So I just opened a Traditional IRA for the first time for tax year '08 (through TD Ameritrade) and was wondering what I should invest in. I'm looking for some moderate growth and might take the money out in order to pay for school in a couple of years. From my understanding, if I take the money out for school (and show that I have an annual income of $0...which will be my income since I won't be working), I will be able to take the money out without paying tax, right? Any suggestions?
https://personal.vanguard.com/us/whatweoffer/ira/whichira I found that comparo chart to be pretty helpful when I was deciding which IRA to put money in a couple of weeks back.
Regarding which fund you want to put money in, it is my personal preference that you pick one that has very low load cost, because cost is one thing that absolutely kills the compounding of your earning. It has also been proven that high load (high cost, actively managed) on average do not beat indexed funds. I know both Vanguard (VFINX) and Fidelity offer a very low cost (0.1-0.2% or so) indexed funds, and that's a good place to start until you have a better understanding of what you want to invest in.
Thanks for the info. Now my question is, what's the difference between an ETF like VFINX and SPY, both of which track the S&P 500?
VFINX isn't an ETF - it's a mutual fund... ETF prices fluctuate intraday like a stock's. A mutal fund's price (NAV) changes at the end of the day. Also check fees, loads, etc. for differences. Go to a site like Google Finance and you can track how they compare in terms of returns over the same period : http://www.google.com/finance?chdnp...o=MUTF:VFINX&cmptzos=-18000&q=NYSE:SPY&ntsp=0 and how they compare to the index they track : http://www.google.com/finance?chdnp...VFINX&cmptzos=-18000;-18000&q=NYSE:SPY&ntsp=0
First off, you WILL be taxed on your current tax bracket (lowest is 10%) but if you cash out ANY of your IRA prior to 59 1/2, you also get hit with a 10% penalty. IRA's are set up for RETIREMENT, I=Individual R=Retirement A=Account EDIT: Apparently you can use IRA funds for retirement without the 10% penalty, but you will still be taxed on the funds. http://en.allexperts.com/q/Funding-Education-1552/tuition-paid-funds-ira.htm You are partly correct about early withdrawls of ira's and educational expenses. They are penalty free but you will be taxed on the amount you take out. There is no limit of the withdrawl that can be taken, as long as you have proof that amount went towards approved educational costs. You must make sure the eligible student attends an IRS-approved institution. This is any college, university, vocational school or other post-secondary facility that meets federal student aid program requirements. The school can be public, private or nonprofit as long as it is accredited. Once enrolled, you can use retirement money to pay tuition and fees and buy books, supplies and other required equipment. Expenses for special-needs students also count. And if the student is enrolled at least half-time, room and board also meet IRS expense guidelines. Without knowing your entire situation, financially, I will say that retirement accounts should be a persons last resort to fund an education for their children. Parents usually have some additional options to pay college expenses that they haven't thought about that may make more sense now and in the future when you are in your senior years. If you use money now out of your retirement account, what is the actual cost to you when you take into account the lost gains in the future you could have realized in addition to the current taxes you owe for the withdrawl taken. You may find that it was an expensive decision to make in regards to the lifestyle you can have in your senior years than if you went a different route.
The obligatory "past success does not indicate future returns." That's true for the Traditional IRA. With Roth IRA, you are free to withdraw contributions (not earnings) after 5 years, free of penalty and tax. http://en.wikipedia.org/wiki/Roth_ira#Advantages
Right, but say I start school in august 2010, and withdraw money from my IRA during tax year 2011 (during which time I'll be in school for the entire year full-time and have an income of $0). Will I still get charged the 10% "minimum" income tax rate even though I'm making squat that year?
[Continuation of story] On what grounds? Will I have to pay taxes on both the original investment and any realized capital gains?
Yes. This happens no matter what, even if you wait till 59 1/2. You will be taxed when you take it out. The advantage is it lowers your taxes when you contribute, and the gains are tax deferred (they're taxed when you make withdrawals).
Right, but if the money is taken out for educational reasons AND I file my yearly return to show an income of $0, on what grounds do I get taxed? At what rate? Do they just make up a rate for a broke kid trying to get a higher level degree?
Money invested into an IRA is invested Pre-tax. The earnings will be taxed when you take it out. Notice the word "earnings?" That would be money you earned.
So if I invest $3,700 in my IRA now, it grows to $5,000 by 2011, I withdraw all $5,000 in 2011 for education fees (my other income being $0)...then I would get taxed as if my annual income for that year is $5,000, which would put me in the lowest tax bracket (10%). Gotcha, thanks.
Honestly, you're better off with a Roth if this is what you are using it for, assuming you're currently in the lowest tax bracket.
