Author Topic: Roth or Traditional IRA for Lending Club Investment?  (Read 8522 times)

watermen

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Roth or Traditional IRA for Lending Club Investment?
« on: February 09, 2013, 05:52:16 PM »
Was reading MMM experiment on Lending Club, would like to open an IRA account there as well. But I don't know which one is better? Roth or traditional?

I don't have any IRA in the past, this is new to me. Please kindly guide me. Thanks.

etselec

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Re: Roth or Traditional IRA for Lending Club Investment?
« Reply #1 on: February 09, 2013, 06:35:05 PM »
Lots of people will argue the fine points of this (there are whole forums dedicated to it, really) but here are the basics. Both accounts have tax benefits - just different kinds.

In a Traditional IRA, you fund the account with pre-tax money and then pay taxes when you withdraw. So if you made $55,000/year and put $5000 into a Traditional IRA, you'd claim it on your taxes and only pay tax on $50,000 of income. Then when you withdraw money from the Traditional IRA, it counts as taxable income and you pay taxes on it like usual. This is good if you are in a high tax bracket now, and you think you will be in a lower tax bracket later. It's usually difficult to take money out of a Traditional IRA without paying a penalty.

In a Roth IRA, you fund the account with post-tax money and then pay no taxes when you withdraw. So if you made $55,000/year and put $5000 in a Roth IRA, you'd still pay taxes on all $55,000 of your income, but then when you go to withdraw the money, you don't need to pay any tax. This is good if you're currently in a low tax bracket and think you might be in a higher one later; it's also good because there are fewer restrictions on when you can take the money out (you can take your contributions out at any time - earnings have some different rules about them).

Clear as mud? :)

watermen

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Re: Roth or Traditional IRA for Lending Club Investment?
« Reply #2 on: February 09, 2013, 06:39:56 PM »
Thanks for the prompt reply.

For either one, do I have to pay tax for whatever I earned in the IRA account on a yearly basis?

grantmeaname

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Re: Roth or Traditional IRA for Lending Club Investment?
« Reply #3 on: February 10, 2013, 06:39:04 AM »
No, you don't pay tax on capital gains or dividends within either type of IRA account.

jfLip

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Re: Roth or Traditional IRA for Lending Club Investment?
« Reply #4 on: February 10, 2013, 07:45:06 PM »
I'm new to this and was wondering the same thing too, watermen.  For tax purposes, it's less of a hassle to use an IRA account vs. plain ole' bank account for Lending Club funds, right?

Left

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Re: Roth or Traditional IRA for Lending Club Investment?
« Reply #5 on: February 11, 2013, 01:29:55 AM »
I'm in the same boat, planning to jump into lending club wit a roth ira. From what I can tell, it is easier to do with an ira because there are no taxes on it, only time is when you start withdrawing the earned amount in retirement.

in a plain bank account, you still have to pay taxes on the interest you make. Been seeing people say they didn't pay any because each interest was <$10, but that's incorrect from what I know about tax laws. You still have to report the total as taxable income, or illegally not report it. Whether they still tax you for it I think depends on the rest of your finances for the year.

Though I am curious if one could claim "lending club portfolio" as a business expense, and write off the defaults as "losses" for tax purposes. Anyone know?

arebelspy

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Re: Roth or Traditional IRA for Lending Club Investment?
« Reply #6 on: February 11, 2013, 07:44:07 AM »
Though I am curious if one could claim "lending club portfolio" as a business expense, and write off the defaults as "losses" for tax purposes. Anyone know?

