IRA / Investing / Retirement Questions...

[MoobyTheGoldenCalf]

OK, I think I'm a pretty smart guy, but I'm starting to get really confused about IRAs. Here's my situation right now. I have a traditional (standard) IRA which I have been maxing out for the past few years. I've already contributed my $3000 max for this year. I also have a rollover IRA from a previous employers 403b. I also have a regular brokerage account which I've been primarily investing in index funds (mostly QQQ). My current employeers 401k options are horrible (they don't contribute anything and the investmet options are crap) so I don't participate in it. I've been deducting my IRA contributions off of my taxes.

I plan on retiring at 50 (I'm 31 now). So in my mind, my plan is use the cash from my regular stock/brokerage account to get me from age 50 to age 59 1/2. Then use the my IRA after that.

So here's my questions:

Can I have open up a Roth IRA as well as keep my Traditional IRA? If I have both can I still deduct my traditional contributions off of my taxes?

I have a bunch of extra cash right now and it seems like because of the $3000 IRA limit, I have no other choice but to put it into my stock account. Is there any way to get around the $3000 limit? I don't want to get too overweighted with my stock account.

Thanks for any advice!

 

[gopunk]

i don't claim to be a financial expert, but here is my understanding:

you can have both, you can still deduct for contrib. for trad. ira. (but not for your roth, of course)

no way to get around $3k limit, but they are raising it to $5k in a few years (2005 i think)

if you have children, or plan on having children, you can open an educational ira, because those contributions are outside of the normal (traditional and roth) ira limits. but i've heard there are better ways of saving for education.... *shrug*

 

[wyvrn]

Biggest thing about Roth IRA is tax savings because you are using after tax dollars now. See, it is likely that when you withdraw from your traditional IRA and 401k for retirement, you will put yourself into the 50% tax bracket. Better to pay 27% now then 50% later.

Article

A report, "Does Participating in a 401(k) Raise Your Lifetime Taxes?" by economists Jagadeesh Gokhale, Laurence J. Kotlikoff and Todd Neumann, showed that workers with incomes under $100,000 were likely to suffer an increase in lifetime taxes and a reduction in lifetime consumption as a result of participating in a 401(k) plan.

Why? Success in the 401(k) plan would cause their Social Security benefits to be taxed.

This means most working Americans need to broaden the base of their retirement security. A rough rule of thumb is that employees with typical 401(k) plans ? which include a 50 percent match ? should "capture the match." Beyond that they should invest in a Roth IRA.

BTW, Scott Burns is also regularly featured on msn.com. I have traded emails with him in the past and he is very knowledgable.

 

[richardycc]

what you can do is open a trust fund for your son's college education. If he doesn't need the money later on, you can use it toward your 1 million dream house. Just make sure that you ask him nicely.

 

[DaveSimmons]

My current employeers 401k options are horrible (they don't contribute anything and the investmet options are crap) so I don't participate in it. I've been deducting my IRA contributions off of my taxes.

Uh-oh. No lawyer be me, but my reading of the tax booklet is that Traditional IRAs are not tax deductible if you are eligible for a company 401k even if you choose not to participate. This isn't a problem for Roth IRA since it is never tax deductible.

Does the company 401K have anything safe like a money market fund? If so, and if you think you'll leave the company within say 5 years, it might be worth maxing it out while you're also doing the Roth IRA. Why?
(a) contribution limit is much higher than Trad IRAs, and you get the 30+% tax savings.
(b) you can still do the Roth
(c) when you leave the company you can roll the funds over into your borkerage and buy something good with the money. Or transfer it directly to vanguard.com and buy a pile of VFINX.

 

[gopunk]

(c) when you leave the company you can roll the funds over into your borkerage and buy something good with the money. Or transfer it directly to vanguard.com and buy a pile of VFINX.

if you buy it from vanguard, do you have to go through their brokerage service? ie, do you have to pay those exorbitant brokerage fees.... because if so, it is probably cheaper just to go through your existing broker.

 

[DaveSimmons]

Originally posted by: gopunk

(c) when you leave the company you can roll the funds over into your borkerage and buy something good with the money. Or transfer it directly to vanguard.com and buy a pile of VFINX.

if you buy it from vanguard, do you have to go through their brokerage service? ie, do you have to pay those exorbitant brokerage fees.... because if so, it is probably cheaper just to go through your existing broker.

If you buy directly from them there is no fee. Most everyone else will charge you a purchase fee because Vanguard is stingy with the kickbacks to brokerages as another way to keep their expenses low.

But if you're trying to pump more money into your normal brokerage to get enough in to avoid those "account maintenance fees" then buying from your own brokerage could be worth the transaction fee.

(edit) some brokerages may also have their own in-house S&P 500 fund that you can buy without a transaction fee. Schwab does but I haven't checked anyone else.