At some point in your career your employer will ask whether you would like to make contributions to a retirement account. Initially, you think, “Sure. Where do I sign?” Yes, it can be that easy, but if you’re smart, you know there are choices.
You will see choices on the enrollment forms like “Roth IRA” or “Traditional IRA” followed by pages of words that all sound like a sales pitch. It’s at this point where you start to daydream and decide to keep your savings under your mattress. But assuming you can fight through the boredom of learning about retirement accounts, which investment vehicle really is best?
I hate saying this, but the truth is: It depends. It depends upon YOUR situation, not the type of investment vehicle. No single investment vehicle is right for everyone. There is no “one size fits all.” You’ve heard this before, but the best advice really is: Make an appointment with a qualified financial planner! Accept it. You’re not a financial expert. Few of us are and you know that your retirement is priority number one. Stop procrastinating and find a financial planner to discuss your needs, resources and goals. I did. I survived. I felt smarter afterwards too. No, it didn’t cost a fortune. In the end, it saved me money. Lots of it. But assuming you refuse, allow me to share what I learned about IRAs.
The basic differences between a Roth IRA and a Traditional IRA have to do with income limits for contributions, withdrawals and taxes (ugh). While I cannot go into detail here, I will highlight some key differences.
A Roth IRA has income limits for contributions whereas a Traditional IRA has none (no limits). The limits for maximum contribution change with tax law changes. For both 2013 and 2014, the maximum contribution for Roth IRAs and Traditional IRAs was $5,500 per year ($6,500 if you are 50 years old or older) or 100% of employment compensation, whichever amount is less. Contributions for both types of IRAs have to be made by April 15 the year after the tax year for which you are contributing. For example: all 2014 contributions must be made by April 15, 2015.
Although withdrawals in general are highly discouraged, both Roth IRAs and Traditional IRAs allow penalty-free withdrawals for certain situations. Some examples are: qualified higher education expenses, first time home purchases and certain major medical expenses. These certain situations may allow you to make a withdrawal before you are 59 ½ years old. Otherwise, those withdrawals are subject to a 10% penalty.
A Roth IRA has tax-free (growth on) earnings and tax-free withdrawals as long as the necessary requirements have been met. A Traditional IRA has tax-deferred (growth on) earnings and taxes are paid upon withdrawal. Do you think your personal tax rate will be higher or lower when you retire compared to where it is today? If higher, then you may consider the Roth IRA because your taxes on withdrawals would be at a higher rate – and all gains over time are tax-free. If lower, then you may consider the Traditional IRA because your taxes on withdrawals would be at a lower tax rate. Or you can open both types of accounts and hedge your bets!
Withdrawals, contributions, and taxes are just some of the differences between the types of IRAs. We haven’t even discussed 401(k)’s. So again, it is ALWAYS best to meet with a qualified financial plannerto ensure you are making the correct decisions for YOUR goals and YOUR income level. Most CPAs can make a recommendation for a qualified financial planner. Make the call.
On June 20, 2014, the Texas Supreme Court issued a ruling in the Ritchie v. Rupe case. In this case, the minority shareholder claimed shareholder oppression and breach of fiduciary duty. The trial court determined there was shareholder oppression and breach of fiduciary duty and ordered the corporation to buy-out Rupe’s shares for $7.3 million. The appellate court upheld the trial court’s decision regarding the finding of shareholder oppression, did not address the breach of fiduciary duty and sent the case back to the trial court to find a value of shares’ fair value including discounts for minority control and marketability.
The fact that the Supreme Court rejected the Fair Value of the shares and ordered the trial court to calculate the Fair Market Value of the shares presents a problem to minority shareholders. If the standard of value for shareholder oppression cases is now Fair Market Value, the value of a minority shareholder’s shares could be substantially impacted by discounts for Lack of Marketability and Lack of Control. The Texas Supreme Court did not agree with the trial court or the appellate court in its ruling. The Supreme Court ruled that minority shareholder oppression is not a common-law cause of action in Texas. Because the appellate court did not address the breach of fiduciary duty, the Supreme Court also did not address the breach. The case was remanded to the appellate court to address the breach of fiduciary duty.
What can minority shareholders do to protect themselves? Before investing in a company, make sure that you have a shareholders’ agreement in place and that you understand what is contained in that agreement. What are you agreeing to and what protections do you have? Read all of the corporate documents of the company and understand what is contained in them and how it impacts you (i.e., Bylaws, Operating Agreements, etc.). To read the full ruling and opinion, please see Texas Supreme Court Case: No. 11-0447, Ritchie v. Rupe 2014 Tex. LEXIS 500