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nest egg

Sunday, January 14, 2007

We have a box in the garage where we collect paper for recycling. I don't usually read the paper. It's Tonto who usually goes through the paper. Anyhow I was standing in the garage waiting for Tonto for whatever reason and happened to spot a title on the paper for an article on the Roth IRA. Here's a really quick run down based on the article.

Contributions to a 401K is usually through the company with whom you are employed and are made with pre-tax dollars. There is a limit on how much you can contribute and you are required to start withdrawing at age 59 1/2 years old. You are taxed on the money you withdraw; which says that the money in the 401K is not all yours. You can borrow from yourself, usually up to 50% of what you have in your 401K. You pay yourself interest when you pay your loan back into the 401K. The interestesting thing is that even though you pay back with taxed dollars, you are still going to be taxed when you withdraw from the 401K.

Contributions to a Roth IRA is made with taxed dollars, which means that when you go to withdraw, you're not taxed. You are not required to withdraw at a certain age, meaning that you can leave it as a legacy to whomever. And I'm not sure, but I don't think there is a limit to how much you can put into a Roth IRA.

Given that tax rates are likely to go up as years go by, it makes more sense to go ahead and pay your taxes now (i.e. Roth IRA). The 401K makes sense if your company matches your contributions -- make the contributions required to get your company's match.

I'm not money savvy, but that's the understanding I got from the article. I've not cross referenced it to other views; you're welcomed to do so. I just wanted to share this tidbit in case it may be of help to others.