Information and discussion on IRA accounts

[pappu]

Can someone explain the
- Benefits of ROTH IRA vs IRA
- Keeping the money in 401k at this time of the economy vs converting to IRA
- Tax benefits when keeping money in IRA accounts
- Any recommendations on what companies to consider for investment in such accounts.

[reedandbamboo]

A basic difference between the traditional IRA and the ROTH IRA is that funds contributed to a traditional IRA could be tax-deductible in the year of the contribution, whereas the ROTH IRA contribution is made with after-tax income. The tax-deductibility of the traditional IRA depends on your AGI as well as whether you are an "active participant" in your company's retirement plan. There are phaseout AGI limits to help you determine the deductibility of your contribution.

A traditional IRA grows tax-deferred until withdrawal. So, when you make your withdrawal from the account, the earnings on a traditional IRA will be taxed, whereas the ROTH IRA grows tax-free (permanently --> both earnings and contributions are not subject to taxation). If withdrawals are made prior to age 59.5, a 10% penalty will apply to both kinds of IRAs.

With the traditional IRA, one is required to make withdrawals starting from age 70.5 whereas with a ROTH IRA one is not required to make any withdrawals at any age. Furthermore, with a ROTH IRA, the contributions can be withdrawn at any time without any penalty.

The annual contribution limits are the same for both kinds of IRA (I think its $5000 this year?).

Late last year I read about the Democratic Congress discussing about a government take-over of worker's IRAs and other private retirement accounts. This is to be kept in mind considering the state of the nation's economy. I have a ROTH IRA and was an active contributor to the account but talk of confiscation is giving me pause.

As for a good place to set up your account, I think Vanguard and Fidelity are a couple of good low-expense firms to be with. If you prefer to actively manage your own funds, go with a discount broker like Scottrade. None of these brokerages have account maintenance or set-up fees.

For more information, here is a link:

http://www.aarp.org/money/financial_...onal_iras.html

[deafTunes123]

Many financial advisers are suggesting that, this is the right time to convert from Traditional IRA to ROTH IRA (if there are heavy losses during the recent market turmoil)., so that the taxable amount will be less than the regular conversion.

Do any one know what is the dead line to make that conversion? Is it Dec 31, 2008 or April 15, 2009?

Any accurate answers please ?

[Caliber]

One can convert to Roth IRA from IRA only if their gross pay per family is less than 100K in 2009 and no limit in 2010. You will be paying taxes only on the gains and all of us know there are no gains but LOSES.

One should explore this option if their gross is less than 100K.

Originally Posted by pappu

Can someone explain the
- Benefits of ROTH IRA vs IRA
- Keeping the money in 401k at this time of the economy vs converting to IRA
- Tax benefits when keeping money in IRA accounts
- Any recommendations on what companies to consider for investment in such accounts.

[we_can]

If the employer matches your 401K contribution, then the first thing to do would prob. be to contribute to 401K. That is because you would otherwise miss that free money your employer is giving. Note also that 401K contribution is pre-tax but you would end up paying tax when you withdraw the money later.

If there is not matching contribution by employer, then ROTH is the somewhat better option. In the case of ROTH IRA, you contribute with after tax money but that grows tax free and when you withdraw it, there are no taxes to pay.

Regarding places to open, 401K is of course determined by your employer. IRA and ROTH IRA can be opened at most of the big brokerage firms.

[desi3933]

Originally Posted by pappu

Can someone explain the
- Benefits of ROTH IRA vs IRA
- Keeping the money in 401k at this time of the economy vs converting to IRA
- Tax benefits when keeping money in IRA accounts
- Any recommendations on what companies to consider for investment in such accounts.

With IRA, you can exercise more control how funds are invested. With 401(k), one is limited to investments (mutual funds) offered by the 401(k) administrator.

One can withdraw money from IRA for eligible health and educational expenses without penalty. Also, one can withdrwa $10,000 without tax penalty for first time home purchase.

Personally, I maintain both 401(k) Solo and Roth IRA. 401(k) solo allows me put up to $44,000 per year.

__________________________
Not a legal advice.
US Citizen of Indian Origin

[desi3933]

Originally Posted by Caliber

One can convert to IRA from 401K only if their gross pay per family is less than 100K in 2009 and no limit in 2010. You will be paying taxes only on the gains and all of us know there are no gains but LOSES.

One should explore this option if their gross is less than 100K.

>> all of us know there are no gains but LOSES.
That may be not true for everyone. My 401(k) for 2008 had 4.2% gain and had always positive returns every year since it was established in 2003.

In every investment, it is important to know when to EXIT to get good returns. Personally, I use technical analysis for Entry and Exit.

Good Luck.
__________________________
Not a legal advice.
US Citizen of Indian Origin

[Eternal_Hope]

One cannot contribute to a Roth IRA if:

1. Single or head of household, and annual adjusted gross income (AGI) > $95,000
2. Married filing jointly, and AGI > $150,000

Personally I think that if you are under 45 years of age (and still have another atleast 15 years left to retirement) then sticking with 401(K) (with matching company contributions) is a good strategy for now. The key is to start shifting the portfolio towards less riskier assets 10~15 years before retirement.

[gcdreamer05]

hi gurus,

I am not familiar with IRA and hence have some dumb a.k.a basic questions.

Hope someone can answer.

1) My employer (a desi) does not want us to open 401(k), or he says no to it, so the only possible option for me would be Roth IRA.

