Friday, September 17, 2010

An Attractive Vehicle

A Roth IRA and Private Stock

Roth IRAs haven’t been embraced as fully as they should. They are an extremely attractive vehicle for many Americans. Part of the problem is that the reward comes after many years and patience doesn’t rank high among American virtues. Also, Roth conversions may require writing a check to the IRS sooner rather than later.

Recent tax law changes have made Roth’s particularly attractive for upper income households. Starting in 2010, the rules for establishing Roth conversions have been eliminated (limits for regular Roths are still in place). 

We have found Roth conversion accounts are a great place to hold private stock or other long dated assets that have a chance of significant appreciation.  The drawback of this option is that an investor loses the potential tax benefit of capital losses if the investment becomes worthless. If the investment appreciates significantly, though, the tax savings can be enormous. Using a Roth for this purpose also entails some attention to detail and additional paperwork. While the law permits this use, most custodians shy away from it because of the added complexity.  Some custodians do however specialize in non-standard assets and the effort to set this up can yield great returns.