Any kind of savings can be an IRA. You can have gold in your IRA. You can have cash in your IRA. You can have whatever you want in your IRA. Any kind of investment is an IRA. What an IRA means is you say to the government, this money, up to $5,000 a year, don't tax me on now. I'm going to put it in a specially labelled bank account, and you'll tax me on it when I retire. So it's just like a pension, but you set it up on your own. And the firm is not involved. Let me just say something on the IRA. If you're not wealthy, if your income is below about $75,000 a year, it operates just like I described. If you are wealthy, if your income is above about $75,000 a year, then you can't get the tax break on the IRA. So the IRAs are really more focused towards lower income populations. Now, here's an interesting question that you all face. You're going to get jobs in a couple of years. And your employers are going to offer you pensions, or a 401(k), and you can set up an IRA. And you're going to have to decide, do I want to do that or not? Now, what are the considerations? Well one consideration is what I mentioned last time, which is that savings earlier in your career is a lot more beneficial than savings later in your career. The second advantage, of course, is that there's the tax break which, of course, the earlier you do it, the more valuable it is than the later you do it by the same logic. On the other hand, there's a huge disadvantage to these forms of savings. You can't get them
until you retire. If you take them out before you retire, you pay a tax penalty on them. So this trade-off when you think about setting these up is you only want to put in money you're sure you're not going to need until you retire. So it's a good idea to set these up. It's a good idea to take advantage of this tax breaks. But, in doing so, you have to remember that there's different kinds of savings, and there's different needs for savings. You can't put savings for a house in these. You don't put savings in case you lose your job in these. These are for savings which you can honestly say I won't need for 30 years. And that's the trade-off. You should do it early and as much as you can. But you should also recognize that you don't want to leave yourself with no money in the bank to do this. Because then, if you lose your job, there's nothing to draw on. And that's how one sort of thinks about these things. Yeah. AUDIENCE: So you said there was a tax penalty if you [INTERPOSING VOICES] early. Is that greater than the tax rate that you would normally pay on them? Because then, even with that penalty-- PROFESSOR: It depends on how long you have the money in. If you have it in for 20 plus years, even with the tax penalty, it's a good idea to do it. But if you're going to have it for five years, it's not worth it.
- Summer '17