As many of you know, I am not a big fan of 401(k)’s and IRA’s. Still, there is an IRA that can work well for many people, depending on your wealth strategy. This is a ROTH IRA. Unlike ordinary IRA’s, ROTH IRA’s don’t simply postpone the tax on your investment earnings to a later year – they permanently eliminate taxes on these earnings. This is the answer to the question posed by our student, Perrilee.

Q: I have again a question about Roth. I have a self directed Roth which I have invested and the roth has gained value. When do I pay the taxes on the gains? I am still confused on the taxes. Perrilee

A: You never pay taxes on a ROTH. This is the magic of ROTH IRA’s. There are some exceptions to this rule. First, any “Earned” income in a ROTH is taxed to the IRA. So, if your Roth owns and LLC and you run a business through that LLC, the IRA will be taxed on the income from the LLC (lot’s of other challenges with a business in a ROTH as well – just don’t do it). Also, most “Leveraged” income in a ROTH is taxed to the IRA, so if you borrow on margin to do your stock trading in a ROTH, the IRA will be taxed on the portion of the earnings generated by the amount you have on margin.

Best uses of a ROTH IRA are stock and option trading, precious metal investing (though not collectibles) and lending (interest income, such as hard money loans or tax liens).

There are some sophisticated tax planning strategies we can also do with a ROTH. You have to be very careful to follow all of the rules on these strategies. When you do, they can be worth thousands or even millions of dollars in permanent tax savings. Call my ProVision office at 866.467.5809 if you want to learn more about these strategies.

Warmest regards,

Tom