Roth IRA bad information

[rollergrrl]

It feels like a lot of bad information out there regarding Roth IRAs. Seems like gurus are pushing them over traditional IRAs no matter ones tax bracket. Personally, I feel they only seem right for people in the lowest tax bracket. I have heard the Argument that taxes will be higher in the future, but history shows something else. Just curious what others thing.

 

[ziggy29]

I think that to some degree, it involves an honest assessment of what you think the future is going to be like.

Not only what are tax rates going to be in the future, but how much income do I expect to have in retirement? Do I expect to be moving to a state in retirement with a higher or lower state income tax rate? Do I think I would be subject to RMDs that kick me into a higher tax bracket? These questions, and more, may influence which way you go.

That said, none of us has a crystal ball or total clarity about our future. For that reason, just as we diversify our investments among different stocks, different sectors, different asset classes... we can diversify with taxable accounts, conventional retirement accounts AND Roth retirement accounts. This gives more flexibility in terms of "engineering" your future income -- to maximize the benefit of lower tax brackets, to keep taxable income just below a certain thresholds (such as MAGI for ACA purposes), to harvest long-term capital gains while in lower brackets and to harvest tax losses to offset other capital gains.

 

[NgineER]

For that reason, just as we diversify our investments among different stocks, different sectors, different asset classes... we can diversify with taxable accounts, conventional retirement accounts AND Roth retirement accounts. This gives more flexibility in terms of "engineering" your future income -- to maximize the benefit of lower tax brackets.

+1

Diversification, flexibility, no RMD and better for heirs.

 

[38Chevy454]

Nice reply Ziggy, it offers additional flexibility in planning. While some FAs may be pushing the Roth, ultimately it is the investor's decision. If they are not knowledgeable enough then they could be making a choice that is not in their best interests. I know my FA (me...) does a good job of considering my best interests at all times.

 

[HI Bill]

Personally, I feel they only seem right for people in the lowest tax bracket.

They are also a great way of having $ available for ER. You can withdraw contributions, tax and penalty-free at any time, even if you retire before 59.5. Many folks don't plan to have enough assessible assets available and realize too late that they're stuck with most of their assets in tax-deferred accounts, which even employing the rule of 72t, may not leave them with enough income.

 

[Ready-4-ER-at-14]

It feels like a lot of bad information out there regarding Roth IRAs. Seems like gurus are pushing them over traditional IRAs no matter ones tax bracket. Personally, I feel they only seem right for people in the lowest tax bracket. I have heard the Argument that taxes will be higher in the future, but history shows something else. Just curious what others thing.

To me the people with the least amount in regular iras will have the smallest required minimum distributions and the people with the most in regular iras witll have the largest required distributions (happen around 70.5 ish check details)
Therefore the more you can move regular ira money to roth iras in smaller percentage tax bands the better if you would otherwise be in high tax bands (with normal predicted stock market/investment yields) in the future.
To me roths can save tax money if used properly and early in life.

 

[bingybear]

It feels like a lot of bad information out there regarding Roth IRAs. Seems like gurus are pushing them over traditional IRAs no matter ones tax bracket. Personally, I feel they only seem right for people in the lowest tax bracket. I have heard the Argument that taxes will be higher in the future, but history shows something else. Just curious what others thing.

I did roth conversions up to the top of the 24% bracket... so would you call this good or bad.

In general it is easiest to justify in the lower brackets. But what if you consider when a spouse passes and you go from MFJ to single? What if you inherit later? Harder to justify when there is an IF or WHEN in the situation.

My bet now is I should do some roth conversions above the 12% bracket since that limits conversion amounts too much. But I am taking a risk it might might not be optimal

 

[steelyman]

My traditional/Roth amounts in my retirement accounts are split 50/50. I withdraw annually and rebalance in both the sense of asset classes (stock/bond) and tax treatment (taxable/tax-free) at that time. I think of it as diversifying both ways.

I don’t have any bond funds in the Roth accounts to lean toward higher expected growth there. I still have quite a bit of stock funds in traditional IRA because that was the only option for most of the time while working and I was DCA-ing faithfully. So any time I withdraw from tIRA, it’s from stocks.

 

[rollergrrl]

Nice reply Ziggy, it offers additional flexibility in planning. While some FAs may be pushing the Roth, ultimately it is the investor's decision. If they are not knowledgeable enough then they could be making a choice that is not in their best interests. I know my FA (me...) does a good job of considering my best interests at all times.

Agree that one needs to be knowledgeable, just feel the some FA and public gurus are blanket cutting their information and a lot of younger/ middle age people are following the information blindly especially regarding tax free is better than Tax deferred. Why the push for tax free?

