Roth IRA

[chickbull]

For those who are earning income and want to shelter some of it because you don't need immediate income and file a joint tax return, you can put it in a Roth IRA. Only one spouse needs to earn income and if over $3000, you can put $3000 in a Roth for both of you, or $7000 total if over 50 years old. Check out the details, but sounds like a great idea.

 

[mickeyd]

The Roth IRA is one of the best gifts that congress ever gave us.  

Unfortunately too few of my fellow citizens have grasped to concept of tax-free growth and continue to not save or save in a traditional IRA so that they can get this year's tax deduction.

When the Roth first came out I remember feeling that it was so good that congress would surely cancel it or make radical changes to it as I assumed that EVERYONE in the USA who had a job would jump on the bandwagon like I had.

Sadley, not much bandwagon jumping has occured, however I'm realy happy to be contributing the max each year, along with the wife, for as long as the law allows me to do so.

 

[unclemick]

It might be some residual bad after taste effects - when the opportunity to convert trad to Roth (4 year ave) a lot of people jumped - in time for the 2000 - 02 pop and didn't like the resulting tax consequenses - Congress/IRS gave some help but - still??

As for starting out - I guess it's the same inertia as 401k, Trad. IRA and just plain - save some money for retirement.

I still run the trad/Roth conversion trade off numbers every fall - it's a judgement call on tax brackets and Congress 10-20 years out.

 

[azanon]

Probably most folks here know about Roths Chickbill, but I guess there are some newbies too.

I use only Roths (except in cases where i had to rollover a pseudo traditional from a company i used to work at).  I like Roths for three reasons:  1.  When you see your balance in a Roth, that amount is yours and all yours.  You wont have to do math in your head to figure how much tax you owe.   2.  It allows you to save more than a traditional; a critical thing for anyone attempting ER. 3. In the event you actually need some money out of the Roth (eeekk! i know), you can do so with no penality, long as you only touch principle.

IMHO, a person that's trying to max their ER opportunity has no use for a Traditional IRA because of #2 above.  Even if the taxes arnt quite as good for your specific situation, the ability to sock away more under tax protection (which the Roth allows, because its "after-tax" money) is a far greater benefit.

 

[John Galt]

For me, "after-tax" and "before tax" money has very little meaning now. My income is so low, it is kind of
irrelevant. Another aspect of ER which was completely
unanticipated.

John Galt

 

[gindie]

azanon-

Not quite sure what you mean about being able to contribute more to a Roth than a traditional. Max. for each (or a combination of both) is $3000 (unless you are 50 or over).

 

[Bob_Smith]

For me, "after-tax" and "before tax" money has very little meaning now.  My income is so low, it is kind of
irrelevant. Another aspect of ER which was completely
unanticipated.

I anticipated that scenario when the Roth first became available. For that reason, the Traditional IRA can beat the Roth. Why pay a tax today when there's a good chance I'll dodge the tax altogether (or pay less tax)?

 

[azanon]

Not quite sure what you mean about being able to contribute more to a Roth than a traditional. Max. for each (or a combination of both) is $3000 (unless you are 50 or over).

I should have clarified. Effectively, you can contribute more to a Roth because the money you put in a Roth IRA has already been taxed. Because of that, both the interest/gains you will earn after that, and all of the principle you put in a Roth is yours. Everytime you look at a Roth balance, you can think of everybit of it as yours, and uncle Sam will never see a dime of it (cause he already saw it before you put it in).

With a traditional IRA, you can also put 3K in, but you havent paid taxes on that money yet. The IRS will always get their taxes, so they get them in the end (on the principle). So, from then on, you'll get tax deferred growth, but in the end, you're going to pay a lot of tax on all the principle you put in there.

 

[John Galt]

But how about a guy like me, with total control
over my taxable income? If I can draw on the IRA
and still keep my total income low enough, I pay no taxes. I realize I am unusual, but it can be done.

