Amanda Stanhaus

Tag: roth ira

Roth IRA

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If the Traditional IRA is the good girl of the IRA family, the Roth IRA is the rebel of the family.

Fun Fact: Senator William V. Roth Jr. of Delaware led the legislative charge to create the Roth IRA in 1997.

Refresher: With Traditional IRAs, the tax man only cares about the $$ at the end when it is withdrawn. The perk is that I’ll be a lower tax bracket when I’m old, compared to when I originally contributed the money as a young money-making machine.

With Roth IRAs, the taxman wants to get his cut at the beginning, because he doesn’t know what will happen with the $$ and when it will be used.

Essentially, contributions to a Roth IRA are taxed initially and then never again taxed. The contribution can be withdrawn at anytime, without a tax or penalty. The rules get trickier with withdrawing earnings from investments. Time to talk to a professional!

As I understand it, the perk with Roth IRAs is that the contribution is initially taxed, can be withdrawn at any time tax-free, and earning—once past a certain age (as of now, 59 1/2)—are not taxed.

When money is in a Traditional IRA or a Roth IRA, the earnings of the investments are not taxed.

So the question becomes when picking between Traditional IRAs and Roth IRAs, do you want to pay the taxman later at a lower tax bracket (Traditional) or pay the taxman now and have my *fingers-crossed* tremendous investment growth untaxed (Roth)?

Watch this Khan Academy video and understand the math to answer this question.

Now that the confusion is cleared up, let’s save for retirement! Let the countdown to Boca begin!

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(Originally published on Amanda Stanhaus’s financial literacy blog: XO, Bettie.)

Traditional IRA

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I’ve discussed individual retirement accounts (IRAs) before…remember they are a nice alternative to 401(k)s.

One of the main types of IRAs is the traditional kind. But being a newbie, I am not privy to knowing what is traditional.

It seems the tradition of Traditional IRAs is that the taxman favors these accountholders.  And when I say favors, I mean the taxman ignores the funds in the IRA account and doesn’t tax the $$ until withdrawn. The taxman is doing his favorites a favor, saving them $$.

A deposit into an IRA account is not taxed. Since we are under 50, we can contribute $5,500 each year (FYI this # sometimes changes) to our Traditional IRA.

Once the money is in the account, I will invest it as I see fit. There are no penalties for buying and selling investment vehicles within the account. Plus, the taxman does me another favor,capital gains are not taxed each year, only in the long run.

The taxman will catch up with me when I’m old (59 1/2 +) and withdraw the money. Ideally, my tax bracket when I’m old will be lower than it was at the prime of my life (AKA now). By asking a bit less of me, the taxman is rewarding me for saving for retirement.

But watch out, the taxman will punish me if I withdraw money from my Traditional IRA pre- 59 1/2. The punishment includes taxing the withdrawal and a penalty too. Ouch, that’s harsh.

Watch this Khan Academy video explaining Traditional IRAs and how accountholders save $$.

Psst…Roth IRAs are seemingly similar, yet the exact opposite of Traditional IRAs. I’ll explain later this week. Just focus on figuring out the tradition of Traditional IRAs.

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(Originally published on Amanda Stanhaus’s financial literacy blog: XO, Bettie.)