Retirement accounts: IRAs and 401ks
Traditional IRAs Introduction to traditional IRA's (Individual Retirement Accounts)
⇐ Use this menu to view and help create subtitles for this video in many different languages.
You'll probably want to hide YouTube's captions if using these subtitles.
- [MUSIC PLAYING]
- What I want to do in this video is talk a little bit
- about traditional IRA's.
- And IRA stands for Individual Retirement Account.
- And the focus in this video is the traditional IRA.
- You'll hear of other types of IRA's, especially Roth IRA's
- and SEP IRA's, but this is only on traditional.
- The gist of all of them is really it's the governments
- way of encouraging you to save for your retirement.
- But they all have slightly different details, so I'm just
- going to focus on the traditional right now.
- So let's say we are in the year 0.
- That's right now instead of year 0, let
- me write right now.
- And you have two options, you could take advantage of the
- traditional IRA, so this is the IRA scenario.
- And this is the no IRA scenario.
- Now, an IRA allows you to put up to a certain amount of your
- income aside.
- Now depending on your age and what year it is, that amount
- will change.
- But in 2010 that number is $5,000 if you're
- under the age of 50.
- And it's $6,000-- this is for an individual, not for a
- family-- and it's $6,000 if you're over the age of 50.
- I guess the rationale was probably gee, if you're over
- the age of 50, you better save even more for your retirement,
- which might only be 10 or 15 years away.
- So they give a little bit more leeway for over the age of 50.
- So let's say we're under the age of 50 and we take full
- advantage of this IRA, so we set aside $5,000.
- Here we set aside nothing.
- Now in the very short term, the advantage is that this
- $5,000 of our income will not be taxed.
- So let's say that I'm in the 32% tax bracket.
- Let me write that on the side because it will
- apply to both scenarios.
- 32% tax bracket today, because I'm making some good money.
- So if on the $5,000 only-- I'm only talking about the taxes
- on the $5,000, you're going to have to pay taxes above and
- beyond that on the rest of your income-- but today, I'm
- going to pay zero taxes on that $5,000.
- So zero taxes on the $5,000.
- Now if I don't set aside that $5,000 into an IRA, then I
- will have to pay taxes on that $5,000.
- So I'm going to have to pay $5,000 times 32%, which is
- equal to what-- I'll just get the calculator out-- so you
- get $5,000 times 0.32 is equal to $1,600 in taxes.
- So I'm going to pay $1,600 in taxes today.
- So in the year that I actually made that $5,000.
- Now I can't set aside $5,000 if I made less than $5,000.
- It's always the lower of your income or these IRA limits.
- And, of course, you're going to pay, even in this
- situation, let's say you made a $100,000, when you put the
- $5,000 aside, you're still going to have to
- pay taxes on $95,000.
- In this situation, where you didn't put the $5,000 aside,
- you're going to have to pay taxes on $100,000.
- So you're going to pay taxes on the extra
- $5,000, which is $1,600.
- Now, let's say in either situation with that $5,000 you
- want to buy and sell some securities or some
- investments.
- So let's say right after you put it in the IRA account, so
- now everything is sitting in our IRA account, all of our
- transactions are sitting in this special IRA account right
- here, where we can actually buy and sell investments and
- trade them, but we can't cash them in and turn them into
- cash and then spend it on a new car or
- something like that.
- So and if we did do that before the age of 59 and 1/2,
- we'd have to pay a penalty.
- So let me write that down.
- You might immediately say hey, gee, this is a good deal.
- Why doesn't everyone always do it?
- Well the answer is, when I pull it out before 59 and 1/2,
- I pay a penalty.
- Let me write this down, because that's important to
- keep in mind.
- Pay penalty and taxes if withdrawn before 59 and 1/2.
- And once again, this is the traditional IRA.
- The Roth IRA, for example, is a little bit more flexible on
- the actual principal amount that you put into the account.
- But we're just dealing with the traditional, so this is an
- important thing to keep in mind.
- This is kind of the tradeoff that you're giving.
- So the government is saying, hey, I'm getting you an
- incentive to put this aside, and I really want to make sure
- that you leave this aside until you are ready to retire.
- So you don't get tempted when you see a nice sports car to
- cash in your IRA and use it, because you're going to have
- to pay a penalty.
- But as long as you don't actually withdraw it and turn
- into cash, you can actually buy and sell
- securities within that IRA.
- So let's say as soon as you put that $5,000, you buy
- $5,000 of stock A.
- Here we don't have $5,000 anymore, we only have $3,400
- of our original amount.
- So we buy $3,400 of stock A.
- And let's say, I don't know, 10 years in the future--
- that's going to be in either situation-- let's say that
- stock A has doubled.
- So in 10 years and you sell it, you have $10,000 here.
- You have $10,000 from sale of A.
- It's doubled.
- Here it's doubled, but you only had $3,400 of stock A, so
- now that $3,400 is worth $6,800.
- So you have $6,800 from sale of A.
- And let's say you want to put that into another stock.
- So let's say you put that all into stock B.
