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Wednesday, April 7, 2010

Investing/ Retirement Saving Part 2

The next type of retirement vehicles is the Roth. The Roth comes in two varieties, the 401k and IRA. They have the same max as their traditional counterparts, $16,500 and $5000 respectively. They also allow extra to be put in them after age 50, $5000 and $1000 respectively.

The biggest reason to put your money into a Roth IRA or 401k is that, because you pay taxes on the money you put in, you do not pay taxes when you taxes when you take it out after 59.5 years. This means that a Roth is the best place to put your money as a young person. Your income will go up as you age, as you get raises and promotions, therefore when you start out you are paying the least in taxes. However most companies do not offer a Roth 401k, though they are becoming more popular. Therefore most people should focus on maxing out their Roth IRA as soon as they can. You can open a Roth IRA at the same places as a traditional IRA.

Another advantage of the Roth IRA is that after 5 years of opening the account, you can remove the money you have put in without a penalty. For a 401k, traditional or Roth and a traditional IRA, you would pay a 10% penalty plus the taxes. The exemption on the penalty is only for the money you put in, not the earnings/interest. This can be helpful also when you want to buy a house. For your first house you can take up to $10,000 out a IRA, traditional or Roth for the down payment, but for a Roth you can take out the up to $10,000 of the interest/earning plus all the money you put in. It is a great way to not pay taxes on the interest on the money you are saving for retirement.

I did it that way, I put 10% away in my 401k when I worked as a student and saved another $7000 in an IRA for my first house. I was lucky though, we moved to a very cheap area for my fiance's graduated school and our duplex only cost $60550, so my IRA covered most of our $12,110 down payment.

You can also use the Roth IRA as a secondary emergency fund after it has been open for five years or more. However money in your retirement accounts normally cannot be gone after so think long and hard before cashing out your retirement for bills now.

The next article will be about how to invest/save in taxable accounts and why you would save there as well as the tax differed and tax advantage accounts.

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