Take a look at this: http://www.madfientist.com/traditional-ira-vs-roth-ira/ I think Matt has posted something similar as well?Anyone have any experience with a Roth IRA? Worth looking into?
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.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.
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.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/
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.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).
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!My first investments were in a roth. I picked Altria, a high yielding tobacco company. This way, the dividends can reinvest and continue to compound for the next couple of decades, tax free.
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.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.
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.Thanks! I'm hoping my tax bracket only increases so it sounds like a Roth IRA is a great place for me to start. Any broker in particular? I was planning on using Charles Schwab for no real reason.
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.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.
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.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.
Very true.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.
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.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.
No, it has nothing to do with risk. It simply isn't an EF if it has to be liquidated.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, nothing to declare. Just remember you can only do that until April 15th for the previous year.Do you have to declare Roth contributions on your returns? I funded my 2013 Roth IRA after submitting my 2013 returns and I figured since it's post-tax income I wouldn't need to do anything retroactively, but would be good to confirm.
Really? We have always put it on the return. Don't they track basis, or is that for your own info only?No, nothing to declare.
You do need basis for early/penalty distributions on earnings, but not for regular ones.Really? We have always put it on the return. Don't they track basis, or is that for your own info only?
That sounds like too much to be honest - unless you have a large number of other assets in the market or elsewhere invested.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.
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.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.
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.That sounds like too much to be honest - unless you have a large number of other assets in the market or elsewhere invested.
Blaming the better half is always a great option!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.
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.That sounds like too much to be honest - unless you have a large number of other assets in the market or elsewhere invested.
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 itIt 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.