David John MarottaDavid John Marotta is the President of Marotta Wealth Management, a fee-only financial planning and asset management firm in Charlottesville, Virginia. He is an oft-quoted writer and speaker on financial matters and his weekly financial column can be found at www.eMarotta.com
Host:What is an IRA?
David John Marotta: An IRA account is an Individual Retirement Account and it is an account where you can put the money into it before paying taxes on it. So, if you are in a marginal tax rate of 35%, you could put $65 into a taxable account or you could put a $100 into an IRA account and so what you are betting is, when you put the money into the account, you are in a higher tax bracket and later on when you retire, you are betting your are in a lower tax bracket.
Now, it turns out that that is not true for everyone. So, if you are very young and you are not making very much money, you could be putting the money in, in a very low tax bracket and later on when you are rich and retired, you could be taking the money out in a very high tax bracket.
Studies have shown that the Federal Government is going to collect a huge amount of money from IRA accounts of the baby boomers and the reason is a lot of them put money in, when they were working and were earning that much and now they are rich and when they take the money out, they are in a much higher tax bracket. They have actually lost money by using an IRA account.
So, IRA accounts need to be very careful, the way you invest in them. The other thing they found is, the money that is sitting in IRA accounts, it is going to come out, from the baby boomer generation, is actually going to end up paying off about a third of third of our federal deficits. So, that is the good news, the force savings by differing, when you pay taxes has also differed the tax income from the Federal Government and so you need to be very careful to tax manage. Tax management is also more important than your investment returns.