New investors should look at Roth Ira

[UnrealizedPotential]

The title sums it up. I wish that I would have put more in a Roth Ira when I was working. I could do conversions, but that is not what this thread is about. It is for anyone who is still working to consider a Roth Ira. Tax free withdrawals after 59.5 is hard to beat.

59.5 comes faster than you think. At 30 it may seem like a long time, and when one is 30 it is. But it is later than you think.

 

[REWahoo]

Doesn't the wisdom of putting $ into a Roth IRA vs a traditional IRA while you are working depend on your marginal tax rate?

I would have paid 32% or so in taxes to fund a Roth in my working days vs 15 to 25% to withdraw from my TIRA today. I think I made the right choice - or am I missing something?

 

[UnrealizedPotential]

Doesn't the wisdom of putting $ into a Roth IRA vs a traditional IRA while you are working depend on your marginal tax rate?

I would have paid 32% or so in taxes to fund a Roth in my working days vs 15 to 25% to withdraw from my TIRA today. I think I made the right choice - or am I missing something?

I don't know if you are missing anything, but here is my thinking. Most people's income will rise upon retirement along with the taxes they pay. This is where a Roth is worth considering. It may not work for you, but I do think for most people it is definately worth a look.

Especially after years of compounding.

 

[walkinwood]

I wish ROTH IRAs existed early in my career when my tax rate was low.

 

[kaneohe]

Doesn't the wisdom of putting $ into a Roth IRA vs a traditional IRA while you are working depend on your marginal tax rate?

I would have paid 32% or so in taxes to fund a Roth in my working days vs 15 to 25% to withdraw from my TIRA today. I think I made the right choice - or am I missing something?

Yes, you are correct. Depends on the tax rates when you fund IRA and when you withdraw.........which are different for various folks and sometimes not well known at the time you contribute.

 

[albireo13]

Doesn't the wisdom of putting $ into a Roth IRA vs a traditional IRA while you are working depend on your marginal tax rate?

I would have paid 32% or so in taxes to fund a Roth in my working days vs 15 to 25% to withdraw from my TIRA today. I think I made the right choice - or am I missing something?

Don't forget, besides the tax on the principle investment, the gains and growth in a Roth are all totally tax free.

In a tIRA, the principle gets taxed but also any growth in addition ... I believe.

 

[REWahoo]

Most people's income will rise upon retirement along with the taxes they pay.

I'm not sure how to reconcile this statement with the frequent news stories of how most US workers have saved very little for retirement. Both can't be accurate.

Not saying having some money in a Roth IRA isn't a good idea as I agree that tax-free withdrawals are great. But you have to look at both sides of the tax equation - pre and post retirement.

 

[UnrealizedPotential]

That's the problem you can't know ahead of time. I can testify to the fact that once no one is earning income it is not so easy to convert. I think one should cover all bases. This is why I think it is worth a look. It's a bit of a gamble in the sense, that you can't know ahead of time tax wise which is the better choice Roth or not.

But one thing I do know is that once it is too late to do a Roth, it isn't easy to convert any tax deferred money there. That's why I think young investors, not old, but young should take a look at the Roth.

 

[UnrealizedPotential]

I'm not sure how to reconcile this statement with the frequent news stories of how most US workers have saved very little for retirement. Both can't be accurate.

Not saying having some money in a Roth IRA isn't a good idea as I agree that tax-free withdrawals are great. But you have to look at both sides of the tax equation - pre and post retirement.

Bad news sells, good news doesn't. It is not a wonder to me that we hear bad news all the time. I'm not saying you are wrong, what I'm saying is one should cover all bases while they can. Once there is no earned income, it is very hard to fix anything tax wise later .

 

[ERD50]

I don't know if you are missing anything, but here is my thinking. Most people's income will rise upon retirement along with the taxes they pay. This is where a Roth is worth considering. It may not work for you, but I do think for most people it is definitely worth a look.

Especially after years of compounding.

But also consider that some of that retirement income is not taxed at the full rate.

LTCG Qualified dividends may be taxed at 0% (is a tax at 0% a 'tax'?) or 15%.

Some of SS is not taxed.

So even if your AGI in retirement is as high as your working income, your taxes may be power, and more of it in a lower bracket.

-ERD50

 

[UnrealizedPotential]

But also consider that some of that retirement income is not taxed at the full rate.

LTCG Qualified dividends may be taxed at 0% (is a tax at 0% a 'tax'?) or 15%.

Some of SS is not taxed.

So even if your AGI in retirement is as high as your working income, your taxes may be power, and more of it in a lower bracket.

-ERD50

It is no doubt a bit of a gamble for sure. But if a Roth turns out to be better, much better for you tax wise when you retire, then a Roth makes sense. That is why I think younger investors should hedge their bets tax wise now while they can.

I think putting at least some, not even a majority, but some of your retirement money to a Roth for younger investors deserves serious consideration.

