I wanted to open an account to keep money in, but since the economy is being weird, I'm not sure if I should do it. Will things ever recover? Would I be better off putting my money elsewhere?
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I wanted to open an account to keep money in, but since the economy is being weird, I'm not sure if I should do it. Will things ever recover? Would I be better off putting my money elsewhere?
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It's always a good time top open up a Roth IRA, especially if you're young. You'll be able to save a lot of money in taxes in the future.



Its a good time. You can invest pretty much anything with Roth. And taxes are definately going up, take advantage of no tax down the line.





The important question is, is it a good time for you under the circumstances. Do you have any debts? Will you need the money for a large purchase in the near/intermediate future? Do you own your own home? Do you have an emergency account already?





Again I will throw out there the fact that the IRS / US Gov't offers no guarantees that the current tax rules regarding IRA's and Roths will remain unchanged for the next 20-30-40 years. As such, 20-20 hindsight applied 20-30-40 years from now may show that money contributed to IRA's actually 'cost' the person money by rendering them ineligible for Social Security, Medicare, or some other future gov't benefit program.And taxes are definately going up, take advantage of no tax down the line.
However I am in complete agreement that, because current year income taxes have already been collected on the money contributed to Roth IRA's, the holders of Roth IRA retirement accounts are far less likely to face 'unpleasant tax surprises' in the future. But even so, opening a Roth IRA or conventional IRA does make the gov't aware that you have 'assets', and 'assets' to which there will always be gov't 'strings' attached due to the tax favored status.
I am also in complete agreement with HockeyBobby that, as a fiscally disciplined and financially responsible 'young person', contributing to an IRA of any type may not be the wisest idea from a purely economic standpoint. If you have outstanding debts charging significant rates of interest i.e. credit cards / car loans / student loans, using available cash to pay down those loans offers a much better 'after tax rate of return' than contributing to a Roth IRA.
The one exception of course is an employer matched IRA plan, where contributing your own money results in a contribution of additional 'free' money by your employer. This is ALWAYS a 'winner'. Unfortunately, it almost never applies for exotic dancers.





^^^ please understand that I am not advocating that saving / investing to help fund retirement should be abandoned. It is very possible to do this without the formal structure and future tax liability and access to your own money 'strings' of a gov't approved retirement savings program i.e. conventional IRA's or Roth IRA's.
It is also very possible that, given the unavoidable demographics of more retirees versus fewer active workers actually paying income tax, 'means testing' of Social Security and other gov't retirement benefits may soon be introduced. If and when that happens, every dollar contributed to a conventional IRA or Roth IRA may result in a dollar of 'lost' gov't retirement benefit eligibility.





You can certainly do that. But, every dollar of dividend income even reinvested dividends would be taxed immediately. Every dollar of gain realized on a trade would be taxed in the year of the trade. If you want to pay your taxes now, then go for it. As a U.S. Citizen and resident, I applaud anyone who wants to pay in more taxes. That just lessens my tax burden. But, I do not expect the government to reduce or do away with the tax benefits of 401K plans, Roth IRAs or traditional IRAs. The reason for establishing them in the first place remains valid. They reduce the burden of older people on the government.
At the risk of being repetitive, Social Security is an anti-poverty program, nothing more. But, if you want to retire just above the poverty level, by all means rely on Social Security. You won't starve.It is also very possible that, given the unavoidable demographics of more retirees versus fewer active workers actually paying income tax, 'means testing' of Social Security and other gov't retirement benefits may soon be introduced. If and when that happens, every dollar contributed to a conventional IRA or Roth IRA may result in a dollar of 'lost' gov't retirement benefit eligibility.
HTH
Z










^^^ the only thing that would be given up monetarily is the tax due on interest / dividend / capital gains earnings ... which might amount to $25-$50 per year on that $5000 Roth IRA contribution versus the same $5000 invested outside of an IRA. But what investing outside of an IRA potentially means not having to give up is the right to is really unknown. A few things that have already been floated in Washington ...
- being forced to spend all of one's IRA money first before receiving any payments / benefits funded by the gov't
- being forced to redeploy all of one's IRA money into a 'gov't managed' investment fund
- being forced to invest one's IRA money in US based US dollar denominated investments
none of these things are the case right now, but could very well become the case over the course of the next 20-30-40 years. And once money has been contributed to an IRA, the 'owner' loses unfettered access to those funds for the next 20-30-40 years. Thus if a future rule change is made that is 'unpalatable' to the IRA 'owner', it will cost them dearly in terms of penalties and lump sum tax liabilities to withdraw their money from that IRA before they reach age 59 1/2 (assuming of course that the gov't doesn't raise the IRA age threshold in future years as well !)
So is it worth it to 'spend' 1% per year on additional taxes as a risk management tool ? With the uncertainty in today's global economy, and with the US gov't's increasing deficits, it is a question that should be asked.





