4. Roth Money
The fourth secret is Roth money. There are two types of IRAs. Most people have what is called a traditional IRA or a tax-deferred IRA. There are no capital gain taxes in an IRA. However, with a traditional IRA, you will eventually pay the taxman. You may not do it 72, when you are required to (known as an RMD, “Required Minimum Distribution”), or you may decide to voluntarily take your money out (“distribute” it) before 72, but you are going to pay the taxes.
You may not have to take all of it (an RMD is just a small percentage of your overall IRA taken out each year), but whatever you take out is going to be treated as income, and taxed. That’s why it’s called tax-deferred. There are significant advantages to deferring taxes, as will be explained ahead, but it’s not as good as tax-free.
Roth money is retirement money that you pay the taxes now, up front. Uncle Sam is willing to take your money now upfront in exchange for the opportunity of lifetime tax-free returns. You can set up a Roth IRA or Roth 401k, but the great idea of either is that, not only does your principle come back tax-free, but so does your principle! That’s a killer advantage in cryptocurrencies, some of which have jumped ten times… 100 times… 1,000 times or more in value in a short time.
As an example, I helped a client sign up for a self-directed IRA in April 2016. He took $92,000 and invested it into Ethereum. About 14 months later, in May 2016, he took out over a million dollars. It happens to be that he did it with a traditional IRA. He’s not paying the taxes now. He will if he wants to or if he reaches 72, but if he had a Roth IRA, that $900,000 plus profit would have been tax-free! Not merely taxed-deferred. The power of a Roth to build real wealth is something that most wealthy people are very aware of, and taking advantage of. There’s no reason the rest of us can’t begin with even a modest amount and build a nice tax-free nest egg (or empire) using the power of Roth money.