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What about a recharacterization of a roth to a traditional?

Question about a Roth Ira?

  • I'm a recent college graduate looking to invest in a vanguard target retirement fund 2050 sheltered in a roth ira account. I know the difference between a roth and a traditional roth ira. A roth is an aftertax contribution, and a traditional ira, you get taxed once you take it out. my question is what is the difference between if I just opened a regular account for the target fund with vanguard under neither a roth or traditional ira vs opening under a roth ira account? Would it be taxed similar to how a traditional ira is? Thanks for your time, and I am fairly new at investing so trying to learn all I can. Thanks

  • Answer:

    It wouldn't be taxed the same as a Roth IRA. As you probably know, capital gains and dividends are not taxed with a Roth IRA. Even when you finally cash it out, as long as you meet the age and other requirements, no taxes will be taken from a Roth IRA. If you just open up a regular account, outside of retirement, you will pay taxes on any capital gains or dividends generated while the money is in the account. When you withdraw it, you may also be liable for more capital gains taxes.

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If you open the fund on it's own, you have to pay tax every year on the fund gains and also on the nav gains you have when you sell the fund. You can also invest as much as you want. Through a trad and roth IRA, you have a cumulative limit of $5000/year contribution. This means that when you add up the contributions for the trad and roth in a given year, they have to equal $5000 as a maximum. Through an IRA, you get tax-advantaged treatments. With the trad, you don't pay tax on your income that you contribute, you pay tax later. EVERYTHING included how much the account has grown is taxed. Roth IRA requires that you pay tax now and then the after-tax income including its growth will never be taxed. For the IRA, you can only access them after five years and at the earliest, when you reach 591/2. If you take out earlier, there will be tax penalties. There are circumstances that allows you to take the contributions out earlier;' though the process is not fast. If you look at analysis, taxes prevent any investment account from growing effectively. You have this landmine when you open a regular mutual fund. When the account is able to grow tax-deferred/tax-free, you are able to utilize compounding to its fullest potential.

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