I already loved the Roth but you made me love it even more! Thank you for the information! Excellent read.

I agree, the roth IRA is beautiful, and I love it. Everyone should have one. The biggest problem is that you can only contribute $5,500 per year, and only if you have w2 income of at least $5,500/year ($6,500/year if you are over 50). Imagine rental properties owned in your Roth IRA providing a tax free income stream in retirement 🙂 Sadly, you can not contribute for past years when you didn’t know about the Roth IRA. So start contributing now, and max out your contribution each year. Roth Ira is the best investment vehicle ever invented. No income tax, no capital gains tax, no required minimum distributions that get taxed at your highest marginal tax rate. The problem is, how do you get more of your money into the roth? (Disclaimer, I am not a financial advisor, not a tax professional. Anyone who knows more than I please correct anything I get wrong) Here are three strategies: 1. Contribute for 2017 NOW. You have until you file your 2017 taxes to make your 2017 contribution. You can make your 2018 contribution now as well, and invest the money tax free in almost anything, including real estate. Contributing early each year gives that tax free investment money more time to grow. 2. Convert traditional IRA or 401k funds to your roth IRA, and pay the income tax on the conversion amount out of pocket, if at all possible. I convert the difference between my adjusted gross income and the top of my tax bracket every year. If the money grows in my 401k, it will someday be subject to RMDs: both the retirement funds I have now, AND their future growth will all be taxed eventually, a larger RMD each yearuntil there is NOTHING left in my 401k or traditional IRA. By converting small amounts every year, I can choose my tax rate on the 401k funds, and the future growth will NEVER be taxed. I’ll be paying 25% of this year’s conversion amount to the irs. Better a small amount now than a larger amount of tax to be paid later when my retirement funds have doubled or quadrupled. 3. Create a side business as an S-corp, with yourself as a W2 employee of your S corp (you also get to wear owner and CEO hats. Your S-corp can have a solo 401k, to which you can contribute. I believe that total individual Retirement contributions are limited to $18,000/year. So, the plan would be, from your regular W2 job, you can contribute to the ROTH IRA up to the max, say $5,500. In addition, whatever W2 income you generate via your S-corp (minus your Roth contribution) up to $18,000 can then be contributed to your solo401k. You can also, wearing your S-corp CEO hat, choose to contribute to each employee’s 401k up to 25% of the w2 income they earned. This maxes out at $54,000, I think. Example: your side business earned $35,000, of which $20,000 was your before tax W2 income. You contribute $12,500 of this $20,000 to your solo401k, and the remaining $7,500 is subject to FICA, unemployement tax, income tax, etc. The s-corp business income of $35,000 has $20,000 salary expense plus an expense for employer FICA tax of 7.5% of $7,500 = $562. After all other business expenses are subtracted from the income, the profit for the s-corp business is, say, $6,000. You can choose to distribute that income to the business owner (yourself), and pay income tax on it, or you can contribute up to 25% of W2 income to your employee’s solo401k. This would be 25% of the $20,000 W2 income = $5000. Total contributions to your solo401k are $12,500 employee + $5000 employer = $17,500. You can then convert this $17,500 to your Roth IRA, paying income tax (say 25%) on the conversion amount, out of pocket. Roth IRA Total: contributed $5,500 + converted $17,500;= $23,000. Total this s-corp side business added to your taxable income for the year: $17500 converted solo 401k funds that became taxable income + $7500 W2 income + $1000 profit distribution to business owner Total = $26,000, taxed at your marginal tax rate. At 25%, this would be $6,500, which is probably slightly more than your taxable income from the s-corp, so you don’t actually get to keep any of the income from your s-corp side business in your pocket: it all went for expenses, taxes, and into your Roth IRA, to invest for your retirement. Even though, on paper, the s-corp business made a profit of $1000, and paid you for your time, in reality, what you got for your time was $17,500 into your Roth IRA. Result: you got to increase your Roth IRA funds by $23,000 instead of only $5,500 Fun fact: you can do this even if you are retired, doing something you enjoy, and keeping busy being your own boss. And a lot of the money you earn, (half in this example) you can invest tax free. When you need to, you can live off of the profits of those tax free investments, and pay zero taxes on that increased retirement income. For life. The good news is people are living longer. The bad news is very few people have enough retirement income to last out those longer lifespans and social security only provides for a poverty level standard of living. We have no choice but to provide for our own retirement. I really love the Roth IRA. Everyone should have one. We all need a tax free income stream 🙂

Additionally, you can draw on contributions anytime, tax and penalty free.

If you are looking to invest in real estate and take out a bank loan through your self-directed IRA account to invest in a property – wouldn’t you pay UDFI taxes (up to 39.6%) on any taxable income generated from that debt? To me it seems like HUGE taxes will be imposed on you if you borrow/leverage the banks money to fund your real estate investments. Correct me if i’m wrong. Although it seems like a Solo(401k) does not impose UDFI taxes. Also note that Solo(401k) accounts only allow you to borrow up to 50% of your total account balance (but no more than $50,000) to invest in assets. And you can’t have full time employees either, otherwise your ineligble to maintain your account. From what I can see, it seems like a Solo(401k) offers more benefits and superiority than other self directed accounts. Then again, these retirement accounts have there limits. But overall useful to some degree.

This was a really great post on ROTH IRA, Scott. Thanks for sharing the information so creatively. Perhaps you can talk about the 401k next?

Let’s back up a second here. (Hi, I am new to this site…hello everyone!) In order to qualify for the ROTH IRA your household MAGI has to be less than 199K (186K is full deduction with phase-outs till 199K). So if you make more than 199K, you’re out of luck. You can contribute “After-Tax” to a Traditional IRA, and then do a “Back-door Roth) Ref: https://www.rothira.com/what-is-a-backdoor-roth-ira To the best of my knowledge, you are allowed a tax-free exchange from your Traditional to the Roth on the amount invested, not the gains on the tax-free deposited money. Please let me know if I am mistaken. Thanks.

Nice article Scott, would like to see you write one that goes something like this: “What a google search of Roth IRA vs. Self Directed IRA doesn’t breakdown, here is what you need to know” or something like that.