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What is IRA?
IRA is an Individual Retirement Account. It provides a tax benefit for a long term saving, especially for retirement. There are many type of IRA. (Traditional, Roth, SEP, SIMPLE, Self-Direct).
IRA is similar to regular brokerage account. Once the money has been deposit, it can purchase most type of securities such as stocks, mutual fund, ETF. In IRA, all capital gains, dividend payments, interest will be tax deferred and taxes don’t need to be paid until it is distributed or withdrawn.
What is the different between traditional and Roth?
They are many types of IRA. For most employee who have 401K from their employer. They can contribute either Traditional or ROTH IRA. For 2013/2014, the contribution limit is $5,500 ($6,500 if you are age of 50 or older). Also, depend on the AGI, (Adjusted Gross Income), the deduction might be phrased or no deduction when contribution Traditional IRA.
For Traditional IRA, the contribution will be pre-tax. For example, a married couple who files joint tax with $91,000 AGI. If they contribute $11,000 for Traditional IRA in 2013, their AGI will be lowered to $80,000. As a result, they will pay lower taxes.
For ROTH IRA, the contribution will be post-tax. There will be no tax deduction when tax return is filed. But, the account will be tax free when withdrawing the money after 59 ½ age or the amount has been sit in the account for 5 or more years.
Which one is better?
Many people have different opinions about which IRA to choose. After contributing IRA for many years, I think both of them are good and I would do both. In our (my wife and I) early stage, our AGI is low. So, I contribute to Traditional IRA and enjoy the pre-tax benefit first. As our career advance and AGI is higher, we switch to ROTH IRA. So, I have both Traditional one and ROTH one. Some people say it is good to convert my pre-tax retirement account into post-tax one. Pay the tax now, and not need to worry about the future.
In my opinion, there is no significant benefit for doing this conversion. It is like you are exchanging an apple with an orange, you won’t get two oranges when you only have only one apple to give! The reason people worry about it because they would get taxed a lot when they retired. Well, I learn that Required Minimum Distribution (RMD) is reasonable and your retirement account is not mega-million, you should be fine. If your account is $1,000,000 and you are 70 years ago, the minimum amount to withdraw is around 36,000. Not bad. Check out the RMD calculator to more detail information. Plus, I probably withdraw $$ from my both pre-tax and after-tax retirement account and do it before age 70 ½. So, I can have much better control on how much money I can take from my pre-tax account before RMD kick in. My goal is to set my tax bracket in a reasonable range.
What is a good investment vehicle for your kid?
Most of the parents would contribute 529 Plan once they have a kid. A 529 plan is a tax-advantaged investment vehicle to encourage saving for the future higher education expenses of a designated beneficiary. But, there is another investment product call “kid IRA” and I think it is much better saving vehicle to help children to reach financial freedom.
What is kid IRA?
When children becomes teenager and they may have a part-time or summer job (lifeguard, babysitting). They will have an earn income. During that year, you can open up ROTH IRA for them and make contribution up to maximum IRA contribution or their wages or compensation from W2 whichever is small. Let say the kids earn $2,000 this year, they can put up to $2,000 to the account. If they earn $7,000, they can only contribute up to $5,500 because 2013/2014 IRA contribution limit is $5,500. Of course, if your teenager don’t work, then no contribution is allowed. Remember: allowance don’t count toward to income.
We all know that kids will probably spend all or most of the money they earn and they wouldn’t think about saving for their retirement. Maybe some parent can force them to do that like “Tiger Mom”. Haha… You never know. The huge advantage is the children will have 50+ year of investment horizon for the money to grow, whereas most of us only have 30+ year period. Having money in ROTH IRA will be tax free when they are withdrawing.
If parents contribute $5,000 for only 10 years with average 8% return over 50+ year period for their kids. He or she will become millionaire easily, given the fact that money cannot be withdrawn before their retirement age. Thus, a good option is to invest low cost index mutual fund: Vanguard’s low-cost index funds are one of the good started.
In my opinion, it is one of the best and practical ways to show love to the children and they will definitely appreciate when they grow older.
