roth 401k and roth dont seem good deal

[mathjak107]

looking at the tax tables it seems to me there are few people that may come out ahead in a roth or roth 401k compared to the regular pre-tax kind..the first 20,000 in regular 401k or ira  withdrawls are virtually at no tax,,the next 15,000 is taxed at 10%...thats 35,000 of income that has never been taxed all for a 1500.00 tax bill on 35,000 bucks.......what a deal ..whywould anyone want to pay taxes up front when you can get a deal like this?...

 

[2B]

The only reasons would be if

• someone didn't qualify for a regular 401k or were significantly restricted in their ability to make contributions (highly compensated employee),

• already expects significant other retirement income so the tax free later is appealing

• or they believe that tax rates will shoot up by the time they retire so they'd rather pay a lot less now.

 

[LOL!]

The caveat that rears its head in the articles I've read is the tax on social security benefits.
If you are low enough income, SS bennies are not taxed. But once you have above around $32K to $34K in income (including half your SS bennies), some of your SS is taxable. This can get significant.

Roth IRA withdrawals don't figure into this, so don't affect the taxability of your SS bennies.

http://www.irs.gov/publications/p915/index.html

But the articles on taxing of SS benefits do not discuss early retirement as far as I've read.

 

[Martha]

It is also nice not to have the income from a Roth counted when determining your capital gains tax rate. You might be lucky enough to get the 5% long term rate if you are in the 15% bracket or below.

 

[New Thinking]

You also do not have to take Required Minimum Distributions with Roth IRAs (and Roth 401ks can be rolled over into Roth IRAs). Roth IRAs are also (probably) the best vehicle to leave as assets to your heirs. They can take distributions over their lifetimes..Due to the compounding, that is a tremendous amount of tax-free income.

More controversial is the opinion that tax rates must go up in the future to pay for the coming costs of the entitlement programs (Medicare, Social Security, Medicaid) at a federal level and at a state level (public employees pensions and healthcare bills comind due are huge). There is an argument to pay taxes now when rates are more likely to be lower.

 

[cute fuzzy bunny]

It doesnt matter. Fifteen minutes before I make a Roth withdrawal, the feds will institute a national sales tax as a replacement for the income tax

 

[d]

the threat of a sales (or value-added) tax is a red herring re roth ... it would apply to all spending, including funds from a traditional ira or 401k

okay ... I missed the "replacement" part. was thinking "additional"

 

[kaneohe]

http://personal.fidelity.com/products/retirement/getstart/aboutira.shtml.cvsr

Tax free withdrawals of contributions for ages < 59.5 yrs.

 

[cute fuzzy bunny]

okay ... I missed the "replacement" part. was thinking "additional"

No problem, lots of other people dont actually read content before lashing out

The good news is that its okay, its just semantics.

 

[d]

... read content before ...

some days (indeed, many days) my typing is faster than my thinking

 

[mathjak107]

i believe tax rates will be the same or lower as we get older..the reason is i believe social security tax rates will sore,medicare taxes will sore....but with baby boomers being such a large group no politacal party will want to tell all these seniors we are raising your tax rates...the tax brackets are adjusting upward too lowering taxes..almost every year the 25% bracket has been raised higher and higher almost approaching 79,000 for 2006..at this rate 120,000 in 10 years will be below 25% ...i hope!

 

[d]

the social security and medicare burdens are perhaps too heavy to be retricted to payroll taxes ... i would not discount at least a portion, directly or indirectly, being shifted to general revenue

 

[cute fuzzy bunny]

some days (indeed, many days) my typing is faster than my thinking

What is this "thinking" thing you speak of?

 

[d]

What is this "thinking" thing you speak of?

don't have much direct knowledge of it myself, but i've been told that some people engage in the practice periodically ... couldn't prove it by me. in any case, its certainly not something to be taken casually, particularly on thursdays through mondays, or during any month which contains in its name the letter "r", or when the pollen count is above "low".  like many things, it is probably best not attempted by amateurs.  you'll note, for example, that even our esteemed elected representatives hardly even indulge in the practice. my advice: don't be tempted; it can have untoward effects and will likely alienate you from your friends. nothing good can come of it ... you'll rue the day...

