Contributing to Roth IRA and Traditional IRA

[mrinvest]

Lots of god information on these boards.

I'm 27 and have been investing in a Roth IRA since I was 20 years old. I changed jobs a couple years ago and rolled my 401k from there into a traditional IRA account. Since then I have been dividing the maximum contributions between the traditional and roth account each year.

I'm also investing in my current companies 401k but they don't offer matching so I haven't been contributing too much.

I just wanted general comments / feedback on my current investing plan. I'm always worrying about the future when it comes to retirement.

[retire@40]

Save as much as you can without depriving yourself.

Keep track of your net worth on a monthly basis.

Figure out how much net worth you will need to become FI and when you want to be FIREd. And then figure out how much you need to add monthly to your current savings to get there.

Each dollar you save will give you 4 cents a year to live on. It doesn't sound like much, but it adds up after a while.

[FinanceDude]

I refer to a person's 401K as the "first line of defense". it is unfortunate that they do not offer a match, but IMHO a 401K is an essential part of getting to FI, particularyl if there's no pension plan there.

Each dollar you put into the 401K is PRE-TAX, and that would save the average investor 25-28%, or in other words, it's a 25-28% return on investment. Plus, since you are "paying yourself first", you are following a big tenet of FI.

If you maximize the 401K, I would put all the max contribution in the ROTH IRA. That way you'll have a bigger nest egg of tax-free withdrawls when you are FIRED...........

Good luck!

[astromeria]

Originally Posted by retire@40

Keep track of your net worth on a monthly basis.

That's pretty anal 8). Unless one really enjoys that sort of thing, I'd say quarterly or annually is sufficient.

[youbet]

Originally Posted by astromeria

That's pretty anal 8). Unless one really enjoys that sort of thing, I'd say quarterly or annually is sufficient.

Worrying that tracking net worth monthly is too often is very anal!

[retire@40]

Originally Posted by astromeria

That's pretty anal 8). Unless one really enjoys that sort of thing, I'd say quarterly or annually is sufficient.

I have all my assets listed in Excel, so it only takes me 10 to 15 minutes a month to update. I save each month and track my net worth progression. I've got over 10 years saved.

And I do enjoy it

[FinanceDude]

Based on the careers many folks on here have had before FIRE, are we REALLY surprised this board is anal??

I thought I was anal before I came on here............I have since found I am a mere amateur.............

[Robert the Red]

I recommend contributing to the Roth over the traditional. At some point, you and your spouse may go over the $160K/year Roth limit, and then you'll be shut out of the Roth. So get it going while you can.

[azanon]

Originally Posted by mrinvest

Lots of god information on these boards.

I'm 27 and have been investing in a Roth IRA since I was 20 years old. I changed jobs a couple years ago and rolled my 401k from there into a traditional IRA account. Since then I have been dividing the maximum contributions between the traditional and roth account each year.

.....................
I just wanted general comments / feedback on my current investing plan. I'm always worrying about the future when it comes to retirement.

My financial advisor, advised against making additional deposits into my 401(k) rollover, due to potential IRS complications and confusion. Yes, most 401(k)s behave exactly like traditional IRAs (though Roth 401(k)s are coming out now), but still..... that's what "he" said, so i never mixed them.

I also have one "Roth conversion" IRA (formally a traditional) and the same advise was given; just leave it alone. Change funds maybe, but dont mix in new money. Again, it just complicates the paperwork.

But my advise anyway, is to just use Roths only. Use a traditional only when you don't have a Roth option.

Lots of god information on these boards.

I agree. For my take on it, see my quote in my sig.

Azanon

[HatePayingTaxes]

As far as always worrying about the future when it comes to retirement…

I'm in a similar boat as you. I'm 27, maxing out ROTH since 19, and always worried about my retirement.

Me and my wife are maxing out our ROTH, maxing out 401k, and saving $30k in taxable account. I know that we're in pretty good shape but I was worrying about my retirement a lot too. Lately, I've been thinking that you never know what's going to happen in the future so don't worry too much about it. Me and my wife can be saving all this money but the market can crash when we're at a retirement age or one/both of us can get into a catastrophic accident, something happens and we have to support our family for rest of their lives.... there are many things life can throw at you.

Life is unpredictable so enjoy life now, enjoy the relationships you have, and don't worry too much about the future. All you can really do is LBYM and save money and maybe you can retire later if you're still alive. If you can't retire, who cares, just work until you die. At least that's my mentality.

[mrinvest]

Thanks for all the feedback, I have been leaning towards maxing out my roth again and just leaving the traditional as it stands. Maybe when the contribution limits get higher in 2008 I'll push a little into the traditional.

I also have one "Roth conversion" IRA (formally a traditional) and the same advise was given; just leave it alone. Change funds maybe, but dont mix in new money. Again, it just complicates the paperwork.

I just hate to leave the traiditional sitting there and not contributing to it. I feel like it's a waste.

[Mr._johngalt]

Originally Posted by mrinvest

I just hate to leave the traiditional sitting there and not contributing to it. I feel like it's a waste.

Why? It's still earning $ tax deferred, right?

JG

[donheff]

Originally Posted by HatePayingTaxes

As far as always worrying about the future when it comes to retirement…

I'm in a similar boat as you. I'm 27, maxing out ROTH since 19, and always worried about my retirement.

