S/O Roth accounts

Re: S/O Roth accounts

• vlagrl29

  

  member

  January 2015

  Most people here will tell you a Roth IRA, but I've always had a traditional IRA since I left my last corporate job.  I just transferred my 401k into an IRA and left it with Fidelity.  Lots more options to invest when it's not a 401k - individual stocks, mutual funds, and bonds

  
  

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• hoffse

  

  member

  January 2015

  I like Roths because you pay the taxes now, and then the funds grow tax free forever.  Traditional IRAs give you a tax deduction in your contribution year, but you will pay taxes on your original contribution AND gains when you withdraw it in retirement.

  
  

  The general school of thought on this is that if you anticipate getting raises, etc. throughout your career then you may be in a higher tax bracket in retirement.  In that case, paying the taxes now saves you money.  On the other hand, if pre-tax contributions means you can max out the account (and you wouldn't be able to afford to max them out with a Roth contribution), then that cuts in favor of the traditional IRA.  If this is you, then you might want to stick with a traditional IRA.  I still don't love traditional IRAs, though, for reasons below.

  
  

  One reason I prefer Roth IRAs is that traditional IRAs (and traditional 401(k)s for that matter) have required minimum distributions that you MUST take once you reach age 70 1/2.  You have to withdraw a certain amount per year, whether you need that money or not, and then you are taxed on that withdrawal at ordinary income rates.  With Roths, you never have to withdraw it. 

  
  

  You may think this wouldn't be a big deal because you need that retirement money, right?  Well believe it or not, a lot of retirees who are MM actually don't need the funds in their retirement accounts once they hit retirement age.  Many work part time to stay active or have pensions or have other investments that actually cost less in taxes (capital gains rates) to live off of than liquidating the funds in a traditional retirement account.  Traditional retirement account withdrawals are taxed at ordinary income rates - and these rates are often significantly higher than capital gains rates.  
  

  
  

  My parents are about to face this.  They currently live on less than what they will be bringing home with pensions when that time comes, yet they will STILL have to withdraw retirement money from their traditional IRAs.  And because those IRAs are taxable at ordinary income rates, there is every possibility that they'll get pushed into a higher tax bracket because of it.  In other words, they are going to withdraw money they don't need and then pay higher taxes on it to boot. 

  
  

  Finally, I know I've said this before, but I'll say it again.  I sort of view Roths as being similar to AI vacations.  If you take a tropical vacation it's possible you may pay more for the AI experience than you would have paid if you did a pay-as-you-go type thing.  Unfortunately, there's no really good way to know, because you ultimately have to pick one type of vacation and just go for it.  For me, I would rather spend an extra $100 4 or 5 months before my trip so the entire thing is paid for and I can relax while I'm there.  I hate feeling nickled and dimed.  Paying taxes in retirement is sort of similar.  If you can afford to pay the taxes now, I vote for paying them now and getting them out of the way.  If the taxes, however, are holding you back from making the full contribution, then you might want to consider the traditional IRA until you can afford to fully fund a Roth.  At the end of the day, more money saved is better than less money.

  
  

  

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• hoffse

  

  member

  January 2015

  AprilH81 said:

  I've been told that a ROTH IRA is better if you qualify.

  
  

  Also, our financial advisor told me that the long term benefits tend to be better than a 401(k) (your situation may be different) and advised us to cut back on the 401k contributions if we couldn't keep the current levels AND max out the ROTH.  Obviously you want to make sure you keep your employer match though so keep participating at least up to the company match.

  
  

  I haven't gotten around to cutting back my contributions this year since we just got married, sold a house, bought a house, remodeled a kitchen etc., but I will still be able to open up my first ROTH but it won't be maxed out this year.

  You should contribute to a 401(k) at least up to the match (if any).  That match is free money.

  
  

  After that, then yes I would do a Roth IRA before upping my contributions to a 401(k).

  
  

  The qualification rules for Roth IRAs are easy to get around.  Technically you can't directly contribute to a Roth if your AGI is more than $193,000 as a married couple (filing jointly) in 2015.  However, you can do a conversion where you basically contribute money to a traditional IRA and then convert it into a Roth IRA and you only pay taxes on whatever gain happened in the interim.  There are no income limits to do this, and that's how high income earners contribute to Roths.  They make a contribution to a traditional IRA on day 1 and then they convert it to their Roth account on day 2.  They pay taxes on the gain that occurred within those 24 hours... if any.  And of course, they don't take a tax deduction for their contribution, since the money ultimately landed in a Roth account.

  
  

  It's really dumb that Congress has never closed that loophole.  The financial/tax people figured it out about 2 minutes after Congress passed the law, and it's been a pretty standard thing ever since.  Any financial institution worth your time will have people who know how to do it.  It's so common that it's actually one of the questions that appears on HR Block/Turbo Tax.... and those are not programs I would rely on for complicated or unusual tax situations.

  

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• bparkhur

  

  member

  January 2015

  Roth. It grows tax free. Can't beat that!

  See my swapping feedback: http://bumpfeedback.proboards.com/index.cgi?board=ac&action=display&thread=13

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• smbenevides1989

  

  member

  January 2015

  Thanks for the info! 

    
  

  

  

  

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