Comments on: 5 Reasons why Everyone Needs a Traditional IRA http://20somethingfinance.com/traditional-ira-benefits/ Personal Finance Blog for Young Professionals Thu, 24 May 2012 00:59:02 +0000 hourly 1 http://wordpress.org/?v=3.3.2 By: G.E. Miller http://20somethingfinance.com/traditional-ira-benefits/comment-page-1/#comment-35436 G.E. Miller Thu, 12 Jan 2012 13:15:18 +0000 http://20somethingfinance.com/?p=508#comment-35436 Yes, those over 50 get an additional $1K catch-up contribution. Yes, those over 50 get an additional $1K catch-up contribution.

]]> By: Linda Horsch http://20somethingfinance.com/traditional-ira-benefits/comment-page-1/#comment-35258 Linda Horsch Thu, 12 Jan 2012 03:06:01 +0000 http://20somethingfinance.com/?p=508#comment-35258 I read that the max contribution for an Traditional Ira for married couples not in any other plan is $5,000 each. A few years ago I thought that if you are over 60 you could contribute $6,000.00 each. Is this still available for over 60 ag egroup. I am 62 and my husband is 66 years of age how much can we contribute for 2011 and 2012. Thank you Linda I read that the max contribution for an Traditional Ira for married couples not in any other plan is $5,000 each. A few years ago I thought that if you are over 60 you could contribute $6,000.00 each. Is this still available for over 60 ag egroup. I am 62 and my husband is 66 years of age how much can we contribute for 2011 and 2012. Thank you Linda

]]> By: ihatefinances http://20somethingfinance.com/traditional-ira-benefits/comment-page-1/#comment-17969 ihatefinances Wed, 12 Jan 2011 07:56:32 +0000 http://20somethingfinance.com/?p=508#comment-17969 @ Jessie above - good point about the tax tiers above, the savings aspect of reducing your taxable income is not that great. however, i still find the ability to pay into the previous years contribution limit very usefully flexible. if you're not maxing out your contribution every year you could, for example, calculate your tax return, then deposit that amount towards your previous years contribution. concerning the taxing of a traditional upon retirement: in your example, you mentioned that the 100,000 would be taxed at 35%, but you're really only paying taxes on the portion that you withdraw each calendar year. using the same logic as your tiered rate explanation, it is possible that you could be in a very low tax bracket if you have paid off your home (are not paying rent/mortgage) and are basically withdrawing minimal living expenses. that said, i chose the roth path over the traditional anyway, but if anything it may save me hundreds of dollars per year, not the thousands the example implied. @ Jessie above – good point about the tax tiers above, the savings aspect of reducing your taxable income is not that great. however, i still find the ability to pay into the previous years contribution limit very usefully flexible. if you’re not maxing out your contribution every year you could, for example, calculate your tax return, then deposit that amount towards your previous years contribution.

concerning the taxing of a traditional upon retirement: in your example, you mentioned that the 100,000 would be taxed at 35%, but you’re really only paying taxes on the portion that you withdraw each calendar year. using the same logic as your tiered rate explanation, it is possible that you could be in a very low tax bracket if you have paid off your home (are not paying rent/mortgage) and are basically withdrawing minimal living expenses.

that said, i chose the roth path over the traditional anyway, but if anything it may save me hundreds of dollars per year, not the thousands the example implied.

]]> By: Settle Tax Debt http://20somethingfinance.com/traditional-ira-benefits/comment-page-1/#comment-10375 Settle Tax Debt Thu, 15 Apr 2010 21:10:22 +0000 http://20somethingfinance.com/?p=508#comment-10375 Roth IRAs are under-utilized. So many people focus on the tax deductibility of traditional IRAs that they fail to pick up on the tax advantages of Roths. Roth IRAs are under-utilized. So many people focus on the tax deductibility of traditional IRAs that they fail to pick up on the tax advantages of Roths.

]]> By: alperen http://20somethingfinance.com/traditional-ira-benefits/comment-page-1/#comment-5839 alperen Mon, 07 Dec 2009 14:47:29 +0000 http://20somethingfinance.com/?p=508#comment-5839 Thanks for the explanation. Thanks for the explanation.

