Retirement

How to Retire with Tax Free Money

If you had to pay the government 10 bucks today or 100 bucks 80 years from now which would you choose? If you’re familiar with time value of money you probably want to know what the current interest rate is. But the answer is very simple when you consider your current tax rate. As a young adult in a low income tax bracket your rate today should be much lower than it will be when you retire. If you really want to be a financial success then you have to pay attention to your taxes. One of the best ways to do this is to use an up-to-date tax software program such as TurboTax every year.

 

A Roth IRA is an excellent way to take advantage of tax bracket saving. IRA stands for individual retirement account. It’s a way for our generation to be sure we will have cash flow at retirement. I for one won’t be depending on the Social Security system.

With a Roth IRA, the money you deposit today is ‘after-tax’ money. (Remember that there are IRA contribution limits and you won’t be able to contribute your entire check.) That means you’ve already paid tax on it and when you decide to withdraw from your IRA you won’t have to pay tax on it again. This is a big deal because right now Uncle Sam probably only takes about 15 to 20% of your earnings. However, once you get older and your income rises, you might be paying Uncle Sam 30 to 36% of each dollar you make. You can even open a Roth IRA for kids.

You can open an IRA with your bank or your brokerage company. If you are a Sharebuilder customer you should check out their Roth IRA account. Once you open an account and deposit funds you can buy and sell stock like you do with your individual account. Wherever you decide to open your IRA make sure you check for fees just like you did when you were choosing a broker to trade with.

Also, make sure you maximize your contributions. Each year you are allowed to deposit a certain amount and there’s no going back if you don’t put in as much as you can the year before. After a while you will have a nice tax free nest egg saved.

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  • http://twitter.com/USMBlogger UltimateSmartMoney

    Yes, Roth IRA or Roth 401K is the way to go if you are confident you investment multiplies.  Many people try Roth IRA but ends up losing their money from stock trading.  Just be careful.

    • http://YoungAdultFinances.com FinancialSuccessforYoungAdults

      Exactly! It’s best to choose a lower risk strategy for retirement funds. At least in my opinion. I’d rather slow and steady growth over time for this type of account.

  • http://twitter.com/onlyonecent One Cent At A Time

     am contributing to IRA and 401(k) at the moment and maxing out on both. Since 401 (k) contribution is more than IRA hence I am betting for low future tax rate. This might be true for almost all of us whose 401 contribution is more than IRA and Roth IRA combined.

    • http://YoungAdultFinances.com FinancialSuccessforYoungAdults

      Very smart, it’s always good to put away the max allowed. Does your wife contribute the max as well?

  • Frugal Toad

    We have an IRA, 403b, 401k, and 529s for the kids college funds.  Don’t think we could swing a Roth.  I do know the deadline to reclassify a Roth back to a Traditional IRA, I think it was Oct 15th.

    • http://YoungAdultFinances.com FinancialSuccessforYoungAdults

      If your kids work at all, you should be able to have them contribute to a Roth, they are in an extremely low tax bracket right now and that money will grow tax free until they retire.

  • http://YoungAdultFinances.com FinancialSuccessforYoungAdults

    Even if it’s just yard work or chores :)

  • http://twitter.com/retirebyforty retirebyforty

    My Roth account is doing terrible. It will take forever to recover….

    • http://buckinspire.com Buck Inspire

      I have a Roth and a 401k. I see the advantage of putting money in a Roth to avoid pay higher taxes in the future. So does that mean you don’t support 401k or traditional IRAs?

      • http://youngadultfinances.com LaTisha Styles

        No I think they have their place, but I see the tax advantages as much better for a Roth if you know how to invest and generate a high return.