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Started By
Message
savings account vs roth IRA
Posted on 4/9/09 at 8:00 pm
Posted on 4/9/09 at 8:00 pm
Can someone explain to me what the benefits of a roth IRA would be over an online savings account (if the savings acct rate was about 80 basis points higher than ira)? I was not sure how much of a tax benefits the IRA provided and was under the impression that withdrawing before a certain point would result in a penalty.
3
Posted on 4/9/09 at 8:04 pm to Southbound
If you put your money into a roth IRA and leave it in until you are 59 1/2 years old, you can take your money out tax free.
Posted on 4/9/09 at 9:37 pm to Southbound
Savings accounts are for emergency funds that you might need at any time without warning. Might be next month, for that matter. You can't withdraw often (like with a checking account) but you can one or twice a month.
An IRA (Roth or traditional) is for what you want to live off after retirement. The idea is that you don't touch it until you don't work for a living. Even for emergencies. If you do, it will cost you a lot.
They are for totally different purposes.
An IRA (Roth or traditional) is for what you want to live off after retirement. The idea is that you don't touch it until you don't work for a living. Even for emergencies. If you do, it will cost you a lot.
They are for totally different purposes.
Posted on 4/10/09 at 3:41 pm to foshizzle
also money in a roth grow tax free until retirement, once it is in the ira it can be invested and hopefully earn a higher rate of return than in a savings acct.
Posted on 4/10/09 at 3:58 pm to foshizzle
quote:
The idea is that you don't touch it until you don't work for a living. Even for emergencies. If you do, it will cost you a lot.
Not true and that is one way that a Roth is very different from a traditional IRA. You can withdraw your Roth contributions without any penalty. Any profits must remain though. This is why maxing out your Roths is a no brainer if you can afford to do so. Tax free growth and tax free withdrawls after retirement.
Posted on 4/10/09 at 9:08 pm to Tigris
quote:
Not true and that is one way that a Roth is very different from a traditional IRA. You can withdraw your Roth contributions without any penalty.
Heh - I was wondering if anyone would take the bait.
What you say is completely correct, one can withdraw contributions at any time without penalty. Oddly enough, I had one guy on this board a few months ago claiming to be a financial advisor who thought that wasn't true. I hope his clients didn't stick with him.
But back to my main point, which is that a savings account is intended to be for occasional, unpredictable emergencies. A Roth is better than a traditional IRA for this, but is still not something you want to raid.
The reason why is that earnings on the contribution are also tax-free. Withdrawing principal means your tax-free earnings decline too. And there is a statutory limit on how quickly you can catch up in better times.
Suppose you are in a temporary bad spot and have to withdraw $20K from your Roth. And further suppose you contributed $40K so far. There's no penalty for this, but suddenly you are earning tax-free on the remaining $20K instead. Meanwhile, when times are better you can still only contribute $5K per year, it'll be 4 years before you are back to where you were. Even if you can contribute more, you can't and get the tax benefit.
You're better off getting a bridge loan or HELOC for situations like that. Or raiding a savings account. Sorry, but I still believe the Roth is not a good emergency vehicle. Better than nothing, but not a good choice.
Posted on 4/12/09 at 1:10 pm to Southbound
What is taxed when you withdraw from the roth ira upon retirement and at what rate?
Posted on 4/12/09 at 5:34 pm to Southbound
quote:
What is taxed when you withdraw from the roth ira upon retirement and at what rate?
Nothing - it is tax-free. That's the biggest difference between a Roth and a traditional IRA. With a traditional IRA you can write off the contributions but you pay taxes when you do withdraw. It is tax-deferred.
With a Roth you cannot write off your contributions. You pay taxes *before* you contribute. This is why you can take out your contribution at any time without penalty - you already paid tax on that. The nice part is that after 59 1/2 you can also take out any earnings tax free too. You can't do that with a traditional IRA.
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