Savings Accounts for a Waste of Time – Choose an IRA!

Savings accounts are worthless. If you are making under $40,000 a year and losing 25% on rent (as most of us are) than, like me, you might be doing the savings / checking account dance. I get paid. I put $300 in savings. A week before my next paycheck I’m broke. I transfer $200 to checking. It goes on and on. And, guess what, Chase (the bank I use) charges me for savings account transfers (to be fair I get 4 per billing period).

I am already putting 6% in my 401k, but since I have less then $10,000 after 2 years this doesn’t seem to be enough of a “nest egg” for me and I’m starting to freak out. I want early retirement goddamnit! I heard of this little investment called an IRA account, but someone said I need to invest in a Roth IRA, rather than a Traditional IRA. Confusing! So I turned to my friends from the north at a great site called Investopedia.com, in Calgary, Canada, for advice. Here is what I was told: “The difference between the two is that the Roth IRA contributions aren’t tax deductible but the distributions are tax free while contributions to a traditional IRA can be tax deductible the distributions are taxed as income.”

Huh?

Ok, so basically I can contribute the same amount to both the Roth and Traditional IRA, however, it’s the taking out that matters. Basically, taxes on money put into a Roth IRA are paid now, while typically distributions from Traditional IRAs may be subject to income taxes at the time they are withdrawn.

So that means…Investopedia?

“I personally would look at a Roth IRA. While I am unsure of what you make [very little] now I assume that when you start to take distributions in the future (retirement) [that happens at 30, right?] that your salary and tax bracket will be higher than what they are today [God I hope so!], which would make it advantageous to have the distributions tax free versus being charged at a higher future tax bracket."

So pay now for to pay less later. Thanks Investopdia! I’ll let you all know what happens when I finally have enough money to invest which should be about $500.

For more on IRAs (and where I borrowed some of the fancy language for this post) go here: http://www.investopedia.com/articles/retirement/03/012203.asp