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"Real" value of a Roth IRA
Posted on 1/30/13 at 9:24 am
Posted on 1/30/13 at 9:24 am
I know Roth IRAs are a popular retirement tool suggested by the money board, but I've gotten to thinking about the "real" value of this money in an economic real dollar sense.
I am only 25 years old and in the 25% bracket. If I contribute to a traditional IRA, I will receive 25% of my contributions back in tax savings. Doesn't the fact that I can use that 25% savings for 45 years somewhat outweigh the fact that I can pull that money out tax-free in retirement?
With all of the uncertainty in Washington I've found it difficult to suggest to my clients without a doubt that a Roth is the way to go. I don't think Congress can destroy the Roth and traditional IRA set-up currently in existence, but doesn't the present day savings reduce some of that risk? And isn't it hard to predict what taxes will look like in 45 years!?
I am only 25 years old and in the 25% bracket. If I contribute to a traditional IRA, I will receive 25% of my contributions back in tax savings. Doesn't the fact that I can use that 25% savings for 45 years somewhat outweigh the fact that I can pull that money out tax-free in retirement?
With all of the uncertainty in Washington I've found it difficult to suggest to my clients without a doubt that a Roth is the way to go. I don't think Congress can destroy the Roth and traditional IRA set-up currently in existence, but doesn't the present day savings reduce some of that risk? And isn't it hard to predict what taxes will look like in 45 years!?
6
Posted on 1/30/13 at 9:31 am to Tenforty1728
quote:
If I contribute to a traditional IRA, I will receive 25% of my contributions back in tax savings. Doesn't the fact that I can use that 25% savings for 45 years somewhat outweigh the fact that I can pull that money out tax-free in retirement?
Someone crunched the numbers for me a few weeks back and it was almost the exact same in the end. The difference was right at 800 if I remember.
Posted on 1/30/13 at 9:32 am to Tenforty1728
All valid points.
Or, what if you've gained 500% over the next 45 years? You get to withdraw that tax free. IRA's are an individual choice that sometimes isn't so cut and dry.
Or, what if you've gained 500% over the next 45 years? You get to withdraw that tax free. IRA's are an individual choice that sometimes isn't so cut and dry.
Posted on 1/30/13 at 9:34 am to Tenforty1728
go to some roth calculators and see what the earnings will be at giving % over that 45 % and all those earnings will be tax free
Since you can only contribute $5k, then you are saving $1250/yr at the 25% bracket
just got to play with the numbers and see where that puts you based on your lifestyle
Since you can only contribute $5k, then you are saving $1250/yr at the 25% bracket
just got to play with the numbers and see where that puts you based on your lifestyle
Posted on 1/30/13 at 9:35 am to Broke
Do you have to pull all the money out of an IRA once you hit 60?
Say you had a traditional IRA, could you just pull out the money in amounts that are slightly lower than higher tax brackets every year?
Say you had a traditional IRA, could you just pull out the money in amounts that are slightly lower than higher tax brackets every year?
Posted on 1/30/13 at 9:40 am to Tenforty1728
I think its good to diversify your tax exposure.
I contribute to 401k on a pre-tax basis AND Max out a Roth, you dont have to just pick one.
I contribute to 401k on a pre-tax basis AND Max out a Roth, you dont have to just pick one.
Posted on 1/30/13 at 9:44 am to GenesChin
quote:
Do you have to pull all the money out of an IRA once you hit 60?
You don't have to take any money out until you reach 70-1/2 when you have to begin taking at least a minimum distribution. The exact amount of the distribution is based on your age but it's about 4% of the principal each year.
This post was edited on 1/30/13 at 9:45 am
Posted on 1/30/13 at 9:45 am to Tenforty1728
I guess it depends on personal preference. I have a 401k and get an employer match so theres my tax savings right there. After the match, I contribute to a Roth IRA because 1) I like the flexibility of the account and 2) I believe I'll be retiring in a higher tax bracket than my current rate.
For people who don't participate in a qualified employer plan at work a Traditional IRA may be better because of the deduction. However, you can only take qualified distributions before 59 1/2 and your tax rates may be higher when you retire.
Well, we have $16.5 trillion of debt, trillions more of unfunded liabilities, and a President who doesn't believe spending is an issue. They're going to have to eventually raise taxes to pay for this stuff.
For people who don't participate in a qualified employer plan at work a Traditional IRA may be better because of the deduction. However, you can only take qualified distributions before 59 1/2 and your tax rates may be higher when you retire.
quote:
And isn't it hard to predict what taxes will look like in 45 years!?
Well, we have $16.5 trillion of debt, trillions more of unfunded liabilities, and a President who doesn't believe spending is an issue. They're going to have to eventually raise taxes to pay for this stuff.
Posted on 1/30/13 at 9:58 am to gatorsimz
The "flexibility" is an important factor. Once you have paid your taxes (Roth), you have greater ability to access the fund. If you needed money from a standard 401k, you would have penalty concerns.
