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How To Take Advantage of Roth IRA Tax Benefits

by Guest on June 30, 2011

We all know that saving money is really the key to building long-term wealth.  Just this week, I was reading an article by Mark Cuban, discussing how to create real wealth.  Right now Mark Cuban is a really happy guy.  He is the outspoken, charismatic owner of the Dallas Mavericks, and if you weren’t aware, the Dallas Mavericks just humiliated Lebron James and Dwayne Wade in the NBA Finals.

Mark’s primary advice for creating real wealth was simple—save money!  Creating wealth doesn’t happen overnight.  It happens over time, and investing your money intelligently can be huge key to building long-term wealth.  In this article, we are going to discuss an alternative retirement investment vehicle, the Roth IRA.

What Is A Roth IRA?

First of all, the Roth IRA is not really an alternative retirement investment.  I simply call it alternative because it’s not nearly as well known as its more mainstream counterpart, the 401k.  The 401k, of course, is the common retirement account that most employers in America offer employees.  A Roth IRA, however, is a retirement account that you must set up yourself either online through a broker, or through an investment advisor.

The primary advantage of a Roth IRA is that the money you invest accrues tax-free, and you are also able to withdraw your investment gains once you reach retirement age without paying ANY tax!  That is an incredible advantage.  Now, the 401k differs from the Roth because with a 401k, an investor invests pre-tax dollars.  However, when an investor then wants to withdraw money during retirement, he or she will have to pay income tax on that money at their current income tax bracket.

The Roth IRA differs significantly.  With a Roth IRA, an investor invests after-tax dollars, which is why he or she pays no tax when funds are withdrawn in retirement.  If a person wants to withdraw money before retirement age to give a friend or family member a cash loan or a working capital loan, he or she will have to pay substantial fees.  Therefore, it is best to keep this money in the account until retirement unless needed for absolute emergencies.

Traditionally, most investors simply open an account with an investment advisor such as T. Rowe Price or Vanguard, and investment decisions are made for him.  A self-directed Roth is a great option for the more active investor.  If you want to personally manage a percent of your net worth, you can open a self-directed Roth IRA through a popular broker such as TD Ameritrade or E*Trade, and you can then actively manage those investments.

Roth IRA Contribution Limits

This is the major disadvantage of a Roth IRA.  The U.S. government has strict max contribution requirements in place.  If you are interested in a Roth IRA, check with an investment advisor or a broker to find out the most recent regulations.  Generally, a person is allowed to contribute several thousand dollars per year to a Roth IRA, but it depends on a person’s annual earnings.  If you earn too much, then you may not be able to open a Roth IRA.  Again, these regulations tend to change rather frequently, so, just as when you are shopping for a cash loan or a working capital loan, consulting with a professional investment advisor is the best thing to do.

What Can You Trade With A Roth IRA?

The beauty of the self-directed Roth IRA is that it is very flexible.  Currently, you are able to trade stocks, futures, options, and currencies.  Remember trading financial markets carries a significant risk of loss, so make sure that you are always trading risk capital.

This has been a guest post by Jason Hoerr, who began his career as a trader in the most unlikely of places. As a high school English teacher, he was introduced to the concept of trading the forex market one day by the Principal at his school. Drawn by both the intellectual challenge and the opportunity to make money, he immediately began researching and learning everything he could about
currencies, economics, and trading. As his passion for the forex market grew, so did his desire to trade full-time. As his track record continued to grow, he began receiving requests to manage client funds. Today, Mr. Hoerr is trading full-time from his home office in Charlotte, NC.

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