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Message
Roth vs. Traditional IRA?
Posted on 3/10/14 at 12:18 pm
Posted on 3/10/14 at 12:18 pm
I recently heard back from my CPA regarding 2013 taxes. For the first time, I owe money to federal. 2013 was also the first year that I contributed to an IRA ($5000). I went the Roth route as opposed to the traditional route so that at retirement age, my withdrawals will be tax free. Had my Roth contribution been a Traditional, it would have saved me $1,537 in taxes in 2013. The growth and future increase from my Roth should justify the $1537 difference that I'll be paying by choosing the Roth over the Traditional, correct? I'm sure this is the obvious answer here, but I just wanted to be certain before I passed up on the opportunity to save $1500 
FWIW, Edward Jones is telling me to stick with the Roth and my CPA suggests that I go with the Traditional. I'd like to believe my CPA, but my gut says to pay up now and enjoy tax free earnings for the next 35-40 years.
Forgive my ignorance and all help is much appreciated
FWIW, Edward Jones is telling me to stick with the Roth and my CPA suggests that I go with the Traditional. I'd like to believe my CPA, but my gut says to pay up now and enjoy tax free earnings for the next 35-40 years.
Forgive my ignorance
and all help is much appreciated 
4
Posted on 3/10/14 at 12:23 pm to ForeverLSU02
I've always justified picking Roth over traditional, right now that is, because I'm in a lower tax bracket then what I'll be anticipating upon retirement.
I haven't quite analyzed the time-value aspect of paying down taxes now rather than later, but I am confident that it'll better serve me paying taxes now.
That being said, I do contribute 10% to Roth and 3% to a traditional IRA to give myself a little mix.
I haven't quite analyzed the time-value aspect of paying down taxes now rather than later, but I am confident that it'll better serve me paying taxes now.
That being said, I do contribute 10% to Roth and 3% to a traditional IRA to give myself a little mix.
Posted on 3/10/14 at 12:42 pm to ForeverLSU02
quote:
Edward Jones
There's your first problem.
As for the difference b/w the 2, in a traditional IRA you put the money in pre-tax and pay the taxes on the contributions and growth when you start taking distributions. In the Roth, the contributions are after-tax money.
This post was edited on 3/10/14 at 1:25 pm
Posted on 3/10/14 at 12:58 pm to jeepfreak
quote:Are you certain of this?
The earnings are not tax-free.
Posted on 3/10/14 at 1:00 pm to ForeverLSU02
You won't get any different investment returns from a Roth than you will from a Traditional unless you invest in different things.
I have a 401 and so I have a Roth for my IRA for tax risk diversification. Plus the Roth removes the need for an emergency fund since you can always pull out what you contributed without penalties.
That said, the Roth can be slightly inferior tax-wise because when you contribute to a tax-deferred account (401 or Traditional) you get to deduct at your highest bracket. For example, if you make $100K and contribute $5K then all of that 5K is deducted at your highest rate. When you're retired your first 5K is at the lowest rate.
That said, I personally believe the Roth's flexibility and tax diversification outweigh this, just be aware there's a small cost.
I have a 401 and so I have a Roth for my IRA for tax risk diversification. Plus the Roth removes the need for an emergency fund since you can always pull out what you contributed without penalties.
That said, the Roth can be slightly inferior tax-wise because when you contribute to a tax-deferred account (401 or Traditional) you get to deduct at your highest bracket. For example, if you make $100K and contribute $5K then all of that 5K is deducted at your highest rate. When you're retired your first 5K is at the lowest rate.
That said, I personally believe the Roth's flexibility and tax diversification outweigh this, just be aware there's a small cost.
Posted on 3/10/14 at 1:01 pm to ForeverLSU02
He just misunderstood you.
Roth earnings are tax free.
Roth earnings are tax free.
Posted on 3/10/14 at 1:01 pm to ForeverLSU02
quote:
Are you certain of this?
Foshizzle's right on this one. If you wait until 59-1/2, the earnings are tax-free.
This post was edited on 3/10/14 at 1:10 pm
Posted on 3/10/14 at 1:02 pm to jeepfreak
quote:
In a Roth, the contributions are after-tax money and you don't pay taxes on the contributions when you take it out,
Correct.
quote:
you do pay taxes on the growth in the account.
Not correct, at least not if you take withdrawals after age 59.5. If you wait that long it is all tax free.
Posted on 3/10/14 at 1:06 pm to TheHiddenFlask
I'm so confused
I've been thinking the entire time that the advantage of a Roth over a Traditional is that you're able to pay contribution taxes up front and that NOTHING, contributions or earnings, are taxed thereafter
ETA: At least if you wait until after 59.5
I've been thinking the entire time that the advantage of a Roth over a Traditional is that you're able to pay contribution taxes up front and that NOTHING, contributions or earnings, are taxed thereafter
ETA: At least if you wait until after 59.5
This post was edited on 3/10/14 at 1:07 pm
Posted on 3/10/14 at 1:06 pm to foshizzle
quote:
Not correct, at least not if you take withdrawals after age 59.5. If you wait that long it is all tax free.
As you stated above, I read that wrong.
Posted on 3/10/14 at 1:08 pm to jeepfreak
quote:That's what happens when someone like me goes around asking questions. Sometimes I don't know how to properly word them
As you stated above, I read that wrong.
