Is There a Better Alternative to a Roth IRA?
According to statistics published by the Investment Company Institute, 43.9 million American households own at least one type of Individual Retirement Account (IRA). Roth IRAs represent 19 percent of these. Here, we examine the benefits and limitations of Roth IRAs, the second-most popular retirement savings vehicle in America today.
Setting up a Roth IRA is a straightforward process.
First, investors must choose the type of IRA they wish to open (traditional or Roth) and which financial institution they wish to invest with. Retirement savers should also consider risk versus rewards, i.e. whether they are willing to chance their money in more precarious schemes in order to reap greater returns.
Once investors have determined their risk tolerance level, they can either choose their own investments, or select a portfolio tailored to their time horizon and risk level. It is then simply a case of completing the application documents and funding their account.
Some financial institutions allow retirement savers to set up automatic bank transfers, enabling investors to automate their monthly contributions.
Roth IRAs come with several significant limitations.
This type of IRA has an annual contribution limit of $6,000 for savers aged under 50. It is possible for savers aged 50 or over to invest catch-up contributions of an extra $1,000 per year, bringing their maximum annual investment to $7,000.
Under IRA withdrawal rules, if retirement savers withdraw funds before reaching the age of 59 1/2, they incur a 10 percent penalty fee, except in limited qualified circumstances. In addition, all investors must begin drawing prescribed minimum annual IRA distributions, which are currently 4 percent of the total account balance, after reaching the age of 70.
The fixed income limit means that not all investors are eligible for a Roth IRA. Retirement savers earning $137,000 or more per year are ineligible for this retirement savings vehicle. Maximum contributions are incrementally decreased for investors earning more than $122,000 per year.
For married couples, the phaseout starts for couples who make a combined income of $193,000 or more. Couples who earn a combined income of $203,000 or more are not able to contribute to a Roth IRA.
A Malta Pension Plan offers increased flexibility.
The US-Malta Income Tax Treaty creates favorable terms for US taxpayers investing in a Malta Pension Plan. Thanks to the many tax-saving advantages, Malta Pension Plans are becoming an increasingly popular alternative to traditional and Roth IRAs.
Whereas IRA contributions must be made in the form of cash, investments in Malta Pension Plans may be made in alternative assets, such as partnership or LLC interests, real estate, works of art, or foreign property. This creates significant opportunities for investors seeking a tax deferral because it enables them to avoid liquidating assets prior to investment, which could incur substantial capital gains tax liabilities.
In addition, under the US-Malta Income Tax Treaty, unlike with a traditional or Roth IRA, retirement savers may make unlimited contributions to a Malta Pension Plan. They can also start receiving distributions from the age of 50 without incurring early withdrawal fees.
From a federal income tax perspective, a Malta Pension Plan is generally classed as a foreign grantor trust, meaning that distributions do not trigger income tax.
With so many benefits, it is easy to see why many tax experts are recommending Malta Pension Plans as the new retirement savings vehicle of choice.
