You know its tax time. I am working on my return and for the first time this year I actually made some money. The person who prepared my taxes said if I open an IRA and put $4000 in it (the max allowed) I can save about $1500 on my taxes.
I have never thought about retirement before, I'm not even 40 yet, and its hard to imagine thinking ahead that far, yet maybe its worth it.
I guess I am just one of those people who lives for the now and figures one way or another things will work out in the future. Its hard to think of locking away money that I could use now or in the near future.
Does anyone have much experience with these things? I also know there are different types of IRAs out there.
Any feedback would be much appreciated.
Gratitude,
Charlie:thinking:
PeriodThree
03-25-2008, 12:57 PM
The government is giving you $1,500 to save money for retirement (or educational expenses).
The day you open the IRA you receive a 37.5% return on your money.
Another way of looking at it is that you are buying a $4,000 IRA for $2,500.
That is a substantial incentive towards an IRA.
Hey out there in the great Wacco Community,:wink:
I am looking for a little feedback and advice.
You know its tax time. I am working on my return and for the first time this year I actually made some money. The person who prepared my taxes said if I open an IRA and put $4000 in it (the max allowed) I can save about $1500 on my taxes.
I have never thought about retirement before, I'm not even 40 yet, and its hard to imagine thinking ahead that far, yet maybe its worth it.
I guess I am just one of those people who lives for the now and figures one way or another things will work out in the future. Its hard to think of locking away money that I could use now or in the near future.
Does anyone have much experience with these things? I also know there are different types of IRAs out there.
Any feedback would be much appreciated.
Gratitude,
Charlie:thinking:
lifequest
03-25-2008, 03:20 PM
I agree with PeriodThree... there are other types of IRA's like the Roth IRA. You don't get an up front tax benefit like you do with the traditional IRA but with the Roth you contribute similar amounts and any interest or appreciation (if invested in a mutual fund and the stock market recovers) accumulates tax free. You've got to keep it in the Roth at least five years and have to be 59 1/2 years old to withdraw it but none of it will reported as taxable income. With the traditional IRA you have to eventually report all the contribution and interest/gain as income as you withdraw it in retirement.
Social Security is going to be around in the future but in a modified form... maybe the benefits will be reduced or the age to start drawing it will increase.
Still its nice to have a dependable source of income coming in. Traditional pensions are disappearing except for public sector employees. So overall its better to save if you can and try to forget about it.
MsTerry
03-25-2008, 05:35 PM
I agree with PeriodThree... there are other types of IRA's like the Roth IRA. You don't get an up front tax benefit like you do with the traditional IRA but with the Roth you contribute similar amounts and any interest or appreciation (if invested in a mutual fund and the stock market recovers) accumulates tax free. You've got to keep it in the Roth at least five years and have to be 59 1/2 years old to withdraw it but none of it will reported as taxable income. With the traditional IRA you have to eventually report all the contribution and interest/gain as income as you withdraw it in retirement.
Social Security is going to be around in the future but in a modified form... maybe the benefits will be reduced or the age to start drawing it will increase.
Still its nice to have a dependable source of income coming in. Traditional pensions are disappearing except for public sector employees. So overall its better to save if you can and try to forget about it.
It is nice if you don't have to worry about needing the extra 4k, but if you start to withdraw before maturity, your savings will vanish quickly and you will actually owe.
On the other hand in your case it seems you have a tax advantage because of the IRA not from the IRA, you should ask your Tax adviser how much it costs you if you were to withdraw all monies from the IRA, that way you know if you come out ahead.
danejasper
03-25-2008, 09:03 PM
Is it worth it? Wow, is it ever! You earn a huge "return" immediately by sheltering that money from taxes, and then that amount grows, also tax free.
Tax free compounding is a massive gain. Always max your tax deferred savings if you can afford to do so. Start early, and contribute often. Discipline yourself if you're employed by having it taken automatically from each paycheck. If you're not employed, set up an automatic transfer from your checking to the IRA each month - you might not even miss the money.
If you're 35 or so, here is another way to look at this. At a nominal rate of return, every $1 that you put in your IRA today is likely to be worth nearly $10 when you are 65. (Note that inflation will eat about 1/3 of this - but still!)
It's like someone is offering to trade you $10 bills for $1 bills. You will really want to have taken this deal in the future.
Play around with the numbers a bit here:
https://www.dinkytown.net/java/RegularIRA.html
Look in particular at the post-tax total (IRA after taxes - the dark purple portion). That's what you'll have to live on (plus any social security that you might have earned). So, how will that let you live?
As a guideline, in order to avoid rapid depletion of your retirement funds, many financial advisers suggest spending just 4% of your total each year. This allows returns minus inflation minus this draw-down to sustain a long term.
So, if you manage to sock away $1M, this means you'd be living on $40,000 a year. Is that enough - if you're retired, have hobbies, want to travel, buy and RV, whatever?
Now - plug $4,000 into the calculator, and work out how much you'll be willing to put in each year between now and retirement. Put in your age, and see what it comes up with. (the 8% suggested return is a reasonable, if somewhat conservative one)
Even if you are disciplined, you won't get near $1M - so you'll be living on less than $40,000/yr. (plus SSI - which is not that much money)
The point is - it's never too late to start, but you really, really should start NOW.
-Dane
danejasper
03-25-2008, 09:06 PM
Oh, and whether he said it or not, the quote often attributed to Einstein really is a good one.
If you have $4,000 available to save $1,500 on taxes, go for it. If you are concerned about tying up the funds, consider a Roth IRA. Since contributions to a Roth IRA are after tax, the amount you contribute can be withdrawn at any time without penalty. You won't save money now, but if you really need the $4,000, you can back it out.
The stock market is down right now. It may be down a little more before it goes up, but for the long term, now is still an ideal time to start investing. Any index fund that tracks the S&P 500 is probably the simplest.
I am in my 20s and do not expect to get anything from social security, let alone any kind of pension. I started saving for retirement before I bought a car, and if buses in my area ran on Sunday, I could have done without that. I would have been saving earlier, but at the time, my rent on the cheapest possible apartment was 85% of my income. Saving before 40 still puts you ahead, and if social security is not cut drastically, consider it a bonus.