 

[HI Bill]

Personally, I feel they only seem right for people in the lowest tax bracket.

I disagree. My top income is in the third tax bracket (22%).

I max-out the tax-deferred first (401(k)), then max out the ROTH IRA, and contribute to a spousal IRA. I'm over 50, so I can save $25K in 401(k), + $6K in spousal IRA + $7K in a ROTH IRA (if you make too much, you won't be able to contribute these amounts). So, this lowers my adjusted gross income by $31K, while still allowing me to save some in the ROTH for earlier use than at 59.5!

 

[RunningBum]

Which gurus are unconditionally pushing Roths?

It's not necessarily only for those in the lowest bracket. If you think your future tax bracket will be higher, or maybe the same, a Roth can be good. No sense in deferring income at a lower rate than you will be paying later.

 

[HI Bill]

Agree that one needs to be knowledgeable, just feel the some FA and public gurus are blanket cutting their information and a lot of younger/ middle age people are following the information blindly especially regarding tax free is better than Tax deferred. Why the push for tax free?

There are online calculators available that help you decide which is a better investment for you in your situtation, in your tax bracket. Definitely not one-size fits all! For much younger folks, the results generally show that ROTH comes out slightly ahead over 401(k), but with changing tax rates, this is subject to change!

 

[rollergrrl]

They are also a great way of having $ available for ER.

I can see why the Roth IRA was started, because it allows savers to touch the money early. But this in itself could actually be bad for younger/middle age savers that are not Disciplined. I wonder if the though behind this account was to stop bankruptcy and delinquent tax payments, because you know the average person would tap into that account.

 

[rollergrrl]

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...

 

[rollergrrl]

This gives more flexibility in terms of "engineering" your future income -- to maximize the benefit of lower tax brackets, to keep taxable income just below a certain thresholds (such as MAGI for ACA purposes), to harvest long-term capital gains while in lower brackets and to harvest tax losses to offset other capital gains.

Thank you for your response. It really is a numbers game!

 

[rollergrrl]

I disagree. My top income is in the third tax bracket (22%).

I max-out the tax-deferred first (401(k)), then max out the ROTH IRA, and contribute to a spousal IRA. I'm over 50, so I can save $25K in 401(k), + $6K in spousal IRA + $7K in a ROTH IRA (if you make too much, you won't be able to contribute these amounts). So, this lowers my adjusted gross income by $31K, while still allowing me to save some in the ROTH for earlier use than at 59.5!

Yes, but you still choose maxing out Tax Deferred first over tax free. There just seems to be a push for tax free Max over tax deferred max by many money gurus( suze Orman and Dave Ramsey). I know they are for entertainment but their Advice still gets followed.

 

[Stonewalker]

After reading these posts, the big question still remains:
What will the dollar be worth when the younger ones try to retire?
Aye, there's the rub.

My youngest makes $80K/year - and that's great. Adjusting for inflation, that still means he has the buying power I had with my starting wage back in 1980.

From my dark perspective, the overspending will catch up to our country - and we'll all suffer.

 

[CRLLS]

Never underestimate the power of the Roth IRA. It is more than just the incremental tax brackets to consider. Roth is a valuable tool to have in one's toolbox when it comes to FIRE and controlling ACA premium subsidy, and later, IRMMA/Medicare costs and taxable SS in retirement. Those are just a few benefits of the Roth. Backdoor Roths, if one is in that frame of mind, can help to fill the Roth account in stead of having investments in a taxable account. The Roth's protection against RMD's is another tool.

I wish I had started funding my Roth earlier.

 

[rollergrrl]

After reading these posts, the big question still remains:
What will the dollar be worth when the younger ones try to retire?
Aye, there's the rub.

My youngest makes $80K/year - and that's great. Adjusting for inflation, that still means he has the buying power I had with my starting wage back in 1980.

From my dark perspective, the overspending will catch up to our country - and we'll all suffer.

That is pretty dark, but could be a reality. Maybe the push for the Roth IRAs will provide tax money to fix the deficit. This might be stereotyping a little, but this younger generation is known for the tiny house. So maybe the overspending isn’t everyone.

 

[CardsFan]

I wish I had started funding my Roth earlier.

I sometimes have the same thought, but then realize that by the time I had a Roth 401k available, I was in the 28% marginal bracket. And before a recent rule change (2014? 2015?), I could not contribute to a Roth IRA, due to income level.

