Author Topic: Roth IRA vs. Taxable Account vs. other options?  (Read 2664 times)

Itchin4Scratch

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Roth IRA vs. Taxable Account vs. other options?
« on: August 10, 2013, 11:39:23 AM »
Ok, bear with me.  I'm a newbie to forums and to investing, so I need some help being pointed in the right direction.

I want to invest in one of the Vanguard stock index funds, and I finally got the minimum amount needed to do so - $3K.

We make very little, but we intend to retire as early as possible.  Since we're already used to living on $20K or less, we are thinking that $500K in investments that earn about 7%ish should cover us the rest of our lives.  (Let me know if I'm incorrect on that.)  We are already using tips from this blog in order to make more money so we can reach our goal in 10-15ish years.

Anywho, I really don't understand the differences in a Roth IRA and Taxable Account, and which would be wiser for us.  I researched on 401Ks and Traditional IRAs, and decided that Roth is the way to go over these two.  But we want to retire in our 40s.  I know we can take out the contributions before age 59 1/2, but would we screw ourselves if we had a Roth if we retire in our 40s?  Are there loopholes that I'm missing?  Are there other options out there that I'm not aware of?

Thank you so much in advance for helping me.  I'm really trying hard to learn, but sometimes it feels like I'm reading German.  :P

frugteacher

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Re: Roth IRA vs. Taxable Account vs. other options?
« Reply #1 on: August 10, 2013, 03:42:04 PM »
I've wondered this too!

I'm not at the point where I can start investing yet because I'm paying some debt off. But when MMM says he staches away money and buys shares of the stock market index funds, is he just doing that in a regular stock account on Vanguard? I assume so because he wouldn't be withdrawing from a Roth and paying the penalty.

slugsworth

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Re: Roth IRA vs. Taxable Account vs. other options?
« Reply #2 on: August 10, 2013, 07:13:12 PM »
You can pull the principle from a Roth account without penalty. I'm guessing you will need to invest in both a Roth and another account due to the low maximum annual limit to a Roth.

teen persuasion

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Re: Roth IRA vs. Taxable Account vs. other options?
« Reply #3 on: August 10, 2013, 08:39:59 PM »
The differences are all about tax deferment.  Traditional IRA and 401k accounts allow you to defer paying income tax on the money you place in the account, and defer paying income tax on the earnings within the account (allowing the money to grow larger, since you don't have to use some of the money to pay those deferred taxes).  In exchange for this, you must pay taxes when you withdraw from the account, at normal income tax rates.

Roth and taxable accounts don't receive any immediate income tax break, but in a Roth IRA (or Roth 401k) the money in the account grows tax free and is tax free when you withdraw it (you paid the tax upfront).  Dividends and capital gains (if you sell stocks, etc) in taxable accounts are taxable each year, but at preferential rates vs. normal income rates, possibly zero.

There can be other reasons to use certain types of accounts.  If your employer has any kind of a 401k match, you should at least put in the minimum required to get the match - that is free money.  We personally put as much as we can in DH's 401k to lower our AGI to capture as much EIC as we can, especially since NYS matches EIC at 30%.  We then turn around and use that tax refund to fund our Roths, so it is tax free going in and coming out!