Retiring with your Roth 401(k)

The most common of retirement plans require you to pay some sort of tax. In fact, this is so common that you may have thought it was just a hard fact of life that you had to deal with. The truth of the matter, however, is that some 401(k) plans are actually exempt from taxes on unrelated debt financed income, especially when it comes to property. If this exemption applies to you and you use it in conjunction with a Roth 401(k) plan, you can build up a hefty chunk of retirement funds for yourself.
Of course, you must first find out if you qualify for this exemption. This easiest way to determine your eligibility is to check yourself against the six restrictions set forth by the Internal Revenue Service (IRS). First of all, there is the fixed priced restriction. This rule states that the price of the acquisition or improvement has to be a fixed amount. Secondly, there is the participating loan restriction, which simply means that the payment of your debts cannot be dependent in any way upon money you make from the real estate property. The third restriction is equally straightforward; the qualified organization cannot be leased to the seller of the property, even after the acquisition. The fourth restriction, known as the disqualified person restriction, applies to pension plans and states that the real estate cannot be leased to or acquired from the disqualified persons referenced in 4975(e)(2). The seller financing rule says that the seller and other disqualified persons cannot finance the acquisition or the improvement of the property. The only exception to that rule is if the financing is for “commercially reasonable” terms.
The sixth and final rule is actually in itself a set of rules, known as the partnership restrictions. These rules state that any and all partnerships must meet certain requirements. The first is that all of the partners must be qualified organizations with no unrelated business income. The second states that all designations of tax items from the partnership to the organization have to be qualified allocations. They cannot change while the organization is a partner and must reach the “substantial economic effect” requirements. The final rule is that the partnership has to pass a test known as the Fractions Rule or Disproportionate Allocations rule.
This can be a lot to take in, so if you are ever unsure of whether or not your Roth IRA qualifies, you can speak to your lawyer or to your financial advisor. Be aware, however, that it is sometimes possible to have your exemption qualify even when you don’t meet one of the restrictions. This is why having knowledgeable professional help is so important. The pros know how to work the system legally and in a way that’s the most beneficial to you.
At the present time, you can actually defer up to $15,000 if you are under fifty or up to $20,000 if you are fifty or over into your plan. This is after taxes, but the gains that you make will always be tax free. So, it is in your best interest that you start taking advantage of these options as soon as possible. Speak to a lawyer today!

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