Why Do You Need An IRA?
I found this really great article on the web written by a colleague of mine. I thought I would share it with you all. Enjoy.
Key points when opening up a ROTH
Individuals earning less than $95,000 can make a full $3,000 contribution. A partial contribution can be made for those with incomes between $95,000 and $110,000. Any earnings over $110,00 you are ineligible to contribute, but (congratulation on making six figures).
Married couples earning less than $150,000 can make a full $3,000 contribution for each spouse, as long as either or both spouses have $4,000 in earned income.
If you are age 50 or older, you can contribute an additional $500 as a catch-up contribution.
Four reasons a Roth rocks:
You can stockpile savings that are tax-free when you start making withdrawals in retirement.
You can withdraw your contributions at any time, without paying taxes or a penalty. That’s because you don’t get an up-front tax deduction for your contributions, as you do with a traditional IRA.
You get generous escape hatches that let you withdraw your earnings to pay for major expenses, such as a first home or college. After your account has been open for at least five years, you can withdraw $10,000 in earnings tax- and penalty-free to buy a first home. And you can withdraw earnings penalty-free to pay for college expenses.
You get estate-planning advantages. Unlike traditional IRAs, Roths don’t require distributions. And your heirs can inherit a Roth IRA tax-free.
Can you have your cake and eat it too?
If you meet the eligibility requirements for both Traditional and Roth IRAs and you want to open both, you may. However, your total contribution between both accounts can only be $4,000, unless you are age 50 or older, then it is $4,500.
| Regularly-Taxed Account | Deductible IRA | Roth IRA |
| You pay income tax, and then make your contribution with post-tax dollars. Your principal may be subject to taxes on dividends and capital gains as it grows. You pay capital gains tax on your gain at withdrawal |
You get a tax deduction, essentially letting you deposit pre-tax dollarsYour principal grows tax-free. | You pay income tax, and then make your contribution with post-tax dollars. Your principal grows tax-free. You pay no further taxes on withdrawal. You pay income tax on the entire amount of your withdrawal |
So we have looked at both Traditional & ROTH IRAs - what else do expect to have when you retire? Social Security? Your company’s traditional pension plan? You shout out. Hmmmmm, great choices if it was the year 1935 when Social Security was first introduce, it was another way for the government to collect additional monies from hard-working individuals to pay for wars. It is the belief of many, that Social Security was never meant to be collected by individuals, ever.
At the time of its introduction the average age for retirement was 65 however, no one ever, hardly ever, lived to that age and was able to collect. Most hard working people never lived passed the age of 58 for men and 62 for women. Have you ever stopped to wonder why the age of retirement is a moving target? It is so you continue working to pay for those retiring now, especially women, who are living longer.
Then there is your company’s traditional pension plan - a historic idea - just that mention is all that it requires because it no longer exist, i.e. unless your name is Bob Nardelli, CEO of Home Depot’s, whose golden parachutes was a cool $210 million package. Or Bruce Karatz, CEO of KB Home, whose golden parachutes was a cool $175 million package.
I hate to be the typhoid carrier at your retirement party, but Social Security will probably be dried up and dead by the time you and I finally catch up to the moving target known as the ‘retirement age’.
To enjoy the retirement you are so diligently working towards, you need to take matters in to your own hands
Fund you employer sponsored 401K to the max, to be eligible for matching funds open a ROTH IRA (more flexible) and provides better after tax income
“After-tax” is the key to retiring with the majority, to all of your money, in your pocket.
You have choices:-
1. Would you like to take a tax deduction now and defer the taxes on your interest and capital gains, or
2. to never pay taxes on your investments?
It’s entirely up to you — and your adjusted growth income (AGI), which determines whether you’re eligible for a deductible traditional IRA (which means lower taxes now and until you retire) or a Roth IRA (which means no deduction, but you never pay taxes on the investments in the account).
To see how powerful this tax savings can be, consider the following example. According to the Quicken IRA Analyzer a 40-year-old who contributes $3,000 a year to an investment account and earns 8% annually on his investments would receive the following after-tax income upon retiring at age 67:
• Taxable account: $15,335
• Traditional IRA: $20,039
• Roth IRA: $24,438
Remember the retirement you want to live depends entirely on you and how you fund it. Less gratification now equally a more relaxed and fun retirement with golf/cruises/spending the day at the pool in the back of the house that is fully paid for as opposed to you asking the following questions because you dropped the ball…
- ‘Would you like to Supersize that?’ or
- ‘Would you like fries with your order?’
This is your retirement don’t blow it.
For more formation on Traditional IRAs and ROTH IRAs check out these sites:
Roth IRA vs. Regular IRA Website
Check out her site for other money saving ideas at:
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