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Old 01-24-2010, 10:10 PM
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Thumbs up Need info on which IRA is better ?

Hi Folks,

Tax season is nearing and we have till April 2010 to invest in IRA for year 2009.

So I was thinking on investing around 5K towards IRA (the max limit allowed per person).

I was looking at Traditional IRA through Bank Of America & through Fidelity and have the following questions.

1) Is BOA Traditional IRA good and how does it compare to Fidelity Traditional IRA, have any of you tried investing in it?

2) The Annual Rate of Return is 8% - does it change every year?

3) What happens if we return to india for some reason, we cannot withdraw the money till 59 1/2 years age without penalty, so if we are in India and our IRA account is here, then how do we withdraw ?

4) If we invest in Roth IRA, can we withdraw the money any time we want ?

such questions espectially ques 3) even when I asked BOA they were not sure, because they cannot link immigration and alien status to IRA and they are confused.

So I am posting this question under Tax section of general forum.

If you are someone who has not yet opened any IRA please consider doing it, not only does it provide a better Rate of return but is also good to invest towards retirement.

I hope fellow immigrants will help answer the above questions.

Thanks
Dreamer05
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  #2 (permalink)  
Old 01-25-2010, 12:03 AM
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1) Not sure how good is BOA IRA. But my suggestion is to open with company like Firsttrade and invest in either stocks or Funds.. This way you will have control and you can manage your accounts by investing in funds and stocks. But always there is a risk.
2) 8% return from BOA, that might be the average return. I don't think they can give any guaranty.
3) In case if you go to india, you need to pay penalty. But if your income is low that time you might save some money on tax difference.
4) Roth iRA contributions are after tax contributions. You will not get any tax benefit on this now.But after retirement there will not be any tax on the gains you made. In traditional IRA you will get tax benifit now, but you need to pay tax when you take the money out.
5) Bottom line is it's all depends on your situation. If you think you will not have any income or very low income when you retire, Traditional IRA is the option. If you think you will have some decent income after retirement, but you need more money and save tax on the gains Roth IRA is the option.
6) In both the cases, taking money out when you go to india is not that easy.
7) If you plan properly you might save money on tax when you go to india.I know one guy moved to india in Jan and took all the money from IRA and paid penalty. Because he doesn't have that much income during that year, he saved money on taxes. All these depends on how much money you have and how well you planned your relocation to india.
Hope this will help.
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  #3 (permalink)  
Old 01-25-2010, 09:59 AM
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With a ROTH IRA you can withdraw all your contributions without a penality or tax , because you have already paid the tax on it, BUT whatever earnings you accumilated are penalised at 10% and you have to pay the taxes on them as well if you withdraw before you are 59 1/2. and as the above post mentioned if you plan your earnings withdrawal accordingly you can minimise the tax impact.

There are a few exceptions to the early withdrwal penality

The early withdrawal penalty does not apply to distributions that:

Are a series of "substantially equal periodic payments" made over the life expectancy of the IRA owner.
Are used to pay for unreimbursed medical expenses that exceed 7 1/2% of adjusted gross income (AGI).
Are used to pay medical insurance premiums after the IRA owner has received unemployment compensation for more than 12 weeks.
Are used to pay the costs of a first-time home purchase (subject to a lifetime limit of $10,000).
Are used to pay for the qualified expenses of higher education for the IRA owner and/or eligible family members.
Are used to pay back taxes because of an Internal Revenue Service levy placed against the IRA.


IN MY CASE: I use fidelity for my ROTH IRA and i feel ROTH has several advantages over traditional.
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  #4 (permalink)  
Old 01-25-2010, 02:08 PM
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Default IRA, Roth, Tradational

Case 1:
If you do not contribute or you do not have an employer sponsored 401K plan, open a Traditional IRA account. This will give you an instant $5000 deduction in your taxes.

Case 2:
If you do contribute to an employer sponsored plan and you want to stash away an additional $5000 in another retirement plan (which by the way is an excellent idea), then you have two choices depending on your income. If your AGI is more than $167,000 then your Roth contributions will get phased out and your only option is Traditional IRA. But, in 2010 the income restriction is removed so you can convert to Roth regardless of your income.

Summary:
For me, among the two it is no brainier to pick Roth because tax free gains. If you do not belong to case 1, there are many advantages of Roth over Traditional, one of them is: no forced withdrawal.

Also, 2010 is a special year you can convert your traditional (or Rollover IRA from 401K) to Roth without income restrictions. You can pay the taxes in two years 2010 and 2011. For high income households (esp Bay Area) this is an excellent opportunity.

Regarding where to create an IRA account, I would strongly recommend Vanguard. But Fidelity and T Rowe Price are equally good. The thing to look for is the total investment cost and expense ratio of the funds you are investing in. Don't ever open an account where you have to pay commission to invest. Also avoid actively managed funds with star fund managers.

