Ira Vs Roth Ira

4 Painless Ways to Save for Retirement

When gas prices rise, we often cope by driving less. Doing so will seem like a sacrifice at first, but some creative planning coupled with a few slight changes to our driving habits is generally enough to save us a few dollars. Most people can cut spending if they really have to, and reducing your expenses is often one of the most effective ways to save more for retirement. Here are four ways that you can spend less and ultimately save more for retirement.

[See 10 Places to Retire on Social Security Alone .]

Pay yourself first . Transferring money into your savings right away is a great trick to keep yourself from spending money you could be investing and growing. Schedule the money to move to your savings the day your paycheck hits your checking account. If you want to take this up a notch, talk to your accounting department to see if they can deposit the check directly into your savings account , and then you can transfer a set amount to your checking account each payment cycle. The difference is subtle, but the more complicated it is to spend money, the less you will end up spending.

Set up a payroll deduction to your 401(k) . One of the best features of a 401(k) is that deposits are automatically taken out of each paycheck. The fact that you don't even get to touch the money is one of the best ways to save, because if you don't see it, you can't use it.

[See 4 Misleading Pieces of Retirement Advice .]

Use a Roth IRA instead of a traditional IRA . One of the advantages of a Roth IRA versus a traditional IRA is that money in the Roth is already taxed. Therefore, all the money you deposit in a Roth IRA will be available for spending in retirement. This isn’t the case with a traditional IRA. Many people forget that their retirement assets in traditional IRAs and 401(k)s will be taxed as regular income before they can touch it.

Pay off your mortgage . When you receive a big tax refund, bonus, or other windfall of cash, should you make extra mortgage payments or invest this windfall of cash? This always sparks a debate, especially now when mortgage rates are at historic lows. Yes, it's true that you can probably invest and get a better return, but paying off the mortgage will help you to better control your spending.

This is all psychological, of course, but many people will feel wealthier with a $300,000 investment portfolio while owing a $250,000 mortgage versus being debt free and having $50,000 to invest. Those who invest a windfall may end up spending a bit more when times are good than they otherwise would have because they end up feeling a little wealthier than if they put their payment towards the mortgage. Therefore, I generally advise people to pay off their mortgage first with extra cash unless they are already well on their way to financial freedom.

Roth IRA vs a DRIP fund? | Roth Ira

What are the advantages and disadvantages of both…Me and my wife already have 401k’s.that we fund.Right now I have a Drip set up through sharebuilder.com investing in PG,MSFT,BAC,MCD,PEPJNJ.. Do we really need a Roth IRA also.Do not plan to sell stock anytime in next 30 years and we put in about 150-200 dollars a month in it.Thanks ahead.

Roth IRA’s are the un-disputed best way to save toward retirement.

They are the only type of fund that I know of that not only allows your money to grow – un taxed, but also allows you to withdraw your money un-taxed. (This is the reason the government put’s such heavy restrictions on how much you may deposit per year) For FY2008, the maximum is only $5,000 per year.

Most financial specialists will tell you that you should be investing the maximum allowed by a Roth IRA before you even consider investing in any other type of fund.

Here are the advantages and disadvantages listed by wikipedia in their article.

Advantages Up to $10,000 in earnings withdrawals are considered qualified (tax-free) if the money is used to acquire a principal residence. This house must be acquired by the Roth IRA owner, their spouse, or their lineal ancestors and descendants. The owner or qualified relative who receives the “first time homeowner” distribution must not have owned a home in the previous 24 months. If the Roth IRA owner expects their tax bracket after retirement to be higher than before retirement, there is a tax advantage to making contributions to a Roth IRA over a traditional IRA or similar vehicle. There is no current tax deduction, but money going into the Roth IRA is taxed at the lower current rate, and will not be taxed at the higher future rate when it comes out of the Roth IRA. If a taxpayer is currently in the 15% tax bracket, then a $1,000 contribution to a traditional IRA would provide a $150 reduction in current-year tax liability. If that taxpayer were in the 30% tax bracket upon retirement, $1000 of traditional IRA distributions would incur $300 in taxes. Therefore, the person would pay twice as much for after retirement income as he received in tax benefits from the traditional IRA deduction (and since gains are compounded, this comparison is valid). Therefore, the Roth IRA offers a specific advantage where a person will retire in a higher tax bracket than that used during their pre-retirement years. Earnings in a Roth IRA are not taxed if withdrawn after the “seasoning” period. Earnings in a Traditional IRA are taxed as Ordinary Income even if the monies were invested in stocks or mutual funds. It is interesting to note that when stocks or mutual funds are held outside of a 401(k), the long term capital gains are only taxed at 15%. Most middle class Americans will pay at least 28% of the capital gains earned in a traditional IRA as federal income tax. (Though in a traditional IRA, this higher tax rate is a quid pro quo for the deduction taken against ordinary income when putting money into the IRA.) The main disadvantage of a Roth IRA (when compared to a traditional IRA) is that contributions are not tax-deductible. If one contributes $1000 to a traditional IRA while in a high tax bracket, one can often receive a tax deduction, substantially reducing the initial cost of contributing (or, potentially, allowing someone without much disposable income to shelter more income). This is not the case for the Roth IRA. The money in a traditional IRA is taxed once it is withdrawn at retirement. With a Roth IRA, there are heavy penalties for early withdrawals of earnings (withdrawals up to the total of contributions + conversions are tax-free). An unqualified withdrawal of earnings will result in federal income tax plus a ten-percent penalty on the amount. Fortunately there are many exceptions, such as buying a first home and paying qualified educational expenses. The perceived tax benefit may never be realized, i.e., one might not live to retirement or much beyond, in which case, the tax structure of a Roth only serves to reduce an estate that may not have been subject to tax. One must live until one’s Roth IRA contributions have been withdrawn and exhausted to fully realize the tax benefit. Whereas, with a traditional IRA, tax might never be collected at all, i.e., if one dies prior to retirement with an estate below the tax threshold, or goes into retirement with income below the tax threshold. It is also possible that tax laws may change by the time one reaches retirement age.

Fairmark guide to the Roth IRA, retirement planning in plain language

The Only Guide You'll Ever Need for the Right Financial Plan, Managing Your Wealth, Risk, and Investments

The 60-Minute Money Workout, An Easy Step-by-Step Guide to Getting Your Finances Into Shape

The Bogleheads' Guide to Retirement Planning

How to settle your living trust, how you can settle a living trust swiftly, easily, and safely