Best IRA Plan?

Discussion in '401k, IRA and Retirement' started by waseem59, May 9, 2014.

  1. waseem59

    waseem59 Well-Known Member

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    which is the best IRA plan, is traditional IRA beneficial or Roth IRA is beneficial. discuss and give some knowledge on the tax deductions from the different IRA plans.
     
  2. JR Ewing

    JR Ewing Super Moderator Staff Member

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    It basically depends upon your income level. Roths have income limits, and they grow tax-free with after tax money. Traditional IRAs don't have the income limits and are tax-deferred with pretax money. Both do have annual contribution limits.
     
  3. CoolCat

    CoolCat Member

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    There are differences in the way Roth IRAs and Traditional IRAs are handled as inheritances, too, right? I'd been advised that if we played to sock away enough that we'd be passing on a good chunk of money, Roth IRAs (and Roth 401k, which I have as an option) are especially good for that. Since you have already payed taxes on the money, your beneficiaries don't have to pay when they take withdrawals.

    I personally have my money split between the two. I won't be retiring for at least another 30 years, and I won't pretend to know what the tax laws will be like by then. Maybe income tax will have been replaced by a national sales tax and traditional IRAs will become a completely amazing deal. Maybe I will be super rich and I'll be in a currently non-existent 50% tax bracket and my Roth dollars will be effectively worth double my traditional dollars. I have no idea, so I hedge my bets and invest in both.
     
  4. JR Ewing

    JR Ewing Super Moderator Staff Member

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    http://www.irs.gov/publications/p590b/ch01.html

    I'll correct my above post about the traditional IRA - it's usually going to be funded with earned income dollars that have already been taxed, generally for those who earn too much for the Roth IRA option.

    The traditional 401k is generally funded with pretax money in a 401k work plan.
     
  5. CoolCat

    CoolCat Member

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    Your link is regarding taking a distribution from an traditional IRA, not contributions toward one. Contributions to traditional IRA are pre-tax. The amount you put in is removed from your taxable income when you do your taxes. When you take a distribution during retirement you will pay taxes on that money. With a Roth, you pay the taxes on the money when you earn it, before it goes into the Roth IRA and then it is tax free when you take a distribution during retirement. The same distinction goes for traditional vs. Roth 401ks. Traditional is tax free going in, taxed coming out while Roth is taxed going in, tax free coming out.

    401ks can only be access through an employer while IRAs can be opened by anyone, and they have separate contribution limits which change from year to year.
     
  6. JR Ewing

    JR Ewing Super Moderator Staff Member

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    You were asking about inheritances, the info is there at the IRS website.

    Traditional 401k is actually tax-deferred, not tax free going in - you can lower the amount of taxable income by deducting that contribution each year from your taxable income.

    IRAs must be funded with earned income on your own. Some people are not eligible for the Roth IRA with after-tax money because they earn too much money, so they must go with a traditional IRA. IRAs are done on your own or through a third party such as a bank or brokerage firm with earned (usually already taxed) money, while 401k's are through work.

    I was already aware of everything else as I do these sorts of things for a living.

     
    Last edited: Jun 22, 2015
  7. CoolCat

    CoolCat Member

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    Kind of. If you don't have any earned income, you might still be eligible for a spousal IRA. Your spouse needs to earn enough to cover contributions to their own IRA and yours, and the Roth limits still apply. It's useful to know if you have a single income household, especially if the earner has a high income. I looked into this a lot last year when my husband was unemployed, but had some money that was earmarked for retirement.
     
  8. norms options

    norms options Well-Known Member

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    Which one is the best depends upon your particular circumstances. For me, I believe that the ROTH is the best retirement plan out there and will max that out before putting any money in 401k or anywhere else. The only caveat to that is if you get employer match in the 401k. Then you would want to take full advantage of the match as well, but most folks who are working toward retirement can probably maximize the match and still put the 5500 max in a ROTH.

    The tax advantages are the main reason I choose a ROTH over a traditional IRA. In the traditional, your money goes in pre-tax, which means you get a tax break this year by deducting your contributions from your taxable income. However, when you retire, whatever you take out is taxed and you must begin taking the Required Minimum Distribution at age 70 1/2. With the ROTH, the money that you contribute is taxed this year, so there is no tax break on the money you put in. The good news is that you are not taxed on anything you take out of a ROTH, which means any gains that you earn over the course of saving for retirement are earned tax free, which is the true benefit that a traditional cannot give you.
     
  9. jondjacob

    jondjacob Well-Known Member

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    We are looking to close our company's 401K program, and I have been trying to figure out if we can instead offer ROTH IRA's instead. I don't know a huge amount about them, besides what has been said - that they are taxed at current rates and grow tax free. The other value I see for my employees is (because we are manufacturing and wage scales are not very high) they are able to access their money without problem if it is needed. We have had problems with employees being told that their hardship withdrawals were not valid.
     
  10. baudwalk

    baudwalk Senior Investor

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    Johndjacob, Fidelity is a major player in managing retirement plans for businesses of all sizes (my wife, working for a local newspaper, was in a Fidelity-managed plan for decades). No worries on accounting, tax reporting, et al. Just a idea. HTH. YMMV.
     

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