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Investing for Retirement
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Author:  Smith Corks One [ July 6 19, 8:37 am ]
Post subject:  Re: Investing for Retirement

Michael wrote:
Your questions are out of my depth, but I'll take a shot at it. Converting a pre tax pension to a roth is going to incur a hefty tax hit. My gut says an IRA with the lowest distros as possible would be the most wealth building option assuming they don't buy terrible securities.

That said, I'm really not sure. Give me another 30 years. This is a great question for the bogleheads.org message board because they have so many retirees on there. I wouldn't be shocked if you search the forums you'd find threads on this very topic. Just keep in mind tax laws change so old threads might not be correct. Obviously, a professional tax lawyer is another great option, but that might be pricey.

Awesome, thanks for the reply. You're right, there were some relevant threads on bogleheads, so I've been reading up. Does seem like a traditional IRA with the lowest distributions might be the way to go. And I wonder, is there a way to re-invest those distributions in something like mutual funds or ETFs, or would those be taxed again? Which makes me wonder - if I'm contributing after-tax income to an IRA (the $5500 max, or whatever), am I taxed again on the whole sum when I take a distribution? Double-taxed wouldn't be very awesome.

Author:  greenback44 [ July 6 19, 2:03 pm ]
Post subject:  Re: Investing for Retirement

Smith Corks One wrote:
And I wonder, is there a way to re-invest those distributions in something like mutual funds or ETFs, or would those be taxed again?

Yes, you can put the distributions into any kind of mutual fund or ETF or bitcoin or whatever. The interest income and capital gains would be taxed when realized.

Quote:
Which makes me wonder - if I'm contributing after-tax income to an IRA (the $5500 max, or whatever), am I taxed again on the whole sum when I take a distribution? Double-taxed wouldn't be very awesome.

If you contribute $5500 in after-tax income to your IRA, then you would have a basis for your IRA of $5500. Distributions from the $5500 basis are not taxed, but anything taken out of the IRA beyond the $5500 (i.e. from income on your basis) would be taxed as income. The allocation between "basis" and "income on your basis" makes this a bit more complicated, but the principle at work here is only gains are taxed, and they are only taxed when you make distributions from the IRA. You should look into either (a) tax-deductible contribution to an IRA, if your income level allows it, (b) a direct contribution to a Roth IRA, if your income level allows it, or (c) a backdoor conversion to a Roth IRA. Roth IRAs are nice, since generally income from a Roth IRA is tax-free. Bogleheads will have more on (c), if you google "backdoor Roth." Option (a) is common enough to show up in TurboTax and the like, but if you do (a), then your basis for your IRA is zero, and any distribution is taxed.

In general IRAs are tax deferral vehicles, where Roth IRAs are somewhat more than that IMHO.

I'm not a tax advisor, no fiduciary relationship, yadda yadda yadda.

Author:  IMADreamer [ July 8 19, 12:46 pm ]
Post subject:  Re: Investing for Retirement

As a testament to the power of interest over time my Mom retired on Wednesday and we've been working on getting everything set up for her. She never made more than about $15 a hour at any point in her life and she assumed she wouldn't have much in retirement other than social security. In fact she'd planned on getting a part time job to make ends meet. My Mom is weirdly insecure about herself even though she's pretty smart so she always has me or my Dad listen in on financial decisions. So after 40 years of working and just putting away whatever percentage she was putting away each check she goes "oh I won't have much at all." Welp turns out she has about 1.3 million put away. lol She didn't believe it and kept asking the guy if it was a mistake. He just laughed. She about crapped when I told her her safe withdraw rate was about 50k a year to which she said "that's more than I make working!"

So anyway, even if you don't make much, if you can manage to put away a little each check and invest it, it really does add up.

Author:  Smith Corks One [ July 8 19, 4:20 pm ]
Post subject:  Re: Investing for Retirement

greenback44 wrote:
Smith Corks One wrote:
And I wonder, is there a way to re-invest those distributions in something like mutual funds or ETFs, or would those be taxed again?

Yes, you can put the distributions into any kind of mutual fund or ETF or bitcoin or whatever. The interest income and capital gains would be taxed when realized.

Quote:
Which makes me wonder - if I'm contributing after-tax income to an IRA (the $5500 max, or whatever), am I taxed again on the whole sum when I take a distribution? Double-taxed wouldn't be very awesome.

If you contribute $5500 in after-tax income to your IRA, then you would have a basis for your IRA of $5500. Distributions from the $5500 basis are not taxed, but anything taken out of the IRA beyond the $5500 (i.e. from income on your basis) would be taxed as income. The allocation between "basis" and "income on your basis" makes this a bit more complicated, but the principle at work here is only gains are taxed, and they are only taxed when you make distributions from the IRA. You should look into either (a) tax-deductible contribution to an IRA, if your income level allows it, (b) a direct contribution to a Roth IRA, if your income level allows it, or (c) a backdoor conversion to a Roth IRA. Roth IRAs are nice, since generally income from a Roth IRA is tax-free. Bogleheads will have more on (c), if you google "backdoor Roth." Option (a) is common enough to show up in TurboTax and the like, but if you do (a), then your basis for your IRA is zero, and any distribution is taxed.

In general IRAs are tax deferral vehicles, where Roth IRAs are somewhat more than that IMHO.

I'm not a tax advisor, no fiduciary relationship, yadda yadda yadda.

More excellent advice. Thanks for taking the time!

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