]]> By: Debt Cancellation http://20somethingfinance.com/traditional-ira-benefits/comment-page-1/#comment-5701 Debt Cancellation Mon, 30 Nov 2009 21:11:40 +0000 http://20somethingfinance.com/?p=508#comment-5701 I agree that everybody should have an IRA. The problem is that many folks just cannot afford to contribute. I agree that Roths can work well for some people, but you need to have the money to begin with. I agree that everybody should have an IRA. The problem is that many folks just cannot afford to contribute. I agree that Roths can work well for some people, but you need to have the money to begin with.

]]> By: Britt (Your Roth IRA) http://20somethingfinance.com/traditional-ira-benefits/comment-page-1/#comment-3749 Britt (Your Roth IRA) Thu, 21 May 2009 17:38:21 +0000 http://20somethingfinance.com/?p=508#comment-3749 With my personal finances, I find a Roth IRA to be a better. Since the contribution limits are the same for both the Traditional IRA and the Roth IRA, if you’re able to contribute to both, the tax deductibility of a Traditional IRA actually works against it. Why? Because when I go to withdraw my money from a Roth, I don’t have to pay taxes. But with a Traditional IRA, I will have to pay taxes upon withdrawal. So even though I laid out more cash initially to fully fund my Roth IRA, I end up with more in retirement because the funds in my account will be free and clear of taxes. That said, once I pass the phase-out income limit for contributing to a Roth, a Traditional IRA will be preferable over a regular brokerage account… With my personal finances, I find a Roth IRA to be a better.

Since the contribution limits are the same for both the Traditional IRA and the Roth IRA, if you’re able to contribute to both, the tax deductibility of a Traditional IRA actually works against it.

Why?

Because when I go to withdraw my money from a Roth, I don’t have to pay taxes. But with a Traditional IRA, I will have to pay taxes upon withdrawal.

So even though I laid out more cash initially to fully fund my Roth IRA, I end up with more in retirement because the funds in my account will be free and clear of taxes.

That said, once I pass the phase-out income limit for contributing to a Roth, a Traditional IRA will be preferable over a regular brokerage account…

]]> By: Jessie http://20somethingfinance.com/traditional-ira-benefits/comment-page-1/#comment-3561 Jessie Thu, 30 Apr 2009 04:37:03 +0000 http://20somethingfinance.com/?p=508#comment-3561 Ryan is right on! There is really almost no reason why a 20-something would want a Traditional over a ROTH. The big reason is that all 20-somethings will need to wait 30-something years before they are eligible to start taking out substantial sums of their retirement. That means the money is going to have a LONG time to grow. For instance 20k invested for 33 years at 5% annual growth comes out to around 100k. If that money were in a traditional IRA you would pay ordinary income tax on the full 100k!!! Ouch! Right now that would mean losing about $35,000 in taxes. If you had put that 20k in a Roth... and paid the 4k in taxes now. Then the money grows to 100k. When you retire you get to take the full 100k whenever you want with no tax worries. That's a huge, huge, huge difference now. And as for this quick last minute traditional IRA contribution to lower your tax bracket and save money... it's basically crap. Here's a scenario to illustrate this point: This article makes it sound like if you made 35k you would pay ($35,000 x 0.25 = $8,750) in taxes. Then they would have you think that if you pay 3k into your traditional IRA you would drop your income to 32k for the year, which puts you in the 15% tax bracket. So you would pay ($32,000 x 0.15 = $4,800) in taxes. So by contributing 3k to a traditional IRA you were able to lower your tax bracket and save ($8,750 - $4,800 = $3,950) in taxes. If this actually is how taxes were calculated it would be great and this would work... But our taxes are calculated on a tiered system. If you make 35k a year you will pay in taxes: $8,025 x 0.10 = $802.50 + $24,525 x 0.15 = $3,678.75+ $2,450 x 0.25 = $612.50 = $5,093.75 If you put the 3k in your traditional IRA you now have a taxable income of 32k, right... and the total taxes on that are: $8,025 x 0.10 = $802.50 + $23,975 x 0.15 = $3,678.75 = $4,481.25. So you can see how you have paid $3,000 into your IRA, but you only lowered your tax liability by $612.50 It is a tiered system. On the first $8,350 everyone pays 10% taxes, then on the next $25,600 everyone pays 15% taxes, and on the next $48,300 everyone pays 25% taxes. Ryan is right on! There is really almost no reason why a 20-something would want a Traditional over a ROTH. The big reason is that all 20-somethings will need to wait 30-something years before they are eligible to start taking out substantial sums of their retirement.
That means the money is going to have a LONG time to grow. For instance 20k invested for 33 years at 5% annual growth comes out to around 100k.

