One of the greatest gifts the IRS gives us is the IRA.  It allows us to dictate how and when we pay taxes on our investments.  I don’t want to write about which is better, a Roth or a Traditional (I use both Roth and Traditional by the way) as they both have their place.  What I do want to talk about are some unique ways to use the amazing tool that you might not see elsewhere.

I want to start with the concept that I’ve based my entire career upon.  That concept is the “Simulated Index Concept”.  To oversimplify it, Let’s say you have $100,000 that you want to put to work in the stock market.  Let’s also say that most of the money is outside of an IRA, and some is inside of it.  Based on the “Simulated index Concept”, you could use some of the money (the money in the IRA) to invest in bullish option strategies on the S&P 500 (or whatever index you choose) and the rest of the “non-IRA money” can be put into something less volatile.  What index to use and what “less volatile” investment to use are topics for another day.  The point is that if you use the options properly, you can create a return similar to the index, with only a portion of the money at risk.  By using the IRA as the risk portion, you are put into a favorable position.  Should the market increase (assuming you are setting up the options well), most of your overall gains will be in the IRA.  Thus, you will have the best tax benefit as the money will not be taxable until age 59 ½ (never taxed if it is a Roth).

The next strategy I’d like to discuss is a bit more complex.  It involves moving money into an IRA beyond the contribution limits.  Let’s say that you already have a similar amount of money inside and outside of the IRA.  You decide you want more money into the Ira, but have already maxed out your contributions.  If you are bullish, you could put in a lot of long positions within the IRA, and put in a bunch of short positions outside the IRA.  That way, if we have a major market rally, you will lose money outside of the IRA, but make money inside of it.  By doing that, you are essentially moving more money into your IRA.  If you have the opposite market sentiment, you could go the other way with the bullish and bearish positions.  The risk is if the market goes the way you don’t want it to, then you will lose money in your IRA. 

The final strategy I’d like to discuss for today involves distributions.  When taking distributions (weather for a Roth or traditional), make sure you have a specific plan for the money you want to take out of the IRA.  For example, if you have a deductible expense, then you may want to use the money from your traditional IRA.  That way, you got to deduct the money going into the IRA, as well as coming out of it.  Should the expense be for something that is not going to be a deduction, then you may want to use your Roth most of the time.  That way, you don’t have to pay taxes on the distribution either way.

As with anything, consult with a financial advisor and a tax consultant before doing any of these strategies.

If you have any questions or want to learn more about what I do as a financial advisor, send me an email at mtosaw@stcharleswealth.com.