Roth IRA
- Thread starter ushdadude
- Start date
I have one. I feel like it's a good addition to my portfolio (savings, stocks, 401K, and Roth). It doesn't offer the tax benefits that a 401K/Traditional IRA do, but since you've already paid taxes on the money going on, you don't have to pay taxes on the money when it comes out at a qualified retirement age (except for earnings).
Take a look at this: http://www.madfientist.com/traditional-ira-vs-roth-ira/ I think Matt has posted something similar as well?
and this: http://www.madfientist.com/ultimate-retirement-account/
Tom Capone
Level 2 Member
If you assume the same tax rate now and when you retire, there is mathematically no benefit to a roth over a traditional ira. The question is where your tax rate will be when you retire based on your situation and current tax rates. (Lower tax rate when you retire take traditional, higher tax rate when you retire choose Roth). My strategy is to have some in both types so that I can take advantage of lower tax rate tiers when I retire.
misterbwong
Level 2 Member
Your income tax rate at time of retirement is very important but don't forget that distributions from pre-tax accounts (like IRA and 401k) are taxable upon withdrawal. Having a mix of income from pre and post-tax retirement accounts (like the Roth IRA) will allow you a bit more flexibility so you can minimize your taxable income during retirement.
Yep some good stuff there. Looking back I have posted a fair bit on this too, but one of the problems with the blog is keeping stuff visible since it drops of the page with all the new content. Ideally we all want all our money in ROTHs when we get to retirement age, as it all pulls out tax free.
It actually pulls out tax free including earnings. That is the beauty of it, the tax free compounded growth. If you pull it out before qualified retirement age of 59 1/2 the you may be subject to tax on the earnings (and perhaps a penalty) depending on the reason - they have certain hardship exclusions.
My personal strategy is to push salary/income into Traditional or SEP IRAs (tax deferred) when income tax is 25% or above, so I can reduce my present day taxes, and then roll it slowly over into ROTHs in later years when I see opportunities. Explained here http://saverocity.com/finance/converting-to-a-roth-ira-using-partial-transfers-to-reduce-tax-costs/
But that is a little bit 'next level' for starters you need to get your IRAs funded and while one is better than that other either is better than none!
I like dividend paying stocks too, but for those starting out it is wise to not pick a single stock, and instead get an index fund (there are dividend stock funds) just in case tobacco becomes illegal or something crazy like that!
Well, in the United States this is not possible because the reliance by local & federal govt. on the MSA/other various taxes the orgs. must 'donate.'
In that case, choose MO and PM (Altria only sells USA, PM ex-USA Philip Morris
).
I agree. I would have done better had I Just picked an index fund that replicates the entiremarket than gambling in my accounts... Or if I had ONLY choosen Altria, I would have done the best... Altria provided annual returns of nearly 20% from the 1950s until 2005 (when they still owned Kraft and had not split off PM).
In that case, choose MO and PM (Altria only sells USA, PM ex-USA Philip Morris
).I agree. I would have done better had I Just picked an index fund that replicates the entiremarket than gambling in my accounts... Or if I had ONLY choosen Altria, I would have done the best... Altria provided annual returns of nearly 20% from the 1950s until 2005 (when they still owned Kraft and had not split off PM).
Tom Capone
Level 2 Member
I wanted to elaborate on the mathematical indifference of a roth vs. a traditional IRA. Assuming a 20% tax rate, if you put $5,000 into an IRA you will get a $1,000 tax deduction resulting in a net cost to you of $4,000. If that $5k investment triples by the time you retire, you'll have $15K, but have to pay $3K in taxes, netting $12k.
Likewise, if you put $4k in a roth IRA, you get no current tax benefit resulting in a net cost to you of $4K. If that $4K investment triples by the time you retire, you end up with $12K, with no tax liability.
There are other considerations (for example, you don't have to take distributions out of a Roth when you turn 70 1/2), but assuming the same tax rate, they are mathematically equivalent. Also, considering they often have the same contribution limits, you are actually saving more with a $5K Roth than with a $5K Traditional (but it also costs you more out of pocket).
I think Schwab is fine, as are Fidelity, TD Ameritrade, and any of the large discount brokers. Just realize they won't be providing you any advice, you need to make most of the decisions yourself (which I recommend, if you're willing to do the work).
If they let you trade Vanguard ETFs for no fee then go for it (I think they do) I personally am with Fidelity and Vanguard.
waytoospicy
Level 2 Member
Another big benefit that I don't believe has been mentioned here yet is that you can withdraw from your Roth IRA up to your contributed amount without any tax consequences.
Consider that US tax rates are at historic lows. That is the major driving force for me to use a Roth IRA rather than Traditional IRA. Keep in mind there are income limits at which you won't be able to make any further contributions. Though there are currently ways around that for the Roth.
This is a big benefit some people use the roth as an emergency fund. You can theoretically get money out of it in case some huge expense comes up. I personally don't do this because I like to have cash on hand, but it is always nice to have options.
Instead of choosing one you should just do both. No one can predict future tax rates so why not use all the savings vehicles available. Max out your 401k match and then do roth this way you have the best of both worlds.
