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what I want to do in this video is talk a little bit about traditional traditional IRAs an IRA stands for individual retirement account individual retirement retirement account and the focus on this video is the traditional IRA you'll hear of other types of IRAs especially Roth IRAs and SEP IRAs but this is only untraditional the gist of all of them is really it's the government's way of encouraging you to save for your retirement but they all have slightly different details so I'm just gonna focus on the traditional right now so let's say we are in Year Zero that's right now instead of years here let me write right now and you have two options you could put you could take advantage of the traditional IRA so this is the IRA scenario and this is the no IRA 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 $5,000 if you were under the age of 54 under 50 and it's $6,000 this is for an individual not for a family and it's $6,000 $6,000 if you're over the age over the age of 50 over 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 take it we're under the age of 50 and we take full advantage of this IRA so we set aside $5,000 $5,000 here we set aside nothing set aside nothing now in the very short-term the advantages is that this $5,000 of our income will not be taxed so let's say that let's say that my tax bracket let's say I'm in a thirty two percent tax bracket thirty two percent tax bracket let me write that on the side because it'll apply to both scenarios thirty two percent tax bracket today because I'm making some good money tax bracket today so if I on the five thousand dollars only I'm only talking about the taxes on the five thousand dollars you have to pay taxes above and beyond that on the rest of your income but today I'm gonna pay zero taxes on that five thousand dollars so zero taxes on the five thousand dollars now if I don't set aside that five thousand dollars into an IRA then I will have to pay taxes on that $5,000 so I'm gonna have to pay five thousand five thousand times thirty-two percent which is equal to what that is I'll just get the calculator out so you get five thousand times point three two is equal to sixteen hundred dollars in taxes so I'm gonna pay sixteen hundred dollars in taxes in taxes today so in the year that I actually made that five thousand dollars now I can't set aside five thousand dollars if I made less than five thousand dollars 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 hundred thousand dollars when you put the five thousand aside you're still gonna have to pay taxes on ninety five thousand dollars in this situation where you didn't put the five thousand dollars aside you're gonna have to pay taxes on a hundred thousand dollars so you're gonna have to pay taxes on the extra five thousand dollars which is sixteen hundred dollars now let's say let's go over let's say in either situation with that five thousand dollars you want to buy and sell some 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 I RA 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 a half 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 why doesn't everyone always do it well the answer is if I pulled it out before fifty nine and a half I pay a penalty let me write this down because that's important to keep in mind pay penalty penalty and taxes and taxes if withdrawn if withdrawn before fifty nine and a half and once again this is what this is the traditional IRA the Roth IRA for example is a little bit more flexible on the actual principle amount that you put into the account but we're just dealing with traditional so this is an important thing to keep in mind this is kind of the trade-off that you're giving so the government's saying hey I'm giving you an incentive to put this aside and I really want to make sure that you leave this aside until you already retire you don't get tempted when you know when you see a nice sports car to cash in your IRA and use it because you're gonna have to pay a penalty but as long as you don't actually withdraw it and turn it 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 five thousand dollars five thousand dollars of stock of stock a here we don't have five thousand dollars anymore we only have thirty four hundred dollars of our original amount so we buy $3,400 $3,400 of stock a and let's say I don't know ten years in the future so let's say in ten years ten years that's going to be an either situation in ten years let's say that stock a has doubled so in 10 years stock and you sell it so now 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 sixty eight hundred dollars so you have sixty eight hundred dollars 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 ten thousand dollars in this situation ten thousand dollars of B and and well hold off there so you buy ten thousand dollars of B and here you might say oh I'm gonna buy $6,800 of B but because you are not operating within an IRA account you were your 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 somewhat lower than short-term capital gains so in this situation you made $3,400 profit 3400 I wrote three hundred forty thousand you made $3,400 profit you're going to have to pay fifteen percent capital gains times fifteen percent times fifteen percent let's get the calculator out again so 34 hundred times 0.15 it's five hundred and ten dollars so you're gonna have to pay five hundred and ten dollars so this is five hundred and ten dollars so you take your 6800 pay five hundred ten dollars to the IRS you are going to be left with you're going to be left with sixty what is that sixty two 6292 i have to pay taxes and 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 so this is 10 years so stock B is now worth $20,000 and you sell it from sale 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 62 6292 also invest in stock B and after 10 years 10 years stock B doubles so it is now what is that twelve thousand five hundred and eighty dollars but once again it's sitting outside of your IRA you have to pay fifteen percent capital gains you had a six thousand two hundred and ninety gain six thousand two hundred and ninety dollar gain times fifteen percent let's see what that is now let's get the calculator where's my calculator there it is so you have six thousand two hundred and ninety times fifteen percent is equal to nine hundred forty-three and let me take that from my twelve thousand five hundred and eighty twelve thousand five hundred and eighty minus nine forty three point five is equal to so I have eleven thousand six hundred and thirty six dollars so I now have eleven thousand eleven thousand six hundred and thirty six dollars and let's say twenty years have passed we are now over the age of fifty nine and a half 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 six 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 we're over sixty now or over fifty nine and a half if you want to be particular now that we're over sixteen we can withdraw the IRA without paying any penalty but we will have to pay taxes so we will have to sell us we're going to withdraw 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 percent tax bracket remember when we first made that 5 that $5,000 we were in a 32 percent tax bracket because we were you know this this young gun at the peak of his or her career making a lot of money now we're making less money we're trying to live off of her savings so we have to pay 25 percent income tax on it so if we pay 25 percent on $20,000 remember now we're actually we're drawing it we're actually putting it into our checking account so we could spend it for for a living or whatever we want to do with it so 25 percent of $20,000 is equal to 5,000 dollars in taxes so we will be left with we will be left with 15 15 thousand dollars to do anything that we want with it now compare this this is fifteen thousand dollars versus eleven thousand six hundred and thirty six dollars and everything we did was completely identical except for over here we took the five hundred the sorry the five thousand dollars and invested within an IRA here we took the five thousand dollars we have 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 you know fifteen thousand versus 11,000 that's almost what is that 30 something percent difference in the total amount of money as and not only that but this tax we had to pay this tax we had to pay we had we don't have to pay this this is only in situation we have 25 percent 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 vs. if you didn't participate in an IRA you're sitting on only a little over eleven and a half thousand dollars and of course the main trade-off here is is that in the IRA situation you really couldn't touch your money so if you had an emergency and you had to withdraw the money you would had to pay penalties on it