September 29th, 2009 by http://www.RalphTaylorsBlog.com

A word today about the Roth IRA. This little known investment is probably the most significant financial tool available.

With the traditional IRA you get a tax deduction by using before tax dollars to fund your investment. The money grows tax free until you take your distributions. The theory is that you will be in a lower tax bracket when you retire, so your distributions will be taxed at that lower rate.

With the Roth IRA, your investment is made with after tax dollars, eliminating the deduction. The money grows tax free within the IRA until you take your distributions, but at this point your distributions are tax free. There are some conditions that apply, but careful planning will achieve a tax free result.

                                               SELF DIRECTED?

Many brokerage firms offer what they call self directed IRA’s, but these instruments are only self directed in the sense that they offer you a choice from a limited menu of options. A truly self directed IRA will allow you to invest in anything not  prohibited by IRS rules.

PROHIBITED INVESTMENTS

It should go without saying that anything  illegal will not be allowed. There are some specifically prohibited transactions:

• You may not engage in self dealing.
• You may not invest in collectibles
• You may not operate a business in your IRA

CONTRIBUTION LIMITS

Presently, the maximum allowable annual  contribution is $5000, with an additional catch up contribution of $1000 allowed for persons 50 years of age or older. The maximum advantage comes not from the annual contribution, but from the tax free treatment of your investment gains. The sizeable gains available from prudent real estate investments can be magnified by tax free status. Yes, you can own and invest in real estate and real estate related products in your IRA. More about that in a later edition.

THIRD PARTY ADMINISTRATORS

You are required to house your IRA with a third party administrator called a Custodian. There are only a handful of companies in the country that will serve as custodian for a truly self directed IRA. My IRA is administered by Equity Trust, who I highly recommend. Visit their website, www.trustetc.com, and spend a few minutes getting acquainted. Not only is there a wealth of information, there is a toll free number you can call to get more information, since I can only touch on the highlights here.

One other thing, IRS rules require your Roth IRA to be in existence for 5 years before your distributions can be considered qualified for tax free treatment. I suggest that you consider a Roth IRA at your earliest convenience