Let's assume you put $5,000 in a Roth in 2005 investing the entire contribution that year in Cummins (CMI) stock at $20.00 per share. (Prices adjusted for splits.) Also assume you sold those 250 shares in 2008 for $70.00 per share. Inside a Roth IRA your tax liability would be? ... That's right, zero. You just made a $12,500 gain on a $5,000 investment and paid no taxes. Had you done the same series of transactions outside the Roth, your tax liability would have been? ... $2,500. Not $25 - $50 dollars as you suggest. Of course CMI paid dividends over those three years, so there would have been more savings as the dividend income inside a Roth is tax free as well. Over a life time, 30 - 40 years, the tax free nature of the income and growth of a Roth results in substantial tax savings, not just $25 - $50 per year.
That's where your perma-bear sentiments doom you. Not every bad idea becomes policy, as a matter of fact few of them do. Further, there is nothing to stop government from means testing Social Security by adopting an all means test. They already do for student aid. There is a better chance that your outside the IRA/Roth/401K/Pension assets will be counted against Social Security.But what investing outside of an IRA potentially means not having to give up is the right to is really unknown. A few things that have already been floated in Washington ...
It is quite a bit more than 1%. Further, your assumption that the federal government is totally arbitrary in its policy making is deeply flawed.So is it worth it to 'spend' 1% per year on additional taxes as a risk management tool ? With the uncertainty in today's global economy, and with the US gov't's increasing deficits, it is a question that should be asked.
HTH
Z





well, the taxes on cap gains and dividends from such an investment outside of an IRA are also zero if it falls under a 'foreign income' exclusion !Over a life time, 30 - 40 years, the tax free nature of the income and growth of a Roth results in substantial tax savings, not just $25 - $50 per year.
Also your choice of a 'three and a half bagger' example, while possible, is definitely atypical. My $25-$50 annual tax difference example was based on ballpark bond / mutual fund / index fund yields which are far more typical.
Also, the taxes on cap gains and dividends from such an investment inside of an IRA are only zero TODAY ... IF you are 60 years old and able to withdraw money without being penalized ! Future tax liability is really an unknown, as is the future penalty free withdrawl age.
My central point is that investing in an IRA involves RISK that investing outside of an IRA does not. You obviously view that risk as minimal compared to the tax advantages, which I totally agree is the case under today's rules. However, for a person in their early 20's contributing to an IRA, they face 40 years worth of future rule change / tax policy change / gov't benefit policy change risk. Obviously these risks are lower with a Roth IRA versus conventional IRA since only the earnings are subject to gov't 'strings' ( whereas with a conventional IRA both the contributed money and the earnings are subject to gov't 'strings'). But these risks are not zero ... and could have profound future consequences.
~
Last edited by Melonie; 09-02-2009 at 09:03 AM.





Only if you assume that the US government is arbitrary and capricious and that somehow America's lawyers will disappear overnight.
Almost zero times profound consequences = almost zero. Compared with the magnification of gains through tax leveraging. Make your choice but just because you are a perma-bear does not mean you are making a rational choice or a rational argument. You emphasize a minimal risk at the expense of very real gains. Your loss, not mine.But these risks are not zero ... and could have profound future consequences.~
HTH
Z



Wow, another simple question, another thread with completely garbage analysis
US Gov: Here's $50
Melonie: Ha, but this $50 has a 0.03% of becoming completely worthless & a 0.04% chance of you taxing the potential returns on this by as much as 25% & and a 0.02% chance taxing it as much as 80%.
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Garbage
Garbage
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In other words, by taking this $50, I'll have either $60 or $75 because I am absolutely 100% certain I know everything about the future because I have read Austrian Economics & I can link to all the shady web-sites who know everything with 200% certainty.
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Garbage
Garbage
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US Gov: mmmmm Kay, Do you want this $50?
Melonie: This $50 is absolutely worthless in the Year 3132. Why should I take it from you? In the year 4165 you'll take it away from me through taxes anyway. Please take a look at the money supply charts drawn by people who live in their mom's basements
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And Zimbabwe & Argentina.
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Oh and Elliot Wave
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I'm too smart to take this $50