2) If i invest in Roth IRA, will the money in that reduce based on the market conditions, (what i am asking is, is it like stocks or is it like a money market account) ?

3) I have been a tax payer for the past 6 yrs (being in US), and i am yet to buy my first house, so will i be eligible for first time home buyer withdrawal from Roth IRA when the time comes to buy a house ?

4) Can you please suggest any good online investment firms which help us open a Roth IRA?

5) How to invest, we just link our savings accoutn and do a online transfer (or) is there any other special way to invest?

6) One more important question, can i now open a roth IRA account and contribute for 2008 tax year ? is that allowed since it is not yet april 2009.

Thanks guys.

[fromnaija]

Originally Posted by gcdreamer05

hi gurus,

2) If i invest in Roth IRA, will the money in that reduce based on the market conditions, (what i am asking is, is it like stocks or is it like a money market account) ?

It depends on your investment strategy so yes your investment may lose value.

3) I have been a tax payer for the past 6 yrs (being in US), and i am yet to buy my first house, so will i be eligible for first time home buyer withdrawal from Roth IRA when the time comes to buy a house ?

Yes you can withdraw funds to buy your first home.

4) Can you please suggest any good online investment firms which help us open a Roth IRA?

I use Sharebuilder which is low cost.
http://www.sharebuilder.com

5) How to invest, we just link our savings accoutn and do a online transfer (or) is there any other special way to invest?

Yes, most online brokerage firms will allow you to link to your savings or checking account.

6) One more important question, can i now open a roth IRA account and contribute for 2008 tax year ? is that allowed since it is not yet april 2009.

I believe you can still invest in IRA for 2008 tax year up till April 1, 2009.

[akhilmahajan]

Let me ask you this. If the GC does not go through and have to leave the country. So, can one take out the money after paying 10% penalty and i think the taxes also instantly, or are there any other catch involved also.

GO IV GO. TOGETHER WE CAN.

[reedandbamboo]

Originally Posted by akhilmahajan

Let me ask you this. If the GC does not go through and have to leave the country. So, can one take out the money after paying 10% penalty and i think the taxes also instantly, or are there any other catch involved also.

GO IV GO. TOGETHER WE CAN.

With the ROTH IRA, you can withdraw your contributions at any time, penalty and tax free (since your contributions are after-tax anyway). The earnings (if any) will be subject to the 10% penalty if they are not "qualified" (qualified distributions or withdrawals fulfill certain criteria specified by the IRS ... such as for first-time homebuyers, or education, etc). Please note this tax-exemption is specific to the Roth IRA and not the traditional IRA.

[gcdreamer05]

why is roth ira good if there is no tax benefit for it, what i mean is , isnt traditional IRA good because your AGI reduces and it helps in tax filing....

But if i invest in roth IRA my taxable income does not reduce....
I can as well invest my after tax money in a money market account right, why is roth IRA so good ?

1) Should we not invest in traditional IRA?
2) Like roth ira does traditional IRA have any benefit for first time home buysers ?

[crazyghoda]

A traditional IRA or 401K while giving you the upfront deduction from your income, doesnt really protect you from taxes. You will still owe taxes on your contributions as well as the earnings when you withdraw it in retirement. All it does is DEFER your taxes not eliminate them.

The Roth IRA and 401K while giving you no upfront tax benefits, will never tax any earnings when withdrawn in retirement. This means that if you start a Roth IRA at 30 and contribute every year the max allowable and assuming an average return of 8% pa on your contribution, you could end up with a neat nest egg at 60 when you retire. However, unlike a Traditional IRA or 401K that money is yours dollar for dollar. No one is going to tax it, no matter what your tax rate in retirement. OTOH, you will owe federal and state taxes on withdrawals from a traditional IRA or 401K account.

Bottom line, if you believe that you will be in a lower tax bracket in retirement choose the traditional option. If you believe tax rates will be higher in retirement (and given the mess we are in and the deficit thats almost a certainty) choose the Roth.

Originally Posted by gcdreamer05

why is roth ira good if there is no tax benefit for it, what i mean is , isnt traditional IRA good because your AGI reduces and it helps in tax filing....

But if i invest in roth IRA my taxable income does not reduce....
I can as well invest my after tax money in a money market account right, why is roth IRA so good ?

1) Should we not invest in traditional IRA?
2) Like roth ira does traditional IRA have any benefit for first time home buysers ?

[jindhal]

Originally Posted by gcdreamer05

why is roth ira good if there is no tax benefit for it, what i mean is , isnt traditional IRA good because your AGI reduces and it helps in tax filing....

But if i invest in roth IRA my taxable income does not reduce....
I can as well invest my after tax money in a money market account right, why is roth IRA so good ?

1) Should we not invest in traditional IRA?
2) Like roth ira does traditional IRA have any benefit for first time home buysers ?

1) Your taxable income doesnt reduce with a ROTH IRA but you dont pay any tax on the income you make from your ROTH Account. You can invest the money from your roth into stocks, bond or just plain money market. When you sell your stocks and make a neat profit.. its all tax free !

2) If you buy a home for the first time you can withdraw 10000 from your roth account. Now on a ROTH you can withdraw your contribution at any time so the 10,000 is all earnings that you have on the account. (if you contribute 4K per year from 2005 to 2010 you can withdraw 20K without any tax penalties and any profit that you might have made from that 20K you can withdraw upto a limit of 10K) there are additional conditions other than just buying a home listed in the IRS Publication. I dont remember the exact number but its something like publication 590.