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  • What if I told you I knew a way to dodge taxes on a chunk of your paycheck? Or how about

  • an investment opportunity that will never pay a penny of taxes on the growth no matter

  • how big it gets? Sound too good to be true?

  • No, we're not talking about some off-shore account in the Cayman islands. This is the

  • amazing tax shelter of the IRA - a government-created program designed to incentivize you to save

  • more for your future self.

  • In 1974, Congress wanted a way to incentivize the country to start saving for their own

  • retirement, and rely less on government programs or company pensions. Their result was the

  • creation of the first IRA.

  • The “I” stands forIndividual”, meaning you don't get to co-own an IRA with someone

  • else, and it's not dependent on a company offering it to you, like a 401(k). The “R”

  • stands for retirement, meaning you promise not to withdraw the money until you reach

  • a certain age. And the “A” can either meanaccountorarrangementaccording

  • to the IRS. Contrary to popular belief, an IRA isn't aninvestmentitself with

  • a set interest rate or statistics. It's a holding cell for your investment of choice.

  • An Individual RetirementAccountcan be set up at nearly any bank or investment

  • company, and can hold investments like mutual funds, stocks or ETFs. But an IRA doesn't

  • have be anaccount”. “Individual Retirement Arrangementsallow you to apply the same

  • tax-benefits to an investment like a piece of land or a small business. Some folks have

  • even used thisarrangementto tax-shelter dairy cows, a car wash and a habanero pepper

  • farm! As long as you play by the rules, you can get pretty creative about what you choose

  • to invest in.

  • IRA's can be broken down to two primary styles; “TraditionalandRoth”.

  • The Traditional IRA is the O.G. IRA. When you're goingTraditional”, you're

  • allowed to save up to $6,000 dollars a year, or $7,000 dollars if you're over age 50.

  • And as long as you meet the criteria, any money you save into a Traditional IRA is tax-deductible.

  • Translation: The more you save, the less taxes you'll owe this year!

  • And since you're paying less taxes, you have more money topotentially invest in

  • your IRA! Essentially, it helps you boost up the amount you save every year. As the

  • years go by and your account grows, you don't have to report the growth on your taxes. But

  • when retirement arrives and it's time to pull to the money out, the amount you withdraw

  • gets taxed as ordinary income.

  • If you're a freelancer or own a small business, you qualify for some special variations of

  • the Traditional IRA; the first is the SEP IRA. SEP stands for Simplified Employee Pension,

  • and can be ideal for self-employed people. The SEP will allow you to raise your $6,000

  • dollar funding limit to the lesser of $56,000 dollars or 25% of your compensation. That's

  • a HUGE potential tax deduction each year! But beware, if you have any employees, you'll

  • probably have to fund their IRA's at the same rate as your own.

  • And if you work for or own a small business, the SIMPLE IRA is kind of like a Traditional

  • IRA blended with a 401(k). Available to companies with 100 employees or less, the $6,000 dollar

  • funding limit is raised to $13,000 dollars and offers a saving-match incentive to workers,

  • usually a 3% matching contribution. So whether you own or work for the small business, the

  • SEP and SIMPLE can help you level up a basic Traditional IRA

  • Then there's the Roth IRA, the cooler, younger brother of the Traditional IRA. Making its

  • debut in the 1990's, and named after Senator Bill Roth, the Roth IRA flips the tax benefit.

  • Instead of getting a tax deduction on the income you put in now, the capital gains,

  • interest, and growth can be withdrawn tax-free in your golden yearswith no limit! This

  • is super attractive to younger investors, since their investments can rack up so much

  • compound-growth over their lifetime, there's a potential boatload of taxes they can avoid.

  • Let's say you started maxing out your Roth IRA at $6,000 dollars a year every year starting

  • at age 25. And let's imagine that money gets invested in index funds that grow at

  • average rate of 8% per year. If you did just that until you reached 65, you'd have around

  • $1.67 Million dollars.

  • Under ordinary circumstances, whenever you profit from an investment, you need to pay

  • taxes. But thanks to yourarrangementwith the government, your Roth IRA hooks you

  • up big time. In our simplified example, yourgainsaccount for $1.43 of your $1.67

  • million dollars. And assuming you owed a “15% capital gains taxon those gains, you'd

  • normally be on the hook for over $214,000 dollars in taxes. But thanks to the Roth,

  • that number is $0!

  • A couple important things to keep in mind when investing through an IRA. First, you

  • can't touch the money until age 59 ½, or you'll with get hit with taxes AND a 10%

  • early withdrawal penalty. Though there are a few exceptions to this rule, like paying

  • for college or buying a home. And contributions or deductions might be limited or eliminated

  • if you and/or your spouse aren't working or have a 401(k) or other retirement plan

  • through your job. And even non-working spouses can save into their IRA if they choose.

  • So which IRA is right for you? Luckily, you don't have to limit yourself to only one

  • - many people have multiple IRAsas long as the total investment doesn't exceed your

  • yearly cap. The factors that might make a Roth, Traditional, SEP or SIMPLE IRA a good

  • fit are unique to you - your age, your income, your goals.

  • Speaking with a tax professional and a financial planner about your situation will always be

  • a safe bet when deciding which IRA to house your investments of choice. They can help

  • you make sure you play by all the rules of thearrangementand don't overlook

  • anything.

  • But one thing's for sure - the advantages of saving into an IRA early and often are

  • truly too good to pass up.

  • And that's our two cents!

  • Thanks to our patrons for keeping Two Cents financially healthy.

  • Click the link in the description if you'd like to support us on Patreon.

  • Do you have any other questions about how IRA's work?

  • Ask us in the comments.

What if I told you I knew a way to dodge taxes on a chunk of your paycheck? Or how about

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什麼是IRA? (What The Heck Is an IRA?)

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    Capalu Yang 發佈於 2021 年 01 月 14 日
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