^^^ by the same sort of 'analysis' ...
... buying and holding index stocks is a sure way to make money
... real estate always goes up in value
... Citibank is a cornerstone institution, whose stock shares are a 'bargain' at $20 per share
my only points here are that investments that involve 'long term bets' do involve risk, and that things that 'have always been true in the past' have a way of no longer being true in the future. IRA's are a long term bet. If a person can afford to take that bet without consequences to other short term personal finances, then by all means do so ( especially with a Roth IRA since the risks involved in that bet are lower). However, don't lose sight of the fact that the final result of investing in an IRA may turn out differently than expected 30-40 years from now when you are finally allowed to withdraw IRA money without having to pay huge penalties.





Save a portion of everything you earn, pay off your debts, invest safely...whether in real estate, stocks, or even a savings account....and you'll eventually be wealthy. Tried and true.





^^^ not in Zimbabwe or Wiemar Germany !





Yes...as Melonie points out, one should be aware of possible calamities that could arise. I would suggest devoting one tenth of one percent of your conscious thought to this type of thing....extreme hyper inflation, asteroid hitting the earth, lighting killing you etc.
The rest of the time, it is prudent to stay in the NOW.




I usually just browse though the threads anymore .... but this simple question seems to have spawned complex diatribes.
Roth IRAs are individual retirement accounts that utilize post taxed money. You can not touch an IRA until you are 59.5. With a Roth IRA there are five different reasons that you could touch it before that age without penalty.
Think of an IRA as a bucket. You can put savings accounts, mutual funds, and CDs into that bucket. They are all still IRA accounts.
You said you wanted to open an account to keep money in .... Do you need access to this money? Is it your emergency fund? Are you concerned about the interest rate? or the FDIC coverage? What is your goal for this money?
To keep it simple I would suggest a Money Market Savings account to start with. It has an interest rate, it is FDIC insured, and you can access your money anytime you need it.
While you are saving away, I would also suggest reading about different types of accounts and retirement planning.
Not fully knowing what you are getting into is worse then anything the economy could do to you.
Nature knows no indecencies; man invents them. ~ Mark Twain




This makes no sense.
Money put into a Traditional IRA has not been taxed and is only taxed when it is withdrawn. Roth IRAs money has already been taxed and wont be taxed when withdrawn.
Most people slowly take out funds from these accounts at retirement. All IRAs have a required minium distrubution at age 70.5. Considering the majority of IRAs are Traditional yes uncle sam still gets his cut.
Social Security pays so little that even if they did means testing for benifits it would be silly to not try to save for retirement anyway.
Nature knows no indecencies; man invents them. ~ Mark Twain





If you are young and put $5,000 in a Roth IRA, it could possibly be worth $30 - $40,000 when you are old enough to withdraw the money. If you don't put any money into IRA's and don't save for retirement because you're afraid you'll lose some of your Social Security payments because of possible means testing, as Melonie was saying, then you won't have anything.





^^^ please stop putting words in my mouth. I never advocated NOT saving or investing money for retirement ( or any other reason ). I only pointed out that official US gov't sanctioned retirement accounts such as IRA's and Roths have 'strings' attached ... and that the effect of those 'strings' over a 30-40 year time span represents a significant 'unknown' risk factor. I obviously acknowledged that, for the moment at least, both conventional IRA's and Roth IRA's offer an income tax advantage to those who actually have to pay income taxes ... which results in a great deal of individual variation in the amount of actual short term tax advantage that a conventional IRA or Roth IRA actually provides to a particular person.
The simple question then becomes whether or not the assumption of the 'unknown' risk factor over a 30-40 year period, when combined with the inaccessibility of IRA money over the same 30-40 year period, is worth the present tax advantages. A related question ( of interest to many dancers ) arises in regard to IRA contributions creating an automatically reported official paper trail of 'expenditures', which can potentially be used by the IRS to 'estimate' an income level that is higher than the amount of income reported on tax returns.





That's was what I thought you were saying. Sorry if I misunderstood.





Those are extreme examples, but Thyssen and Krupp started enormous fortunes on borrowed money during the Wiemar Republic. Fortunes that exist today. Indeed, during times of hyper-inflation the proper investing strategy is to borrow far more than you save. While I don't pay a lot of attention to Zimbabwe, I suspect that some savy investors are at this very moment borrowing money as fast as they can to buy Zimbabwean businesses and assets. Money that they can pay back with greatly inflated Zimbabwean currency in a few years when Mugabe is dead and gone.
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