Thanks all for the advice. Going to put the $1400 to good use.

This message has been edited. Last edited by: kz1000,

Yes!

Definitely worth it.

quote:

Originally posted by kz1000:
Starting with $1400, adding $50/mo, is 12 years compounding going to make a difference?

That's $8600 in contributions over 12 years.

At a very conservative 6% rate of return, that IRA will be worth almost $13,000 in 12 years. Around $4300 in additional money.

At the long term historical stock market average rate of return of 12%, it'll be nearly $20,000. Over $11,000 in additional money.

quote:

Originally posted by RogueJSK:

quote:

Originally posted by kz1000:
Starting with $1400, adding $50/mo, is 12 years compounding going to make a difference?

That's $8600 in contributions over 12 years.

At a very conservative 6% rate of return, that IRA will be worth almost $13,000 in 12 years. Around $4300 in additional money.

At the historical stock market rate of 12%, it'll be nearly $20,000. Over $11,000 in additional money.

Sounds better than blowing it on overpriced ammo.

Just make sure you're using the money in that IRA to invest in quality diversified investments, like low cost growth stock mutual funds or index funds. (An IRA isn't an investment in and of itself... It's just an account that holds money that you can use to invest, like you could with a standard brokerage account. You still have to pick specific investments.)

And while you didn't ask for further financial advice... I'd say you have a very healthy emergency fund, so if I were in your shoes, I'd put your savings going forward towards paying off your car debt. Maybe even pay it off altogether with some of your $10k, depending on how much it is total. Once that's knocked out, you will have even lower bills each month, and can afford to save/invest even more.

In my opinion you have nothing to lose by putting money into a ROTH, as long as they don't change the rules.

The best part about a ROTH is you can use it like a savings account if nothing else. Because the money has already been taxed you can pull your contribution out at any time without penalty.

quote:

Originally posted by VANQUISH:
The best part about a ROTH is you can use it like a savings account if nothing else. Because the money has already been taxed you can pull your contribution out at any time without penalty.

Yep. Except unlike a savings account, you stand to lose some/all of it if your investments tank. So it's not a 100% replacement for having a separate savings account with your emergency fund. But you're correct that it doesn't lock down the money like a 401K or Traditional IRA, so the contributions within can still be accessed if needed, without having to pay a stiff fee in taxes and early withdrawal penalties.

You can open both ROTH and Traditional. Split max between them. And even have a Solo 401(k) if you are qualified.

Traditional and 401(k) contribution reduces taxable income [see Schedule 1, Lines 15 & 19]. Some people are eligible for a tax credit from either of the three retirement programs [see Schedule 3, Line 4 via Form 8880].

Investment? Industrials mutual fund. Electrical sector.

quote:

Originally posted by Woodman:
You can open both ROTH and Traditional.

You certainly can. But he should stick to a Roth.

Would you rather pay income taxes on $7200 or $20,000?

In fact, I'd even look at lowering some of the 401k contributions, provided it's not going to cost any company match, and instead move that over to max out the Roth IRA contributions. ($6000/year, or $7000/year if 50+) But you'll want to examine your tax situation to make sure that makes sense. For example, to ensure that the additional $6k/year in taxed contributions isn't going to bump you into a higher tax bracket.

Socking it into a retirement account makes complete sense, being 12 years away from your desired retirement date.

All things being equal, I really like Roth IRA's flexibility, and the fact that I've already paid all the tax on it. But how often are all things really perfectly equal? For example, the question of which would be the best IRA for you this year, partly depends on whether you might want that $1400 to do anything specific for this year's taxes.

For example, if putting that in a deductible tradtional IRA (and the resulting $1400 reduction in taxable income) would put you under some major thresshold and change your treatment (making more deductions allowable, changing your eligibility for stimulus, etc.) then you'd want to factor that in. You'd want to do your entire return both ways and see what the difference would be in the total tax bill, to be sure.

While everyone thinks this is a great idea. How about a different thought.

But first a question. Do you plan to rent for the rest of your life?

Being single, low debt load. How about finding a nice little place with a bit of elbow room and get into buying an affordable place to call your own.
In most scenario's financially it will pan out way better for you over time.
It diversify's your overall financial situation.

I understand that home ownership is not for everyone. It is just another option.

I could of never rent long term myself. But I get it why some do.

quote:

Originally posted by old rugged cross:
While everyone thinks this is a great idea. How about a different thought.

But first a question. Do you plan to rent for the rest of your life?

Being single, low debt load. How about finding a nice little place with a bit of elbow room and get into buying an affordable place to call your own.
In most scenario's financially it will pan out way better for you over time.
It diversify's your overall financial situation.

I understand that home ownership is not for everyone. It is just another option.

I could of never rent long term myself. But I get it why some do.

My rent is cheap for the area I live in. It includes heat water garbage & sewage. Plus if something breaks I call the landlord and it gets fixed. I have no desire to own a home.

