IRA
From Debt Free Dude
An IRA is an individual retirement account. It is a way to save money for retirement without paying taxes on the money now. You still pay taxes on the money when you take it out. An IRA is a particularly good investment strategy when you expect your tax liability to be lower in the future. For example, if you are making a tremendous amount of money right now, but expect to be at a much lower income in retirement, an IRA will let you defer your taxes until later on when you may be paying less. Another example is when you expect tax rates to be much lower in the future than they are now.
IRAs can be a particularly good choice for someone coming to the end of a high paying career with retirement near. The IRA will let them set money aside and delay taxes until they no longer have a high salary pushing them into a higher tax bracket. At the end of your career, there is less time for the IRA to appreciate so the taxes paid on the growth will likely be minimal.
Early in your career a Roth IRA may be a better choice. It lets you pay taxes today, but not pay anything on the increase from the investment. The Roth IRA is also a good choice if you expect tax rates to increase significantly in the future.
- Can I borrow against my IRA?
- No. It isn't legal to use the funds in your IRA as collateral for a loan. If an IRA is used as collateral for a loan, tax and an additional 10% penalty is due on the amount in the IRA. This rule also means you cannot enable margin on an IRA account. This also eliminates the possibility of using shortselling as an investment technique with IRA funds.
- Can I borrow money from my IRA?
- Not directly. However, you can roll the money over to a different IRA. Once withdrawn you have 60 days to put the money in a new IRA account. This basically gives you a 60 day loan. This isn't recommended because if you don't get the money back within the 60 day timeframe, you will be hit with the early withdrawal penalties which will charge you tax at your current tax bracket plus an additional 10% tax.
- What happens if I withdraw money from an IRA before retirement age?
- You will have to pay taxes on the amount as if it was current income. In addition you will have to pay an extra 10% fee.
- Is there any way to withdraw money early from an IRA?
- Yes. You can take money out to buy your first home and for certain types of hardship. However, these withdrawals are subject to your current tax rate. They are not subject to the 10% penalty.
- How does an IRA save me money on taxes?
- If you make $40,000 per year and you put $2,000 into an IRA, your taxes will be calculated as if you only made $38,000 that year. This means you don't have to pay tax (right now) on the $2,000. The $2,000 can grow tax deferred until you get ready to take it out at retirement. If you plan to make substantially less during retirement this might be a good tax strategy. However, considering that taxes may go up substantially, you may end up paying much more in taxes than you would with a Roth IRA where you pay taxes now, but your investment grows tax free.
- Is an IRA protected from creditors in a bankruptcy
- Yes. Federal law prohibits the assets in an IRA from being subject to creditors claims during a bankruptcy. There is one notable exception. The Internal Revenue Service can seize your IRA and other retirement accounts to meet unpaid tax liability. These accounts are normally protected from other creditors.
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