Maximizing Your IRA: An Interview with Terry Coxon

By Dennis Miller

As working folks get closer to hanging up their spurs, it is easy to become overwhelmed. When should you take Social Security? What type of insurance do you need? Should you buy an annuity? Do you need nursing home insurance? Should you roll over your 401(k) into an IRA? The list goes on and on.


Retirement planning requires many irreversible decisions. We each need to get it right; however, what is right for us is not always right for someone else. And, in addition to basic number crunching, we each make assumptions about life and politics—sometimes without even realizing it.

One of my most significant personal decisions pertained to a Roth IRA. Managing your traditional or Roth IRA is an ongoing process, no matter how near or far you are from retirement. And the options are worth investigating regardless of the size of your portfolio. Making sure your money lasts requires much more than picking the right stocks. Owning those stocks—or whatever else you invest in—inside the right type of account can grow your portfolio faster and save you thousands of dollars in taxes, if not more.

I’m not shy about seeking out experts in different investment niches. In this spirit, I reached out to Terry Coxon, a senior economist and editor at Casey Research and principal in Passport IRA.

In the spirit of full disclosure, I want to add that Terry has taken the time to mentor me on occasion, and he’s encouraged me to bring some of my vast life experience to our readers. As Terry has reminded me from time to time, math is only part of the retirement puzzle—the uncertainties inherent to politics and the law are also integral pieces.

Terry travels the world, and I was lucky to catch him upon his return from a recent trip to the Cook Islands.

Dennis Miller: Terry, welcome. Many investors use a traditional IRA or retired with a lump sum from their 401(k). Can you tell us how a Roth IRA differs from those plans?

Terry Coxon: With a traditional IRA, if your income isn’t too high, you get a tax deduction for your annual contribution. But later, the money you withdraw is taxable as ordinary income, except to the extent of any non-deductible contributions you made. In the meantime, earnings accumulate without current tax, which helps the money grow much faster.

A Roth IRA is different. With a Roth IRA, you don’t get a tax deduction for your contributions; but all the withdrawals you later make can be tax free. The only requirements for keeping withdrawals 100% tax free are: (a) the Roth IRA must be in at least its fifth calendar year of existence; and (b) you must have reached the calendar year in which you will be at least 59 1/2 years old. As with a traditional IRA, earnings accumulate and compound free of current tax – which is the special power source of any retirement plan.
Most 401(k) accounts are similar to a traditional IRA in that contributions are deductible; withdrawals are taxable; and while they stay inside the account, earnings go untaxed. However, there is a variant called a Roth 401(k) that is available to sole proprietors and to participants in employer plans whose rules provide for Roths. With a Roth 401(k), there is no deduction for money that goes in; the money is invested free of current tax; and everything can be tax-free when it comes out.

Fleeing the High Tax Zone

 

Dennis: When I retired, I had a 401(k), and then rolled it over to a traditional IRA. As I began to understand the Roth IRA, I realized there were real benefits to putting my nest egg in a Roth. I had a CPA tell me not to do it, and he ran the numbers to show me why.

In April 2012, you published an article, Doing the Roth Arithmetic, which painted a much different picture. Can you explain all the factors and why they are so important?

Terry: Staying with a traditional plan or going to a Roth is a big decision, and it’s not always an easy or simple one. The decision needs to be based on the individual’s current circumstances, which are a matter of fact, and also on his hard-to-know future circumstances. Make the right decision, and you can come out way ahead. Let’s look at two extreme situations—which is helpful because extreme situations point to clear answers.

Situation #1 is the individual who has all of his investments in an IRA or other retirement plan, who is not in the top tax bracket, who expects that his tax rate is more likely to decline than to rise, and who expects to consume all of his assets in his own lifetime. That individual has nothing to gain by going the Roth route and might be walking into a higher tax bill if he takes it. If that description fits you, sit tight with your traditional IRA or 401(k).

Situation #2 is the individual with substantial investments outside of retirement plans, who is in or near the top tax bracket and expects to stay there, and who has more than he needs to live on for the rest of his life. That individual should definitely convert to a Roth. He’ll have to pay a big tax bill now rather than later, but he’ll get the better of the bargain. He will be buying out his minority partner—the government—that in any case will, sooner or later, collect 40% or so of his traditional IRA in taxes.