With all the complicated rules involving traditional and Roth IRAs and the 10% penalty for early withdrawal, what is their benefit over simply opening a non-retirement investment account? It seems one way or another, you're going to pay taxes on the invested money. I'm lost when trying to make sense of the IRA rules. Any advice would be very appreciated.

Yes

I opened one at Vanguard and Wells Fargo recently, trying to max out 2020 contributions before the cutoff next month

quote:

Originally posted by L90814:
With all the complicated rules involving traditional and Roth IRAs and the 10% penalty for early withdrawal, what is their benefit over simply opening a non-retirement investment account? It seems one way or another, you're going to pay taxes on the invested money. I'm lost when trying to make sense of the IRA rules. Any advice would be very appreciated.

With a standard investment account, you're investing with post-tax money, so you've paid income taxes on that money before you invest it. You then also have to pay taxes on capital gains and returns on your investment.

With a traditional IRA, you're investing with pre-tax money. You don't pay income tax today on the money you contribute. But you later have to pay income taxes on the withdrawals.

With a Roth IRA, you're investing with post-tax money. So you've already paid income tax on that money. You then later don't have to pay any taxes on any money you withdraw, including on the gains/returns on your investment.

So the standard investing account is taxed on the front end and the back end. But the Traditional IRA lets you defer taxes until the back end. And the Roth IRA totally shields you from any back end taxes and lets your investment grow free from any later taxes.


The price you pay for the tax advantages of either type of IRA is that unlike a standard investment account, there's a limit to how much you can add to your IRAs each year ($6k/$7k, depending on your age), and there are some rules on when and what you can withdraw from these IRA accounts before retirement age. With a traditional IRA, you can withdraw without any penalties after 59.5 years of age, but any withdrawals before 59.5 have an additional tax penalty applied. So it's strongly discouraged. With a Roth IRA, you can likewise withdraw without any penalties after 59.5, but you can also withdraw some or all of your contributions (the money you put in, not any gains/returns) at any time before 59.5 without any penalty too. But withdrawing from a Roth beyond your contributions before 59.5 results in penalties just like a Traditional.

There are also a few exceptions allowed for these early withdrawal penalties, such as allowing you to withdraw from IRAs penalty-free to purchase a home, pay for major medical expenses, pay for your kid's college, etc.

And there are also a few other nuances, like the fact that Traditional IRAs require you to withdraw a percentage of the money every year starting at age 72, whereas Roth IRAs do not.

quote:

Originally posted by L90814:
With all the complicated rules involving traditional and Roth IRAs and the 10% penalty for early withdrawal, what is their benefit over simply opening a non-retirement investment account? It seems one way or another, you're going to pay taxes on the invested money. I'm lost when trying to make sense of the IRA rules. Any advice would be very appreciated.

The tax rules are complex, but the advantages of both IRAs over plain-vanilla accounts is that your income and recognized gains in plain-vanilla accounts are always taxable, whereas those gains and income aren't taxed when generated in IRA accounts if you follow the rules.

While you are right that you will be taxed on the invested money (Roth IRA: before you put it in; Traditional IRA: when you take it out), the attraction is that all the gains and income from those investments compounding over time, are tax free if you play by the rules.

Rogue and Joel,

Thank you very, very much! I didn’t realize the attraction of the IRAs is that the gains are not taxable. That really changes things for me. Thank you again!

quote:

Originally posted by L90814:
I didn’t realize the attraction of the IRAs is that the gains are not taxable.

With a Traditional IRA, the gains are taxed as income when you withdraw them. But you don't pay capital gains taxes.

With a Roth IRA, the gains are not taxed at all. (Not as capital gains nor as income.)

quote:

Originally posted by BigSwede:
I opened one at Vanguard and Wells Fargo recently, trying to max out 2020 contributions before the cutoff next month

Why two different places, and not just one?

The annual IRA contribution limit ($6k if under 50 or $7k if 50+) applies to all of your IRA accounts together. Not per account, or per type of IRA. That is, you could open two IRAs and deposit $3k in each for 2020. Or you could open one and deposit $6k in it. But you couldn't open two and deposit $6k in each for $12k total.

So even if you happened to want to open one Roth and one Traditional and split your $6k total 2020 contribution between the two for tax purposes, why not just open them both at the same place?

Just opened Roth accounts for wife and I with Fidelity. Wish I had done it 5 years ago!

Was able to kickstart with $14K in each (max for 2020/2021 contributions)

I know there are ups and downs, but in just 2 weeks already up over $600. Compare that to the $1.20/mo interest on that money the bank was paying (.1%) on simple savings account.

Opened a Fidelity investment account as well to put my savings to work, even if I have to pay tax on the earnings. Nothing crazy, just the same mutual funds as in the Roth accounts.

Between the three accounts, estimating a conservative 9% return, I’m looking at about a 30%+ gain on the total contributions (continuing to contribute annually to the Roth’s) over 4 years.