Advantages of tIRA over regular investment account

[MaxRules]

I've come up with a new question for the smartest people on the net!

I have been investing for a while now in a regular brokerage account at Fidelity. All mutual funds, just a place to stash money. Now my tax accountant says I can contribute up to $5500 into a Traditional IRA and save about $1200 on my tax due this year. That sounds like a good benefit. Now I've already read everything on the Fidelity site about the different IRAs and as many search topics I could handle here on this forum. Deducting from my tax due is the only part I can see the benefit of the tIRA. It looks like I can buy any mutual funds under my new tIRA as I could under my regular account, like the Spartan 500 index fund. What is the real advantage of the tIRA besides the tax deduction? It looks like my $5500 will be locked up tight, whereas with the regular account I can sell the fund shares and have the money in a few days. (and yes, I've read the sticky on how to withdraw tIRA funds penalty free... very interesting). Why couldn't I just invest only in my regular account and keep it there until age 59.5? Wouldn't it grow the same? Or if I retire at age 39.5, I'd have easy access to my money.

As for the tIRA fund to invest in... just go for the regular Spartan 500 index fund or one of their target date retirement funds?

[matchewed]

Because you save money faster when you don't pay taxes up front.

It would grow the same but you'd have to spend more in order to get that same growth because you have to pay taxes before and after instead of just after. That tax accountant already pointed that out. In order to invest in a normal taxable account you'd have to pay a total of 1200+5500=6700 in order to have the same growth as 5500 in a tIRA.

[maizefolk]

And you won't pay taxes on capital gains and dividends in the tIRA account. Now if you're a perfect buy and hold investor you won't have any capital gains until you start taking money back out of savings at FIRE, but each year you're saving you'll owe at least 15% on the dividends your stocks/index funds pay out which reduces how fast your money can compound.

If you were investing in bonds, the reduced growth that comes from paying taxes each year is much much worse.

[seattlecyclone]

The money in an IRA is not in any sense "locked up tight." The early withdrawal tax is only 10%. That's more of a "subtle nudge" than a "tight lock."

Even this 10% tax is avoidable. Read http://forum.mrmoneymustache.com/investor-alley/how-to-withdraw-funds-from-your-ira-and-401k-without-penalty-before-age-59-5/ for more information about how to do it.

[jim555]

tIRA/401k for me was good since I was in a high tax bracket and saved a bunch in taxes.  Roth is a no brainer if your bracket is lower, and you can get you contributions out at any time.

[MaxRules]

Thanks for all the great info as always. I read everything on Fidelity about the MRDs required with an IRA when you turn age 70.5.  Not much info on this, does the MRDs basically make you withdraw your account down to zero? I don't see any info on percentage required (it'll probably change in 30 years) or how long the account might last past age 70.

Also, will I actually be 59.5 years old someday?

[seattlecyclone]

Thanks for all the great info as always. I read everything on Fidelity about the MRDs required with an IRA when you turn age 70.5.  Not much info on this, does the MRDs basically make you withdraw your account down to zero?

Not quite, but the percentages do get a bit larger every year.

I don't see any info on percentage required (it'll probably change in 30 years) or how long the account might last past age 70.

See this IRS table. It does depend on life expectancies, which are subject to change. As of now, you'll need to withdraw 3.65% when you're 70, 5.34% when you're 80, 8.77% when you're 90, and 15.87% when you're 100.

My opinion on these required distributions is that they're good to be aware of, but not worth making drastic changes in your decisions about where to put your money. As you can see, the required distribution is probably not much more than you would take out anyway, at least until you're in your 80s and probably won't be living all that much longer.