I am a 20 year old college student. I plan to retire well before age 59 1/2 and I would like to know if an IRA could have any place in my portfolio. The main question is "Is the benefit of having earnings accumulate tax-deferred greater than the cost of the 10% penalty for early withdrawal over say a 20 to 25 year period?". I already have some savings and investments, but I had never considered IRAs because I always planned on retiring early. If anyone has an answer for me I would appreciate it greatly. I am familiar with the other aspects of investing that Fools promote-index funds, Foolish Four, small cap stocks, and shorts, and their allocation within a portfolio, I seek only information about the appropriateness of IRAs or other tax deferred investment vehicles for my situation.

I am a 20 year old college student. I plan to retire well before age 59
1/2 and I would like to know if an IRA could have any place in my
portfolio. The main question is "Is the benefit of having earnings
accumulate tax-deferred greater than the cost of the 10% penalty for
early withdrawal over say a 20 to 25 year period?".

By all means, it is to your advantage to do so. It only takes a year or two to come out ahead on the 10% penalty depending on your rate of return. This becomes an even better deal if one can discipline oneself to invest the tax savings gained with the IRA, and put it into a taxable mutual fund. You can then greatly increase the leverage of your decision to use an IRA. This is taxable, but only on the distributions of the fund; you get the price appreciation free until you sell.

Good luck in this foolish plan, it makes an old fool wish these vehicles had been available when he was your age.

TTFN...JIm

You can withdraw from an IRA without the 10% penalty if your withdrawals are in substantially equal annual amounts as for retirement income. Check IRS Publication 590 for all you ever wanted to know about IRAs.

Regards, Jim

Greetings, BlueDevilFan, and welcome.

<<I am a 20 year old college student. I plan to retire well before age 59 1/2 and I would like to know if an IRA could have any place in my portfolio. The main question is "Is the benefit of having earnings accumulate tax-deferred greater than the cost of the 10% penalty for early withdrawal over say a 20 to 25 year period?". I already have some savings and investments, but I had never considered IRAs because I always planned on retiring early. If anyone has an answer for me I would appreciate it greatly. I am familiar with the other aspects of investing that Fools promote-index funds, Foolish Four, small cap stocks, and shorts, and their allocation within a portfolio, I seek only information about the appropriateness of IRAs or other tax deferred investment vehicles for my situation.>>

As Jwilson pointed out, it is definitely to your advantage to do so. The earlier you can get that money to work, the better for accumulating the sum you will need to retire in style. And you can, as Jvanscoy mentioned, avoid the early withdrawal penalties as well when the time comes to take that money for living expenses. Further, paying the penalty may also on occasion make sense. But first things first, and that's getting the money to work for you. Do so now, and I'll virtually guarantee you will never regret it. At your age and if it lasts, the Roth IRA seems a very appropriate vehicle for accumulation purposes.

Regards…..Pixy

bluedevilfan writes:
<<I am a 20 year old college student. I plan to retire well before age 59 1/2 and I would like to know if an IRA could have any place in my portfolio.>>

I'll assume that "well before" means you want to retire when you're 45 or so. If you start _today_ and invest $2000/year into a Roth IRA, and get a _great_ return of %20 for the next 25 years, you'll end up with ... drum roll, please ... just over $1M, worth perhaps $500k in today's dollars. Sure, that's tax free, but it's no retirement.

Even if you get access to a 401(k) or other employer plan, you might get to put away $8k-$10k per year, resulting in perhaps $5M, on which you'll have to pay taxes, too, netting out to perhaps $2M in today's dollars.

You'll have to have substantially more than that invested outside your IRA. I think the best bet would be to use the IRA like an insurance policy. The longer you let the money compound, the more there will be. So plan to retire on non-IRA assets, but fully fund the IRA just in case.

And if you never need it, let your kids fight over it,
shess

shess said:

>>you'll end up with ... drum roll, please ... just over $1M, worth perhaps $500k in today's dollars. Sure, that's tax free, but it's no retirement.<<

$1 million, tax-free... that's no retirement? Hmmm....

Just as an experiment, give me a mil and let me try!

Shess,

<<And if you never need it, let your kids fight over it,>>

A short version of Pixy's philosophy. :-)

Regards……Pixy

Orangeblood,

<<$1 million, tax-free... that's no retirement? Hmmm....

Just as an experiment, give me a mil and let me try!>>

Sorry - No solicitations. Besides, it's my sworn duty and obligation to undergo the test first just in case it may be dangerous to loyal readers in this corner of Fooldom. Be assured, though, that I'm perfectly willing to make this sacrifice. :-O

Regards…..Pixy

<<I am a 20 year old college student. I plan to retire well before age 59 1/2 and I would like to know if an IRA
could have any place in my portfolio. The main question is "Is the benefit of having earnings accumulate
tax-deferred greater than the cost of the 10% penalty for early withdrawal over say a 20 to 25 year period?". I
already have some savings and investments, but I had never considered IRAs because I always planned on
retiring early. If anyone has an answer for me I would appreciate it greatly. I am familiar with the other aspects
of investing that Fools promote-index funds, Foolish Four, small cap stocks, and shorts, and their allocation
within a portfolio, I seek only information about the appropriateness of IRAs or other tax deferred investment
vehicles for my situation.>>

To look at the value of the tax-deferred growth aspect of an IRA (401(k), 403(b), etc) run some numbers: Take a $2000 annual investment (max IRA annual contribution) and grow it at 25% (to be broadly consistent with the various Foolish screens) for 30 years (I'll let you retire at 50, just to keep the numbers round). Then do the same, but reduce your growth rate by 15%, 28%, and 33.6% at various break points in your 30 years of investing, to be consistent with your tax bracket changes as your career progresses and the fact that now you're not investing in a tax deferred environment. You'll find the difference over the time frame to be quite astonishing for not having had tax-deferred growth.