- And I'm painting a very rosy picture, you can't always
- ensure that stocks will double.
- And then so you buy $10,000 in this situation.
- $10,000 of B and well, I'll hold off there.
- So you buy $10,000 of B.
- And here you might say oh, I'm going to buy $6,800 of B, but
- because you are not operating within an IRA account, you're
- going to have to pay taxes on the capital gains from this
- right here.
- So capital gains are gains made from capital investments.
- In this case, the capital investment is
- investing in stocks.
- And since you owned your stock for more than one year, you at
- least will only have to pay long-term capital gains, which
- tends to be lower than short-term capital gains.
- So in this situation, you made $3,400 profit.
- You're going to have to pay 15% capital gains.
- Times 15%.
- Let's get the calculator out again.
- So $3,400 times 0.15.
- It's $510, you're going to have to pay $510.
- So you take your $6,800, pay $510 to the IRS.
- You're going to be left with $6,290.
- Remember, the reason why you have to pay taxes is this is
- not operating inside of an IRA.
- Here you are operating inside of an IRA, so you don't have
- to pay taxes.
- Now let's say you invest in stock B and then over the next
- 10 years, stock B also doubles.
- So stock B is now worth $20,000 and you sell it
- from sale of B.
- And once again it's sitting inside of your IRA, so you
- don't have to pay any capital gains on it.
- Now, in this situation, you use that $6,290 to also invest
- in stock B and, after 10 years, stock B doubles, so it
- is now $12,580.
- But once again, it's sitting outside of your IRA, you have
- to pay 15% capital gains.
- You had a $6,290 gain times 15%.
- Let's see what that is.
- Let's get the calculator.
- Where's my calculator?
- There it is.
- So you have $6,290 times 15% is equal to $943.
- And let me take that from my $12,580 minus 943.5.
- So I have $11,636.
- Let's say 20 years have passed, we're now over the age
- of 59 and 1/2, we can now withdraw from our IRA.
- Now, of course, this situation, this is cash that
- we have. We can do anything with it.
- Maybe we're now over 60 years old, this could be used for
- our retirement for our everyday expenses.
- Now this money that was sitting in an IRA, now that
- we're over the age of 60, or over 59 and 1/2, if you want
- to be particular.
- Now that we're over 60 we can withdraw the IRA without
- paying any penalty, but we will have to pay taxes.
- So we're going to withdraw, no penalties, but we will have to
- pay taxes, but the huge advantage here is once we're
- over 60, we're probably earning less money, so the
- actual tax bracket that we're in is
- probably going to be lower.
- So let's say we're in a 25% tax bracket.
- Remember, when we first made that $5,000, we were in a 32%
- tax bracket, because we were this young gun at the peak of
- his or her career making a lot of money.
- Now we're making less money, we're starting to live off of
- our savings.
- So we have to pay 25% income tax on it.
- So if we pay 25% on $20,000-- Remember, now we're actually
- withdrawing it.
- We're actually putting it into our checking account so we can
- spend it for living or whatever we
- want to do with it.
- So 25% of $20,000 is equal to $5,000 in taxes.
- So we will be left with $15,000 to do anything that we
- want with it.
- Now, compare this.
- This is $15,000 versus $11,636.
- And everything we did was completely identical, except
- for over here we took the $5,000 and
- invested within an IRA.
- Here, we took the $5,000, we had to pay taxes on it.
- Then we invested it in the exact same way-- we actually
- made very good stock investments in both
- situations-- and we ended up with a significant
- less amount of money.
- I mean, this is a $15,000 verses $11,000, that's almost
- a-- what is that?-- a 30-something percent
- difference in the total amount of money we have.
- And not only that, but this tax we have to pay, this is
- only a situation where you have a 25% tax rate.
- When you're retired, you might even have a lower tax rate
- than that, and it's deferred a good bit.
- But the real thing to think about is just, 20 years in the
- future, you're sitting on $15,000, versus, if you didn't
- participate in an IRA, you're sitting on only
- a little over $11,500.
- And of course, the main tradeoff here is that in the
- IRA situation, you really couldn't touch your money.
- So if you had an emergency, and you have to withdraw the
- money, you would have had to pay penalties on it.
- [MUSIC PLAYING]
Be specific, and indicate a time in the video:
At 5:31, how is the moon large enough to block the sun? Isn't the sun way larger?
|
Have something that's not a question about this content? |
This discussion area is not meant for answering homework questions.
Discuss the site
For general discussions about Khan Academy, visit our Reddit discussion page.
Flag inappropriate posts
Here are posts to avoid making. If you do encounter them, flag them for attention from our Guardians.
abuse
- disrespectful or offensive
- an advertisement
not helpful
- low quality
- not about the video topic
- soliciting votes or seeking badges
- a homework question
- a duplicate answer
- repeatedly making the same post
wrong category
- a tip or feedback in Questions
- a question in Tips & Feedback
- an answer that should be its own question
about the site
Share a tip
Suggest a fix
Have something that's not a tip or feedback about this content?
This discussion area is not meant for answering homework questions.