How, exactly, would it be a business expense?
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grantmeaname

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Re: Roth or Traditional IRA for Lending Club Investment?
« Reply #7 on: February 11, 2013, 09:05:27 AM »
I'm in the same boat, planning to jump into lending club wit a roth ira. From what I can tell, it is easier to do with an ira because there are no taxes on it, only time is when you start withdrawing the earned amount in retirement.
Not exactly. With a traditional IRA, you get a tax deduction on the money contributed to the account, so it's like you never earned it as far as your taxable income is concerned. Then, when you retire, and you take distributions from the account, each dollar you take out is an additional dollar of your regular income. It doesn't matter if it's a "gain" or it got there from dividends or a direct contribution- it all comes out the same. With a Roth IRA, you don't get the tax deduction up front, but distributions from the IRA are not taxed as income (or at all). Either way, you aren't paying taxes on earnings while it's in the account.

Nords

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Re: Roth or Traditional IRA for Lending Club Investment?
« Reply #8 on: February 11, 2013, 09:11:30 AM »
Though I am curious if one could claim "lending club portfolio" as a business expense, and write off the defaults as "losses" for tax purposes. Anyone know?
How, exactly, would it be a business expense?
"Blog research".  Yeah, sure, that's it.  Blog research.

watermen

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Re: Roth or Traditional IRA for Lending Club Investment?
« Reply #9 on: February 11, 2013, 10:17:40 PM »
I'm in the same boat, planning to jump into lending club wit a roth ira. From what I can tell, it is easier to do with an ira because there are no taxes on it, only time is when you start withdrawing the earned amount in retirement.
Not exactly. With a traditional IRA, you get a tax deduction on the money contributed to the account, so it's like you never earned it as far as your taxable income is concerned. Then, when you retire, and you take distributions from the account, each dollar you take out is an additional dollar of your regular income. It doesn't matter if it's a "gain" or it got there from dividends or a direct contribution- it all comes out the same. With a Roth IRA, you don't get the tax deduction up front, but distributions from the IRA are not taxed as income (or at all). Either way, you aren't paying taxes on earnings while it's in the account.

Do you pay tax on the income you earned in Roth IRA when you withdraw?

Left

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Re: Roth or Traditional IRA for Lending Club Investment?
« Reply #10 on: February 12, 2013, 07:01:10 AM »
How, exactly, would it be a business expense?
I was thinking of the people that do this full time as their "job" lol

arebelspy

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Re: Roth or Traditional IRA for Lending Club Investment?
« Reply #11 on: February 12, 2013, 07:10:06 AM »
How, exactly, would it be a business expense?
I was thinking of the people that do this full time as their "job" lol

How, exactly, would it be a business expense?
We are two former teachers who accumulated a bunch of real estate, retired at 29, and now travel the world full time with two kids.
If you want to know more about me, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
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etselec

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Re: Roth or Traditional IRA for Lending Club Investment?
« Reply #12 on: February 12, 2013, 01:42:18 PM »
Do you pay tax on the income you earned in Roth IRA when you withdraw?

Nope.

chucklesmcgee

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Re: Roth or Traditional IRA for Lending Club Investment?
« Reply #13 on: February 12, 2013, 05:14:56 PM »
How, exactly, would it be a business expense?
I was thinking of the people that do this full time as their "job" lol

How, exactly, would it be a business expense?

You run an asset management company. Your initial capital is invested. Defaults would be considered bad debts and can be written off. Just an argument for the sake of an argument.

But really though, for an individual this is irrelevant. If you invest $1000, have $300 in interest payments and $100 in defaults for the year, you have $200 in taxable income.

grantmeaname

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Re: Roth or Traditional IRA for Lending Club Investment?
« Reply #14 on: February 12, 2013, 05:36:52 PM »
It would be much simpler to put it in an IRA, or failing that a charitable trust.

arebelspy

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Re: Roth or Traditional IRA for Lending Club Investment?
« Reply #15 on: February 12, 2013, 06:05:09 PM »
You run an asset management company. Your initial capital is invested. Defaults would be considered bad debts and can be written off. Just an argument for the sake of an argument.

But really though, for an individual this is irrelevant. If you invest $1000, have $300 in interest payments and $100 in defaults for the year, you have $200 in taxable income.

