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Tax-Deferred vs. Tax-Free Investing
Dear Jeff:
Hi Jeff, enjoy your expertise. I am 66 years of age and a retired government postal worker. I have a traditional IRA with Fidelity Investments -- right now worth about $7,500. I also have money in an IRA money market fund. I don't own my own home, I rent, and my children are all married. It's just me and the wife -- she is 60 and also has IRAs with Fidelity. I own a growth/income fund and two other growth funds. Should I add to my positions? I don't need this money for the next 3-5 years, hopefully. Thank you.
Jeff Says:
By all means, add more to your investments. The sooner you can invest your money, the sooner your money can work for you. I am sure that you have heard the phrase "work smarter, not harder." This principle applies to money as well, and the smart money is in tax-deferred investments. The financial leverage that tax-deferred investments provide is incredible and should certainly not be overlooked.
Unfortunately, income taxes cannot usually be avoided forever. Traditional IRAs must be distributed beginning at age 70 1/2 whether you need the money or not. Uncle Sam gave you the tax break, now he wants his taxes. The distributions can be based on your life expectancy or the joint life expectancy of the participant and the beneficiary -- which can spread the tax liability over a number of years.
Another thing you must consider is that you may not be eligible to make further contributions to your IRA. You indicate that you are retired and I will, therefore, assume that you are not working anywhere else and do not have earned income. The maximum contribution allowable to an IRA is the LESSER of $3,000 or 100 percent of your income. If my assumptions are correct, then you would not qualify for an IRA. In that case, you should still consider investing in a regular, non-qualified investment.
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