Roth IRA bad information

[kskmfire]

So many of the responses are spot on. They reference planning now as well as for the future (as best we can).

We should have used Trad IRAs instead of Roths for our “overflow” savings.

I made the mistake for a number of years funding the Roth after maxing our 401ks. My thinking was either “continue funding a brokerage acct or putting some of that in a Roth and never being taxed again.” Like free tax savings instead of stashing in a brokerage.

Looking back (now in LifeInFIRE) with having years of probable 12% (15%) bracket optimization windows ahead of us (love 0% Fed LTCGs) we should have funded Trad IRAs when possible saving high 20’s% and then Roth converting at 12/15%. That mistake cost us 10%+ taxes on our initial Roth contributions.

If you are low in the 12% bracket (FIRE), it’s possible each year to convert what was many years of $6k contributions.

However, being better at tax bracketing and planning (we all get wiser, right?) at least we’re not waiting until RMDs (Required Income Distributions) to learn a bigger (oops) lesson…assuming we kind of understand future tax brackets.

 

[ERD50]

Originally Posted by RunningBum View Post
Which gurus are unconditionally pushing Roths?

Driving home, on the radio Listening to Dave Ramsey, seems that is what he is always telling people to do. You never hear it depends...I know it’s supposed to be entertainment...

Ugghhh! Yep, I really, really dislike Dave Ramsey. It's all or nothing with him on everything. No conditions, no thought, just do as I say. He treats his audience like idiots.

I know, some will defend him, saying his audience is mostly ignorant ( a description, not a put-down), of things financial. But he doesn't teach them, he keeps them ignorant - follow the guru! And feeds them a lot of bad information, some of it good for Dave, not so good for his audience.

-ERD50

 

[RunningBum]

Ramsey claims that you should do a Roth even if you (30 yr old) expect your retirement tax rate to be as much as 5% higher in retirement. Beyond that, probably not.

https://www.daveramsey.com/blog/do-you-have-the-right-ira-for-retirement

Roth IRA Tax Benefits for (Nearly) Everyone

Make sure you catch that last difference, because it’s a big one. When you retire, the money you withdraw from a traditional IRA is taxable while the money you withdraw from a Roth IRA is tax-free.
A study by T. Rowe Price showed that the benefits of that tax-free retirement income make a Roth IRA a better choice for nearly everyone investing for retirement. “Even though the Roth IRA contribution doesn’t qualify for an income tax deduction, decades of compounding tax-free money can generate more spendable income in retirement,” the study concluded.(1)

For example, a 30-year-old investor whose income tax rate drops by 5% in retirement will still have 9% more spendable retirement income by using a Roth IRA rather than a traditional IRA. If his rate remains the same, as is the case with most retirees, he’ll have 17% more non-taxable income. Investors age 50 or older who experience a 6–10% drop in their tax rate could, however, be better off with a traditional IRA. “For investors nearing retirement, there isn’t enough time for the money to compound at a rate to counter the significant reduction in their tax bracket during retirement,” the study explained.

I get 404 (page not found) for the TRowe Price source he uses.

Anyone want to try the math to see if that's true?

 

[LOL!]

So many of the responses are spot on. They reference planning now as well as for the future (as best we can).

We should have used Trad IRAs instead of Roths for our “overflow” savings.

I made the mistake for a number of years funding the Roth after maxing our 401ks.
...

With those 401(k)s, were you even eligible for deductible tIRA contributions? I know that we were not. And we were not eligible for Roth contributions either (income too high). And before 2010, people with modified AGI above $100K could not do Roth conversions.

We had to put money into taxable brokerage account.

That is, sometimes laws force one upon a specific path and there is nothing that one can change about it.

 

[JAGOTI]

I don't know what future tax rates will be, so I am (tax) diversifying by holding assets in Roth IRA's and traditional IRA's.

 

[cathy63]

With those 401(k)s, were you even eligible for deductible tIRA contributions? I know that we were not. And we were not eligible for Roth contributions either (income too high). And before 2010, people with modified AGI above $100K could not do Roth conversions.

We had to put money into taxable brokerage account.

That is, sometimes laws force one upon a specific path and there is nothing that one can change about it.

Yup. This is why my tIRA has a basis. Instead of putting everything above the 401K savings in a taxable account, we chose to max out our tIRA contributions even though they were non-deductible. We were able to convert DH's tIRA to Roth in 2010, but by then mine had a mix of non-deductible contributions and 401K rollovers, so the tax hit would have been too great.

 

[oneill225]

Love our Roth IRAs.

We will need to milk our 401k accounts to keep the tax bill down over the next decades, but if any big purchase arises, we can tap the Roth without concern about the tax implications (as in, being taxed at the highest bracket).

If I was still a young worker, I would pour every possible dollar into Roth accounts over tax deductible. This is now easier than ever with Roth 401k options, as well as Roth IRAs.

 

[natetheb]

If I was still a young worker, I would pour every possible dollar into Roth accounts over tax deductible. This is now easier than ever with Roth 401k options, as well as Roth IRAs.

That is exactly what my wife and I are doing. We are young, have young kids, and because of the Tax Cuts and Jobs Act we are quite literally in the lowest tax bracket we will probably ever see again (22%)...aside from having another kid of course.


As far as negativity towards Dave Ramsey, I am a bit surprised by it. A majority of Americans want simplicity and Dave preaches a very simple but proven effective method. His method is radical but when you listen to some of his callers, they need radical in their lives! Sure one can split hairs with his ideology, but no one cannot deny his methods are effective for 90% of all situations.

 

[gwraigty]

Love our Roth IRAs.

We will need to milk our 401k accounts to keep the tax bill down over the next decades, but if any big purchase arises, we can tap the Roth without concern about the tax implications (as in, being taxed at the highest bracket).

If I was still a young worker, I would pour every possible dollar into Roth accounts over tax deductible. This is now easier than ever with Roth 401k options, as well as Roth IRAs.

My husband's 401k is a mix of pretax, after tax, and Roth. If we could go back in time, it all would have been after tax and then, when it became available to him, Roth.

When we married, he'd already been contributing pretax for a few years. When I learned we were in the lowest tax bracket, I suggested that it made no sense to not pay the taxes right then, when you can only go up in brackets (barring tax law changes, of course). He switched to after tax. For awhile, we'd regularly revisit the issue and change if needed. For example, during the years I took RMDs from an inherited IRA, we switched to pretax.

At this point, my projections show that keeping contributions Roth will make the most sense, to try and keep RMDs down in future. Even so, about 82% of his total balance is pretax. Company contributions are all pretax, no matter how you've structured your contributions.

 

[HI Bill]

If I was still a young worker, I would pour every possible dollar into Roth accounts over tax deductible.

I would obtain the company match first in the 401(k), then if you can't do both (ROTH IRA and 401(k), put the extra into the ROTH IRA. However, you really do need to use a ROTH vs. 401(k) calculator to determine which ends up ahead in your circumstance. This is not one-size-fits all, and depending on your current and future tax rates, as well as age and years to retirement, the tax-deferred may or may not come out ahead. And if you're planning to retire at 55 or later, you can still access the tax-deferred funds penalty free.

 

[mickeyd]

When I qualified to make contributions to a Roth years ago my main incentive was that I was making an investment in my future (retirement). It worked! I now have a big stash of cash that I can access at any time and not be taxed on.


Keeping it simple for almost 75 years...