Posted on 3/10/14 at 1:09 pm to jeepfreak
quote:
Even if you put after-tax dollars into a Roth, any earnings on that principle will be taxed when taken out of the IRA
False. As long as you have had the account opened and funded for +5YRS, are over age 59 1/2, then you will received Roth money tax free.
There are other ways to recieve the money tax free, such as the first home buyer allowance and disability/medical expense situations.
Posted on 3/10/14 at 1:10 pm to foshizzle
quote:
I have a 401 and so I have a Roth for my IRA for tax risk diversification.
The ROTH/traditional determination is based on whether you think your marginal tax rate will be higher in retirement than it is now. Because this is based on so many unknowable variables -- the end value of my retirement portfolio, whether SSI will still be available, what tax rates will be in effect in 20 years, whether I successfully woo a Rothschild heiress, etc etc -- I think the best solution is to split the baby and put some money in both.
Posted on 3/10/14 at 1:49 pm to Cold Cous Cous
quote:
The ROTH/traditional determination is based on whether you think your marginal tax rate will be higher in retirement than it is now. Because this is based on so many unknowable variables -- the end value of my retirement portfolio, whether SSI will still be available, what tax rates will be in effect in 20 years, whether I successfully woo a Rothschild heiress, etc etc -- I think the best solution is to split the baby and put some money in both.
This right here. This board is quick to say Roth no matter what, but it's not always best.
It all depends on taxes now vs taxes later. If you're in a high bracket now, and expect to be lower at retirement, put more into the pretax vehicle. You may also use that to lower AGI in order to qualify for any tax credits or deductions.
I would suggest a healthy mix of both.
Posted on 3/10/14 at 2:04 pm to LSUtigerME
IMO, as an extremely generic rule..
If you are early in your career and can afford to max a Roth every year and then some, there's a strong likelihood of you being in a higher tax bracket when you start making retirement withdrawals.
If you are further along or late in your career, and/or will only be putting away a smaller amount per year, there's a strong likelihood of you being in a lower tax bracket when you start making retirement withdrawals (barring other forms of retirement income, pensions or whathaveyou, not taken into account by this rule).
If you are early in your career and can afford to max a Roth every year and then some, there's a strong likelihood of you being in a higher tax bracket when you start making retirement withdrawals.
If you are further along or late in your career, and/or will only be putting away a smaller amount per year, there's a strong likelihood of you being in a lower tax bracket when you start making retirement withdrawals (barring other forms of retirement income, pensions or whathaveyou, not taken into account by this rule).
Posted on 3/10/14 at 3:36 pm to ForeverLSU02
quote:
2013 was also the first year that I contributed to an IRA ($5000). I went the Roth route as opposed to the traditional route so that at retirement age, my withdrawals will be tax free. Had my Roth contribution been a Traditional, it would have saved me $1,537 in taxes in 2013.
First and foremost, you can contribute $5,500 for 2013. Secondly, I don't understand this math. If a $5,000 deduction for a tradition IRA saves you $1,537 in taxes (30.74%), then you are either married with a taxable income north of $223,050, or single with a taxable income north of $183,250. Either way, if you're covered by an employer sponsored plan, you are outside of the phaseout limits and your contribution would not be deductible anyways.
I'm willing to bet that you owe $1,537 in taxes, and you're under the impression that a traditional IRA contribution is treated like a tax credit, which is incorrect. Many people make that mistake in my experience.
Posted on 3/10/14 at 3:48 pm to slackster
quote:Yeah, I'm aware of that now. When I initially contributed the $5000 last year I was told that was the max. I just recently discovered that it was increased to $5500.
First and foremost, you can contribute $5,500 for 2013
quote:Neither yet.
If a $5,000 deduction for a tradition IRA saves you $1,537 in taxes (30.74%), then you are either married with a taxable income north of $223,050, or single with a taxable income north of $183,250.
Our taxable income was around $134,000 in 2013.
quote:I'm not
Either way, if you're covered by an employer sponsored plan
Posted on 3/10/14 at 3:51 pm to slackster
quote:
I'm willing to bet that you owe $1,537 in taxes, and you're under the impression that a traditional IRA contribution is treated like a tax credit, which is incorre
Roth:
Owe $1,327 to federal
Refund $506 state
net = ($821.00)
Traditional:
Owe $25 federal
Refund $741 state
net = $716
Difference of $1,537
Posted on 3/10/14 at 3:56 pm to ForeverLSU02
quote:
Our taxable income was around $134,000 in 2013
Well then, at best, a traditional IRA contribution would save you $1,250 in Federal taxes. I'm assuming the rest are state taxes.
If you can afford the tax bill of $1,537, why don't you put $500 more into a traditional IRA for yourself, and then max out your spouse's traditiona IRA. At the very least, you can put enough to negate your tax bill for 2013.
ETA: I assumed it was all federal taxes based on the OP. The math makes sense now with the clarifications. Thanks.
This post was edited on 3/10/14 at 3:58 pm
Posted on 3/10/14 at 4:00 pm to slackster
Based on those numbers, a traditional IRA contribution for yourself of $500 and one for your spouse of $2,170.79 should give you a net $0 for tax liability.
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