The ROTH as an EF is valid, but only if assets are stored in Cash/Equivalents. A common mistake is people think they can do this and also invest in the market. Doing so can offer value, but it negates the EF concept.
Very true.
The other thing to remember is that you can't replace the money in your Roth once you take it out (though if its within 60 days, you can). e.g. its not a loan out of your Roth, its a distribution. Therefore, you're forgoing tax free earnings on that money that you just took out.
depends on one's risk factor. if this is someone's strategy then hopefully they understand that there is a good chance they will be taking money out when the market is down.
when it rains it pours, fewer people get fired when the dow is up so chances are the emergency fund will be needed when the dow is down and we are in a recession
No, it has nothing to do with risk. It simply isn't an EF if it has to be liquidated.
I am not saying you can't do this, and sure risk tolerance defines that you might be inclined to (or not), but an EF must be in cash/equivalents because its purpose is to provide liquidity without needing to sell.
This is a critically important point.
If you want to use a ROTH as a EF and then want to put the assets into the market, it is not an EF. I am not judging people who do this, but they need to accept that it is a different thing, and they have lost the purpose of having an EF.
You do raise very good points - I am just hammering this point home more for new readers who want to try the strategy, and I agree with what you say about a down market.
Tom McGhee
Level 2 Member
Put money in a ROTH IRA if you start when you are younger. Put money in a Traditional IRA when you getting into it late in life. Live to be 70 1/2 and laugh every year you put money into it thinking if you would live that long to enjoy it.
I just added a Resource on Roth IRA's to give people a bit more background on how they work
http://saverocity.com/forum/resources/roth-iras.2/
http://saverocity.com/forum/resources/roth-iras.2/
Mountain Trader
Level 2 Member
I think there is good information here, at least to get someone started on this important topic. Folks who do not have tax and investment expertise should get some of that through research or from someone who does have that expertise.
It was mentioned that if you think your tax rate will be the same at retirement as it is when you contribute, then there is no difference between a Roth IRA and a Contributory IRA. Folks should run the numbers (or have someone run the numbers) with the assumptions you believe are most likely to occur. In particular on this detail, notice that in both a Contributory IRA and a Roth, the earnings build up tax free. However, in a Contributory IRA, earnings are taxed when you pull them out, while in a Roth, they are not. This can be huge, especially for those starting IRAs at a young age where earnings before withdrawal could go on for 40 years or more.
This is not rocket science, but it is complex. Learn more, get some help.
It was mentioned that if you think your tax rate will be the same at retirement as it is when you contribute, then there is no difference between a Roth IRA and a Contributory IRA. Folks should run the numbers (or have someone run the numbers) with the assumptions you believe are most likely to occur. In particular on this detail, notice that in both a Contributory IRA and a Roth, the earnings build up tax free. However, in a Contributory IRA, earnings are taxed when you pull them out, while in a Roth, they are not. This can be huge, especially for those starting IRAs at a young age where earnings before withdrawal could go on for 40 years or more.
This is not rocket science, but it is complex. Learn more, get some help.
Really? We have always put it on the return. Don't they track basis, or is that for your own info only?
You do need basis for early/penalty distributions on earnings, but not for regular ones.
http://www.irs.gov/publications/p590/ch02.html#d0e10630
Tracking basis is never a bad thing at all - I am just saying the IRS doesn't need you to. If it is no bother to you then I am not saying it shouldn't be done. Just that you don't need to go back and amend
BoonDR
Level 2 Member
I think of ROTH as EF only in the most extreme sense. A nuclear options so to speak.
My EF funds are as follows:
6 months + expenses (probably closer to 9-12 as frugality would likely be at an extreme in a emergency) in a traditional savings account.
1 year+ in CD's
~3-4 months in ROTH IRA.
My EF funds are as follows:
6 months + expenses (probably closer to 9-12 as frugality would likely be at an extreme in a emergency) in a traditional savings account.
1 year+ in CD's
~3-4 months in ROTH IRA.
Mark Showalter
Level 2 Member
I own a rental house in my non-traditional Roth using Equity Trust Company so that all the income I derive is tax free as will be any capital gains if and when I sell the property.
That sounds like too much to be honest - unless you have a large number of other assets in the market or elsewhere invested.
Certainly a thread in its own right! I think many folk lean towards these when they don't trust the market, but it often comes with a lot of negatives, akin to storing Munis in IRAs as you lose a lot of natural tax advantages by sheltering.
BoonDR
Level 2 Member
I have decent amount, most likely not a large amount by your standards, but the CD's were unintentional, long story and I'll leave it at blaming my better half.
Blaming the better half is always a great option!
cocobird
Level 2 Member
It also depends on one's age and risk appetite. Most recommendations are that one hold's 40 to 60 percent of investments in cash or cash equivalents at retirement. Granted I'm retired and don't follow that rule (I'm still aggressively invested), I'm just pointing out that individual circumstances have an impact on one's cash position.
Absolutely. I'm being very general, and couldn't give a proper answer without knowing a heck of a lot more information.. there is nothing wrong with being 100% in cash if you have enough of it