The 9 Steps to Financial Freedom by Suze Orman

Author:Suze Orman [Orman, Suze]
Language: eng
Format: epub
ISBN: 978-0-609-60716-9
Publisher: Crown Publishing Group
Published: 2012-03-06T05:00:00+00:00

IRA Guidelines

A few thoughts to keep in mind. Are you eligible for a company retirement plan like a 401(k) and do you also qualify to fund a Roth IRA? If so, it can be confusing as to whether you should fund your 401(k) plan or the Roth IRA first. It would be best to fund both to the maximum if you can. But if money is tight and it is an either/or situation, then this is what I would do. If you have a 401(k) plan where your employer matches your contribution, meaning that for every dollar you put into your retirement plan at work, they put money in for you as well to match in full or in part, I would first fund my retirement plan at work up to the point of the match. Now, if you don’t get a company match on your 401(k), I would make my first priority the Roth IRA before investing in the 401(k). If you have been investing in a nondeductible IRA, you, too, should definitely consider switching to a Roth IRA; for most people it makes the nontax-deductible IRA obsolete. If you are not covered by a company retirement plan, and can really use the tax write-off right now from a traditional IRA deposit, but you are a spender and not a saver and—realistically—will fritter away the tax savings from a traditional IRA instead of investing them each year, then you might want to lean more toward the Roth IRA as a savings against future taxes that you would have owed with a traditional IRA. In other words, pass up the current tax savings for the future big picture. If you are very young, just starting out in your career, and in a low tax bracket, by all means look into a Roth IRA, which can jump-start your retirement savings by a lot, even if you switch tactics later. Let’s say that from ages twenty-one to thirty you invested $5,000 a year into a Roth IRA averaging an annual return of 6 percent every year and then you never deposited another cent into that account and just let it grow; at age sixty, you’d have more than $400,000 that you could access totally tax-free. Big difference, if you think that all it would have saved you in taxes in a traditional IRA (if you are in a 15 percent tax bracket) would be about $750 a year, or $7,500 over ten years. As you can see, it makes no sense to have to pay taxes on $400,000 later on in life (when you might be in a very high tax bracket) just to have saved $7,500 over ten years early in your career. By the way, if your tax bracket changes and you want the deduction of a regular IRA, you can make that change anytime you want. Rather than making a deposit into your Roth IRA that year, switch to a traditional IRA.

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