Me and my wife are maxing out our ROTH, maxing out 401k, and saving $30k in taxable account.

Relax! At 27 you shouldn't be worrying about your retirement. Worry about the company going bust or the schools. If you are doing all the above you are so far out front that you have nothing to worry about. Vote Democratic to protect SS and make sure the super-rich get taxed and you are good to go.

[mrinvest]

Vote Democratic to protect SS and make sure the super-rich get taxed and you are good to go.

Last week was a GREAT week!

[FinanceDude]

Originally Posted by donheff

Vote Democratic to protect SS and make sure the super-rich get taxed and you are good to go.

Ummm.........excuse me, the stats for 2005 indicate that the top 5% of all wage-earners paid 93.4% of all taxes in the US........and we had a Republican Congress, no??

[astromeria]

Originally Posted by FinanceDude

Ummm.........excuse me, the stats for 2005 indicate that the top 5% of all wage-earners paid 93.4% of all taxes in the US........and we had a Republican Congress, no??

I call misleading statistic. The top 1% make 15-20% of the income!

Distribution of net worth and financial wealth in the United States, 1983-2001

Total Net Worth
Top 1 percent Next 19 percent Bottom 80 percent
1983 33.8% 47.5% 18.7%
1989 37.4% 46.2% 16.4%
1992 37.2% 46.6% 16.3%
1995 38.5% 45.4% 16.1%
1998 38.1% 45.3% 16.6%
2001 33.4% 51.0% 15.5%

Financial Wealth
Top 1 percent Next 19 percent Bottom 80 percent
1983 42.9% 48.4% 8.7%
1989 46.9% 46.5% 6.6%
1992 45.6% 46.7% 7.7%
1995 47.2% 45.9% 7.0%
1998 47.3% 43.6% 9.1%
2001 39.7% 51.5% 8.8%

From NYTimes, Oct 10,2005:

Overall incomes rose by 2.7 percent in 2003, compared with the previous year, the I.R.S. said. A quarter of this increase went to the top tenth of 1 percent, the 129,000 taxpayers with reported incomes of $1.3 million or more, an analysis of the data showed.

The top 10th of 1 percent paid almost 23.6 percent of their reported income in income taxes in 2003, down from just under 27 percent in 2002. That is a decline of 3.4 percentage points. For taxpayers in the bottom 80 percent, the effective tax rates fall by three-tenths of a percentage point or less.

Only for those Americans in the top 1 percent, the nearly 1.3 million taxpayers who made at least $327,000, did incomes increase significantly more in 2003 than the rate of inflation. And this increase was concentrated within the top tenth of 1 percent. The income of that group grew by 9.5 percent in 2003 over the previous year while the rest of the top 1 percent had a gain of 3.7 percent.

For the bottom 99 percent of taxpayers, income rose by slightly less than 2 percent, which was below the inflation rate of 2.3 percent.

The top 1 percent of taxpayers received almost 17.5 percent of all income and paid a third of all income taxes in 2003, the I.R.S. found. The top tenth of 1 percent received 7.57 percent of reported income and paid more than 15.3 percent of all income taxes.

The share of all reported income reported by the top 1 percent of taxpayers increased by 0.57 percentage point, compared with 2002. Nearly all of this increase - 0.47 percentage point - went to the top tenth of 1 percent.

The top tenth of 1 percent had more income in 2003 than the poorest third of taxpayers, a group with 330 times the number of people, analysis of the data showed. This is a sharp change from 1979, the earliest year in the I.R.S. report, when the total income of the poorest third of Americans exceeded that garnered by the top tenth of 1 percent by 2.5 to 1.

The I.R.S. data tend to understate incomes for those at the very top because of different rules for reporting wages and capital gains, meaning the actual disparity was larger than the official data show.

Other data show that among major world economies, the United States in recent years has had the third-greatest disparity in incomes between the very top and everyone else. Only Mexico and Russia, among major economies, have greater disparity.

[MooreBonds]

Originally Posted by mrinvest

I'm 27 and have been investing in a Roth IRA since I was 20 years old. I changed jobs a couple years ago and rolled my 401k from there into a traditional IRA account. Since then I have been dividing the maximum contributions between the traditional and roth account each year.

I'm also investing in my current companies 401k but they don't offer matching so I haven't been contributing too much.

Assuming that your 401(k) investment options are halfway decent, I'd max out the 401(k) and max out your ROTH IRA contribution.

Since your 401(k) balance will ( presumably) far outweigh your IRA balance, I'd put all of your IRA contributions into a ROTH, since it gives you "tax diversification" in the likely even that tax rates will be different when you retire. That way, you won't be stuck saying "I sure wish I had put more of my contributions into a ROTH years ago to avoid the taxes now".

Moderator edit: quote fix.

[mrinvest]

It seems at this point my best option is to leave the IRA as it is, max out my Roth and contribute more to my 401k without affecting my current cost of living.

[bongo2]

Originally Posted by FinanceDude

Ummm.........excuse me, the stats for 2005 indicate that the top 5% of all wage-earners paid 93.4% of all taxes in the US........and we had a Republican Congress, no??

Ummmm......excuse me.......no.

Top 50% pay 90+%. Top 5% pay around 50% of taxes - and have a large share of the total income. And why focus on taxable income? And why focus on income tax? etc etc.