Tuition and a Roth IRA

**SnoopyCool** · 04-20-2012, 03:32 PM

Question about tuition is yes, you can take out-of-pocket expenses that you pay, in the form of an education credit (American Opportunity, Hope, Lifetime Learning, Tuition and Fees); or as a deduction like Tuition and Fees. Go to this link for more info:

Tax Benefits for Education: Information Center

**thesmartnickel** · 04-20-2012, 06:51 PM

I linked a blog post I made a while ago below. It talks about IRAs and the differences between Roth and Traditional. In short, IRAs are retirement accounts that give you tax advantages by using them to invest rather than a normal account with a broker or mutual fund company.

With a traditional IRA, you get to deduct your contributions from your taxable income that year, saving you taxes right now. You let your money grow tax free, but you pay tax when you withdraw from it in retirement (hopefully at a lower tax bracket/tax rate than when you contributed to it).

A Roth, on the other hand, lets you contribute after-tax dollars (meaning you don't get any tax savings now) into the account which grows tax free and isn't taxed when you withdraw the money. This means all your earnings in your Roth are tax free when you take them out.

The main benefit of the Roth is that you get your investment returns tax free. This benefit is even greater of tax rates go up between now and in the future (which is quite likely to happen). The main benefit of a Traditional is the deferral of taxes from now to in the future when hopefully you are in a lower tax bracket (assuming taxes don't increase very much).

IRAs

**SeanH** · 04-20-2012, 07:23 PM

As indicated above, ROTH IRAs win if you can put low tax money in now and you expect to pay higher taxes later. I'd like to toss a different spin of the ROTH at you. ROTH IRAs decrease uncertainty. Predicting your future taxes and income is difficult. With a ROTH IRA you know what tax you are currently paying and you owe nothing on the earnings. If you are comfortable with your current taxes then the issue is settled.

Other then that - the ideal situation is to max your ROTH IRA ($5k). ROTH IRAs are advantageous because you control them. They aren't associated with work like a 401k. The restrictions are reasonably straight forward and provide some exceptions if you absolutely had to tap the money. If you open the account through someone like Fidelity or Vanguard you'll have plenty of fund options to choose from.

If you intend to fund a ROTH 401k through your job - max a ROTH IRA first. You'll have more control and options over the ROTH IRA than you will the ROTH 401k.

**jpg7n16** · 04-21-2012, 12:35 AM

Originally posted by musicrocks0304 View Post

My second question involves a Roth IRA. Can someone please explain to me in more detail what a Roth IRA is and how it is better/worse than other alternatives? What is a good amount to contribute? How do I open up a Roth IRA? It would just be great if someone could explain it to me as if they were telling someone who didn't know anything about it- as I do not.

Thanks guys!

A Roth IRA is a special type of account. The best way to understand what it is, and why it's awesome... is to imagine it didn't exist.

In the normal course of events, when you buy something for a dollar and sell it for 2, you have to pay tax on your gains. The IRS taxes income from any source derived, including investment gains. So in a Roth-less world, all your investing gains would be taxable.

As an incentive program to save for retirement, a special type of account was created - a Roth IRA (individual retirement arrangement/account). This account, when used for retirement, has a special tax arrangement (hence the name). As long as you don't touch your money until its been in the account at least 5 years, AND you are over 59 1/2 years old- the arrangement is that it's all completely tax free. Pretty awesome when you consider that there may be literally hundreds of thousands of investment gains that you'll never have to pay tax on.

Now the IRS has penalties for not sticking to the arrangement. The deal was that this is retirement money. If you don't stick to your end of the bargain, then you owe tax on gains, plus a 10% penalty tax.

They also arent nuts and giving this tax free opportunity to as much as you want, so they limit you to a max of $5,000 per year. Further, they restrict who gets this deal to people with lower incomes. (see here for details: Roth IRA Income Limits )If you make several hundred thousand dollars each year, they figure you don't need the tax savings. You'll just have to console yourself with your millions of dollars.

**kv968** · 04-21-2012, 04:40 AM

A couple more features of a Roth IRA compared to a traditional or 401k...

In a Roth, at any time you can withdrawl the money you contributed without any penalties and/or taxes. Whereas with a tradition IRA you would most likely pay taxes plus a 10% penality if you take the money out before you're 59 1/2. Although taking money out of a Roth is discouraged since it's meant to be for retirement but it is an available option.

Another, maybe minor, benefit of a Roth is there is no requirement for you to take the money out. With a traditional or 401k you HAVE to start taking a certain amount of money out when you reach 70 1/2 whether you need it or not. Basically because the government wants some of the taxes.

As far as opening a Roth account, just contact one of the better fund families out there (i.e Vanguard, T. Rowe Price, Fidelity, etc...) and tell them you'd like to open one. You can even just go to their website and open one up online. The typical initial contribution ranges from $1000-3000 with additional contributions usually being $100. I would suggest, if you don't know much about investing, to just start off with the appropriate target date fund they offer and then as you learn more expand your investments if you'd like. Although sticking just with the target date is appropriate regardless.

Tuition and a Roth IRA