John Galt

 

[azanon]

Yeah your situation is different John. I was advocating Roths for someone aspiring towards ER, not someone who's past the finish line. Yeah, if you can keep earned income so low that tax isnt an issue, why use them? I assume you still have earned income since that's a requirement to be eligible to contribute to IRAs.

 

[Telly]

But how about a guy like me, with total control
over my taxable income?  If I can draw on the IRA
and still keep my total income low enough, I pay no taxes.  I realize I am unusual, but it can be done.

John Galt

I dunno John, all may not be quite so green in the Emerald City of the future. Up to 85% of your SS benefit may be taxable. As a determinant of how much of your SS is taxable, the IRS uses your taxable income, PLUS your non-taxable income, with the 32k constant for married filing jointly. So, if at first the taxable component of SS doesn't look too bad, just wait for inflation to boost your income requirements, and boost your inflation-indexed SS bennies. The 32k is a CONSTANT in the algorithm, so as the years go by, SS bennies get taxed heavier and heavier. It really starts to move.

A couple years ago I built a spreadsheet to calculate the taxable portion of SS dollars. The inputs are SS benefit $, taxable income $, and non-taxable income $. I had to flow chart it all out on paper first, and learn logic operations in Excel. It was an eye opening experience on how Byzantine our tax law really is.

 

[cute fuzzy bunny]

Dont count out roths for the already ER'ed, albeit with a twist.

It might be a great idea to find a way to generate just the 3k needed in earned income to fund the roth. I'm sure most of us can find a way to spring a few grand without actually working in a conventional manner.

In my situation where I ER'ed and the wife continues to work part time, we're going to use her earned income to stuff a pension and 403b plan, then fully fund a roth.

I have pretty good control over my current income right now, but I think I'm going to lose that (in a good way) when our combined IRA's start requiring withdrawals and social security hits. We may be seeing uncontrolled income in the six figure range (in todays dollars) and having some of that as non taxable roth income should taste pretty good.

But thats a long time from now and almost anything can happen between now and then...

 

[yelnad]

My husband pays a $25 a year maintenance fee for his Roth IRA through Ameritrade. Is this normal? Suggestions?

 

[cute fuzzy bunny]

For one to pay for a roth account maintenance or for ameritrade to nickel and dime you?

I think if you have a low balance, usually under 5 or 10k, many places will charge you a small fee. Even vanguard does it I think...a "low balance" fee. If your balance is higher than that, move it somewhere where they dont charge you stuff without returning you some value!

 

[yelnad]

OK - so I just opened my own Roth IRA through TIAA-CREF with no fees. When choosing my allocations every category had choices for both variable annuities and mutual funds. What's the difference? For now I just selected the same allocations as my 403b, which are all variable annuities.

 

[Bob_Smith]

OK - so I just opened my own Roth IRA through TIAA-CREF with no fees. When choosing my allocations every category had choices for both variable annuities and mutual funds. What's the difference? For now I just selected the same allocations as my 403b, which are all variable annuities.

Hi yelnad,

Annuities are insurance company financial products, usually with high expenses. I wouldn't invest in annuities. I would suggest that you read a good book for beginners. My favorite is Personal Finance for Dummies by Eric Tyson. It's well done and an easy read. Also, take a look at another thread in this section where people are listing their investments. It will give you a feel for the types of things people here are doing with their money.

 

[charlie]

yelnad,

A variable annuity within a tax sheltered account like
a ROTH IRA makes absolutely no sense. It is almost
criminal that they would give you this choice, IMHO.
I am not familiar with 403b accounts, but I suspect
they are similar to a 401k. If you can, I recommend
that you switch to the equivalent mutual funds immediately. With variable annuities you are putting
a tax sheltered investment within a tax sheltered
structure. The variable annuities have a higher cost
ratio than the underlaying mutual fund to cover the
death benefit. Run, not walk to the nearest exit.

