Roth or Traditional IRA for Lending Club Investment?

Lots of people will argue the fine points of this (there are whole forums dedicated to it, really) but here are the basics. Both accounts have tax benefits – just different kinds.

In a Traditional IRA, you fund the account with pre-tax money and then pay taxes when you withdraw. So if you made $55,000/year and put $5000 into a Traditional IRA, you’d claim it on your taxes and only pay tax on $50,000 of income. Then when you withdraw money from the Traditional IRA, it counts as taxable income and you pay taxes on it like usual. This is good if you are in a high tax bracket now, and you think you will be in a lower tax bracket later. It’s usually difficult to take money out of a Traditional IRA without paying a penalty.

In a Roth IRA, you fund the account with post-tax money and then pay no taxes when you withdraw. So if you made $55,000/year and put $5000 in a Roth IRA, you’d still pay taxes on all $55,000 of your income, but then when you go to withdraw the money, you don’t need to pay any tax. This is good if you’re currently in a low tax bracket and think you might be in a higher one later; it’s also good because there are fewer restrictions on when you can take the money out (you can take your contributions out at any time – earnings have some different rules about them).

Clear as mud? 🙂

“Borrowing” for investing during retirement

Wondering if any of you do this, do a balance transfer for the amount of money you have available on hand  to invest with at 0% for X months. Then park the amount that you have in a high yield savings (so you’ll have the amount liquid at time to pay back). And put the borrowed money into another investment. This can be tied up past the X months because you are going to pay it off with amount in savings. Anyways using this you could for the X months, be collecting on twice the amount that you have.

This kills your credit score I’m sure, but for people in retirement, where they shouldn’t be needing to buy another house (hoping it is paid off, or at least have mortgage terms already set), why wouldn’t this be a good strategy? I mean it’s similar to how the super rich live off of borrowed money against their “net worth”.

I know college students do this sometimes but since they are early in life, their credit score comes into play more so than at end of career.

Or do the same with taking a line of credit on their homes, instead of that crazy reverse mortgage thing. Since the interest/fees on a home equity line of credit is anywhere from 0-3% (where I am). And if you can earn more than the fees, why not take out a line of credit and make sure to pay it back.

I’m considering this as an option in addition to using a property as a “rental”. Once the house is paid off, keep renting it out as well as taking out a line of credit on it. Wouldn’t this give you another source of income? It makes owning a rental all that much more attractive if this is possible. I don’t know the laws around this so it may not be possible :S

this is a little opposite of “mustachism” since you are taking on a debt, but a debt that has minimal fees/none. And if you know you can pay back what is owed, why isn’t this an option?