 

[RunningBum]

That's the problem you can't know head of time. I can testify to the fact that once no one is earning income it is not so easy to convert. I think one should cover all bases. This is why I think it is worth a look. It's a bit of a gamble in the sense, that you can't know ahead of time tax wise which is the better choice Roth or not.

But one thing I do know is that once it is too late to do a Roth, it isn't easy to convert any tax deferred money there.

That's so dependent on each individual case it's foolish to say it as a general rule. I was well on my way to converting to my Roth completely before RMDs would kick in, at a rate way lower than most of the income I deferred. ACA subsidies are getting in the way of that now, but I'm still well over halfway there and am still converting a little each year.

That's why I think young investors, not old, but young should take a look at the Roth.

I think most people here have given similar advice, though it's really based on income, not age. The young tend to have incomes this works for, but why not use the direct factor instead of equating young with low income, which may not be true.

Anyway, at lower tax rates, the advice usually given is to take your 401K (and employee stock purchase) up to the company match, then HSA (or maybe that first), then max out the Roth, then probably finish any other savings in taxable because LTCGs will generally be taxed at 15%--0% in some situations, and above 15% for high income earners.

 

[RunningBum]

It is no doubt a bit of a gamble for sure. But if a Roth turns out to be better, much better for you tax wise when you retire, then a Roth makes sense. That is why I think younger investors should hedge their bets tax wise now while they can.

It's best to optimize your taxes over your whole life, not just in retirement.

 

[jkern]

I don't know if you are missing anything, but here is my thinking. Most people's income will rise upon retirement along with the taxes they pay. This is where a Roth is worth considering. It may not work for you, but I do think for most people it is definately worth a look.

Especially after years of compounding.

I don't really agree with your statement about most people's income and taxes after retirement. Over the last 8 years of early retirement, my income is 1/10 of my pre-retirement income and my taxes have been next to zero.

 

[Clone]

When you fund your trad IRA or 401k, you are using before tax dollars. So with a 25% tax rate, putting $1300 into an IRA only 'costs' you $1000 out of pocket. Roths are after tax, so $1000 out of pocket gets you $1000 in the account.

Invested the same, they gain the same. When you pull it out, you pay taxes on the trad or 401k, but there is more in it. If the tax rate coming out is the same as the tax rate going in, then it works out to be a wash.

The current system where some folks are managing their income for ACA purposes would give an advantage to the Roth. Otherwise, the financial benefits are a function of tax rate when the money goes in vs tax rate when the money comes out.

If your tax rate in retirement is lower, the edge goes to 401k or traditional.
If your retirement tax is higher, then the edge goes to the Roth.

 

[RunningBum]

Okay. I will shut this thread down. I don't want to argue with anyone. I really don't. I'm out of this thread. Sorry I started it.

I dislike being disagreed with, but learning something outweighs that. Sometimes I get disagreed with because I don't express my ideas well, but even that is learning something.

 

[ERD50]

Okay. I will shut this thread down. I don't want to argue with anyone. I really don't. I'm out of this thread. Sorry I started it.

Wow.

My usual reaction to a post like that is to recommend that rather than post to a discussion forum, they should start their own blog. They can say what they want, disable comments, and no one can disagree with them. And they can sit back and just imagine all the readers basking in their words of wisdom.

Of course, they won't learn much that way, but I guess that's not the point?

-ERD50

 

[pb4uski]

Yes, you are correct. Depends on the tax rates when you fund IRA and when you withdraw.........which are different for various folks and sometimes not well known at the time you contribute.

+1 IF your tax rates are the same when you defer as when you withdraw then tax-deferred vs Roth doesn't matter.

A brief example... a 30 year old with a 30% marginal tax rate has a decision to defer $10 of income or not.

If they defer the income and the $10k grows at 7%, in 30 years it is $76k.... and if they withdraw the $76k they end up with $53k that they can spend.

OTOH, if they go with a Roth then $3k is used to pay taxes on the $10 of incomeso only $7k ends up in the Roth. That $7k grows at 7% in 30 years to $53k that can be spent.

All else being equal, and advantage is gained only if the tax rate when withdrawn is lower than when deferred.

For me, when I deferred that income I expected that my tax rate in retirement would be lower than my tax rate while working and in early retirement that has been the case so I am coming out ahead.... but once we start SS I suspect that advantage will be diminished somewhat.

If I end up with a higher tax rate in retirement than when I deferred that income then it is a nice problem to have and the excess is a "success tax".

 

[UnrealizedPotential]

Wow.

My usual reaction to a post like that is to recommend that rather than post to a discussion forum, they should start their own blog. They can say what they want, disable comments, and no one can disagree with them. And they can sit back and just imagine all the readers basking in their words of wisdom.

Of course, they won't learn much that way, but I guess that's not the point?

-ERD50

I just was hoping to reach out to younger people or maybe even those who never considered a Roth Ira before to take a look. I did not in anyway mean to start arguments or anything close to it. I was just trying to help in a small way if I could to those whom it might help.

