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Roth or Traditional for Young Investor
Old 12-24-2018, 03:28 PM   #1
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Roth or Traditional for Young Investor

I convinced my daughter to start an IRA a couple years ago. I helped her set up a traditional IRA since that was the account type we had at the time. She only earns around 21K per year so she isn't able to contribute much, and only has about 7K in her IRA with no other retirement savings. Every little bit helps I suppose.

Anyway, I'm working on converting our tIRA to a Roth, and it got me thinking whether a Roth would be a smarter choice for her as well. If so, why?
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Old 12-24-2018, 03:33 PM   #2
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Roth. Tax free growth.
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Old 12-24-2018, 04:28 PM   #3
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Roth. Tax free growth.
There is an argument for traditional as the compounding of those extra $$ helps with juicing the miracle of compounding and time. But I'm not wanting to start a dust up.

I think it comes down to chocolate or vanilla. Just get the ice cream!

BTW. Doing same with DS, nephew and niece. Getting them to save, index invest, avoid (unwarranted) debt, LBYM. Rather agnostic as per Roth or traditional. Kinda like the pay off mortgage argument (3.375% for us, so I didn't).
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Old 12-24-2018, 04:28 PM   #4
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Roth is a great way to go while in a low tax bracket. At 21k / year, there is no advantage to using a 401k.
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Old 12-24-2018, 04:40 PM   #5
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Roth
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Old 12-24-2018, 04:54 PM   #6
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TI think it comes down to chocolate or vanilla. Just get the ice cream!
Exactly.
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Old 12-24-2018, 04:59 PM   #7
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It is not so cut and dried.

If she pays income taxes, then a Roth might not be a good idea.

For instance, if some contribution to a traditional IRA will be deductible and reduce her income taxes AND if later when she withdraws it, her income is so low or deductibles so high that she is not taxed on the withdrawals, the traditional is a better option.

So my point is that just because someone is low income does not mean Roth is better.

Consider that over 40% of US families do not pay any federal income taxes, so clearly Roth IRAs are good for those folks if they can and are allowed to contribute. But the next tier up where a family has to pay income taxes means that a tIRA could reduce their income taxes to zero and these folks aren't going to have big withdrawals in retirement, so may have zero taxes in retirement, too.
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Old 12-24-2018, 05:01 PM   #8
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Another vote for the Roth.
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Old 12-24-2018, 05:42 PM   #9
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Roth, and put some in for her if you can.

She's unlikely to be paying much income tax, if any, so the value of the Trad IRA deduction is minimal

If she has a 401(k) or similar with a match, she should contribute enough to get the maximum match, even if it hurts - "free" money
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Old 12-24-2018, 05:56 PM   #10
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Roth ... She's unlikely to be paying much income tax, if any, so the value of the Trad IRA deduction is minimal

If she has a 401(k) or similar with a match, she should contribute enough to get the maximum match, even if it hurts - "free" money
+1

But realistically, the choice is a crap shoot. One can play with numbers but tax policy and rates will change many times before her retirement and what the rules and rates will end up being is unknowable.

For example, RMDs were invented long after I started contributing to a 401K. Who is to say that Roth distributions over a certain amount won't be taxed just like social security is taxed and Medicare charges are means tested now? It's not at all impossible that at some point they'll begin taxing based on assets in addition to taxing income. The government offers no guarantees of predictability or fairness.
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Old 12-24-2018, 08:15 PM   #11
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I like Roth's for most people just starting out.

Even if they are paying taxes, it is likely at a lower rate than they would have to pay taking the money out of a tIRA in the future.

In an emergency you can withdraw your contributions without penalties. So you can stretch a little bit to contribute to the Roth. If you stretched a little too far, take some back out.
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Old 12-24-2018, 08:23 PM   #12
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I wish someone told me importance of Roth when my income was low and I was on lower tax bracket. I would recommend Roth until she moves in 20%+ bracket.
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Old 12-24-2018, 09:34 PM   #13
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I recommend a Roth as well. Once it has been in place 5 years she can withdraw $ for things like buying a home.
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Old 12-25-2018, 02:20 AM   #14
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Single and make under $157,000 Roth
More than that I'd go traditional.
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Old 12-25-2018, 04:56 AM   #15
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A bit off topic; but, I have an acquaintance who owns a small business. For his company advertising he sometimes uses his children in the ads and pays them the going rate for child actors/models. Then he puts the funds into IRAs that he set up for them.

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Old 12-25-2018, 06:07 AM   #16
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Roth, lifetime tax free growth.
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Old 12-25-2018, 08:05 AM   #17
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Roth. I ran a very quick taxcaster on a single person with 21K of income and came up with $303 in taxes. There's very little you can save by doing a traditional IRA. Unless it looks very likely she'll always have very low income and perhaps pay no taxes in retirement, the Roth is the way to go.

The other advantage is that she could pull from the Roth without penalty to pay for a house, and should have a couple other ways to pull from it before 59.5 if needed, that aren't possible with a tIRA.
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Old 12-25-2018, 08:33 AM   #18
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Roth. Tax free growth.
I'm sure this has been posted many times before, but here we go again.

For equal tax rates, the simple comparison between Roth and traditional is a wash.

Suppose I am willing to forego $6,000 of spending this year so I can save for retirement and I'm in a 25% tax bracket.

I can contribute $8,000 to a tIRA. That only costs me $6,000 of spending money due to the taxes I avoid. Now, suppose my money doubles before I withdraw it. I'll have $16,000 before tax and $12,000 after tax.

Or, I can contribute $6,000 to a Roth IRA. Suppose my money doubles before I withdraw it. I can withdraw $12,000, with no tax.

In both cases, giving up $6,000 in spending today gives me $12,000 in spending later.

"The Roth is better because you don't pay taxes on the investment income" is too simple. The traditional does just as well because I have investment earnings on the money I didn't pay in taxes, and I get to keep some of that money.

This assumes that all the contributions and withdrawals are subject to the same tax rate. Actual decisions involve thinking about how my taxes would look in the future if the gov't doesn't change tax policy, then thinking about how policy might change. It also involves other details about the differences between the Roth and traditional that people have mentioned above.
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Old 12-25-2018, 08:54 AM   #19
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I recommend a Roth as well. Once it has been in place 5 years she can withdraw $ for things like buying a home.
A common misconception...........while true, you do not have to wait 5 yrs to withdraw original contributions which can be withdrawn tax/penalty free anytime. Earnings, however, cannot be withdrawn tax/penalty free until your first Roth is 5 yrs old AND you are 59.5 y.o. There are a limited number of exceptions to these rules.
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Old 12-25-2018, 09:23 AM   #20
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If income is 21K (numbers are sensitive to this input so re-evaluate if income is slightly different), put 1.8K in TIRA and rest in Roth. This combo reduces AGI to get factor for savers credit to max 0.5 and reduces tax to 0. Since there is no more tax to be saved, further TIRA gains nothing so best to put rest in Roth.
https://www.irs.gov/retirement-plans...-savers-credit
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