The money for the tax bill can and should come out of the individual’s non-IRA assets—which live in a high tax zone. That way, the net effect of converting to a Roth is to move capital from the high-tax zone (direct personal ownership) to the no-tax zone (the Roth).

You can get an added bonus by converting to a Roth IRA, and it’s a lot more valuable than a second ShamWow. A Roth IRA is not subject to the minimum withdrawal requirements that kick in at age 70 1/2 for someone with a traditional IRA. Escaping the minimum withdrawal requirements lets money stay in the no-tax zone longer, especially if you won’t need to spend it all in your own lifetime.

Don’t ask why, but unlike a Roth IRA, a Roth 401(k) is subject to minimum withdrawal requirements. However, you can convert a Roth 401(k) to a Roth IRA without tax cost.

Dennis: I have a friend who has a traditional IRA and is of the age where he has to take a required minimum distribution and pay taxes on the income. He is quite a bit older than his wife and would prefer to leave the money in the sheltered account. With a Roth IRA, are there any required withdrawal times or amounts?

Terry: Your friend is a good candidate for a Roth conversion. If he converts, he can stop making the withdrawals he doesn’t want to make. And once the Roth reaches its fifth calendar year, withdrawals he or his wife take will be tax-free. And if his wife doesn’t use it up, the Roth will be available for tax-free withdrawals by their children or other heirs.

Self-Directed and Open Opportunity IRAs

 

Dennis: A lot of folks think you have to have an IRA with a bank or brokerage company. Can you explain the concept behind self-directed Roth IRAs?

Terry: Quite a few people will be knocked over by the news, but the rules written by Congress allow an IRA to invest in almost anything (there are only a few, easy-to-live-with limitations). But when you go to a bank, broker, mutual fund family, or insurance company, you find that you can only invest in… their stuff. So go elsewhere.

“Self-directed” IRAs are available with a number of IRA custodians that specialize in opening doors to the full world of investment possibilities for IRA participants. They don’t promote any particular investments or investment products. Instead, they earn fees by doing the paperwork for pulling whatever investments you want under the umbrella of your IRA. It could be an apartment house or a farm or gold coins or private loans or tax liens or almost anything else. Rather than buying CDs from a bank, your IRA can be the bank.
It can be even better. A few custodians administer a special type of self-directed IRA called an “Open Opportunity” IRA. The idea is as powerful as it is simple. The IRA owns just one thing—a limited liability company that you manage. Since you are the manager, you have hands-on control, and you are free to buy almost any investment you think is right. You don’t need to wait for anyone’s permission or stamp of approval. The hands on the steering wheel are yours.

Dennis: What tips do you have for folks who want to roll their 401(k) over to a Roth? When should they start? Should they pay the taxes from the proceeds or other funds?

Terry: As I said earlier, the decision to convert isn’t simple. The best single indication that it is the right move is that you are able to pay the tax out of non-retirement-plan assets.

Dennis: I recently wrote an article about encore careers. If a retiree decides on a second career, can he start making contributions to his Roth?

Terry: Yes, no, and yes.

The first yes is: you are as eligible to contribute from your earnings from your encore career as you were during your earlier careers.

The no is: if your income is too high, you are not eligible to contribute to a Roth IRA.

The second yes is: Anyone can convert a traditional IRA to a Roth IRA. There are no income limitations. So you can always get to a Roth by contributing to a traditional IRA and then converting. The required waiting period is less than 15 nanoseconds.

Internationalizing Your IRA

 

Dennis: I’ve recently spoken with Nick Giambruno, senior editor of International Man, about international diversification. Can you help us understand our international options if we have money in a Roth?

Terry: This is one more wonderful thing about the Open Opportunity IRA structure. The LLC that lives inside the IRA can invest anywhere in the world. Want a brokerage account in Singapore? The IRA’s LLC can be the account holder. Want a farm? The LLC can buy it in New Zealand. Want gold? The LLC can keep it in a safe deposit box in Austria. Want your IRA to go into the ski rental business? The IRA’s LLC can open a shop in Chile. And the IRA’s LLC can own—or be—a foreign LLC.

Dennis: I have a good portion of my Roth offshore, but it is not inside an LLC. It is invested in traditional investments—stocks, bonds, etc., except on a worldwide basis and in a variety of foreign currencies. Are there times when an LLC might not be necessary?

