Talking to my son about savings

Kaye Thomas wrote a very easy to read and pretty complete tutorial.

Click here

$4K (because he is not 50) He can withdraw his deposit without penalty, but earnings would be taxed and 10% penalty if he's under 59-1/2 More important, teach him the 'rule of 72'. At 10%, money doubles in 7 years. From now till 66, this money can potentially double 7 times. 2^7 is 128. His $4000 can grow to over $500,000. Ok, this ignores inflation. It may 'only' be worth $128K.

Tell him if he puts the $4000 away each year for 8 years, he will be ahead of the friend who starts at 24 and puts away $4000 every year for the rest of his life.

JOE

Currently $4,000 ($5,000 if age 50 or older). Of course, emphasize they are _not_ deductible. The payoff comes much later -- 43+ years, in his case; but WOW, think of the compounding!

The 10% additional tax applies to "unqualified" distributions (e.g., excess contributions, early distributions, etc.)

Most important exception is distributions that are a return of your regular contributions -- which are not includable "in your gross income." There are other exceptions for a first-time homebuyer up to $10,000 (lifetime limit) ... or for distributions because you are disabled ... or in payments to a beneficiary after one's death (like he'd care about that). The major benefit of a Roth, of course, is that all _Qualified Distributions_ are not taxable -- and the major qualifier is the Roth has been open for 5 years, and the TP is age 59 1/2. Smart son. Pub 590 might be excellent bedtime reading -- good sleeping aid. Bill

-- Barry Margolin, snipped-for-privacy@alum.mit.edu Arlington, MA

Everything you need to know about Roth IRAs from Kaye Thomas:

1. Maximum contributions to a Roth are the same as a traditional IRA: the lesser of your earned income or ,000 (,000 if you are over 50.) If you earn too much, though, you are prohibited from contributing to a Roth (0,000 for single, 0,000 for MFJ)
2. There is no penalty for early withdrawal of contributions. When you take money out of a Roth, your contribution is considered to be withdrawn first. So if you contributed ,000 to the Roth over several years and it is now worth ,000, you can take out the ,000 without penalty. Anything more than that will incur a 10% penalty. So if you took out the entire ,000, you would have a 0 penalty (plus have to pay tax on the ,000).
3. Exceptions to the penalty are listed on Form 5329. The common ones include first time home buyer (up to ,000), qualified higher education expenses (tuition, fees, books, room & board), medical expenses that exceed 7.5% of your AGI. So there won't be a penalty on the withdrawal of any earnings, but you will still have to pay tax on the withdrawal if you are under the age of 59-1/2 (except for the first-time home buyer. If the account has been open for at least 5 years, then the withdrawal of earnings is tax-free also.) As with many tax questions, the answer is not always easy!

$4000 hard cap, but can't contribute more than your earned income (though the contribution funds themselves can come from savings, gifts, etc.).

No penalty or tax for withdrawing contributions. Withdrawals of earnings are taxable plus get hit with the

-- Rich Carreiro snipped-for-privacy@animato.arlington.ma.us