If that money were in a traditional IRA you would pay ordinary income tax on the full 100k!!! Ouch! Right now that would mean losing about $35,000 in taxes.

If you had put that 20k in a Roth… and paid the 4k in taxes now. Then the money grows to 100k. When you retire you get to take the full 100k whenever you want with no tax worries.

That’s a huge, huge, huge difference now.

And as for this quick last minute traditional IRA contribution to lower your tax bracket and save money… it’s basically crap.
Here’s a scenario to illustrate this point:

This article makes it sound like if you made 35k you would pay ($35,000 x 0.25 = $8,750) in taxes. Then they would have you think that if you pay 3k into your traditional IRA you would drop your income to 32k for the year, which puts you in the 15% tax bracket. So you would pay ($32,000 x 0.15 = $4,800) in taxes. So by contributing 3k to a traditional IRA you were able to lower your tax bracket and save ($8,750 – $4,800 = $3,950) in taxes. If this actually is how taxes were calculated it would be great and this would work…

But our taxes are calculated on a tiered system. If you make 35k a year you will pay in taxes:

$8,025 x 0.10 = $802.50 +

$24,525 x 0.15 = $3,678.75+

$2,450 x 0.25 = $612.50 = $5,093.75

If you put the 3k in your traditional IRA you now have a taxable income of 32k, right… and the total taxes on that are:

$8,025 x 0.10 = $802.50 +

$23,975 x 0.15 = $3,678.75 = $4,481.25.

So you can see how you have paid $3,000 into your IRA, but you only lowered your tax liability by $612.50

It is a tiered system. On the first $8,350 everyone pays 10% taxes, then on the next $25,600 everyone pays 15% taxes, and on the next $48,300 everyone pays 25% taxes.

]]> By: alara http://20somethingfinance.com/traditional-ira-benefits/comment-page-1/#comment-1386 alara Mon, 01 Dec 2008 18:02:13 +0000 http://20somethingfinance.com/?p=508#comment-1386 It is true that capital gains are not taxed with a traditional IRA. Capital gains are not taxed until the capital gain is realized… that is, upon sale. BUT IRA distributions are taxed as ordinary income…. and the Roth will be tax free in that capacity, provided you follow all requirements. It is true that capital gains are not taxed with a traditional IRA. Capital gains are not taxed until the capital gain is realized… that is, upon sale. BUT IRA distributions are taxed as ordinary income…. and the Roth will be tax free in that capacity, provided you follow all requirements.

]]> By: Craig http://20somethingfinance.com/traditional-ira-benefits/comment-page-1/#comment-1249 Craig Mon, 24 Nov 2008 21:24:40 +0000 http://20somethingfinance.com/?p=508#comment-1249 Thanks for the explanation. I do not know much about the difference so this was a big help. It seems there are a lot of advantages to a traditional IRA. I'm sure there are advantages to the other types of retirement fund as well. Maybe a follow up article could have a basic pros/cons lists of each. I had a traditional IRA set up with a former job, and now with my new job I don't have anything set up through the company. To be honest I kind have lost contact with anything involving that former IRA account and don't know even where to begin to find out more about it and what to do next. Any advice? Craig www.budgetpulse.com Thanks for the explanation. I do not know much about the difference so this was a big help. It seems there are a lot of advantages to a traditional IRA. I’m sure there are advantages to the other types of retirement fund as well. Maybe a follow up article could have a basic pros/cons lists of each. I had a traditional IRA set up with a former job, and now with my new job I don’t have anything set up through the company. To be honest I kind have lost contact with anything involving that former IRA account and don’t know even where to begin to find out more about it and what to do next. Any advice?

Craig
http://www.budgetpulse.com

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