Among other things, I think all IV members regardless of where they are in their immigration journey, should contribute to the following every year:

401K: 16500 (excluding the employer match)
IRA: $5000 (Roth or Traditional)
College Savings 529: $2000 (If you have kid/nephew/niece)
TIPS/I-Series Savings Bond: Anything that you can stash away in savings.
Other Investments: S&P Index Funds, High Dividend Yield Index, International Index, Domestic and Foreign Bonds, Debt Funds

If you don't believe in equity stay with bonds but don't use stock market performance as an excuse not to save or invest in your future. This small amount of savings (approx 25-30% of your income) over your working years will get compounded and go a long way when your earning potential is not as good as it is now.

Good Luck !!!

Last edited by Canadian_Dream; 01-25-2010 at 08:32 PM.
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  #5 (permalink)  
Old 01-25-2010, 05:20 PM
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All: My friend's income is 210K. He is married and they file jointly. Can he take advantage of traditional IRA for both 2009 and 2010? Can he invest in roth IRA this year?
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  #6 (permalink)  
Old 01-25-2010, 08:31 PM
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He can do traditional IRA every year without any income restrictions. So yes technically he can do it for both 2009 (before April) and 2010. No he CANNOT contribute to Roth IRA, because of his income, BUT he can CONVERT his old Rollover/Traditional IRA to Roth this year and pay taxes in two installments one this year and the next in 2011.

IRA and 401k Contribution Limits
https://retirementplans.vanguard.com...BuildingWealth

From the first link:
You can contribute to a Roth IRA if your income falls below the Roth limits. You're
allowed a prorated contribution if your income falls within the "phase-out" range. If your
income exceeds the income range you won't qualify for a Roth IRA contribution. Though
the 2010 Roth IRA conversion limit is removed, phase out limits still apply for contribution.



Quote:
Originally Posted by unseenguy View Post
All: My friend's income is 210K. He is married and they file jointly. Can he take advantage of traditional IRA for both 2009 and 2010? Can he invest in roth IRA this year?
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  #7 (permalink)  
Old 01-26-2010, 01:02 PM
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Default Workaround for income restriction

I just realized that there is a backdoor trick to solve the income restrictions for this year. Your friend can contribute to Traditional which has no income restriction and then immediately convert to Roth which has no conversion limit. This way your friend can not only convert but also contribute indirectly to Roth. This may require some help from IRA custodian but they might be prepared for this because a lot of people would be converting from Traditional to Roth this year.
Hope this helps.

Quote:
Originally Posted by unseenguy View Post
All: My friend's income is 210K. He is married and they file jointly. Can he take advantage of traditional IRA for both 2009 and 2010? Can he invest in roth IRA this year?
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  #8 (permalink)  
Old 01-26-2010, 06:04 PM
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Hi,

I would like to know if someone knows the answer for this. We are planning to go back to India in 4 years. I don't have any 401-K/IRA account as of now. If I open IRA this year and contribute for next 4 years lets say till 2014. Assuming I go back to India in 2014, And Lets say after 4 years I have 25000 $ in my IRA. Can I withdraw 10000 $ from my IRA. I know I have to pay the penalty of 10% , I wanted to know what tax I need to pay. Would 10000$ would be considered as my annual income of 2015 ? and then above 10% I have to pay tax of that bracket ?

Thanks in advance
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  #9 (permalink)  
Old 01-26-2010, 09:24 PM
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Hi there,

Which investment product is good? I mean less risk and more return, Mutual Funds Or Bonds Or Stocks Or ETFs Or CD? One needs to choose one of investment product while opening IRA.

Thanks,
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  #10 (permalink)  
Old 01-27-2010, 06:22 AM
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Quote:
Originally Posted by coolest_me View Post
Hi,

I would like to know if someone knows the answer for this. We are planning to go back to India in 4 years. I don't have any 401-K/IRA account as of now. If I open IRA this year and contribute for next 4 years lets say till 2014. Assuming I go back to India in 2014, And Lets say after 4 years I have 25000 $ in my IRA. Can I withdraw 10000 $ from my IRA. I know I have to pay the penalty of 10% , I wanted to know what tax I need to pay. Would 10000$ would be considered as my annual income of 2015 ? and then above 10% I have to pay tax of that bracket ?

Thanks in advance
Hi , Your income would be calculated as, your income from the year when the actual withdrawl of the amount occurs plus any additional income from that year. Then your total income would be taxed.

For eg: if you do a withdrawal of 10K before 31-dec-2014 and in 2014, and you earned a salary of 100K , then your total income would be 110K for that year. You will have to pay regular tax on this amount. Plus 10% penalty for early withdrawal on 10K amount.

