Everyone knows what a Roth IRA is, don’t they? No, even if you think you do, you probably don’t-so let’s have a little ROTH IRA school.
Roth IRA’s got their name from the late Senator Roth from Delaware.
The difference between Roth IRA’s and Traditional IRA’s:
- You pay taxes on the money as it is deposited into a Roth IRA-with a traditional IRA, you take an income tax deduction at your current federal rate on the deposit.
- The government taxes withdrawals, and also tells you when you start to take money out of the traditional IRA. Money taken out of a Roth is not taxed, and you can remove it when you want to-after 59 1/2. (With some restrictions.)
Similarities:
- They both allow investment in many different types of securities, stocks, bonds, and even real estate.
- They both are limited in the amount you can deposit, based on age and income requirements.
So how do you decide what retirement vehicle to use? 401-K, Roth, or traditional IRA….
If you company matches- deposit up to the matching amount in your 401-K. For most middle income folks, the next decision is the hardest-if you can afford to pay the taxes, I would deposit the next part of retirement savings in a Roth IRA. When that was maxed, I would save the rest in a traditional IRA. (Until you reach at least 15% of your income.)
So what does this mean in the real world-lets say you are a married nurse, and your spouse makes the same 40,000bucks/ year for a gross income of $80,000 for you as a couple. If your company matches 3% of your income in their 401-K then, put $1200 in that account-(3%). Now you can put up to $5,0000 in your Roth, if you are under 45-so let’s put your remaining $4800 in your Roth-which gets you to 15%. With the company match, that gives you $7,200 in your retirement savings for the year.
Now remember, you have to pay taxes on the $4,800 you put in your Roth, at whatever your income tax rate is, both state and local. However, when you remove that money, the balance and the growth from your investments can then be withdrawn tax free. WHEN YOU WANT TO-after retirement-not on the governments schedule, as a traditional IRA requires.
Now keep in mind, the example above includes estimates and generalizations, so to make your own decision you need to have your tax information handy. And if you really want to dig into this further for all the exceptions/explanations, then check out Wikipedia’s Roth IRA section here.
“Dr Dean, Now that my head is spinning, what do I do?” Well if you want to open a Roth IRA, then you need to talk to a discount, or full-service broker and open an account. The brokers usually require a minimum investment,. Many savers are successful having the money electronically deposited into the IRA, so they aren’t tempted to spend it.
So go get started on having a secure retirement. You want to be eating steak, or asparagus during your retirement, not canned soup. You want to travel the world, not your one bedroom apartment……
Let me know if you have questions. That is what I am here for.
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