split from another thread - Individual Retirement Accounts
My CPA told me I should get an IRA because not only is it a good way to save for my future but a good way to save on taxes. I swear they are so confusing I think a good CPA is worth every penny. My CPA gave me a free consult and then billed me when she did my taxes. She even has given me a discount for having all my information really organized on spreadsheets for her.
Re: how many of you actually PAY taxes and how do i get started with that?
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Originally Posted by Bunny
My CPA told me I should get an IRA because not only is it a good way to save for my future but a good way to save on taxes. I swear they are so confusing I think a good CPA is worth every penny. My CPA gave me a free consult and then billed me when she did my taxes. She even has given me a discount for having all my information really organized on spreadsheets for her.
And what's an IRA? I know, I know. I'm smart, but not the smartest.:-\
Re: how many of you actually PAY taxes and how do i get started with that?
individual retirement account...
it's basically a savings account that you can't touch until you're 59 1/2.
if you have a traditional IRA, contributions are tax-deductible.
Re: split from another thread - Individual Retirement Accounts
There are several different forms of IRA's available. Basically they all allow a person to avoid paying income taxes in some form on money set aside for retirement. One type allows the money being put into the IRA to be free of income tax. Another form allows the interest earned by the IRA investments to avoid income tax and thus compound faster.
When considering an IRA in any form, the first decision is to be ABSOLUTELY SURE that you will not need to touch this money until you reach age 59 1/2. The reason is that if you're forced to withdraw money before then, you'll have to pay at least some of the taxes you originally avoided plus a hefty penalty.
Another fact to consider is that Washington is able to pass lots of new laws between now and the time you reach age 59 1/2 - meaning that it's distinctly possible that 30 years from now the US gov't may decide to stop paying social security benefits to people who already have money saved in retirement accounts (a so called 'means test'). This means that there IS an element of risk that the dollars you put in an IRA today may be dollars that you won't receive in gov't benefits and will have to pay for things yourself 30 years from now using your IRA money. I do have a retirement account, but not a large one because of this risk factor.
Re: split from another thread - Individual Retirement Accounts
Not that that couldn't happen, but everything suggests that the government wants to encourage you to save for your retirement (hence all the tax breaks), so it seems counter-productive to revoke SS.
If there is a cut in SS, why would it just apply to people who saved in an IRA? What about other savings account? What about just regular brokerage account? What about owning real estate investments? If SS benefits were cut, I feel that even more reason to save in an IRA because people will probably be screwed across the board, despite their assets.
Re: split from another thread - Individual Retirement Accounts
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If there is a cut in SS, why would it just apply to people who saved in an IRA? What about other savings account? What about just regular brokerage account? What about owning real estate investments? If SS benefits were cut, I feel that even more reason to save in an IRA because people will probably be screwed across the board, despite their assets.
Well, in principle you're probably right. However when you're talking about money in a bank account or brokerage account when you reach age 60 you're free to spend that money on a flashy new car or a killer vacation or make gifts of the money to family members (subject to the gift tax of course). So by the time you turn 65 and officially apply for SSI you could have significantly reduced your assets such that you'll be eligible for a bigger Social Security check and better medicare coverage. But if the money is locked up in an IRA, and assuming that they raise the early withdrawl penalty age along with the legal retirement age, you can't spend that money without paying back probably half of it in deferred taxes now coming due plus early withdrawl penalties. So you wind up not paying the back taxes and early withdrawl penalties, you keep the IRA, and you get a smaller Social Security check and worse medicare coverage because you have your own assets to cover living/health expenses while some other people don't. Then if you develop some medical problem you'll be required to use your IRA money to pay the deductible and uninsured percentage which can chew through $100,000 in the blink of an eye. After your IRA funds are wiped out paying these bills, which medicare would have covered if you didn't have an IRA when you retired, you'll then be eligible for the larger Social Security check and better medicare insurance. But the difference is of course that you didn't get to buy that new car, you didn't get to take those great vacations, and you didn't get to give some of that money to your children and grandchildren - you effectively gave that money to the government by allowing them to NOT have to pay your medical bills and send you a smaller SSI check until the point that you developed health problems which financially wiped you out.
Re: split from another thread - Individual Retirement Accounts
We could speculate a million examples of the goverment screwing us over, but in the end, I think you'll agree it's far more likely that we are going to undersave for our retirement than oversave.
Re: split from another thread - Individual Retirement Accounts
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I think you'll agree it's far more likely that we are going to undersave for our retirement than oversave
I suppose that depends on definitions ... whether today's young workers are saving to pay for their own retirements or "saving" by paying a 12%+ tax for 40 years to pay for someone else's retirement. Of course GWB's private SSI accounts would change this situation significantly.
Re: split from another thread - Individual Retirement Accounts
Wow. I'm looking at Melonie and Emily's posts, and you girls are very smart--thanks for answering my question.
Re: split from another thread - Individual Retirement Accounts
My CPA told me there are exceptions to withdrawing the money early. One she mentioned was if I wanted to buy a house I could take it out without penalty (have to pay the taxes on it I'm sure) and use it for the down payment on a house. She also pointed out that if I'm in a 25% tax bracket and put $4000 for the year into my IRA (the maximum per year allowed) that it really only cost me $2800 when you consider the tax savings so it's really like you are being given that difference. I still don't have one but I think I'm going to check with Fidelity since it's one she mentioned that was good.
Re: split from another thread - Individual Retirement Accounts
I have a Fidelity IRA. So far I really like them.
Re: split from another thread - Individual Retirement Accounts
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My CPA told me there are exceptions to withdrawing the money early. One she mentioned was if I wanted to buy a house I could take it out without penalty (have to pay the taxes on it I'm sure) and use it for the down payment on a house. She also pointed out that if I'm in a 25% tax bracket and put $4000 for the year into my IRA (the maximum per year allowed) that it really only cost me $2800 when you consider the tax savings so it's really like you are being given that difference
Yes there are certainly special circumstances which allow you to use IRA money before age 59 1/2. Buying a house is one - dealing with huge medical bills is another. However, depending on the specific type of IRA involved, sooner or later the IRS is going to try and reclaim the tax benefits. The example you used is a Traditional IRA, where #1 the money contributed to the IRA is tax deductible at the time the contribution is made, and #2 where interest earned on investment of the IRA funds is tax deferred until you withdraw the money. If you withdraw the money early for one of these special circumstances, you are correct that the 10% early withdrawl penalty is waived. However, you are still responsible for paying income tax on the money withdrawn - which if you're purchasing a house and are withdrawing $250,000 could be taxed at a net 50% tax rate (plus increase your income tax rate on your regular income to 50% as well in the year the IRA funds are withdrawn).
I personally prefer the Roth IRA, where the contributions are not tax deductible at the time the contribution is made, but where any interest earned by the IRA investments and any eventual withdrawls from the Roth IRA are both tax free. I consider this particularly important for a financial scenario where Social Security checks are considered to be taxable income plus Traditional IRA withdrawls are also considered to be taxable income - i.e. I'd rather be paying say a 15% tax rate on my Social Security checks only, rather than paying a 30% tax rate on both my Social Security checks and Traditional IRA withdrawl checks.
Re: split from another thread - Individual Retirement Accounts
Another benefit of the Roth IRA is that you can get the contribution amount (not the earnings) out at anytime without paying any tax or penalty on it (as it's already been taxed), so if something did come about and you did need at least some of the money you could get your hands on that portion of it fairly easily.
A note on the use of your IRA money for home purchases also, there is a cap of $10K on that amount.