I am not eligible to contribute to a Roth IRA,
What incentive do I have to invest after tax money into an IRA (where the withdrawl age is 59 1/2 yrs old)? Wouldn’t it be better to just invest in mutual funds where I can withdrawl the money at any time?
- Thanks
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If it is money that you intend to save for retirement, and you think you will be in a lower tax bracket once you retire, then you *definitely* want the IRA.
If it’s money you want access to in the short term, you don’t stash it. (If *real* short term, keep it in cash).
Another thing to keep in mind: Actively managed mutual funds (in other words, not index funds) buy and sell stocks within itself, which generates taxes: taxes that get passed onto you (but you don’t have to pay if it’s in an IRA).
A thought: do some of each. If there’s an active managed fund that you like, put it in your IRA. And then do an index fund outside your IRA that is accessible to you.
I am sort of rusty on the current tax laws. You can invest in a traditional IRA but not a Roth IRA? Is that right? I knew there was an income limit above which you could not contribute to a Roth–$120,000 for a single tax payer. I take it you are over that limit.
There is a problem contributing to a traditional IRA that you certainly should be aware of. Although you get a tax deduction for your contribution today, when you withdraw the funds, they withdrawal is taxed at the full tax rate. Now if you should happen to be in a lower tax bracket by then, there might be an advantage.
But let’s assume that you were to invest in an index mutual fund outside of an IRA account. I specifically state index because they are much more tax efficient than managed mutual funds for which you must pay capital gains tax on realized capital gains annually. An index mutual fund has very little realized capital gains. So over a 30 year period of time, if that index mutual fund were to gain 6% annually and you were to contribute $5000 annually to it, you would have 395,000 of which you would have to pay capital gains tax on 245,000. Capital gains tax will most likely be about 1/2 the tax you would pay on the withdrawal from a traditional IRA account. Assuming 28% tax bracket, $68,600 vs about $34,300. Of course you will not have had to pay tax on the contribution of $150,000 to the IRA, where as you would have had to pay tax on the contribution to the index mutual fund during the 30 years. Again at 28% 42,000 in taxes would be saved by contributing to the IRA account during those 30 years. An you will have had to pay taxes on the dividend distributions during that time outside of an IRA account.