 

[cute fuzzy bunny]

It all sounds very mysterious and confusing.

 

[IBWino]

What is this "thinking" thing you speak of?

I often think! Thith ith becauth I often forget to take a thower for theveral daths.

 

[jdw_fire]

the social security and medicare burdens are perhaps too heavy to be retricted to payroll taxes ... i would not discount at least a portion, directly or indirectly, being shifted to general revenue

Remember, most baby boomers aren't saving enough to retire and will still be working.

 

[mathjak107]

Remember, most baby boomers aren't saving enough to retire and will still be working.

another good point for keeping the tax rates lower....lets face it if the roth concept really benefited us do you think the governmernt would have given it to the public so easy....they know retires are pulling out up to 35,000 a year at minimal tax and actually winning so the roth concept gets you to pay them your taxes before you realize you dont have to....

 

[Texas Proud]

It might just be me... but I think that most people on this board will have a good stash when they retire and will be at least in the 15% bracket... and I would hazard to guess a lot will be in the 25%...

And with the looming SS debt that will have to be paid out of the general fund, I bet these brackets will creep up over the years... you can not get the money we are talking about from 'the rich'...

 

[2B]

And with the looming SS debt that will have to be paid out of the general fund, I bet these brackets will creep up over the years...  you can not get the money we are talking about from 'the rich'...

According to the government, anyone in retirement living on anything above the maximum SS is considered "rich."  The following is based on an age 66 retirement estimate.  I'm not exactly sure what that exact amount is these days but for an individual it's about $24,000.  A maxed out couple could retire at 66 with $48,000 coming in.  A couple with a non-contributing (or undercontributing) spouse gets a bit over $36,000.  I'm sure someone has the right numbers so feel free to correct these. 

Anyone daring to retire before "full retirement" will incur the wrath of the SS god and get a big reduction but they can start collecting at 62.

The whole question of taxes is an interesting situation.  "Elderly" voters have the highest turnout and are most likely to directly vote their pocketbook/wallet issues.  The boomers will have a definite split between the "haves" who will be FIRE'd and the "have nots" that will work until poor health or bad economy "retire" them.

I suspect the political parties will continue to use this as a wedge issue but the rhetoric will heat up.  Means testing will be tried but I don't think it will work too well.  I expect the taxation of benefits to creep upwards but that will be less severe than means testing.

I'm just tired of hearing about "lock boxes" with my social security in it.  I can't believe that anyone who says that wouldn't get laughed out of the country.  I am very worried that anyone would actually believe there really are individual "accounts" with actual dollars in it.  All of the laws and official documents clearly say that the benefits can be changed at any time.  It's an old people welfare system.  When I'm there, I want mine.

 

[pms163]

A benefit of Roth 401k is that you can put in $15k (or $20k in year you turn 50 or older) of after-tax dollars.

With a standard 401k, you're limited to $15k (or $20K for >=50) of pre-tax dollars. (Amounts greater than this can be put in after tax, but you need to pay tax on earnings upon withdrawal.)

So if you're trying to maximize the amount of your salary that you can put away in tax preferred manner, the Roth 401k has an advantage.

 

[mathjak107]

im not convinced any roth is a good deal for most of us

 

[mathjak107]

just looked for 2006 you can put an extra 5000 in a 401k after 50 for a total of 20,000...20,000 pretax dollars is pretty powerful considering you can pull out 35,000 a year at 1500 in tax.

 

[cute fuzzy bunny]

I dunno...seems to me that putting money in a roth now that I wont be taking out for 20 years, being able to withdraw that money + the investment growth tax free is a pretty good deal.

 

[mathjak107]

but you can pull out 35,000 a tear almost totally tax free from a traditional filled with pretax dollars..seems crazy to piss away 25% or so upfront for something you can get almost tax free anyway for 1500 bucks in total taxes for most of us...in fact if you do this right by having your equities outside the retirement plans and your income generating stuff in the retirement plan you can do even better. capital gains on the stuff outside of the retirement plan is a mere 5% if you can get into the 15% bracket and is soon to go to zero....