Generally most people retire at a higher income tax bracket. It is best to use the standard 401k to receive co. match. Then if you're near a rate level adjustment, push to keep below the next rate. If you can't shelter at a lower rate, Roth is a great place to go.
Generally most people retire at a higher income tax bracket. It is best to use the standard 401k to receive co. match. Then if you're near a rate level adjustment, push to keep below the next rate. If you can't shelter at a lower rate, Roth is a great place to go.
Posted on 1/30/13 at 10:18 am to jso0003
quote:
I think its good to diversify your tax exposure.
This. We don't know what your taxes will be when you retire. It is a way to help protect your tax risk. Furthermore, I'm largely of the opinion I'd rather pay taxes on my seed, not the harvest.
But it is all personal choice.
Posted on 1/30/13 at 12:13 pm to jso0003
quote:
I contribute to 401k on a pre-tax basis AND Max out a Roth, you dont have to just pick one.
Posted on 1/30/13 at 12:22 pm to rsande2
I contribute to a 401K and started maxing out a traditional IRA
I know I don't get the tax diversification that the roth provides but I don't care
I still have some money leftover for savings after I contribute to the retirement accounts. As long as all 3 accounts keep growing, I think I'll be alright. I like working and will probably work until I reach 70 or so.
By that time I'll have whatever savings, SS income(probably not much), and 2 retirement accounts to draw from.
I know I don't get the tax diversification that the roth provides but I don't care
I still have some money leftover for savings after I contribute to the retirement accounts. As long as all 3 accounts keep growing, I think I'll be alright. I like working and will probably work until I reach 70 or so.
By that time I'll have whatever savings, SS income(probably not much), and 2 retirement accounts to draw from.
Posted on 1/30/13 at 1:35 pm to Oenophile Brah
quote:
The "flexibility" is an important factor.
Yes. There are no required distributions with the Roth. Roth can be used as an emergency fund.
Posted on 1/30/13 at 1:56 pm to Dusty Bottoms
quote:
Roth can be used as an emergency fund.
And a college fund
Posted on 1/30/13 at 2:42 pm to jmtigers
All very valid points and good discussion. I'm a CPA and I feel like Roth's get pushed a little too hard for people who are very young. I believe Roths are a great idea for anyone planning to retire in the next 8-10 years because I do believe rates will be higher over the horizon. I'm not as sure about people who won't retire for 30 years or more.
Posted on 1/30/13 at 3:02 pm to Tenforty1728
Well, the argument for people retiring in 30 years is that their tax bracket is more than likely naturally go up because try aren't making a ton of money right now, and the tax deduction from other options isn't goingto drastically reduce their taxable income (especially by lowering their tax bracket).
Posted on 1/30/13 at 9:31 pm to Powerman
quote:
I know I don't get the tax diversification that the roth provides but I don't care
I still have some money leftover for savings after I contribute to the retirement accounts. As long as all 3 accounts keep growing, I think I'll be alright. I like working and will probably work until I reach 70 or so.
No offense but this makes zero sense to me.
Why would you keep dumping cash into a savings account with taxable earnings when you could use a Roth as a savings account for all intents and purposes with the money growing tax free??
Posted on 2/3/13 at 10:46 am to jso0003
As opposed to starting a new thread, I figured I'd bump this. I'm in my mid 20's. First year attorney making around 50k. Trying to decide between a traditional IRA and Roth. As has already been mentioned in this thread, my theory behind leaning towards Roth is that I don't see myself remaining in the same tax bracket now as I will be when I retire, and I don't really need the tax savings now. Is there something I'm missing that would make the traditional IRA more attractive?
Posted on 2/3/13 at 10:49 am to jso0003
quote:
Why would you keep dumping cash into a savings account with taxable earnings when you could use a Roth as a savings account for all intents and purposes with the money growing tax free??
+1
Aside from the fact that you are only going to earn, at the most, 1% on savings...
Posted on 2/3/13 at 12:43 pm to Tenforty1728
quote:
I am only 25 years old and in the 25% bracket. If I contribute to a traditional IRA, I will receive 25% of my contributions back in tax savings. Doesn't the fact that I can use that 25% savings for 45 years somewhat outweigh the fact that I can pull that money out tax-free in retirement?
The reason why ROTH is recommended for someone in your situation is - you're likely to have a higher income at retirement than you do now, ergo, you want as much of that as possible immune from taxation.
An opposite situation would be a professional athlete, whose earnings are sky high right now and needs every penny of tax savings (which are real, no question, even at your tax bracket) he can get his hands on. He maxes out his traditional 401K/IRA, or whatever is available, because his tax rate at retirement will likely be less than it is now.
I hope this makes sense from the "rule of thumb". However, everyone's situation varies, at least a little, and there are times when the knee jerk "ROTH" recommendation does not pass the A/B, 2-track analysis. If it doesn't for you, take the immediate benefit of tax savings now, and take solace that if you lose money down the line, you did so with eyes open, and you at least did the analysis.
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