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Author: Matt83076 Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 75539  
Subject: newbie question: Traditional/Roth? Date: 11/22/2000 1:55 AM
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This is my first time in the discussion boards, and I am hoping for a little guidence concerning weather I should open a regular or roth ira. I have been messing with the calculators and I am a bit confused. I will likely be having a little trouble making the maximum contribution to an ira for a few years (I am 24 and trying to start another job).

My question is: would it be better to start out with a traditional ira, and then change to a roth when I can make the maximum contribution? Or should I just start out with the Roth and be done? It seems to me that if you can't make the max contribution per year, a tradional ira is better. But if you can contrubute enough to make up for the tax, a roth is better. If so, is it even worth it to try and convert later on? Thanks for any help!!!
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Author: tsouth Two stars, 250 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 26278 of 75539
Subject: Re: newbie question: Traditional/Roth? Date: 11/22/2000 7:28 AM
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My question is: would it be better to start out with a traditional ira, and then change to a roth when I can make the maximum contribution? Or should I just start out with the Roth and be done? It seems to me that if you can't make the max contribution per year, a tradional ira is better. But if you can contrubute enough to make up for the tax, a roth is better. If so, is it even worth it to try and convert later on? Thanks for any help!!!

.....................

The likelihood is probably high that you'll be in a higher tax bracket when you retire than you are now (just starting out), so that leads me to advise you go for the Roth IRA. Since you get years and years of the profits growing with no taxes.

Also, if your new job has a 401k, you can continue to contribute to your Roth IRA AND the 401k, in the same year, if you chose. If your new job has a 401k and you opened a Traditional IRA, you could continue to contribute to the IRA, but you couldn't deduct those contributions on your taxes (even if your employer has the 401k and you aren't putting into it). Also, it might give some headaches later if some of your contributions to the Traditional IRA are deductible and some not.

The Roth IRA also has some other good things going for it. I especially like the fact that after 5 years, you could withdraw the money you put in (not the profits) without penalty -- so you could have this pot of money that is being saved towards your retirement, but it could also act as part of your emergency savings (after the 5 years at least).

If your new job has a 401k, especially with any match, I would advise that you start putting into it as soon as possible (whatever you can afford). Then, increase your contribution every time you get a raise.

Best of Luck,

Teresa

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Author: EditorialWe Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 26283 of 75539
Subject: Re: newbie question: Traditional/Roth? Date: 11/22/2000 4:04 PM
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The Roth IRA also has some other good things going for it. I especially like the fact that after 5 years, you could withdraw the money you put in (not the profits) without penalty -- so you could have this pot of money that is being saved towards your retirement, but it could also act as part of your emergency savings (after the 5 years at least).

OK, I have a dumb question. I know you can withdraw money from a Roth after 5 years for, among other things, a first time home purchase.

But here's where I don't get. I opened my Roth in 2000 with $2k. Then I contribute $2k per year until 2005. Am I eligible to withdraw the whole $10k that I contributed...or just the $2k that has been in there 5 years>

Clarification welcome ...

EditorialWe


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Author: TMFPixy Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 26284 of 75539
Subject: Re: newbie question: Traditional/Roth? Date: 11/22/2000 4:21 PM
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EditorialWe asks:

OK, I have a dumb question. I know you can withdraw money from a Roth after 5 years for, among other things, a first time home purchase.

But here's where I don't get. I opened my Roth in 2000 with $2k. Then I contribute $2k per year until 2005. Am I eligible to withdraw the whole $10k that I contributed...or just the $2k that has been in there 5 years>

Clarification welcome ...


Well, actually I'll confuse you some more. :-)

There's a difference between "qualified withdrawals" and withdrawals, and there's also a priority of withdrawal from a Roth IRA. As to priority of withdrawal, they are:

a. First from all annual contributon money.
b. Next from all conversion contribution money from the oldest to the youngest.
c. Last from earnings.

You may take your annual contribution money at any time for any purpose free of taxes and penalty. You may take your conversion contribution money without taxes but WITH an early withdrawal penalty within the first five years of the conversion, and free of taxes and penalty after five tax-years.

You may take earnings penalty and tax free only after the account has been open for five tax-years AND you have attained age 59 1/2. Do so before then, and the money will be taxed and penalized UNLESS it is a qualified distribution, then it won't be taxed or penalized. If it's not a qualified distribution but otherwise meets one of the other exceptions for an early IRA withdrawal, then the earnings will be taxed, but not penalized.

In the example you cited, all the money to be taken will be annual contribution money after five years. Therefore, neither taxes nor penalty will apply.

For details, see our IRA at http://www.fool.com/money/allaboutiras/allaboutiras.htm or read IRS Publication 590 (Individual Retirement Arrangements) available at http://www.irs.ustreas.gov/forms_pubs/pubs.html.

Regards..Pixy


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Author: BookmFool Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 26285 of 75539
Subject: Re: newbie question: Traditional/Roth? Date: 11/22/2000 4:39 PM
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The Roth IRA also has some other good things going for it. I especially like the fact that after 5 years, you could withdraw the money you put in (not the profits) without penalty

Actually, that's not entirely true. With a Roth, you can withdrawal your contributions any time, because they've already been taxed. There's some confusion between the Roth and the Traditional. With a Roth, first time homebuyers can pull out $10,000 in profits penalty free and tax-free if the money has been in the Roth IRA for at least five tax years, not if the Roth has been open for 5 years. So EditorialWe, in your hypothetical situation, only that first $2000 could be pulled out if it were a Traditional IRA. If it were a Roth, whatever you put in (your contributions) is fair game.

Early distributions from a Traditional IRA used to pay for a first time home purchase (up to $10,000) will not be subject to the 10% tax penalty, but will be subject to ordinary income taxes.

HTH

BmF

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