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Author: BuildMWell Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 75810  
Subject: Re: 401(k) and also IRA contributions Date: 10/7/2003 4:00 PM
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"Can I set up an IRA and contribute to that also?" - SFFrankK

I do not think so...not a traditional IRA anyway. Maybe a Roth.

However, be careful with getting too much tax deferred investment. They can become a money trap if you are not thinking ahead far enough.

I would always max out the company 401-K and build on this for your retirement. However, there is a lot to be said for having a really nice portfolio that is not tax deferred. Pay the tax and own your investments outright. The capital gains will be taxed when you take them, but you can take them when you choose...not when the IRS tells you you can take them.

Think about it this way. Let's say you amass several million bucks in an IRA. You are 65 years old and getting your Social Security. At 70-1/2 you will have to take your distributions no matter what you want to do. Thus, it is really smarter to take out of the IRA as early as possible. The longer you delay, the higher the tax bracket your future withdrawals will put you into. Plus, you will end up giving back almost all of your S/S income in taxes since 85% will be figured as income. You are, in simple terms, "Screwed!"

Here you though you were so smart by deferring the taxes and you actually end up in the maximum tax bracket anyway. However, if you paid the taxes when you earned the income and invested in a non-tax deferred account, you are free to take any amount out at any time and pay the capital gains. Plus, you can write-off any losses against gains to eliminate the cap gains to begin with. In an IRA, a loss is just a 100% loss. There is no write-off against gains because you have not paid any tax yet. The applicable tax is yet to be determined...and that is the trap!

I retired at age 49. I live off of my IRA and I love spending the gains from my non-tax deferred account when I want something nice...like a new car. I sell some stock and pay cash. If that money were in an IRA, I would have to think twice before doing anything. If the withdrawal was too great, I would have penalties and greater taxes. In the non-tax deferred account, I have a 15% capital gain at most...and with some losses I do not even have to pay that.

Now, you might argue that I could not have known that the government would drop the cap gains tax to 15%...and I didn't. But, that makes my point exactly. We never know how the rules may change. Having some tax deferred and some non-deferred is a smart move. That leaves all of your options open for the future. Then, you have control and can move either way that makes the best sense financilly.

I believe the beauty of IRA's is very much oversold. If you will think this whole thing through, you will see what a money trap the IRA can be. But, that is just my opinion.
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