Thread: What is an IRA?
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Old 07-14-2017, 01:02 AM  
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Default Re: What is an IRA?

Any investment advisers that I've listened to all consistently say you should fund a Roth IRA as close to the allowed limit as you can while you are young and working. That's also what I was told by an investment counselor I consulted 10 years ago.

A regular IRA has the advantage of reducing your tax liability right now. You don't pay tax on the income that you divert to a regular IRA, until you draw it out. When that happens, you're likely to be in a lower tax bracket than you are now.

Income that is "tax free" isn't automatically better than taxable income. The income from municipal bonds is tax free. So why do you suppose everyone doesn't put all their investment money into municipal bonds? The reason is that municipal bonds tend to not generate a very high yield earnings-wise. They can get away with paying lower yields because investors know the income will be tax-free.

Your logic is a little bit shakey. One way of having low taxes in retirement is to simply have a low income when you retire. If your income is low enough you might pay no taxes. You might be in the povery bracket where the tax rate is zero percent. So would it make sense to not save any money so that you could retire poor enough to not have a tax liability? Of course not. You want to have the largest "after-tax income" you can manage. That's what will determine your standard of living. You can't figure out how to get that maximum net income by just preferring investments that are the least taxed. You have to look at the profitability of the investment.

When you say your "estimates" show you should try to have low taxes when you retire, I'ld love to know what is the feature of your "estimates" that leads you to this conclusion. Since you don't "have a ton of earnings no matter what," why are you so concerned about being taxed?

Everyone wants to have their taxes be as low as they can get them . . . now and later, during retirement. The money you put into a a Roth will be available for you to take out without you having to pay a tax on that money when you withdraw it. That's because that money came from income you already paid tax on. (Just like when you take money out of a plain old savings account, you don't get taxed on the withdrawal.) Hopefully the money sitting in the Roth will grow. The amount it grows by will be taxed when you take it out. It will get taxed based on what tax bracket you're in at the time. So a Roth doesn't really generate tax-free income. Unless of course you're quite poor in your retirement. In that case you might fall into the zero oercent tax bracket. If your income when you are 60 is less than $16,000/yr, you won't pay any income tax, no matter where the income comes from. It's unlikely you'll be that poor. Most likely, you'll be in the 15, 25 or 28 percent tax bracket. Keep in mind that there's a Standard Deduction of about $6000. That's why a person with an income of $16,000 pays no federal income tax. (You add $6000 to the top of the income in the zero percent tax bracket, which is about $10,000.)

Last edited by Rose76; 07-14-2017 at 01:43 AM..
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