You too can reap the tax advantages of a Roth IRA

You too can reap the tax advantages of a Roth IRA

SeattlePI.com

Published

The trove of IRS records recently uncovered by ProPublica has confirmed what many have always suspected: Billionaires often enjoy a substantially lower tax rate than the average American.

They do that by claiming losses and deductions that reduce their taxable income and by holding much of their wealth in investments, which often aren’t taxed on an annual basis.

The most recent example from ProPublica’s reporting: PayPal co-founder Peter Thiel, who in 1999 had the privilege of purchasing company stock for one-tenth of a penny per share. He bought 1.7 million shares for just $1,700, and he did so in a powerhouse retirement account known as a Roth IRA.

THE ROTH IRA ADVANTAGE

It’s not a coincidence that Thiel opted for a Roth IRA to hold his PayPal shares: Investments in a Roth IRA grow tax-free. In Thiel’s case, ProPublica says that investment has grown to about $5 billion.

Yes, that seems unfair. But typical Americans don’t have to be Peter Thiel to take advantage of the Roth’s tax benefits.

“The rules really aren’t different for Peter, or any wealthy person, and the average person that’s out there,” says Todd Scorzafava, a certified financial planner and partner at Eagle Rock Wealth Management in East Hanover, New Jersey.

So what are those rules? Among other things, you’ll have to wait until age 59 ½ to start pulling investment income out of your Roth IRA; otherwise, it may be taxed or penalized. The account also has income limits, and an annual contribution limit of $6,000 ($7,000 if you’re 50 or older). Those who follow the rules — tech billionaires or otherwise — reap the Roth’s rewards.

HOW ANYONE MIGHT BENEFIT FROM A ROTH IRA

With a traditional IRA, contributions are tax-deductible, meaning your taxable income will be lower the year you make contributions....

Full Article