Retirement Accounts (IRAs, Roth IRAs, 401K) – Part 2. So what are they, anyways?

On May 5, 2012 by Andy Bandy Man

Yesterday we established that retirement accounts are like vegetables – they don’t taste good now (you can’t use the money to buy pizza and beer), but in the long run they are good for you. Like… thou$and$ of dollar$ good for you.

The problem it is actually difficult to know exactly WHERE you should invest your money. I searched all over the Web for a comprehensive explanation and actually had a hard time sorting out the information!  So for the FIRST TIME EVER, I will explain it all clearly right now, so you will no longer have an excuse for not having a retirement account:

By “Anybody that Earned Income,” I mean that you must have received payment in the form of some type of wage, salary, or freelance work. If you were just in school and your long-lost Uncle Tommy decides to send you $5,000, you sadly can’t put that in a retirement account.

In the next couple slides, we’ll discuss the pros and cons of each account:

 

 

 

 

One final note – while retirement accounts typically have a 10% early withdrawal penalty if you access the money before age 59.5, you actually can have penalty-free access to the money if you really really need it:

  • Paying college expenses for you, your spouse, your children or grandchildren.
  • Paying medical expenses greater than 7.5% of your adjusted gross income.
  • Paying for a first-time home purchase (up to $10,000)
  • Paying for the costs of a sudden disability
  • As mentioned above, Roth IRA contributions can be withdrawn penalty-free after 5 years (though yesterday’s chart shows that it is usually NOT a good idea to remove money from your IRA until you are actually ready to retire!)

Tomorrow we’ll finally discuss what you’ve been waiting for – what should YOU do?  Click here to link to Part 3.

 

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Here are some technical notes in case you want to know more about the 2 points above:

*Roth IRA: You can invest up to $5,000 in a Roth IRA every year as long as you don’t make too much money. Specifically, if you are single and make under $110,000 or are married and make under $173,000, you can invest all $5,000. If you make between $110,000 and $125,000 as a single person (or $173,000 and $183,000 as a married couple) then you are in a gray area and can only contribute a partial amount, which you can calculate here.  If you make more than that amount, screw you and get off of my blog!  No Roth IRA for you!

Actually, even if you make too much there is currently a loophole that allows you to put money in a Roth IRA – you can open a Traditional IRA and convert to a Roth. There are a few reasons why you might not want to do that though (if you really are making that much, you might benefit more from the tax break right now). We’ll discuss more tomorrow.

**Traditional IRAs: You can reduce this year’s tax burden by contributing to a Traditional IRA. But, there are a few catches – either you must NOT contribute to a 401K, or you contribute to a 401K but make less than $55,000 if you are single and $90,000 if you are married.

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