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Author: borngiantsfan Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 75649  
Subject: Re: Starting IRAs for Children Date: 10/19/2011 9:16 PM
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Hi JAFO,

Thanks for your reply. A few thoughts and corrections:

1. "- The Roth is tax free at withdrawal time, when they will likely have a higher tax liability"
To which you responded - "Until 9/9/9 passes or the FairTax or any other consumption based tax."

You are correct, though I have three thoughts in response:
- given the lack of major overhaul of the tax code in the past, I don't see a major overhaul happening in the future
- in most proposed plans over the past 2 year that have an income tax component, there is little talk of eliminating the "tax-exempt" nature of the Roth IRA. And I don't see the US going to a solely consumption based tax system
- so based on the most likely income based tax systems to be in place in the future, it is highly likely that a traditional IRA distribution 50 years from now will be taxable and the Roth IRA distibution now since it was already taxed at their current (and almost 0% tax) rate

2. "- Funds can be withdrawn from a Roth IRA for home purchase if needed"
To which you responded - "I believe that up to 10k can be withdrawn from a traditional IRA without penalty for a first-time home purchase. And with respect to the Roth IRA, "funds" is imprecise. IIRC, contributions can be withdrawn without penalty, but if you are withdrawing earnings, then the usual rules apply."

You are sort of correct:
- Up to $10K can be withdrawn from a Traditional IRA for a 1st time home purchase without the 10% early withdrawal penalty. but you still have to pay the applicable taxes on the withdrawal (state, federal, etc.)
- The Roth IRA allows you to pull out up to $10K of the profits in the IRA (once account has been open for 5 tax-years) both penalty free and tax free
- And, as you pointed out, the initial contribution money can always be pulled out with out tax or penalty. and in fact, it is required that the initial contribution "funds" be withdrawn first, before the "earnings". So with a Roth, and assuming there is over $10K in the account, more than $10K could be available for home purchase.

3. "- The ROTH IRA is more flexible than a traditional IRA in many other ways."
To which you responded - "Many? Other than no RMDs, which more of a theoretical issue for mos people, what other way?"

ok, clearly using the word "many" was a little off. What other ways?
- no RMD - you already mentioned
- ability to pull out initial contributions without tax or penalty for pretty much any reason. Trad IRA has several exceptions where you can pull out without penalty, but you still pay tax.
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