question of tax advantage

[Guest dmoore80]

One more question- the difference between the Roth and regular is that you don't get to deduct the contributions on your taxes, correct? So it's as if you just put them in a savings account, right? But is that it? You've just payed income tax on it as part of your regular pay, you don't continue to have to pay taxes on the increases in the account, as you do with interest from a regular savings account, do you? I apologize for my ignorance, but I am truly new at this.

Thanks!

[John G]

You fund Roth contributions with "after-tax" dollars and get no deduction. No front end deduction, but the back end is great... no taxes on normal distributions. A roth is the tax shelter for the average Joe.

After you establish a Roth, you have no interim taxes on interest, dividends, or capital gains. Zero.

You talk about savings accounts and interest. These are ultra conservative approaches to investing. For most people opening a Roth, they have decades of tax sheltered growth before they draw upon the account in retirement. With a long hold period, you should look into stock mutual funds. Stocks (equities) have always outperformed interest bearing investments in any period that exceeds 20 years. Grab a copy of the March or April issues of Kiplinger Finance, Money, or even Consumer Reports which cover retirement accounts like Roths during the tax season. Most public libraries will subscribe to these mags.

You will have trouble building a significant nest egg if your annual interest rate is slightly over the rate of inflation. Folks that are just getting started are sometimes uncomfortable with stock/mutual fund investments. The solution is to become more knowledgable about these topics and the above mags are a start.