IRA is an Individual Retirement Account. It provides a tax benefit for a long term saving, especially for retirement. There are many type of IRA. (Traditional, Roth, SEP, SIMPLE, Self-Direct).
IRA is similar to regular brokerage account. Once the money has been deposit, it can purchase most type of securities such as stocks, mutual fund, ETF. In IRA, all capital gains, dividend payments, interest will be tax deferred and taxes don’t need to be paid until it is distributed or withdrawn.
What is the different between traditional and Roth?
They are many types of IRA. For most employee who have 401K from their employer. They can contribute either Traditional or ROTH IRA. For 2013/2014, the contribution limit is $5,500 ($6,500 if you are age of 50 or older). Also, depend on the AGI, (Adjusted Gross Income), the deduction might be phrased or no deduction when contribution Traditional IRA.
For Traditional IRA, the contribution will be pre-tax. For example, a married couple who files joint tax with $91,000 AGI. If they contribute $11,000 for Traditional IRA in 2013, their AGI will be lowered to $80,000. As a result, they will pay lower taxes.
For ROTH IRA, the contribution will be post-tax. There will be no tax deduction when tax return is filed. But, the account will be tax free when withdrawing the money after 59 ½ age or the amount has been sit in the account for 5 or more years.
Which one is better?
Many people have different opinions about which IRA to choose. After contributing IRA for many years, I think both of them are good and I would do both. In our (my wife and I) early stage, our AGI is low. So, I contribute to Traditional IRA and enjoy the pre-tax benefit first. As our career advance and AGI is higher, we switch to ROTH IRA. So, I have both Traditional one and ROTH one. Some people say it is good to convert my pre-tax retirement account into post-tax one. Pay the tax now, and not need to worry about the future.
In my opinion, there is no significant benefit for doing this conversion. It is like you are exchanging an apple with an orange, you won’t get two oranges when you only have only one apple to give! The reason people worry about it because they would get taxed a lot when they retired. Well, I learn that Required Minimum Distribution (RMD) is reasonable and your retirement account is not mega-million, you should be fine. If your account is $1,000,000 and you are 70 years ago, the minimum amount to withdraw is around 36,000. Not bad. Check out the RMD calculator to more detail information. Plus, I probably withdraw $$ from my both pre-tax and after-tax retirement account and do it before age 70 ½. So, I can have much better control on how much money I can take from my pre-tax account before RMD kick in. My goal is to set my tax bracket in a reasonable range.
What is a good investment vehicle for your kid?
Most of the parents would contribute 529 Plan once they have a kid. A 529 plan is a tax-advantaged investment vehicle to encourage saving for the future higher education expenses of a designated beneficiary. But, there is another investment product call “kid IRA” and I think it is much better saving vehicle to help children to reach financial freedom.
What is kid IRA?
When children becomes teenager and they may have a part-time or summer job (lifeguard, babysitting). They will have an earn income. During that year, you can open up ROTH IRA for them and make contribution up to maximum IRA contribution or their wages or compensation from W2 whichever is small. Let say the kids earn $2,000 this year, they can put up to $2,000 to the account. If they earn $7,000, they can only contribute up to $5,500 because 2013/2014 IRA contribution limit is $5,500. Of course, if your teenager don’t work, then no contribution is allowed. Remember: allowance don’t count toward to income.
We all know that kids will probably spend all or most of the money they earn and they wouldn’t think about saving for their retirement. Maybe some parent can force them to do that like “Tiger Mom”. Haha… You never know. The huge advantage is the children will have 50+ year of investment horizon for the money to grow, whereas most of us only have 30+ year period. Having money in ROTH IRA will be tax free when they are withdrawing.
If parents contribute $5,000 for only 10 years with average 8% return over 50+ year period for their kids. He or she will become millionaire easily, given the fact that money cannot be withdrawn before their retirement age. Thus, a good option is to invest low cost index mutual fund: Vanguard’s low-cost index funds are one of the good started.
In my opinion, it is one of the best and practical ways to show love to the children and they will definitely appreciate when they grow older.