Terry: Whatever you want your IRA to buy and wherever you want the investments to reside, doing everything through your IRA’s wholly owned LLC is quicker, easier, and cheaper. With the LLC in place, you don’t need to keeping going back to the IRA custodian for every transaction. You avoid fees and you avoid delays. You are in the driver’s seat.

Using a foreign LLC to hold foreign investments may give you two additional advantages. First, some foreign institutions are more willing to deal with a non-US LLC owned by a US person than they are to deal directly with a US person. Second, if the US government ever imposes currency controls or capital controls or undertakes a program of forced gold sales, an IRA’s foreign LLC—depending on the specifics of the new rules—might go untouched.

Dennis: Terry, I want to thank you on behalf of our readers. You have opened up avenues for real tax savings and additional safety.

Terry: People work hard, and it is tough for some to save money. Understanding their Roth IRA options is a good way for people to keep it and make it last. Enjoyed it, Dennis—glad I could help.

Final Thoughts from Dennis

 

With a traditional IRA, you get a tax deduction when you make your contribution, and that money grows tax-free. When you take it back out, it is subject to taxation.

A Roth works in the opposite manner. There is no tax deduction when you make the contribution, but it also grows tax-free. The difference is that when you take it out, there is no tax as long as you follow a few basic rules, which Terry discussed.

I am a strong advocate of maximizing your 401(k), particularly if your employer matches all or part of your contributions. Save as much money as you possibly can during your working career. At the same time, there are many reasons why, as Terry suggested, you might want buy out your business partner (the government) so you can grow your nest egg tax-free and make tax-free withdrawals as you see fit.

As you’ve just read, as the editor of Miller's Money Forever, I often have the pleasure of interviewing my colleagues on a variety of topics to give our subscribers even greater exposure to different investing sectors. Recent interviews include:

• Energy Profits with Marin Katusa, senior economist and editor at Casey Research;
• The Ultimate Layer of Financial Protection with Nick Giambruno, editor of International Man;
• Juniors for Seniors with Louis James, globe-trotting senior editor of Casey Research's metals and mining publications; and
• Other esteemed colleagues.

Gain access to everything our portfolio has to offer, as well as access to these top minds through occasional interviews and input, with your risk free 90 day trial subscription to Miller's Money Forever.

The article Maximizing Your IRA: An Interview with Terry Coxon was originally published at Millers Money.

Make sure you don't miss "What 10-Baggers [and 100-baggers] Look Like"

A Monetary Master Explains Inflation

By Terry Coxon, Senior Economist

One of the best things about being a partner in a research firm employing about 40 analysts is that I have unfettered access to really smart people. While we have a great team with expertise across the spectrum, when it comes to monetary matters, my go to guy is Terry Coxon, a senior editor for our flagship publication, The Casey Report.


Terry cut his teeth working side by side for years with the late Harry Browne, the economist and prolific author of a number of groundbreaking books, including the 1970 classic, How You Can Profit from the Coming Devaluation. The timing of Harry's book should catch your eye, because his analysis that the dollar was headed for a big fall was spot on. Anyone paying attention made a lot of money.

As coeditors of Harry Browne's Special Reports, Terry and Harry made a formidable team for over 23 years. During this period, the two deeply researched the operating levers of the global economy, with a focus on the nature of money and impact of monetary policy. They also looked for ways to apply what they learned about macroeconomics into practical investment strategies, coauthoring Inflation-Proofing Your Investments. On his own, Terry wrote Keep What You Earn and Using Warrants.

Putting his expertise into action, Terry founded, and for 22 years served as the president of, the Permanent Portfolio Fund, one of the top performing funds in history.

Having Terry on the Casey Research team as a senior economist has been a huge personal boon. By the time you finish reading my brief interview with him, I suspect you'll understand why.......David Galland

David: Let's start by defining terms. What exactly is inflation? Most people view inflation as a noticeable increase in the prices of everyday things. How do you define inflation?

Terry: The original use of the term in financial matters referred to money, not to prices. It meant an increase in the total amount of money held by the public. Such a monetary inflation can be engineered by government printing or, under a gold standard, by increasing the official price of gold, as in 1933.

Monetary inflation can also be engineered by inventing a new category of legal tender, as in the case of the silver dollars minted in the 19^th century. And inflation of the money supply can happen without government tinkering, such as through the discovery and development of new gold deposits (as in the cases of the California and Klondike gold rushes), or through decisions by commercial banks to operate with thinner cash reserves in order to issue more deposits.

