Self-directed Roths and a potential loophole for the IRS to look into.

[Baitball Blogger]

In red counties if there is one subject that comes up in conversations that I overhear that troubles me, it is talk about ways to make money, which may not all be on the up and up.

One time I was in a Starbucks and sat next to three well-dressed young ladies. They had planners open and two of them were talking to a third like she was a novice of some kind. Maybe an inductee to whatever product they were selling. They were very concerned about how she was getting along in her first weeks at the job. They talked about her clients and they came up with the term haircut. Oh, I thought. They are traveling beauticians. I tuned out the conversation as best as I could, but they were right next to me. One of them asked the inductee if she could take a heavier load. I heard resistance from the girl. Still feeling her way, I thought. The other woman told her that if she felt comfortable with her client she should encourage him to to get a haircut once a week. Okay, my back straightened. Something was off. Who needs a haircut once a week? But, I had blown my cover. They knew I was listening. The girls shut their books and the conversation changed to something that was obviously forced and awkward.

A more recent experience occurred a week ago. First a disclaimer: I know just surface information on financial packages. Absolutely don't know if any of the terms I'm using are valid. But, they were talking about self-directed Roths. I think they are tax deferments, producing profit which you don't have to declare until you cash it in. So, one guy was talking about how you're allowed to have one, and the second person asked if you can buy more than one. The first guy almost choked, and seemed to parse his words. "Your financial consultant is obligated to tell you that you are only allowed one; but, are you asking me if the IRS diligently audits to look if you have more? No. To my knowledge, they don't."

I'm thinking. Ohhh, umm, Whisper White Numbers!

[mahatmakanejeeves]

1. In a Roth IRA, you pay tax before the money goes in.

Whatever happens after that, you don't pay taxes when you cash in your investment.

Say you have a Roth IRA. You pay income tax on the money before it goes into the Roth. Your Roth includes a brokerage account. You buy AAPL at $30/share. It goes to $700/share. You decide to take some money off the table. You are not taxed on the $670/share gain, as you already did that years earlier.

Second case: You have a Roth IRA. You pay income tax on the money before it goes into the Roth. Your Roth includes a brokerage account. You buy Enron at $100/share. It goes to $0/share. You lose everything. Tough luck. No retirement for you. "Welcome to Walmart."

Full disclosure: I have a Roth IRA. I've made some stock picks that turned out more like Enron than Apple. Tough luck. Other choices were better.

[PoindexterOglethorpe]

2. You can have more than one Roth IRA.

You just can't (legally) contribute any more than what the IRS says you can contribute each year.

[FakeNoose]

3. Those ladies in Starbucks

...might have been professional call girls?

[miyazaki]

4. Maybe their pimp was named Roth.

[Ms. Toad]

5. It's not a loophole.

It is a well-regulated retirement account. Any trustee on a Rogh IRA is obligated to file annual paperwork reporting every Roth the IRS.

You can have as many Roth IRAs as you want, so long as your annual contribution is no more than what you are permitted in a year (which varies somewhat by age).

There are basically two formats for individual IRAs. You deduct teh contribution from the top of your income (regular IRA) before taxes, so it reduces your taxes now (but you pay taxes on both the income and later). Or - you pay taxes on the income now - and everything in the account is yours tax-free at retirement (the Roth). At one point I had between a half-dozen and a dozen IRAs, either Roth or regular. They are now consolidated into 2 accounts (one of each variety).

You might want to do a little basic research before you assume it is some sort of scam.

[Baitball Blogger]

6. I am going to ask someone who overheard the same conversation to make sure it was

a Roth they were talking about. It was a broad conversation.

Thank you for you wonderful post. Very informative.

[Baitball Blogger]

7. Got the info Ms. Toad.

It was a Roth. Is that the one where you max out at $6500 per person? The example that was laid out was that you could have three different employers over time, and max out with each of them - not to mention having the ability to purchase them on your own - self-generated. Yes, you will be over your approved limit IF you put in more than 6500 a year - BUT it will be up to the IRS to figure it out. AND the part that irked me was the advice that the guy said that to his knowledge, the IRS was not really actively pursuing these overreaches.

Just reporting what was said.