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Author: dsemmler Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 75381  
Subject: Re: maximum contribution/year? Date: 7/28/2003 4:04 PM
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What is the difference in a retirement account (IRA or 401k) vs. the investment account you have mentioned, besides the retirement account limits?

The 401(k) account is funded with pre-tax dollars and the money can grow in a tax-deferred environment. You will not pay any taxes on the contributions or earnings/dividends until you begin to take distributions. A Traditional IRA works in a simialr fashion to the 401(k) but has a lower contribution limit. A Roth IRA is a little bit different animal. The Roth is funded with after-tax dollars and the money grows without being taxed. The key difference here is that the money is not taxed when you begin taking distributions (assuming the current tax laws of course).

A standard investment account, as mentioned as the alternate to the retirement accounts, is also funded with after-tax dollars. However, any dividends are taxable income and you will be responsible for any capital gains tax when selling a position. However, unlike a retirement account, you can get a tax benefit from a capital loss in a standard investment account. Typically, an account like this would be opened with a discount broker, full-service broker or mutual fund company.

I can open an account with some boker, diversify it, and hopefuly earn $550k over 30 years. Then I have the retirement account with $450k, which equals $1Mil. Is that the example you are referring to?

I assume that is what the other poster was referring to. Given that retirement accounts have various limits to how much you can contribute, you may find it necessary to invest funds in a taxable account, as mentioned above. Have you run some rough numbers to determine how much you will need for retirement? A good rule of thumb is to determine what salary you would like to draw in retirement and multiply that by 25. For instance, if you want a salary of $50,000 in retirement, you would need approximately $1.25 million in retirement savings.

Are the differences tax advantages and limitations and that is all? I also know there are some borrowing penalties on the retirement accounts.

For the most part, yes. The key differences are the tax advantages and contribution limits. And you are correct, there are certain penalties related to distributions from a retirement account depending on a variety of circumstances. In a nutshell, it is best not to borrow from your retirement accounts until you are retired.

Hope this helps some. BTW, I am still in the learning process as well and still planning what I need to do to reach my goals.

dt
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