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Author: Dawn193 Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 75642  
Subject: Help me Pleeease!! Date: 2/17/2000 1:20 AM
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I have $1000 that I want to start investing for retirement. I have already picked a fund that I have been researching but here's the problem:Roth or Traditional IRA?! I'm so confused my heads gonna explode! Here's the facts: I'm turning 40,both my husband and I are self-employed w/no employees. He's a contractor that works alone, I am in direct sales (party plan consultant). I'm not clear if the tax bite of the next 20 years would be worth it or no big deal. People who advise me to do the Roth say: "Pay the taxes now so you get it all at the end!" (But do I want to pay more taxes everyear?) The ones who advise the Traditional say: "Why give the government the taxes for the next 20-30 years? Let it grow tax-deferred then let them take their cut"
Please Help Me!!!
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Author: sphillipnew One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 19198 of 75642
Subject: Re: Help me Pleeease!! Date: 2/17/2000 9:49 AM
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Dawn193 writes...

People who advise me to do the Roth say: "Pay the taxes now so you get it all at the end!" (But do I want to pay more taxes everyear?)
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You're not actually paying MORE taxes than you would be, rather passing up a tax deduction. When you fund a Roth you're using after-tax money, however you will not be assessed an "extra tax" so you're not actually paying anything more than if you contributed no money to an IRA. With a traditional IRA you fund with after-tax money, yet are allowed to deduct the amount you contributed on your income taxes.

In the case of the Roth, you will take the money out tax free. In the Traditional, your money will be taken out and taxed at ordinary income tax rates. Both IRAs are tax-sheltered, that is, you pay no capital gains taxes when buying and selling securities within the IRA.

In my opinion, Roth is the only way to go, but you may have other circumstances where a Traditional might make sense. For example, if you think you'll be in a lower tax bracket when you retire, it might make sense to choose Traditional.

I know there's a whole section on IRA's here on the Fool site. Do a search and you should find it. Good luck!



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Author: LTPlayer One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 19199 of 75642
Subject: Re: Help me Pleeease!! Date: 2/17/2000 10:33 AM
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Dawn193,

This has been discussed on this board before (with 19,000 posts, one should expect that it has been covered). Several people have posted tables they have generated from spreadsheet projections. In comparing traditional IRA's and ROTH IRA's they turn out to generate the exact same after-tax rate of return (if your post-retirement tax bracket doesn't change from when you make your contribution). Both of them generate a better after-tax rate of return than any account outside of an IRA, unless you can justify being able to getter a better rate of return on that account. Also, these projections generate slightly different results depending on its assumption of post-retirement tax bracket.

The ROTH IRA is the better investment if you can fund it at the full $2000 per year. This is because you can only put in $2000 PRE-TAX dollars into a Traditional IRA, while you can put in more PRE-TAX dollars into a ROTH IRA. The exact amount is dependent on your tax bracket. If you are in the 28% bracket, the amount is greater than $2800. Being able to put more pre-tax money into a tax advantaged account generates more money after retirement.

If you want to learn more, my suggestion to you would be to search this board for some of the past posts on this subject. Perhaps someone more organized than I am will post some links to previous threads on this subject.

Good Luck,

LT

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Author: mphipps Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 19250 of 75642
Subject: Re: Help me Pleeease!! Date: 2/18/2000 9:36 PM
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Well you have an additional problem with taxes that normal lazy, NOn Self employee, people don't have.
Taxes, specifically the Self employment tax.
You can't reduce your Self employment tax via an Retirement account unless you incorporate. Which unless you are revenue from SE of over 150K and revenue over 100K a year its not cost effective.
So given that IMO here is the optimal solution

Set up SEP IRA you can invest up to 15% of your new revenue, (netincome from Schedule C.). ###Note### because of the Way Self Employment tax works you really only get to invest 13.5something%.
But that will reduce your taxable income.
If you enough cash after that then you might want to go with Roth.
YOu have to look for tax reduction first it you are SE, because of SE Tax and cash flow.

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Author: mattpam Three stars, 500 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 19289 of 75642
Subject: Re: Help me Pleeease!! Date: 2/19/2000 7:31 PM
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Sure it sounds easy to pospone paying retirement taxes till you retire! But if you put the $2000 per year in a Roth and take your small tax lump now, think of how that compounds taxfree for ever and ever. Have you any idea how much state and federal tax you will be liable for when it comes time to take that money out of your conventional IRA? I've been there, and had to take more money out the IRA to pay the tax on the withdrawal and more money to pay the tax on the money I drew out to pay the tax, and so on! Don't get on a tax treadmill. Pay now - eat well later - - Matthew

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