Of course I invite those who may disagree with me. But it seemed everyone wanted to argue with me. If that's how my post seemed to others then I did a terrible job of communicating. Maybe my opinions seem strong. Maybe they're wrong. But everyone can disagree with me and that doesn't mean they are right. No one on this forum is God nor does any one single opinion count more than another.

We must all live in this World together. We must all strive to reach out and help each other. That is all I was trying to do.

 

[pb4uski]

Don't forget, besides the tax on the principle investment, the gains and growth in a Roth are all totally tax free.

In a tIRA, the principle gets taxed but also any growth in addition ... I believe.

True, but it doesn't matter... see example above. What matters, all else being equal, are the marginal tax rates when the income is deferred compared to when it is withdrawn.

 

[UnrealizedPotential]

I dislike being disagreed with, but learning something outweighs that. Sometimes I get disagreed with because I don't express my ideas well, but even that is learning something.

I guess I express myself not so well. All I was trying to do was to help others. It seemed everyone was against me. I guess I have strong opinions and sometimes they are wrong.

But the bottom line is the thread was headed in a direction which didn't benefit anyone. I was hoping the subject might help someone or at least get their interest up. Sometimes the best of intentions go wrong.

 

[ERD50]

I just was hoping to reach out to younger people or maybe even those who never considered a Roth Ira before to take a look. I did not in anyway mean to start arguments or anything close to it. I was just trying to help in a small way if I could to those whom it might help.

Of course I invite those who may disagree with me. But it seemed everyone wanted to argue with me. If that's how my post seemed to others then I did a terrible job of communicating. Maybe my opinions seem strong. Maybe they're wrong. But everyone can disagree with me and that doesn't mean they are right. No one on this forum is God nor does any one single opinion count more than another.

We must all live in this World together. We must all strive to reach out and help each other. That is all I was trying to do.

OK, so maybe it was just a communication problem, I have had more than my share of those.

But if you are interested in that, let me explain where the communication went wrong for me. In your OP, you said:

"... So for all those who can , contribute to a Roth Ira. ...
... If you haven't already done so, get started now."

So this came across as fact, no ifs and buts, no other considerations - just do it.

And that was immediately followed by informed comments that there are other considerations. That's not "arguing", that is trying to shed some light on statements that might be taken at face value. I think every response was meant to be helpful.

There was no attack on you. OK, maybe one comment that could be viewed (but it wasn't IMO) as an 'attack' on the statement - but that's fair game.

Stick around, share and learn - you''ll be fine. But be extra careful with the one-size-fits all generalities. Life is too complex for those in most cases.

-ERD50

 

[bingybear]

UP--I disagreed with a couple of your strong comments, but I may know the reason... or at least have a guess. "Its hard to convert with no income or after you can't contribute to Roths. My guess is that you are looking at this with most of your assets are in TIRA/401ks/Annuities.

Try standing in my shoes... 56% after tax/39% TIRA/5% other. I'm below 59.5yo
If I invest the taxable in equity ETFs (low income) and I have after tax $ to pay taxes on Roth conversions.

If I had to pull everything from a TIRA, it would be expensive tax wise.

Sometimes when people disagree it is more that they see something different because they are looking at something different or a different set of conditions.

or I could be full of it.

 

[ERD50]

....

But the bottom line is the thread was headed in a direction which didn't benefit anyone. I was hoping the subject might help someone or at least get their interest up. Sometimes the best of intentions go wrong.

But it may have helped someone. What should be the takeaway is that if anyone thought a ROTH was right in all cases, they should realize it is more complicated than that. It might be right in many cases, or some cases - it depends. and they would have learned some of the things it depends on.

That's a good thing.

edit/add - one other good thing about having some money in a ROTH that gets lost in the calculations. Lets say one year in retirement you have a very large expense (maybe buy a new home before you sell your old one, or a new car, boat, and decide to pay cash, or whatever). If you have that much in the ROTH, you can withdraw it, and have no tax concerns. Take it out of tIRA and it is income. Sell investments, you may have cap gains. ROTH is a non-event tax-wise. That much income in one year could put you in the tax bracket of the rich & famous, lose deductions, face AMT, etc. ROTH good.

-ERD50

 

[UnrealizedPotential]

OK, so maybe it was just a communication problem, I have had more than my share of those.

But if you are interested in that, let me explain where the communication went wrong for me. In your OP, you said:

"... So for all those who can , contribute to a Roth Ira. ...
... If you haven't already done so, get started now."

So this came across as fact, no ifs and buts, no other considerations - just do it.

And that was immediately followed by informed comments that there are other considerations. That's not "arguing", that is trying to shed some light on statements that might be taken at face value. I think every response was meant to be helpful.

There was no attack on you. OK, maybe one comment that could be viewed (but it wasn't IMO) as an 'attack' on the statement - but that's fair game.

Stick around, share and learn - you''ll be fine. But be extra careful with the one-size-fits all generalities. Life is too complex for those in most cases.

-ERD50

Point taken. I also deleted the last sentence as I could see where it was wrong to make it.