I clearly remember the day I sat in my tax preparer’s office and heard about this new thing called a Roth IRA. After more than a decade of trying, Senator William Roth had finally succeeded in getting his amendment to 26 U.S.C. 408 included as part of the Taxpayer Relief Act of 1997 that the Republican-controlled Congress had convinced President Bill Clinton to sign. I didn’t understand much about Roth IRAs back then. Nobody did. But I did quickly grasp the concept of money growing tax free and then being able to take it out tax free as a qualified distribution at a far-later date. The idea of living on money “I earned” but that I did not have to pay taxes on really appealed to me.
I took advantage of the opportunity in the tax code at that time and converted my traditional IRA to a Roth IRA. Since then, I have seen the amazing power and benefit of tax-free wealth (TFW). Individuals have used Roth IRAs and Roth 401(k)s to grow and accumulate large sums of money. Then, at a time of their choosing and in a manner in which they are comfortable, they take a qualified distribution of those funds and use it however they wish without having to worry about paying taxes on it.
As I bring this series on my Roth Theorem to a close, I want you to envision what your retirement would be like if you could consistently take money out of an account, and once you got that money, you could do whatever you want with it knowing that you did not have to pay taxes on it, even though it’s reported on page 1 of your 1040 tax return, because it never makes it over into the tax calculation column. Imaging the feeling of having a consistent, monthly or quarterly income that you could give or spend as you wished without worrying about taxation.
If your mental picture excites you, take the time to go back and re-read this series of articles on the Roth Theorem. I hope they inspire you to fulfill your own Roth Theorem and use the resources available to build tax-free wealth for you and the next generation.