Help me out guys if I am speaking with forked tongue.

Cheers,

Charlie

 

[Bob_Smith]

Yep, I agree with Charlie. I have a 403(b) and they are sometimes called "tax sheltered annuities". In fact, that's how all the official 403(b) documents in my organization are titled. This leaves unsuspecting employees with the impression that they must buy annuities. The insurance companies love that! I'd say more than 75% of the people in the organization I worked for have nothing but annuities inside their 403(b)'s, simply because insurance companies have salesmen to push them, and the employer is almost always clueless.

 

[John Galt]

I bought an annuity once, in the early 90s. Decided
later it was a mistake (dodn't do my homework,
which is typical. My ex. got it in the divorce.

John Galt

 

[yelnad]

I definitely need to read up on this more and sign up for an appointment the next time a rep is on campus.

OK - my 403(b) ONLY deals in annuities.

TIAA-REF stands for: Teachers Insurance and Annuity Association College Retirement Equities Fund

So I can't change anything in my 403(b) to mutual funds. I'm pretty sure I can change the ROTH-IRA to mutual funds.

 

[mickeyd]

Variable Annuities have an extra layer of expense built in to them that do not benefit the annuitant but are usually quite favorable to the insurance company and agent.

 

[Bob_Smith]

So I can't change anything in my 403(b) to mutual funds. I'm pretty sure I can change the ROTH-IRA to mutual funds.

You can definitely change the ROTH to mutual funds. You can probably change the 403(b) to mutual funds  too. Even if your employer is clueless and has stuck you with poor choices, you can usually get around it. First, choose a no-load money market fund from your employer's menu and direct all of your 403(b) contributions to that fund. Then open a 403(b) account at Vanguard. They have an option on their application that involves opening an account for the receipt of transfers only. Choose that option; it leaves your employer completely out of the loop. Then transfer the balance from your employer's plan to Vanguard periodically. Leave enough in the existing employer account to keep it open; ask about minimum balances. When the funds arrive at Vanguard you can choose any investment there that you want. My daughter is doing this now. I was forced to do it until I convinced my employer to add Vanguard to the list. Unfortunately, if you have money in existing annuities they may hit you with hefty fees to switch, so watch out for that. Also you mentioned visiting with a "rep". Be careful. They usually aren't on your side and you don't want to be asking them for financial advice.

BTW, TIAA-CREF does offer mutual funds. Are you saying your employer denies access to those?

 

[yelnad]

They have mutual funds, but there is no option for my money to go directly into them. Perhaps I can open one, and then transfer the money from the annuities into the mutual funds? Why does this have to be so confusing and why doesn't the website explain all this crap? I like to think that I know more about this than a lot of my friends ("retirement? what retirement?") and therefore expect to be able to find answers when I have questions. You guys have been very helpful. I'll keep you posted on what I find.

 

[mickeyd]

TIAA-CREF is a pretty up right company. I suggest that you call the 800 # and ask away. Take good notes, read your notes back to the rep on the phone. ASK manny, many questions.

It is in your best interest to fully understand what you are investing in.

Would you buy a car without knowing that it had a spare tire? What mileage it got? What the crash potential was? Of course not. A Roth IRA, a 403b and any mutual fund is just the same.

 

[Bob_Smith]

They have mutual funds, but there is no option for my money to go directly into them.

Yelnad, if you are referring to your Roth at TIAA-CREF, I checked their site. Go here: http://www.tiaa-cref.org/open_account/iras.html Click on "download an application". A small window will pop up. In that small window notice there are 2 links. Do not click on "select a State". Instead click on the bottom link "Funded with Mutual Funds Only". An application will be downloaded that enables you to invest directly in mutual funds in your Roth at TIAA-CREF.

On the 403(b), I'd call TIAA-CREF as Mickeyd suggests. But on the Roth, it's just a matter of opening a Roth and choosing whatever mutual fund you prefer.