Today "inflation" usually refers to price inflation, which is a rise in the general level of consumer prices. That second use grew out of the public's experience of episodes of monetary inflation being followed by periods of rising prices.

Notice that with either use of the word, there is a little mushiness. During some periods, depending on what you include as "money," you may find either an increase or a decrease in the supply of the stuff. Suppose that the supply of hand-to-hand currency goes up while the quantity of bank deposits goes down by a larger amount. Is that monetary inflation or monetary deflation? And what exactly does an increase in the "general level of consumer prices" mean? There's more than one way to define an index of prices, and there are many ways to tinker with it.

David: In your view, have the US government and the Fed been following an inflationary policy?

Terry: Yes. Since the Lehman swoon in 2008, the M1 money supply (hand to hand currency plus checkable bank deposits) has increased by 72%, so the policy is clearly one of monetary inflation. And the Fed is avowedly committed to avoiding price deflation at all costs. They'll do whatever it takes to prevent price deflation, up to and including sacrificing virgins. That deflation phobia is necessarily a commitment to price inflation, and Mr. Bernanke has indicated that consumer prices rising at a rate of 2% per year would be ideal. So either way you define inflation, the Fed is all for it.

David: Based upon your studies, just how extreme or extraordinary has inflation been since the beginning of this financial crisis?

Terry: A 72% growth in the money supply over a period of five-plus years is a gigantic increase. Take a look at the chart. It shows the annual growth rate in M1 over all five year periods from 1959 to the present (dates on the chart indicate the end of a five-year period). As you can see, the only episode of monetary inflation that comes close to what is happening now is the money printing spree of the high price inflation 1970s and early 1980s.

David: How certain are you that the monetary inflation here in the US is going to ultimately manifest as price inflation?

Terry: You're asking for a lot when you say "certain", certainly more than you're going to get from me. But here's why price inflation seems inevitable. The Federal Reserve can easily create more money. There's no limit to that power, as they've already demonstrated. At any hint of deflation, they will produce more cash. They can never know how much new cash would be enough, but because they see deflation as a vastly more serious problem than price inflation, they always will err on the side of too much new money. That attitude is a guarantee of price inflation.

David: When price inflation begins, how significant do you think it will be? A little inflation? A lot? Hyperinflation?

Terry: Mr. Bernanke will get to visit his ideal world of 2% price inflation, but it will only be a whistle stop. The price inflation that lies ahead will be at least as bad as what happened in the 1970s episode, when the annual inflation rate approached 15%. The money that's already been printed so far may be enough to produce such a 1970s size problem. And more new dollars are coming, because the Fed won't stop printing until price inflation becomes obvious.

Making matters worse is that the devices for paring down the amount of cash that you need for the sake of convenience, such as credit cards, ATMs, and online banks, are now far more widely available and cheaper to use than they were in the 1970s. When price inflation becomes noticeable, people will turn more and more to those devices to reduce their holdings of value leaking cash. That drop in the demand for money will reinforce the price inflation that originated in the Federal Reserve's increase in the supply of money.

David: I know it can only be a wild guess, but based on your observations, how long do you think it will take for price inflation to become obvious?

Terry: Within twelve months after you hear that the economy has at last fully recovered from the recession.

David: What is the biggest flaw with the deflation argument?

Terry: Whatever process someone might have in mind as a driver of price deflation, no matter how powerful that process might be, the Federal Reserve has the power and the will to carpet bomb it with more new money. What the deflationists overlook is that if deflation ever seems to be winning, the Fed will simply extend the game for as many innings as it takes for inflation to win. In a fiat-money system, inflation always gets another chance.

David: What would make you change your view that price inflation is inevitable?

Terry: Brain surgery.

A time tested way of protecting wealth is to move it out of one's native currency and into a location that's more economically sound. But is that even possible for US citizens these days? If so, what are the best places to explore for moving wealth offshore, and how is that best accomplished? Should you and your family follow your money and expatriate your home country?

All these questions, and many more, are answered in a new, free report by legendary speculator Doug Casey. Titled Getting Out of Dodge, it offers specific, actionable advice for moving your wealth and your life safely offshore. Get started while you still can: governments around the world are beginning to tighten their nooses.


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