I DO think now, if you are in the 12% bracket, Roth is the way to go (which is why I make conversions in this bracket). But above that, it is probably a crap shoot. So the earlier comment about diversifying makes the most sense. A little in tax deferred, a little in Roth and a little in after tax. Your options later on are much more wide open.

 

[HtownRose]

When I first became aware of Roths, they were offered as IRAs only, not 401ks, that or my employer didn't offer the option, so I began contributing to a Roth IRA at the maximum amount each year in addition to maxing out my 401k at work. Best of both worlds IMO - get the immediate tax savings by having less of my salary taxed & also put $ in an account that will never be taxed + all the flexibility as described above.

Now that I am working part time for very low pay, I have a Roth 401k to which I contribute just enough to get the employer match, continue to contribute the max to my Roth IRA every year, & did a small Roth conversion last year. No detailed plan yet, but a general goal of converting approximately half my starting traditional IRA value to Roth by the time I have to start RMDs.

 

[LOL!]

For many taxpayers, a traditional IRA is not deductible because they have a 401(k) or 403(b) at work. In such a situation, a Roth IRA is the option. One really has no choice ... unless they are low income and have no money to contribute.

Yes, they could make a non-deductible traditional IRA contribution and convert it to a Roth IRA, but why do two-steps when one steps works?

So I am not surprised that Roth IRAs are suggested so often. Indeed, any financial advisor worth anything that has for a client someone who is already contributing to a work 401(k) or 403(b) has to suggest a Roth IRA for retirement over anything else, don't they?

 

[foxfirev5]

As others have stated the Roth IRA is a very useful tool well beyond the scope of current tax bracket. I view it as an opportunity and emergency fund which can be tapped at any time. With no tax considerations I can stick very close to my current annual income and taxes. However if a real estate deal comes up I can jump on it and access funds within a few days. Of course it would have to be a deal of a lifetime ( of which I've had a few) to drain the account. Along with HSA, RMSA, tIRA, Series I Bonds, CD's etc the Roth provides a significant diversifier for a source of $$$.

 

[VanWinkle]

I think that to some degree, it involves an honest assessment of what you think the future is going to be like.

Not only what are tax rates going to be in the future, but how much income do I expect to have in retirement? Do I expect to be moving to a state in retirement with a higher or lower state income tax rate? Do I think I would be subject to RMDs that kick me into a higher tax bracket? These questions, and more, may influence which way you go.

That said, none of us has a crystal ball or total clarity about our future. For that reason, just as we diversify our investments among different stocks, different sectors, different asset classes... we can diversify with taxable accounts, conventional retirement accounts AND Roth retirement accounts. This gives more flexibility in terms of "engineering" your future income -- to maximize the benefit of lower tax brackets, to keep taxable income just below a certain thresholds (such as MAGI for ACA purposes), to harvest long-term capital gains while in lower brackets and to harvest tax losses to offset other capital gains.

Great response!! It is not all of one thing, but a variety of accounts that lead to the ability to control taxable income. RMDs are fine as long as they don't put you in a tax crunch with other sources. I can handle the taxable income with other sources that are tax free and pay a minimum of federal and state taxes.

 

[Jerry1]

For me it’s the balance between RMD’s and today’s tax brackets. With SS and RMD’s, I will most likely be in the higher bracket. Maxing out the 12% bracket is therefore a easy decision, especially since I can live on my taxable account and live pretty well. That allows me to get the money out of my IRA, lowering future RMD’s and paying at lower tax rate. Whether to go into or max the next bracket (currently 22%) is a harder decision but mathematically, it makes sense.

Don’t forget. No, you cannot predict the future of tax rates but we’re re in the midst of a temporary tax law. The brackets are 12% and 22%. They will go back to 15% and 28% unless Congress makes them permanent. I can’t know for sure, but if all congress has to do is nothing in order to increase taxes, then I think it’s a good bet that the brackets will go back up.

Remember though that if you’re over 59.5, you don’t need a ROTH to get a lot of the benefit. Just taking a distribution will lock in the lower tax rate and lower future RMD’s. You’d just be giving up the tax free benefit of a ROTH. Remember, that tax free status only applies to the earnings of your ROTH. The distribution is already taxed and will not be subject to tax again whether it’s in a ROTH or not.

So to me, the ROTH has the best benefit to someone who is under 59.5 because they can convert money out of their IRA into a ROTH without the early withdrawal penalty. It also has benefit to someone who can live long term without needing that money. If you put it in a ROTH for say 6 years, all you’ve done is shielded from tax the earnings you made in those 6 years. Certainly something, but not likely some big bonanza. Let those earnings grow 20 years and now you’ve probably shielded a serious chunk of change.