Tell me about IRAs

[jenkinswoody]

Okay financial wizards out there..........Im starting to do more and more outside of my regular workplace to earn money. The bad thing is that these small "projects" earn me enough non-taxed money to pain at tax time. I understand that in the long term that I need to sit down with a planner, etc. In the short term, I've been looking into IRAs to reduce my tax burden for 07. Am I correct that investing money into an IRA would probably help? It would have to be a traditional vs a Roth - right? Why do Roth then? Where are some good places to look into getting an IRA account set up? Do most institutions offer the same products for similar fees?

I understand that all situations are unique (and you may say why ask on a fb message board? I say why not?)- I'm just looking for a place to get started so I can begin to form a plan. Thanks in advance for your help.

 

[Gatorubet]

Okay financial wizards out there..........Im starting to do more and more outside of my regular workplace to earn money. The bad thing is that these small "projects" earn me enough non-taxed money to pain at tax time. I understand that in the long term that I need to sit down with a planner, etc. In the short term, I've been looking into IRAs to reduce my tax burden for 07. Am I correct that investing money into an IRA would probably help? It would have to be a traditional vs a Roth - right? Why do Roth then? Where are some good places to look into getting an IRA account set up? Do most institutions offer the same products for similar fees?

I understand that all situations are unique (and you may say why ask on a fb message board? I say why not?)- I'm just looking for a place to get started so I can begin to form a plan. Thanks in advance for your help.

"Come all you young rebels
And list' while I sing
For the love of one's country
Is a terrible thing.
It banishes fear
With the speed of a flame,
And makes us all part of
The Patriot Game."

 

[shetuck]

"Come all you young rebels
And list' while I sing
For the love of one's country
Is a terrible thing.
It banishes fear
With the speed of a flame,
And makes us all part of
The Patriot Game."

Days can be sunny
With never a sigh,
Don't need what money
Can buy.
I'm chipper al the day,
Happy with my lot.
How did I get that way?
Look at what I've got.
I got rhythm,
I got music,
I got my man --
Who could ask for anything more?

 

[Buckeye Buh Nim]

Okay financial wizards out there..........Im starting to do more and more outside of my regular workplace to earn money. The bad thing is that these small "projects" earn me enough non-taxed money to pain at tax time. I understand that in the long term that I need to sit down with a planner, etc. In the short term, I've been looking into IRAs to reduce my tax burden for 07. Am I correct that investing money into an IRA would probably help? It would have to be a traditional vs a Roth - right? Why do Roth then? Where are some good places to look into getting an IRA account set up? Do most institutions offer the same products for similar fees?

I understand that all situations are unique (and you may say why ask on a fb message board? I say why not?)- I'm just looking for a place to get started so I can begin to form a plan. Thanks in advance for your help.

The answer to your question is it depends. I apologize in advance for the length of this email.

There are three types of IRAs that you should consider.

1. Traditional IRA- This is a tax deferred account. You can set one up with just about any bank. You can use the funds to invest in whatever you want. There are costs (usually minor) in set up and maint. All funds that go into this account are tax deferred. That is you don't pay taxes on anything until you withdraw. There is a small cap that you cannot exceed annually ($4,500)

2. Roth IRA- This is not a tax deferred account. The mechanics (set up, maint, caps) are very similar to an IRA. The key advantadge of a Roth IRA is that growth is not taxed. When you take money out at retirement, none of it is taxed.


Illustration of difference between the two.

Let's say that you invest 10k in IRAs, and that your marginal tax rate is 30%(accounting for both fed and state)

If you used a traditional IRA your up front tax savings would be 3k. If you used a Roth, it would be 0.

At this point the advantads of the regular IRA = 3k.

Now lets say that 20 years down the line you retire and take the money out, and that in 20 years your 10k is worth 40k. (this assumes an avg. 7% rate of return)

If you used a traditional IRA for the 40k and your marginal tax rate is 30% your cost of taking the money is 12k

If you used a roth the cost is 0. Advantadge 12K to the roth and an overal 9k advantadge. (not accounting for the time value of money)


In general, I am a big proponent of the Roth vs the Regular IRA if you are younger. The opportunity for growth is the decision maker here.

