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Be Diligent With Your IRA


Christian talk radio with Rob West

October 28, 2022

Ecclesiastes 11: 6 says, In the morning sow your seed, and at evening withhold not your hand, for you do not' know which will prosper, this or that, or whether both alike will be good. That verse tells us the importance of diligence. Today we’ll give you some ways you can be diligent with your IRA. Okay, so the first way you can be diligent about your IRA is to make a very basic decision: TRADITIONAL OR ROTH IRA? Money contributed to a traditional IRA goes in pre-taxed, meaning you can deduct that amount from your adjusted gross income at tax time. Money going into a Roth IRA, of course, is after-tax. Meaning you can’t deduct it. Later in life, when you withdraw those funds, you’re taxed on your traditional IRA contributions and earnings but your withdrawals from a Roth account are tax-free. And because of that, a lot of folks automatically assume that a Roth IRA is better. Don’t make that assumption. The Roth is only the better option if you expect that your retirement income will actually be more than you’re making now, and generally, that means the Roth is better for younger investors. It’s better to pay the tax on those contributions now, rather than later when they may be in a higher tax bracket. But at a certain stage in your working life, your expected retirement income will be less than you’re making at that point. That makes the traditional IRA a better option for older investors, who’ll pay taxes on their withdrawals later when they expect to be in a lower tax bracket. So when you’re deciding between a traditional or Roth IRA, you have to ask, On the day I retire, am I likely to be making more or less than right now? But what if you still can’t decide? WHY NOT BOTH A ROTH AND TRADITIONAL IRA? Ecclesiastes 11: 2 even tells us of the need to diversify our holdings. It reads, Give a portion to seven, or even to eight, for you know not what disaster may happen on earth. If you can’t decide between a traditional or Roth Ira, open both and split the maximum contribution between the two. That way you’ll have taxable and non-taxable income streams in retirement. . Another way to be diligent with your IRA is paying attention to when you make your contributions. The IRS allows you to make them all the way up to tax day, April 15th and still have them apply to the prior tax year. But doing that means you’ll lose up to 15 months when your contributions could be making compound earnings. Now, why would someone do that year after year? Well, for example, it might seem to make sense for folks who expect an annual bonus at the end of the year. They wait for it and then use it for IRA contributions after the first of the year, maybe even waiting until the April 15th deadline. Other folks might just procrastinate, again waiting for the deadline before acting. It’s far better to make consistent contributions to your IRA all through the year, which again, will give your holdings more time for compound earnings. If you’re expecting a year-end bonus, adjust your budget so you can contribute that amount through the year, instead of waiting. You can also be diligent about contributing the maximum allowed amount to your IRA. That’s $6, 000 a year, or $7000 if you’re 50 or older. But did you know that some people can actually double that amount? IRA contributions must be made from earned income, but what if you have a non-working spouse? Well, you can open another IRA in the spouse’s name and again contribute the maximum amount, as long you, the working spouse, make enough to equal the combined maximum of $12, 000 or $14, 000 if you’re both over 50. And that could actually be a better option than maxing out your contributions to a company 401k if it’s loaded with fees and has few investing options. Another way to be diligent with your IRA is to start investing early. Let’s look at three different scenarios, assuming an annual gain of 8%. (Keep in mind, the 100-year average for the SP 500 is over 10%. ) If you invest $250 a month starting at age 25, by age 65, your holdings will grow to more than $875, 000. If you wait until age 35, your holdings will reach only $375, 000. A huge difference! And if you wait until age 45 you’ll accumulate less than $150, 000. No wonder Proverbs 13: 11 reads, Wealth gained hastily will dwindle, but whoever gathers little by little will increase it. So if you haven’t started investing yet, start today! On today’s program, Rob also answers listener questions: ● What are the tax responsibilities for adult children who inherit property from a parent? ● What is the biblical case for long-term saving and investing? ● How should you use proceeds from annuities?

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