I would suggest, if your employer has 401(k) plan with matching contribution, then I would recommend investing in that first. Some employers provide 100% match for first 6% , some provide 25% matching on overall contribution etc. varies. That match is a free money. If your employer has such a plan, take full advantage of matching contribution.
Depending on your income your IRA contribution could be tax deductible or not. However, 401(k) contribution also helps you lower your tax bracket thus making you eligible for other deductions that would have been otherwise ineligible for.

After 401K, next choice should be Roth IRA, as you would be paying taxes upfront, and your income would grow tax free should you withdraw the amount upon reaching the age.

If you still have more money left invest it in traditional IRA, or normal individual investment account.

College savings plan: If you have kids, invest in 529 plan every year.

Type of investment. Always have a balanced portfolio. Divide your portfolio between stocks and bonds. Your share of bond % should be = your age. Suppose you are 32 years old , then keep 32% investment in fixed income or bonds, rest invest in stocks and have aggressive investment portfolio for the remaining with maximum possible return.

All the best!
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  #11 (permalink)  
Old 01-27-2010, 12:56 PM
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So If I m settled in India and have no US income then whatever I withdraw from my IRA would be my total income and I have to pay tax on that.
If this is the case then I think those who are very certain that they will settle in India and currently in the higher tax bracket (>25%) would save money even if they withdraw money from IRA. One can save 25% right now and pay 10% + small tax when you withdraw.
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  #12 (permalink)  
Old 01-27-2010, 12:59 PM
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So If I m settled in India and have no US income then whatever I withdraw from my IRA would be my total income and I have to pay tax on that.
If this is the case then I think those who are very certain that they will settle in India and currently in the higher tax bracket (>25%) would save money even if they withdraw money from IRA. One can save 25% right now and pay 10% + small tax when you withdraw.
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  #13 (permalink)  
Old 01-27-2010, 03:30 PM
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Quote:
Originally Posted by unseenguy View Post
After 401K, next choice should be Roth IRA, as you would be paying taxes upfront, and your income would grow tax free should you withdraw the amount upon reaching the age.

If you still have more money left invest it in traditional IRA, or normal individual investment account.
That's incorrect, if you maxed out in Roth by contributing $5000 you CAN'T contribute to Traditional IRA. However you can divide the $5000 between the two IRA's. Of course if you are eligible for Roth you wouldn't want to contribute to Traditional, unless there is a tax benefit by contributing to Traditional.
In most cases there you can't deduct Traditional IRA contribution from income because most people have 401K contributions going on at the same time. So Traditional over Roth: Roth Wins !!!!
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  #14 (permalink)  
Old 01-27-2010, 05:40 PM
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Default

Quote:
Originally Posted by Canadian_Dream View Post
Case 1:
If you do not contribute or you do not have an employer sponsored 401K plan, open a Traditional IRA account. This will give you an instant $5000 deduction in your taxes.

Case 2:
If you do contribute to an employer sponsored plan and you want to stash away an additional $5000 in another retirement plan (which by the way is an excellent idea), then you have two choices depending on your income. If your AGI is more than $167,000 then your Roth contributions will get phased out and your only option is Traditional IRA. But, in 2010 the income restriction is removed so you can convert to Roth regardless of your income.

Summary:
For me, among the two it is no brainier to pick Roth because tax free gains. If you do not belong to case 1, there are many advantages of Roth over Traditional, one of them is: no forced withdrawal.

Also, 2010 is a special year you can convert your traditional (or Rollover IRA from 401K) to Roth without income restrictions. You can pay the taxes in two years 2010 and 2011. For high income households (esp Bay Area) this is an excellent opportunity.

Regarding where to create an IRA account, I would strongly recommend Vanguard. But Fidelity and T Rowe Price are equally good. The thing to look for is the total investment cost and expense ratio of the funds you are investing in. Don't ever open an account where you have to pay commission to invest. Also avoid actively managed funds with star fund managers.

Among other things, I think all IV members regardless of where they are in their immigration journey, should contribute to the following every year:

401K: 16500 (excluding the employer match)
IRA: $5000 (Roth or Traditional)
College Savings 529: $2000 (If you have kid/nephew/niece)
TIPS/I-Series Savings Bond: Anything that you can stash away in savings.
Other Investments: S&P Index Funds, High Dividend Yield Index, International Index, Domestic and Foreign Bonds, Debt Funds

If you don't believe in equity stay with bonds but don't use stock market performance as an excuse not to save or invest in your future. This small amount of savings (approx 25-30% of your income) over your working years will get compounded and go a long way when your earning potential is not as good as it is now.

Good Luck !!!

real nice advice.

thanks
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