I am trying to figure out some things about roth and traditional IRA's. I know that a traditional IRA is tax deductible. When you draw out of a traditional IRA, are you taxed at the long term capital gains rate for selling stock or at your current income tax rate? If it is your current income tax rate, aren't you not paying any taxes if you are retired since you are not generating any more income. Also, I have been told that I should convert to a Roth IRA since I am young(24) and just started my IRA last year with the maximum contribution(2,000). My conversion costs should be pretty low since I made about $300 in a mutual fund(big mistake!) on the 2,000 so I will be taxed on the 2,300. When I put this info. into the calculator for "Should I convert to Roth IRA?, I got a better return from the traditional. My income is around 32,000 so I am in a lower tax bracket. Is this why the calculator is giving me this result. Any help would be greatly appreciated.
I am 25 and have around $10,000 in a 401K, but I am looking at finding a new job that does not offer a 401K plan. Should I roll that money into a IRA, Roth IRA, or Maybe a mutual fund like Vanguard Growth or Index 500? Any advice would be greatly appeciated.When the money comes out of a regular IRA it is tax at your current rate. Don't assume your current rate will be less than you are paying now. It could be higher. Probably will be since you are 25 and realize the need to start saving.Go fo the ROTH.
When you draw out of a traditional IRA, are you taxed at the long term capital gains rate for selling stock or at your current income tax rate?When you withdraw from a traditional IRA, it is at your current income tax rate.Deciding whether or not to convert can sometimes be a difficult choice. There is an article here on the Fool which might help you:http://boards.fool.com/message.asp?id=1040013000441002&sort=postdate
<<<Also, I have been told that I should convert to a Roth IRA since I am young(24) and just started my IRA last year with the maximum contribution(2,000). My conversion costs should be pretty low since I made about $300 in a mutual fund(big mistake!) on the 2,000 so I will be taxed on the 2,300. >>>By all means, convert to a Roth IRA. It's the only good thing that Congress/Government has done in the past 10 years!!! What little, and I stress little when looked at in the big picture sense, taxes you'll pay on the conversion is laughable. Forty years from now when you start withdrawing from your Roth IRA, TAX FREE, you'll thank yourself.Quick math, even if you're in the 28% bracket, you'll owe maybe $644. If you're in the 15%, $345. I'd pay that in a second and consider it a downpayment on a million TAX FREE dollars.JLC
>> ..you'll owe maybe $644. If you're in the 15%, $345. I'd pay that in a second and consider it a downpayment on a million TAX FREE dollars.I think thats over simplifying it. The tax you pay now no longer factors into the compounding part of the equation. People often compare a $2000 Tradition IRA to a $2000 Roth IRA contribution, but, as you pointed out, the Roth contribution will cost you more in taxes. To my figuring the tax upon withdrawal for the traditional IRA (that has compounded on the unpaid tax in the beginning) is exactly the same as the upfront tax for the Roth. Now I know equations make everyones head swim but these aren't too dificult.Traditional IRA:s=p*(1+i)^n*(1-r)This states that value,s (what you get) equals principle times the quantity 1 plus interest (assummed returns, dividends, capital gains, etc.; most pick between 8 and 12%) raised to the power n (number of years invested) (so far this is simple compound interest, stick with me) times the quantity 1 minus the tax rate (to acount for taxes paid at retirement).OK, lets compare to a Roth:s=p*(1-r)*(1+i)^nHere you've paid taxes up front so to compare apples to apples you're investing less. Then compound that amount. If you look closely these equations are identical.The difference is that for the Roth your taxed at the current rate, for the Traditional IRA the tax rate is whatever it will be at retirement. Some believe taxes will go up. History has certainly shown us this. But you must also consider that you will have less income in retirement (typically you can live comfortably with 80% of your final income, and if you've paid off your mortgage, quite a bit less) so a traditional IRA is better.Why then all the ballyhoo regarding the Roth? Because the Roth contribution is after tax and the limits for both IRA types are set at $2000, the Roth essentially allows a gross up contribution of ~$3000 depending on your current tax rate (this number comes from $2000/(1-r) assumming r is 33% (28% fed + 5% state)) (the p in the above equation). In essence, the Roth allows a larger annual contribution limit.The other reason the Roth gets so much press is the limits for participation are set much higher, allowing more high income people to participate.Doug
Good insight and thought, but nothing is ever so simple. I was looking from a stand point of this being a new college grad just starting out. Chances are, his/her tax bracket will never be this low again. And, if he's is successful in his/her career and investing, post retirement tax bracket will be high/higher still. So from my angle, the little taxes paid now will be less than the more paid later from a traditional IRA.JLC
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