Roth IRAs – Tax Planning

There have been articles in the news recently about how the ultra-wealthy have made full use of Roth individual retirement accounts (Roth IRAs). One article states that Peter Thiel, a Paypal founder, had $5 billion USD in a Roth IRA as of 2019.

While most of us will not end up with a Roth IRA anywhere close to that size, US taxpayers should consider using tax planning strategies that may be available to avoid taxes in retirement, even if it means paying taxes upfront.

Traditional IRAs are tax-deferred so you have a tax liability building up. Most people don’t think about it, but some of your IRA already belongs to the US government, and maybe foreign governments depending upon where you plan to retire. As a US expat, you are currently in a preferred tax bracket versus being a US resident. By using Roth IRA tax planning strategies now, you remove the uncertainty of future taxation by controlling your taxes, not Congress.

There are complex rules surrounding the use of Roth IRAs as an expat; it is always best to consult a US qualified financial advisor, accountant, or tax attorney. There are income limits set for who can contribute directly to a Roth IRA that are different for expats versus US residents. For clients who can’t contribute directly, Avrio may recommend annual Backdoor Roth contributions.

Clients with higher income can convert assets in a Traditional IRA or 401(k) to a Roth IRA. Taxes are paid on the amount converted, then investments grow tax-free. Investments can be withdrawn completely tax-free if you have held the account for at least five years and are age 59½ or older. Think of Roth IRA conversions as tax insurance. It doesn’t matter how much tax rates increase; your tax rate will be zero.

Going back to Peter Thiel, he used a self-directed Roth IRA account. In self-directed Roth IRAs you can own investments such as private equity, private debt, venture capital, private company shares (Pre-IPO) or real estate; investments that you generally can't invest in through a Roth IRA held at traditional brokerage companies such as Fidelity or Vanguard, etc. This tax planning strategy is available to most investors, not just the wealthy.

Any financial decision has tradeoffs. Roth IRA conversions may not be right for everyone. Some people think they’ll be in a lower tax-bracket in retirement, maybe they can’t afford the tax bill now or maybe they hope to receive college financial aid for their children. In most cases, with Roth IRA conversions, the worst-case scenario is tax rates don’t go up but you’ve locked in a 0% tax rate on future gains for life. You’ve even saved the heirs of your Roth IRA taxes.

Financial planning for retirement is a long-term plan. The strategies you employ today will save you taxes tomorrow. Avrio Wealth – Financial Planning for Tomorrow.