That still doesn't make it a business expense.  Bad debt is not an expense.
We are two former teachers who accumulated a bunch of real estate, retired at 29, and now travel the world full time with two kids.
If you want to know more about me, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.

grantmeaname

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Re: Roth or Traditional IRA for Lending Club Investment?
« Reply #16 on: February 12, 2013, 06:18:35 PM »
I get to put on my accountant hat!
Ahem.

grantmeaname

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Re: Roth or Traditional IRA for Lending Club Investment?
« Reply #17 on: February 12, 2013, 06:26:33 PM »
Snark aside: bad debt expense is typically recognized by companies that do not do financing for a living. If you made a little LLC to do loans in Lending club, the defaults would be one of the regular costs of doing business. Anyway, it's not like "writing down" business expenses would really apply. You can get a tax deduction for expenditures you as an individual make for a business, but the business doesn't get a tax deduction for any expenses it incurs. Business income isn't taxed like personal income, either -- businesses pay income tax on profit, not earnings like you or I do. [Incidentally, they're taxed again when the profit moves from the business to its owners (that's dividend and capital gains taxes), so it's not so straightforward as "make it a business, then your taxes go down".]

krishnamba

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Re: Roth or Traditional IRA for Lending Club Investment?
« Reply #18 on: July 31, 2014, 08:18:04 PM »
@grantmeaname what happens if a llc business keeps reinvesting the amount that they make as profit. The owner takes no income for say 20 years doesn't it act like a tax haven of sorts like an IRA. So instead of 25%-40% you pay only 15% taxes and keep reinvesting.
And you can keep adding your personal income to it as additional investments.

So an initial investment of 100k in llc reinvesting its 11% taxed @15% make its final growth rate at 9.35%.
Over 35 year 2.283 million.

grantmeaname

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Re: Roth or Traditional IRA for Lending Club Investment?
« Reply #19 on: August 02, 2014, 01:44:06 AM »
Looks like my last post isn't entirely right, which I guess is proof that I learned something this year?

[dayjob]
By default LLCs are taxed like partnerships in the US, so you'd pick up any income the investments were producing currently and then pay nothing when the earnings were distributed out at the end. If you wanted to be taxed only at the end you'd want something like a corporation, but then the corporation would pay income tax on its profits every year and you'd pay tax on its dividends. And even then I imagine the IRS has some sort of regime by which they claw back some of the benefit of deferral (they certainly do for the foreign equivalent of your idea. Moral of the story - tax planning is hard.

[/dayjob]

rmendpara

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Re: Roth or Traditional IRA for Lending Club Investment?
« Reply #20 on: August 02, 2014, 05:44:16 AM »
Both Roth and traditional have similar benefits (tax deferral).

The difference is when you withdraw in retirement.

With a traditional, your withdrawals will be considered taxable (albeit at a relatively low rate unless you have a ton of income) or completely tsx free in a Roth.

Side note:
I have a taxable account at Prosper @12k right now. Stopped reinvesting and am letting it wind down a bit because I want to keep p2p exposure to 5% of total portfolio in the short term and maybe 5-10% in a decade or two.

I'm considering rolling over 10k in ira money in the next year or two (not sure Roth or traditional yet) to get the benefits of tax deferral since interest is not taxed at 15% like dividends and capital gains.

I think p2p is good exposure to have in retirement accounts or taxable accounts... Depending on your needs.
« Last Edit: August 02, 2014, 06:37:30 AM by rmendpara »

chasesfish

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Re: Roth or Traditional IRA for Lending Club Investment?
« Reply #21 on: August 02, 2014, 06:31:57 AM »
Back to the original poster, it's a lot easier to do LC in an IRA, which type is entirely dependent on the situation.

I've been in LC for just over three years, my return is 7.22% this morning and it's been relatively flat.  I'm a little lower than MMM because it's an older portfolio and I like 3yr notes