Here is the third option for the Self Employed. A SEP IRA. This is like your very own self employed 401K plan with a key advantadge.

The IRA contribution limits are 4.5k per year. The SEP is limited to 20% of your self employment income up to 42k (or more if it went up this year)

If you want to squirrel a lot of money away, the SEP is the way to go.


PM me if you want more on self employment options long term.

 

[Go Bucks 0716]

Anyone have thoughts on what I should do? My employer offers a new Roth 401(k) option. Am I better off, 1) putting all my contributions in pre-tax to lower my taxable income, 2) put all my contributions in the Roth option, or 3) a mix of both?

 

[NJ-Buckeye]

Anyone have thoughts on what I should do? My employer offers a new Roth 401(k) option. Am I better off, 1) putting all my contributions in pre-tax to lower my taxable income, 2) put all my contributions in the Roth option, or 3) a mix of both?

How old are you?
If young, I'd probably recommend Roth.. if middle aged and beyond, traditional

The game is really... when will your money be taxed at the lowest rate... usually younger, you're into a lower tax bracket... thus, take the hit now and let the investment growth for the rest of your life be tax exempt ... If older, you defer the tax hit with the idea you'll withdraw it when you retire and thus in a lower tax bracket at that time...

Doing a mix isn't a bad idea... but under 30, I'd probably do the Roth.. then a blend... then eventually, traditional only

 

[Go Bucks 0716]

Thanks NJ-Buckeye. I am 32 and started traditional Roth IRAs after I graduated (not sure if this matters). Now I am trying to figure out what the difference in my paychecks will be: 10% contribution pre-tax versus 10% post tax.........

 

[ORD_Buckeye]

First thing, Jenkins is you need to sit down with an attorney/cpa and explore the option of forming an LLC--preferably a non-resident Nevada company. Have all of these outside payments made to jenkinswoody, ltd as say consulting payments rather than you personally. Then, take what you need out of the LLC as a salary, leaving the rest in. The tax benefits will be enormous.

I know that wasn't the main question, and you may be doing this already. Just in case, I'd thought I'd throw it out there.

 

[shetuck]

Thanks NJ-Buckeye. I am 32 and started traditional Roth IRAs after I graduated (not sure if this matters). Now I am trying to figure out what the difference in my paychecks will be: 10% contribution pre-tax versus 10% post tax.........

you should max out both because, like NJB said, the overall objective is to minimize your taxes - both in the short-term (401k contributions) and the long-term (roth). once you get in the habit/routine of taking that 20% haircut for yourself off-the-top (before you even see any of the money), your budget and expenditures will fall in line. the additional benefit, obviously, accrues because of the taxes you either didn't pay off the top (401k) or didn't pay on the backside (roth).

 

[Go Bucks 0716]

you should max out both because, like NJB said, the overall objective is to minimize your taxes - both in the short-term (401k contributions) and the long-term (roth). once you get in the habit/routine of taking that 20% haircut for yourself off-the-top (before you even see any of the money), your budget and expenditures will fall in line. the additional benefit, obviously, accrues because of the taxes you either didn't pay off the top (401k) or didn't pay on the backside (roth).

So shetuck you suggest I put 10% in my 401(k) pretax, 10% into my Roth 401(k) plan, continue to max my regular Roth IRA account contribution, and suck it up with a lower paycheck amount?

 

[shetuck]

So shetuck you suggest I put 10% in my 401(k) pretax, 10% into my Roth 401(k) plan, continue to max my regular Roth IRA account contribution, and suck it up with a lower paycheck amount?

disclaimer: i'm not a financial advisor...

anyway... what i was saying is do whatever it takes to minimize the taxes you're paying by fully exploiting the limits for contributions that uncle sam allows. what that means, for most americans, is a $4,000 roth contribution and $15,500 401k contribution (unless your employer sets a lower limit) for 2007.

remember, though, that entire 401k contribution amount doesn't come off the bottom-line of your paycheck. it comes off the top so you get two benefits right away: 1. you don't have to pay taxes on it, and 2. the fact that it gets taken off the top of your income, it's possible that it'll drop you down into a lower tax bracket. so, for example, just because you're skimming off let's say 15% of your pre-tax income towards roth and 401k, it doesn't mean you're giving up that same percentage on the bottom.

