Roth IRAs

     Imagine an investment that gets you a 50% yield (well, almost 50%) just for being in a particular kind of account. Essentially, that's what a Roth IRA is.
     The rule is very simple. If your money is already taxed (and your wages are), any of that which you put in a Roth IRA is never taxed again. Compare that to a qualified plan. Suppose when you retire you are elated to discover that your qualified plan has earned you a million dollars. And now you want to withdraw and spend that million dollars. But you discover that because it was only tax deferred, that any money you withdraw is fully taxable as ordinary income. And if your tax bracket is 35%, well that's $350,000 you can kiss goodbye. Of that million dollars, you get to keep just $650,000; or about two thirds.
     But what if you had invested that money inside a Roth IRA instead? Now when you want to withdraw and spend that money you discover that the million dollars really is a million dollars, yours to keep and spend any way you want.
     So let's compare. $1,000,000 versus $650,000. Yes, my math was right, or nearly. $1,000,000 is almost 50% greater than $650,000. That's a lot of money.
     The point is obvious. However you invest your money, you're better off, far better off, investing it in a Roth IRA and save all that tax money. You may be an active investor trading your own account, buying and selling puts and calls and other fancy stuff. Or you may be a passive trader who uses annuities or mutual funds. Whatever suits you, consider doing it in a Roth IRA.
     Someone may ask you, but annuities are already tax advantaged, so why would you want to put an annuity inside a Roth? Isn't the Roth superfluous? The reason you should want your annuity to be inside a Roth is because the annuity, as wonderful as it is, is not “tax advantaged” enough. Annuities, like qualified plans, are only tax deferred. That is not the goal. The goal is tax avoidance. And for that you need a Roth.
     Roth's are complicated and you need to talk to your tax advisor. Decades ago I moved money into a Roth IRA and received a nasty letter from the IRS informing me that I had to back the money out of the Roth (“recapture” they called it).  Why? Because that year I sold a house and that pushed my taxable income over the limit. I was not eligible to make a Roth contribution. So do be careful.
     Here's a suggestion. Suppose you're retired with nothing to do, and you would like to put some money in a Roth. But you're not earning any money so you're not eligible to make a Roth contribution, and income streams from annuities and social security don't count. Here's what you can do. Do some paid work. Be a math tutor, cut somebody's lawn, teach guitar, anything that you enjoy doing that will earn you some income that you declare as income. Now all of that money can go into your Roth, assuming of course that it is all discretionary (you don't need it to live). And that is a good way to increase your estate that you intend to leave to the kids.