It’s back to school season again and I can’t help but miss college. In my senior year, my professor for Career Planning had invited an Attorney to talk to the class about employment contracts. Although I don’t remember everything, one piece of the lecture that stuck out was not to worry about investing in 401k plan. “Don’t worry you’re still young, you don’t have to put aside any money right away. You should worry about this later on in life.”
I’m no financial adviser, however something about this advice felt off to me. I’ve always read that you should start investing in 401K plan as soon as you get a job that offers it. I’m sure many of you have heard of a 401k, but how many of you know about traditional IRAs and Roth IRAs? I’ve been told a Roth IRA is one of the greatest saving tools for a young investor, so I’m taking the right steps to open one. I wish I opened one years ago; better late than never. I have limited expertise on retirement accounts, therefore I’ll allow the experts to guide you in the right direction. 🙂
What Is the difference between a traditional IRA and a Roth IRA?
According to http://www.iravs401kcentral.com, “A Traditional IRA gives you a tax break up front. This comes in the form of a deduction on your income taxes (which is why it is often referred to as a tax-deferred IRA). Once invested, the principal and earnings grow tax-free. At retirement, you then pay income taxes on the money you withdraw.
Named after the senator that endorsed it, a Roth IRA is essentially the opposite of a Traditional IRA. You pay your taxes on the money up front when it is first invested. When you do that, you don’t get a tax deduction on your income taxes. Once invested, the principal and earnings grow tax-free. At retirement, you don’t pay anything on the money you withdraw.”
How does a Roth IRA work?
“As with any government gift, the Roth IRA comes with a few strings attached. First, you can contribute to a Roth only if you have earned income from a job. Say you’re in school, you’re not working and you have a little extra money left over from your student loan or your parents gave you money. You cannot put it in a Roth. Also, you cannot save more than you made. So if you worked a summer job and made only $3,000, the most you could contribute to a Roth would be $3,000.
It’s also possible to make too much. You can contribute the full $5,500 in 2013 as long as your income falls below $112,000 if you’re single, and $178,000 if you’re married filing a joint tax return. The contribution limit is then phased out incrementally if you make between $112,000 and $127,000 (single) or $178,000 and $188,000 (married-joint).” Kiplinger.com
Once I put money in my traditional IRA am I allowed to take it out?
“If you withdraw earnings from your traditional IRA before age 59 1/2, you’ll usually pay taxes on that money, along with a 10% penalty. But there’s an exception for first-time home buyers. If you’ve owned the Roth for at least five years, you may withdraw up to $10,000 in earnings for the purchase of a home without paying taxes or penalties. Plus, your contributions come out tax- and penalty-free even before you begin to tap into earnings.” However if you take money out of your Roth IRA there is no penalty. Kiplinger.com
“Will Investing in a Roth IRA protect my savings from being taxed?
“Investing in a Roth won’t reduce next year’s tax bill because Roths are funded with after-tax dollars. The payoff comes later. Once you’re 59 1/2 and have owned the Roth for at least five years, withdrawals are tax- and penalty-free. That’s not the case with traditional IRAs and 401(k) plans. Investing in those accounts will lower your tax bill in the year of the contribution, but future withdrawals will be taxed at ordinary income tax rates, which currently range from 10% to 39.6%.” Kiplinger.com
If you still have more questions feel free to check out Kiplinger.com or Google IRA, and you will be able to find a ton of information on each plan. Hope this post helps! As always be wise, stay humble and build.
Image : http://1.bp.blogspot.com/-_LcuiR-FkSo/UPA3gmYY_-I/AAAAAAAADQ0/hyNGaleKD7k/s320/roth_20ira.jpg