SavingAdvice is starting a new column that’s going to look at strange, offbeat ways to save and make money. Anything that’s a little odd, uncommon, or contrarian is fair game – as long as it’s legal.
You probably already know about Roth IRA’s. These are IRA’s that you fund with after tax dollars and then, when you retire, your withdrawals are tax-free. In contrast, regular IRA’s are funded with pre-tax/tax deductible dollars but you pay taxes on your withdrawals when you retire. The big draw of a Roth IRA is that you pay your taxes now, at what is likely to be a lower rate than will be in effect when you retire, and then during retirement you don’t have to worry about taxes. But what if you could figure out a way to avoid taxes on both ends? Is it possible to create a Roth IRA that carries no tax burden whatsoever?
I have a friend who is trying just such an experiment. He is funding a Roth IRA with money that is not subject to taxes. He’s putting in all his gifts, money found in the street, rebates, credit card cash back, and other money that isn’t taxable income into this Roth IRA. He’s funding the account with money on which no taxes have been taken out. When he retires, he will not pay taxes on his withdrawals, either,
making this account completely tax free. So far he’s managed to accumulate about $5,000 in this IRA, including the interest he’s earned from his investments. With about twenty years to go until retirement, he could have a nice chunk of money in this tax-avoided account.
Is such a thing ethical? You could argue it both ways. You could say that he is cheating the system by operating against the spirit of the Roth rules. However, I would say he is being smart. He is careful to make certain that the money he puts into this account is not subject to taxes, so he’s not breaking any laws to my knowledge. He’s putting his gifts and found extra money to good use. Rather than dropping this non-taxable money into a regular savings account where the earnings are subject to taxes, he’s using it to best advantage, protecting any earnings from future taxes.
Now, obviously my friend does not intend to retire on just this money alone. It would be nearly impossible to gather together enough tax-free money to provide a comfortable retirement. Unless you have a lot of people giving you big gifts, you need another plan. My friend has other retirement accounts that will provide the bulk of his income. This is merely his attempt to “stick it to the man” by avoiding taxes on his retirement income as much as possible. When he retires, he will have a least a small amount of money on which he has never and will never pay taxes.