What's the point of an IRA

[Anonymous]

I'm sure this is a stupid question, but I don't get the point of an IRA if you make over the limit to take a tax deduction. Aren't you just better off investing your money in a mutual fund, which doesn't have all the limitations of an IRA? Perhaps the answer is that an IRA grows tax free, but what does that really mean -- just that you aren't taxed on the dividends that are reinvested every year? That seems like a pretty minimal amount and would have to be weighed against the dispersement rules for IRAs. Like a mutual fund, you are still taxes on your capital gains when you withdraw money right? Please help this investing novice!

[Anonymous]

You don't get the capital gains rate when you withdraw -- it's regular income.

[Anonymous]

Look up "backdoor roth". It's a very good option for those without deductible ira contributions to account for, particularly if they will be receiving substantial retirement income from a pension or 401k RMDs.

[Anonymous]

OP you are mostly right, except that you are confusing a mutual fund with something else - I think what you mean instead of mutual fund is taxable investment.

[Anonymous]

Anonymous wrote:Look up "backdoor roth". It's a very good option for those without deductible ira contributions to account for, particularly if they will be receiving substantial retirement income from a pension or 401k RMDs.

Yes, do check this out. Can be a very good deal in the right circumstances.

[Anonymous]

If you have deductible ira contributions, there is an out if you're lucky. Check your work 401k documentation. Some plans allow for an "in-service rollover" where you can roll those ira funds over into your current 401k. Then you can utilize the backdoor roth to your heart's content.

[Anonymous]

A Roth IRA grows tax free. That means once you reach 59.5 anything you take out isn't taxed -- original contributions and growth. Tax free is really tax free.
You can also take any of your original contributions out tax free at any point, as long as they've been in the account for at least 5 years.

With a traditional IRA, you still have to pay taxes and can't take anything out without penalty.

[Anonymous]

I don't get a deduction for putting money in my IRA. My CPA told me there is no point to putting money in there. So, I stopped.

[Anonymous]

Your CPA is wrong IMO.

One point of putting money in there is that it grows tax free (dividends and cap gains) for as long as you leave it there, and when you withdraw it years from now you may be in a lower tax bracket (many people's income is less in retirement), so you get the tax sheltered growth and a potentially lower tax rate at withdrawal.

[Anonymous]

Anonymous wrote:I don't get a deduction for putting money in my IRA. My CPA told me there is no point to putting money in there. So, I stopped.

A CPA only cares about minimizing this year's taxes. He/she is NOT a financial planner.

[Anonymous]

Anonymous wrote:Your CPA is wrong IMO.

One point of putting money in there is that it grows tax free (dividends and cap gains) for as long as you leave it there, and when you withdraw it years from now you may be in a lower tax bracket (many people's income is less in retirement), so you get the tax sheltered growth and a potentially lower tax rate at withdrawal.

pp here... in fact I would probably fire any CPA that gave me such simplistic and ignorant advice, unless it is likely that my income in retirement will be so high/ high enough that there is no benefit to sheltering your dividends and capital gains on the IRA for years til you withdraw it.

That's very questionable advice from the CPA if they didn't also point out this benefit to offset the lack of deductibility.

[Anonymous]

Anonymous wrote:

Anonymous wrote:I don't get a deduction for putting money in my IRA. My CPA told me there is no point to putting money in there. So, I stopped.

A CPA only cares about minimizing this year's taxes. He/she is NOT a financial planner.

A good[i][u] CPA (like mine) is smart enough to point out more than just this year's perspective. PP should find a smarter CPA.

[Anonymous]

I actually would agree with the CPA. I would say that doing a backdoor Roth would be the best thing in those circumstances, but taking on all the restrictions of an IRA, plus paying ordinary income tax on growth that would be eligible for capital gains taxation (leaving aside the annoyance of tracking the tax-free basis for each withdrawal) probably makes it not worthwhile to do a nondeductible IRA. YMMV.

[Anonymous]

Problem is, 59.5 years is a long time from now.

Who knows what will happen in the year 2040? The government might do some kind of means testing in the future and tax IRA withdrawals for people who have a lot of assets. You never know.