Author Topic: Traditional or an IRA  (Read 2862 times)

pogoslayer

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Traditional or an IRA
« on: June 25, 2015, 08:18:20 PM »
If you read my previous topic by chance I apologize for the dum questions. If not, again, I'm 20 year old half way done with college and have no debt.

Should I be pouring my savings into my selected index funds in a traditional taxable account or make a IRA/Roth account? I have a feeling the whole 4% rule thing is coming for a IRA. Help is appreciated.

MDM

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Re: Traditional or an IRA
« Reply #1 on: June 25, 2015, 08:29:48 PM »
The word "traditional" is usually applied to distinguish whether an IRA (or 401k, or 403b, etc.) is "traditional" (no tax at contribution, but taxable at withdrawal) or "Roth" (post-tax at contribution, not taxable at withdrawal).  "Taxable" is just taxable.

But more to the point: you can't just convert savings to an IRA - you can contribute up to the amount of "earned income" you have for that tax year.  Assuming (true?) that, if you do have earned income as a student, you pay little or no federal income tax on it, Roth may be best.

If you can't do an IRA, and you don't the money in savings any time soon (given that you are still in school, that may be a bad assumption), then taking it out of savings and putting into a good index fund seems a fine idea.

See the case study sticky for the info needed (as applicable) if you want a more detailed reply.  Good luck!

bdonney

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Re: Traditional or an IRA
« Reply #2 on: June 25, 2015, 08:42:36 PM »
I believe MDM is cautioning that if may need the money In the relative near future (Maybe income isn't stable because you're still in college) than it may be something you play with in standard taxable accounts (not Roth or Traditional IRA) If that assumption is true though it is possible that you pull money out of investments in the near future at a loss unless you hedge more towards bonds.

If you have good savings and maybe you're in a situation that you can't think of needing to pull this money out any time in the next several years than you would want to put money into generally an IRA.

If you're just starting you can put this into a Roth IRA and have a tax advantage on the interest pulled in. You will also be able to more easily pull the principle (contributions) out. Since you're probably currently in a low  tax bracket also it makes a better case for the Roth vs Traditional at this time.

Traditional vs Roth, one isn't best, it just depends on your current situation but you do want to fill those buckets ($5500 a year currently) as quick as you can.

*Please feel free to poke holes in my analysis people.

pogoslayer

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Re: Traditional or an IRA
« Reply #3 on: June 25, 2015, 11:20:03 PM »
The money I'm putting I is good for the long haul. From what I'm reading I should do my best to max out the Roth IRA every year and put all of it under an index fund such as vtsax? Whenever I can start doing more time reliable deposits and can max out the Roth for sure should it be switched to a traditional with the higher yearly cap?

MDM

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Re: Traditional or an IRA
« Reply #4 on: June 25, 2015, 11:24:30 PM »
should it be switched to a traditional with the higher yearly cap?

What do you think the yearly cap values (both the lower and the higher) are?

pogoslayer

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Re: Traditional or an IRA
« Reply #5 on: June 26, 2015, 01:39:16 PM »
should it be switched to a traditional with the higher yearly cap?

What do you think the yearly cap values (both the lower and the higher) are?

My apologies, I was under the impression that a regular IRA had a higher yearly cap instead I now know if to be 5500. So I should make a roth, do my best to max it yearly and put all of it in an index fund/bonds? Where should I be putting any excess money after the roth is capped for the year? Sorry again if this is trivial to answer. I'm trying my best to learn

MDM

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Re: Traditional or an IRA
« Reply #6 on: June 26, 2015, 01:56:24 PM »
I'm trying my best to learn

Learning is good, and you are already doing so.  E.g., now you know about IRA limits.

For more learning, read through the posts at http://jlcollinsnh.com/stock-series/ - it will likely answer your "what next?" question, but if not let us know and we can try.

What I find interesting/noteworthy is that you have more that $5500/yr free cash to invest while being a college student.  Do you mind sharing a few details on how you are managing that?

bdonney

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Re: Traditional or an IRA
« Reply #7 on: June 26, 2015, 04:10:29 PM »

Learning is good, and you are already doing so.  E.g., now you know about IRA limits.

For more learning, read through the posts at http://jlcollinsnh.com/stock-series/ - it will likely answer your "what next?" question, but if not let us know and we can try.

Best thing MMM pointed me to. I try to get everyone I know to read that. I don't think anyone I know has read it :(.

TomTX

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Re: Traditional or an IRA
« Reply #8 on: June 28, 2015, 09:43:49 AM »
should it be switched to a traditional with the higher yearly cap?

What do you think the yearly cap values (both the lower and the higher) are?

My apologies, I was under the impression that a regular IRA had a higher yearly cap instead I now know if to be 5500. So I should make a roth, do my best to max it yearly and put all of it in an index fund/bonds? Where should I be putting any excess money after the roth is capped for the year? Sorry again if this is trivial to answer. I'm trying my best to learn

Max out the Roth, then see if you can get a part time job with a decent 401k ;)

I would put 100% in VTSAX. There is no point in worrying about bonds or international stocks until you are over $50k.