Roth IRA

I'm interested in this too. We've got money in an IRA as well, not a Roth though. I hear the tax treatment may be different.

 

Simple I.R.A.=investment is tax deferred until it is withdrawn.

Roth I.R.A.=investments are taxed when they are deposited. When it is withdrawn, it comes out tax-free.

Variable or fixed annuity=investments are tax free both when deposited and when withdrawn. Only earned interest is taxed.

 

It's a lot more involved than that.

1. The SIMPLE-IRA is a tax-deferred retirement plan provided by sole proprietors or small businesses (fewer than 100 employees) who do not maintain or contribute to any other retirement plan. Contributions are made by both the employee and the employer. In a SIMPLE-IRA, contributions and the investment earnings can grow tax-deferred until withdrawal (assumed to be retirement), at which time they are taxed as ordinary income.

If you contribute to a Simple IRA, you may also be eligible to contribute to a Roth IRA depending on income level. A Simple IRA is in lieu of a 401 (k), not Roth IRA. In other words, a Simple IRA and Roth IRA are not mutually exclusive.

2. Roth IRA's aren't really "taxed" when deposited. You make contributions with "after-tax" money. For example, let's say you contribute $1,000 to a 401 (k). That's a pre-tax deduction, meaning your taxable income is reduced by $1,000. If you contribute $1,000 to a Roth IRA, you don't get that tax deduction.

They also do have tax consequences if you make early withdrawals. A Roth IRA has no maximum age restrictions, is not deductible, and is not subject to mandatory distribution.

The better comparison is between the Traditional IRA and the Roth IRA.

3. Once you're eligible to contribute to a a 401 (k), you should also consider contributing to a Roth IRA if your cash flow and income tax bracket allows.

Roth IRAs do not fluctuate anymore than any other retirement vehicle. They have different tax consequences but fluctuation depends on the investment choices you make.

For example, if youre really conservative you can setup a Roth IRA or Traditional IRA and just invest it in money market accounts or CD's (although not recommended if you want some real long term growth).

4. The problem with variable annuities are they have high expenses called mortality and expense ratios (M&E expenses), early withdrawal tax consequences and generally high surrender charges (usually at least 7 years). This is not something you want to invest in unless you've already maximized qualified plan contributions and want a guaranteed death benefit, have creditor protector issues or have major tax deferral needs.

 

RIET: Very detailed and mostly accurate. I was detailing it in laymens terms, so it could be easily understandable.

with V.A.s, I'm thinking you're not looking at the big picture. Some V.A.'s are able to be liquidated in as little as one year, without any penalties. There are hundreds of different kinds of annuities with different guarantees and term conditions.

That said, you know that liquidating an I.R.A. or 401 k before age 59 1/2 has MAJOR penalties, as well.

 

Drewdog-

To answer your question, now that others detailed the difference between the two.......I would do the Roth IRA over the traditional IRA, based of the fact that you are young & most likely not in a very high tax bracket right now. The hope is that you put the $ in and by the time you take it out it has doubled many times over. With the Roth you take it out tax free. I would recomend contributing to retirement account in the following order.......

1. Contribute to the 401k up to any company match

2. Contribute to the Roth IRA up the the max allowed for the current year.

3. Contribute any additional $ to the 401k up to the yearly max.

I think that one should contribute 15% of their gross income for retirement savings.

 

Well, many variable annuities (not all) have very high surrender charges.

Also, there's no real need to pay the M&E expenses unless you have already maxed out qualified plans and Roth or Traditional IRAs unless a guaranteed death benefit is a primary concern.

Liquidating IRAs and/or 401 (k)'s do have penalties but there are numerous exceptions including financial hardships, disability, paying for education, paying for medical expenses, or you take substantial equal payments (there are limitations to this).

Also, many people don't realize that you do not have to wait until 59 1/2 to start withdrawing funds from your 401 (k) if
you are separated from service (through permanent layoff, termination, quitting or taking early retirement) in the year you turn 55, or later.

Even when comparing Annuities to Mutual Funds in non-qualified accounts:

If you die with money left in your annuity, your beneficiary will have to pay state and federal income taxes on any gains you made during your lifetime. On the other hand, with a mutual fund, the cost basis is stepped-up at death, meaning your heirs will avoid having to pay taxes on the gains.

Also, All income generated from gains in an annuity are treated as ordinary income verus a mutual fund or stock investments that are potentially taxed at lower capital gains rates.

 

I have a Roth IRA and the best thing about it is that if you hold it for at least 5 years, you can withdraw from it without paying taxes AND a penalty for certain situations like first time home buying.

So, I would definitely go with a Roth but also contribute quite a bit to the 401(k) as well.