Broker / Investor · Tewksbury, MA · Member since 2008 · 1k+ posts · 351 votes
Two questions for anyone willing to help a newbie.
1) what is the point of a roth or traditional IRA if you can only add 5000 to it each year. I am 30 so that means I have 29.5 years I can add to it. If my math is correct that means I will have $147,500.00 in there by the time I retire at 59.5. How am I suppose to survive the next 30 years on $147,500.00?
I currently have a "roll over IRA" which was at one point a 401(k) when I was an employee.
2) I would like to open up a stock trading account where I can buy dividend paying stocks with my roll over IRA. I would like to add the dividends to my current monthly income. Is this possible to do? Is it a horrible idea tax wise? Is the tax rate on dividends really high? I currently only make 70k a year as a sole proprietor with all my income in the form of commissions.
Investor · Mountaintop, PA · Member since 2013 · 110 posts · 57 votes
9y
I use Reality Income (Stock Symbol 'O') for reliable monthly income. It is a Real Esate Investment Trust, so it is required to pay dividends. It has paid 577 consecutive monthly dividends. Additionally, that dividend has increased in 77 consecutive quarters. As of the end of the year, the dividend yield was 4.2%. Over the last year has traded in the 50-70 dollar per share range. I would either dollar cost average in, or wait for a pull back in the price. I am not a broker, nor a financial advisor, so please consult with someone before making a large investment
Specialist · Dayton, OH · Member since 2014 · 352 posts · 265 votes
9y
There is one thing in this thread that I haven't seen yet so I'll way in. The point is not that you can only contribute a minimal amount into the account it's how fast it can grow and what you can do with it. You can use the money in that account to buy, hold and sell real estate. All of the money that is generated from that goes back into the account tax free and is not considered as a contribution. It doesn't even matter how much money you have in your account it can be done. For example:
If you want to wholesale a property use $500 out of your investment account to pay the earnest money fee. When you sell and collect say $5000 fee that all goes back into the account. You can rack up a lot of money very quickly that way, none of it is taxed or considered as contribution because it was generated as profits from a smart investment.
You can do the same thing with flips for even bigger numbers or rentals where the rent each month goes back to the account. You can have as many properties in the same account as you would like or if you are looking for more deductions simply create new accounts like college savings account for your kids, or health savings accounts, or whatever. There are so many different accounts that most people qualify for they usually can't max contribute to each of them each year. This can be done very easily through Equity Trust (where I have mine) or several other self directed custodian companies.
If you want learn more about it get your hands on a CD from Robyn Thompson called "what wealthy women do". It explains many of these ideas very well step by step and in simple terms. I got it for free but don't know how. I'm sure you could buy it direct from her or try google and see if there are any free versions or on youtube.
Financial Advisor · Atlanta, GA · Member since 2016 · 256 posts · 350 votes
9y
@Ozzy Smith good point about the compounding power and flexibility of IRAs, and I will add a clarification so people don't get themselves in trouble. The law is reasonably complicated about what you can and cannot do tax free inside a retirement account. You can invest tax free inside a retirement account. You cannot operate a trade or business tax free inside a retirement account. Whether an activity is an investment or a business is a factual determination beyond the scope of this discussion, but in most cases IRS will view wholesaling or flipping as a business, which would make all of the income from the activity taxable in the year it is earned. I am particularly concerned about the example of treating the $5,000 assignment fee in a wholesale deal as if it were the capital gain on a $500 investment. I'm not saying it would be impossible to set up deal that way, but I do know that the way most wholesalers do business would not qualify for this treatment.
Broker / Investor · Tewksbury, MA · Member since 2008 · 1k+ posts · 351 votes
9y
The Roth definitely sounds better. Great examples too. I wish I learned this stuff in school.
Thank you @Fred Boyd for your advice. Since I am a sole proprietor I pay the government 4 times a year. The only money I can deposit into a roth is after tax money. I am a bit confused as to what after tax money is in my situation. >_<
Broker / Investor · Tewksbury, MA · Member since 2008 · 1k+ posts · 351 votes
9y
@Dan Mahoney It must be nice to live off of dividends and interest income. Add some passive rental income to that monthly income you should be good later in life.
Since I get all my money pre tax as a sole proprietor, do you know when I am permitted to put $5500 into a roth each year?
Financial Advisor · Atlanta, GA · Member since 2016 · 256 posts · 350 votes
9y
@Rich Hupper I can only imagine because I still have to work for a living! I'm just pointing out that lots of people live off passive income, and not everyone who lives off passive income gets it from real estate. In fact most do not.
At the income level you stated, you are eligible to contribute to a Roth IRA. For example, up until April 15 of this year you can contribute $5,500 for 2016 plus you can contribute $5,500 for 2017 any time bewteen now and April 15, 2018. So you could theoretically put in $11,000 today if you happen to have it sitting around. If you did, you would next be eligible to contribute on January 1, 2018.
Roth IRAs are a great long term investment opportunity and could save you a boatload in future taxes. My only caution would be to make sure you have enough "emergency fund" money in the bank to get you through any of the challenges that might happen in life whether it be job loss, illness, family issues, etc. If you have to raid retirement accounts or resort to high-interest loans to pay for an emergency than this will negate the long term tax benefit of a retirement account. I recommend you set aside 3-6 months income in cash in a regular savings account and don't touch it until you have a genuine emergency.
Roth 401k/IRA - pay your taxes today, give up your money for decades.
deferred 401k/IRA - give up your money for decades, pay your taxes tomorrow.
@Rich Hupper you are very wise to be asking these questions. There is another thread in this forum asking a similar question. You may want to check it out.