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Petty Ca$h
Never mind graduation, let's talk retirement
Brian Latko
Staff Reporter
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Would you laugh if I told you I started saving for my retirement at age 17? I bet you would. But I’ll be laughing my way to Third Federal when I’m 59½ years old. Anyone with a couple of courses in economics under their belt can you tell that a lot of money accruing interest over a long period of time makes for some nice vacations. Now the question is, how do you go about saving for your retirement? If your answer is your checking account, then we need to talk.
Of course one day we all hope to have a career with a company that offers us retirement packages and savings plans, but until then we have to rely on the one savings method that anyone can do: an IRA. Yes, even if you have nothing more than a summer internship or one of those mysterious jobs at Veale that everyone I know seems to have, you can open up an IRA. IRA stands for Individual Retirement Account, and it allows you to put a certain amount of money away per year, depending on your income. The pro of an IRA is that, depending on which type you choose, you will receive some sort of tax break. The con is that the tax break disappears, and is sometimes replaced by penalties, if you have to use it before you reach the age of 59½. I’m not going to lie, it is a commitment. But it is one of the better commitments you’ll ever make.
There are actually three types of IRAs, so bear with me and I’ll tell you which one is best.
1) The first type of IRA is a nondeductible IRA. With this type of IRA, your yearly contributions will not be considered tax deductible, and when you withdraw the money at retirement-age, the interest you have earned over time will be taxed as income. That is a lot of tax. In addition, if you do have to withdraw the money before you reach 59½, you’ll be penalized.
2) The second type of IRA is a deductible IRA. With this type, your yearly contribution will be considered tax deductible, but the money will be taxed when you withdraw it. Penalties still apply if you withdraw early, unless you’re doing so to help pay for a home.
3) Finally we have the Roth IRA. The Roth IRA does not consider your deposits tax deductible, but it does consider your withdrawals tax deductible. There are also no penalties for withdrawing money for home purchases or education expenses before age 59½, but you lose the tax break. As long as you’re at retirement age, you won’t see any tax on the way out, only on the way in.
So let’s decide which one is the best. To oversimplify, we determined that, in the first type the money gets taxed on the way in and out. In the second type the money gets taxed on the way out but not on the way in, and in the third type the money gets taxed on the way in but not on the way out. So the first type, the nondeductible IRA, is clearly out of the picture. But between the second and third, it’s a matter of which is better: tax in or tax out?
The whole point of a retirement account is to earn interest over time, which means that you’ll have more money at the end then at the beginning. Therefore you should prefer the Roth IRA, which taxes money at the beginning, when there is less to be taxed. Who really wants to deal with tax at the age of 59½ anyway?
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