Tax Free Wealth for a “Non-Working” Spouse

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Let’s say you are the breadwinner and your spouse is a stay home mom or dad.

Due to all the contributions to your retirement plan at work your side of the balance sheet is growing significantly more than your spouse’s. You are concerned about “equalization of estates”. (Equalization of estates is an old estate planning term when there was more concern with estate tax. The estate tax issue is a non-starter for most nowadays but there is something to be said for both spouses having ownership in something.)

What you should do is plop down $5,500 in January in your Spouse’s Roth IRA. Doesn’t matter if he or she isn’t “working” for an income. Only matters that you are.

Do this every year and you’ll be surprised at how quickly the account can grow. Have I mentioned that Roth’s grow TAX-FREE too???

How To Avoid 50% Tax Increase On IRA Distributions

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Roth TSP: Here’s Why You Should Do It

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If you are a Federal employee you NEED to be investing your contributions into the Roth TSP. Why?

Because you’re going to get a pension from the Feds, most likely. Plus Social Security. So, right there alone, you’re going to have sizable taxable income at retirement.

If you have a pension of say $3k a month, you’re already above the first threshold for taxation of your Social Security benefit. All you need in Social Security income is $16k for you to begin to have 85% of your benefits taxable.

Add required distributions and your’re triple taxed. RMDs, pension and Social Security. Oh, think it’s bad now. Wait to you or your spouse dies. It’s going to get much worse at that point.

So, pay a bit more tax now, take advantage of your deductions and exemptions if you have some. Your deferrals go into the Roth. The employer deferrals go to the Traditional side.

Invest your Roth side into GROWTH investments, like the C, I or S Funds, or the lifecycle funds. If you are a nervous investor, put the traditional side of the TSP into the G or F funds but take advantage of the tax free GROWTH potential of the Roth.

To take advantage of Tax Free Growth though, what do you need?

You got it, growth! Bonds don’t grow. Only stocks can grow, but yes indeed, it’s going to be a scary time on occasion. That’s the nature of the equity market. When you own something it’s more at risk. When you loan something it’s less so.

A bond is a loan. A stock is to own. You can lose all in a stock. Which is why you don’t put everything in one stock. You diversify. The C, S, I or Lifecyle funds do just that for you.
Take advantage of the fact they have WAY LOW fees! I’ve never seen fees as low as on the TSP. Use it to your advantage.