obviously the other benefit there, in addition to not having to pay taxes on that 401k and possibly paying less taxes on your income after the 401k contribution gets taken off the top, is that that money will grow at a rate that outpaces inflation in the long-run (hopefully). so you have those three plusses working in your favor... even if you put your money into bonds (or something else that is less aggressive), you'll be getting a very healthy net return that will likely exceed 10-15% in the long-run. few money managers on wall street can do better than that, on a straight-up investment, in the long-run than that.

so that's where that whole "pay yourself first" thing comes from. once you adjust your expenditures accordingly, you won't feel the pinch and 5-10 years down the road you'll be amazed at what you've built up with so little money up front.

just one more important point here (and this is the reason why you should really sit down with a financial planner/advisor or a CPA)... everything i'm saying here ignores the likelihood that you have other high-interest debt such as credit cards, car loans, privately-financed school loans, etc. depending on that (your "debt structure" picture - the rates, the terms, the duration, etc.) you may be better off putting some/all of the money you'd otherwise be putting towards your roth (not your 401k) toward paying off that high-interest debt.

in either case the numbers will tell you what to do in order to maximize your net return for retirement, and a professional can easily work those numbers up for you.

 

[Go Bucks 0716]

disclaimer: i'm not a financial advisor...

anyway... what i was saying is do whatever it takes to minimize the taxes you're paying by fully exploiting the limits for contributions that uncle sam allows. what that means, for most americans, is a $4,000 roth contribution and $15,500 401k contribution (unless your employer sets a lower limit) for 2007.

remember, though, that entire 401k contribution amount doesn't come off the bottom-line of your paycheck. it comes off the top so you get two benefits right away: 1. you don't have to pay taxes on it, and 2. the fact that it gets taken off the top of your income, it's possible that it'll drop you down into a lower tax bracket. so, for example, just because you're skimming off let's say 15% of your pre-tax income towards roth and 401k, it doesn't mean you're giving up that same percentage on the bottom.

obviously the other benefit there, in addition to not having to pay taxes on that 401k and possibly paying less taxes on your income after the 401k contribution gets taken off the top, is that that money will grow at a rate that outpaces inflation in the long-run (hopefully). so you have those three plusses working in your favor... even if you put your money into bonds (or something else that is less aggressive), you'll be getting a very healthy net return that will likely exceed 10-15% in the long-run. few money managers on wall street can do better than that, on a straight-up investment, in the long-run than that.

so that's where that whole "pay yourself first" thing comes from. once you adjust your expenditures accordingly, you won't feel the pinch and 5-10 years down the road you'll be amazed at what you've built up with so little money up front.

just one more important point here (and this is the reason why you should really sit down with a financial planner/advisor or a CPA)... everything i'm saying here ignores the likelihood that you have other high-interest debt such as credit cards, car loans, privately-financed school loans, etc. depending on that (your "debt structure" picture - the rates, the terms, the duration, etc.) you may be better off putting some/all of the money you'd otherwise be putting towards your roth (not your 401k) toward paying off that high-interest debt.

in either case the numbers will tell you what to do in order to maximize your net return for retirement, and a professional can easily work those numbers up for you.

Who needs a financial planner...I have Buckeye Planet Financial Planning Services, LLC!

Thanks for your thoughts. The only comment I have is that as I mentioned in an early post, my employer is offering a new Roth 401(k) option for 2008 (not just a traditional 401(k) plan and I am determining if this is a good fit for me. Again, thank you for your expertise!

 

[Thump]

I max out my Roth every year.

Although if you make over $75,000 or $80,000 a year, I believe you can't contribute to it.

 

[jenkinswoody]

Who needs a financial planner...I have Buckeye Planet Financial Planning Services, LLC!

No kidding. Thanks for the all the advice on here and from the PMs. A lot of useful information and some great ideas.

 

[Taosman]

My Roth IRA was way under performing, so I pulled it. And re-invested.
Just because it sounds like a good investment doesn't mean it will out perform other investments.
You may be better off investing in I-Shares or the like. Buyer be ware!
But, most people aren't as anal as I about investments.
Always read the paper work your sent!
Talk to your financial guy regularly.
It's your responsibility in the end to keep track of investments!