is funded the policy needs to be structured properly so that you can earn tax-free gains.  This product also does not have to follow any of the government retirement rules, like the 10% penalty for early withdraw before the age of 59½ or required minimum distributions at the age of 70½.  Most advisors do not talk about these because they do not understand how they work and they don’t take the time to educate themselves to better protect their clients. 

Let us show you how these work and how they fit nicely in your retirement plan.  Once we show our clients how these work, they request that we use it in their retirement plan.  It has become a best seller at Coastline Financial Solutions.