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| *Ostroff, Fair and Company>>>Investing |
Mutal fund IN or outside of a roth IRA? |
im 20, and i want a good retirement, but i also want to have some money to help buy a house, so should i buy a mutual fund outside of a roth IRA? i dont get how the tax deferred from the roth IRA works and how it compares to buying just a mutual fund. A roth IRA is contributed to with after-tax money, so you get no immediate tax break. However, if you meet the requirements, you may withdraw the contributions AND earnings in retirement without taxes. This can be a HUGE advantage for retirement. There are two other things you can do with a Roth IRA: 1) Withdraw the contributions, not the earnings, at ANY TIME without penalty or taxes. This is because you have already paid taxes on your contributions, since they were "after-tax". (If you withdraw earnings before age 60, you are assessed a penalty.) 2) Withdraw contributions and earnings without taxes for the purpose of buying your first house. You must have held the Roth IRA for at least 5 years and you can only withdraw up to $10,000 for your house purchase. With a regular taxable custodial account, you will pay taxes on the distributions and dividends every year, as well as pay a capital gains tax whenever you sell shares of the fund. Using a taxable account for retirement investing can create a paperwork nightmare because of the hundreds (or thousands) of tax lots that are created every time you buy shares at a different price. When you eventually sell some shares in retirement, you will have to figure out captial gains taxes for several decades, using hundreds of tax lots. This borders on insane. Your accountant will probably murder you if he/she has to do this. Sufficed to say, please use tax-deferred accounts for your retirement investing. With tax-deferred accounts, withdraws are treated at income and taxed as such. Therefore, the taxation becomes MUCH more simplified. You won't be computing any capital gains. Besides the Roth IRA, taxable money market accounts and short-term bond funds are good places to place money that you want to use towards a house purchase. I prefer the money market account because the shares are held constant at $1, so you will not have to compute any capital gains taxes. I have a free downloadable book on retirement investing. I am not a financial rep, nor am I selling anything. The book took me 16 months to write, so I worked really hard on it. Click on my profile and read my info to get the website. The book is specifically designed for young people who want to learn about investing. Chapter 24 talks about the various retirement accounts. the Roth IRA is an investment vehicle, specifically for retirement. You can put just about anything (savings account, CD, mutual funds, stocks) into an IRA. With the Roth, as long as you keep that money in there for 5+ years and a couple of other guidelines, you do not pay taxes when you withdraw the money. The tax deferment is the biggest benefit because if you pay the taxes on your gains each year like a savings account, you do not accumulate as much in the end if you compared that to tax deferred savings. There is no difference in cost if you buy it in/out of the IRA. |
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