That said, next consider two things: a) the brute force of simply paying the early withdrawal penalty of what you might take out annually, or as a lump sum, for those 9.5 years before you turn 59.5 as compared to the value of that portfolio at age 50; alternatively, b) setting up a program of "substantially equal withdrawals" forever (or maybe only until 59.5; TMF Pixy can answer such a question in the Retirement Planning message board) from your IRA (401(k), and I think, 403(b) retirement plans would have to be rolled into an IRA to do this) and thereby avoid the early withdrawal penalty.

Hope this helps.

Eric Hines

<<<<$1 million, tax-free... that's no retirement? Hmmm....

Just as an experiment, give me a mil and let me try!>>

Sorry - No solicitations. Besides, it's my sworn duty and obligation to undergo the test first just in case it may
be dangerous to loyal readers in this corner of Fooldom. Be assured, though, that I'm perfectly willing to make
this sacrifice. :-O

Regards…..Pixy>>>>

Nope, nope, can't do that--clear conflict of interest. Besides, since third time is a charm, and I'm the third to suggest such a thing, clearly, I'm ideal to conduct a properly objective and rigorous test of the concept. email me, and I'll send you Swiss bank account to which you should wire the $$$.

Eric Hines

Eric,

<<To look at the value of the tax-deferred growth aspect of an IRA (401(k), 403(b), etc) run some numbers: Take a $2000 annual investment (max IRA annual contribution) and grow it at 25% (to be broadly consistent with the various Foolish screens) for 30 years (I'll let you retire at 50, just to keep the numbers round). Then do the same, but reduce your growth rate by 15%, 28%, and 33.6% at various break points in your 30 years of investing, to be consistent with your tax bracket changes as your career progresses and the fact that now you're not investing in a tax deferred environment. You'll find the difference over the time frame to be quite astonishing for not having had tax-deferred growth.

That said, next consider two things: a) the brute force of simply paying the early withdrawal penalty of what you might take out annually, or as a lump sum, for those 9.5 years before you turn 59.5 as compared to the value of that portfolio at age 50; alternatively, b) setting up a program of "substantially equal withdrawals" forever (or maybe only until 59.5; TMF Pixy can answer such a question in the Retirement Planning message board) from your IRA (401(k), and I think, 403(b) retirement plans would have to be rolled into an IRA to do this) and thereby avoid the early withdrawal penalty.>>

It would make for an interesting study that would quickly bog down in tax deferred versus taxable; Roth vs other tax deferred; 20% vs 28% capital gain tax; part of total return to be allocated to dividends vs price appreciation; needed withdrawal vs 72t mandated withdrawal; and a few others I haven't thought of yet. For that reason, I'll volunteer you to do it and I'll check the numbers. How's that for a deal? :-)

BTW, you can take 401k/403b monies from the plans under Section 72t rules without having to go through the drill of transferring to an IRA first. Also, you can take them without worrying about the ten percent penalty at all if you wait until age 55 to retire (provided the monies stay in the plan as opposed to being transferred to an IRA). Also, when 72t withdrawals start, they must continue for the LONGER of five years or until age 59 ½. Start at age 58 and it goes until age 63. Start at age 50 and it goes until age 59 ½. Start at age 54 ½ and it goes for five years.

Regards…..Pixy

<It would make for an interesting study that would quickly bog down in tax deferred versus taxable; Roth vs
other tax deferred; 20% vs 28% capital gain tax; part of total return to be allocated to dividends vs price
appreciation; needed withdrawal vs 72t mandated withdrawal; and a few others I haven't thought of yet. For
that reason, I'll volunteer you to do it and I'll check the numbers. How's that for a deal? :-)>

That's why I suggested just a few numbers--and round ones at that. Just to keep it simple. Anything more complex than back of the envelope doodlings, and you'd have to pay me. Unfortunately, noone can afford what I'd want to charge....

Eric Hines

Eric,

<<... Anything more complex than back of the envelope doodlings, and you'd have to pay me. Unfortunately, noone can afford what I'd want to charge....>>

I'm shocked -- SHOCKED -- that you would demand reimbursement for spending the next two weeks on such an analysis and then expect to get paid for it, too. Oh, the horror of it all. Where does it all end? This is the online world where information is shared willingly and -- more importantly -- freely. Are you really suggesting that one's labors should be rewarded? Think of what that would do to the economy, man! The inflationary spiral would be horrendous and the impact on the individual would be devestating. To avoid paying your fee, others would attempt to do the analysis themselves. That leads to education and self-improvement. Soon they wouldn't need you at all. You would be thrown out of work, and inevitably the economy would collapse. All that just because you want to be paid for your efforts. Hmmph! Some people are just too short-sighted. :-P

Regards.....Pixy

Pixy--

<...Soon they
wouldn't need you at all. You would be thrown out of work, and inevitably the economy would collapse. >

I wish I were that central to the economy. Think of how rich I could get. And how well off everyone else would be following the dictates of Hines-Capitalization. Oh, the wonder of it all....

Eric