retirement

[wildbil]

I have a question for anyone who knows about finances.


I'm looking at getting a personal retirement for me and my wife, but I don't understand something. IRAs, roth IRAs they take money from you when you withdrawl or put into them. Is this money pretax from your paycheck? what is the advantage if you can't withdraw whenever you want it? why put my money into a savings that has little "penalties" for withdrawing?

Hopefully somebody can help me understand.

Wildbil

[MountainDon]

http://www.money-zine.com/Financial-Planning/Retirement/Roth-IRA-Rules/

That's a Roth IRA specific article. There are links to others within.

[Bill Houghton]

I have a question for anyone who knows about finances.


I'm looking at getting a personal retirement for me and my wife, but I don't understand something. IRAs, roth IRAs they take money from you when you withdrawl or put into them. Is this money pretax from your paycheck? what is the advantage if you can't withdraw whenever you want it? why put my money into a savings that has little "penalties" for withdrawing?

Hopefully somebody can help me understand.

Wildbil

Wildbil,

the only thing I know is this; I am self employed.  If I take $100 from my business acount to use for living expenses, I pay a pretty hefty income tax, say $30.  If, on the other hand I take that same $100 and put it in my retirement account, uncle sam allows me to put the whole $100 in there, including their $30 tax money.  The idea is that the $100 will grow more over the next 20 or so years, so that when I hit retirement age, I will have more to draw out overall.  I will still have to pay tax on the money when I take out (because sam's money is in there too), but the theory is I will have more to take out because over the years the $100 will grow more than if I had to pay the $30 up front.  Supposedly it is a win/win.  We end up with more for us in retirement, and uncle sam gets more in taxes because we have more overall to draw out.  Does that make sense?    Also, the theory is that when we are retirement age our tax bracket will be lower, so we will have to pay uncle sam less when we do draw it out. 

My 2 cents.

Bill in the U.P.

[diyfrank]

roth IRAs they take money from you when you withdrawl or put into them. Is this money pretax from your paycheck? what is the advantage if you can't withdraw whenever you want it? why put my money into a savings that has little "penalties" for withdrawing?



Wildbil

Yes they take out the tax at the time its deducted from your pay. You pay no tax later when you retire. The Roth advantage over a savings account is the money you put in it every year is tax deductible.

If you made 70,000 and put 10,000 into your Roth, The income tax at the end of the year is for 60,000

If thats not right, then I'm lost to. 

[MountainDon]

Roth IRA contributions are never tax deductible.  However, a non-deductible contribution to a Roth IRA is not subject to federal tax when withdrawn.  This means you can realize a capital gain or have interest income and not have to pay any taxes on these gains.


For some taxpayers, a traditional IRA allows you to take an immediate deduction from your taxes as discussed above.  This provides the taxpayer with immediate tax relief.  However, when making a withdrawal from a traditional IRA, all of the money that was never subject to federal taxes becomes taxable at withdrawal.


There are penalties for some early withdrawals from IRA's, as an incentive for you to leave the money sit there. So as far as saving money goes, one should have a retirement IRA account(s) AND one should have an emergency cash fund. And then, as far as I'm concerned, you should also have a third category of savings, short term savings. This is the one you put money into that is being saved for the new laundry machine, the computer you want, the new rug or tile floor, the Mexican vacation, etc. And then you can have a fourth category for long term savings, for the money that wouldn't be eligible for placing in an IRA.

You would use the emergency cash fund for those unexpected expenses, car and home repairs for example. The emergency cash money should be of sufficient size to cover at least three months of living expenses in case one finds themselves out of a job or injured away from work making it impossible to work. The emergency fund is never tapped for things you want; it is only for things are are needed.

[Bill Houghton]

What an excellent forum this is.  To me it is just amazing the diversity of  information available here.   

You folks rock!

Merry Christmas and have a Fantastic New Year

From Bill in the U.P.