Supercharge your Roth IRA

  • by

When you start talking about Roth IRAs, people start salivatating.  The reason is earnings grow in a completely tax free environment within the Roth.  Because of the completely tax free treatment there are all sorts of “interesting” concepts being promoted by professional advisors on how to supercharge your Roth.

The challenge is these ideas create a kind of of “Gresham’s Law” in the tax planning realm, bad tax advice makes it harder to provide good tax advice. When people are told they can move all their profits to a completely tax exempt entity, they typically aren’t interested in such exciting topics as the home office deduction or the ability to write off their aspirin.

Compounding the challenge is the fact it normally takes the government a number of years to crack down on the too good to be true concepts.

Case in point is the government action against an attorney in St. Louis.  Back in July of 02 the IRS approved an investigation into the attorney.  The government was of the opinion that the attorney promoted concepts (schemes?) which involved taxpayers establishing Roth IRAs and through various means, moving hundreds of thousands, and in one case, millions of dollars into the Roths in a very short time period.  That is Supercharging!

Finally, on Friday September, 17th, 2010, 8 years after the initial investigation a court finally ordered the attorney to stop talking about the Roth concepts.  In fact the court order permanently banned the attorney from advising on the “establishment of any other Individual Retirement Account based arrangement.”

So what occurred over the 8 year gap?  A number of clients are in a world of hurt with the IRS.      One was hit with 285,000 in taxes.  Another was hit with $3 million in taxes.   Not sure if he was a client of the attorney or not, but a St. Louis radio personality was hit with a $500K fine just for trying to supercharge their Roth. . . the radio personality estimates the structure saved him about $1,000.00 in taxes.

I know its a jungle out there, I also know it is hard to determine who to trust.  If you are presented with some incredible sounding tax strategy, sure it might work, but the best way to protect yourself is to request a formal opinion from the IRS or at the very least have a disinterested 3rd party tax attorney give you a written legal opinion.  Yes, both of the above are going to cost you money, but the bills will probably be a lot less than the bill the IRS will present you if you did something wrong.