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Subject:  Re: Roth investing/withdrawing at 60 Date:  3/15/2012  10:27 AM
Author:  ziggy29 Number:  70356 of 88074

>> I tend to disagree <<

Couldn't tell. This is actually one of the most anti-Roth arguments I've ever heard, which surprises me. Yes, it's not always the best choice for people, but you make it sound like a borderline scam. Anyway, point by point:

>> You are correct about being able to withdraw all you want tax free. But if you bury gold in the backyard you can take out all you want tax free. The point here is the money you invest in the Roth was taxed before if went in -- so the only "saving" you have is for taxes on the net gains in your Roth. <<

So? Conventional IRAs and 401Ks are fully taxed when withdrawn, so the only "saving" is the added compounding from the tax deferral (which Roths also have, by the way). How does this make Roths worse?

>> #1 Roth's have value if the goal is to pass money the Roth owner will not need to the next generation without taxes. (But keep in mind estate taxes don't happen on over 90% of the estates.)

Otherwise they have no value? I know you didn't sway that but your language choice here makes that a logical inference. That's far from true.

No other value? Here's a hint that has a LOT of value for some: no RMDs.

>> #2 Assuming the Roth owner is going to use/spend the funds - than a Roth does not make sense unless the tax rate (that would be total tax rate, not marginal) at the time of withdraw is less than the tax rate when funds are placed in the Roth. i.e. If in retirement your tax rate is less than when working, it it doubtful you will pay less taxes in total and/or have equal purchasing power. <<

Of all your caveats and counterpoints, this is (to me) the only real compelling consideration. Yeah, if you know you're in a 28% bracket today and likely to be in the 15% at retirement (using current rates), a traditional IRA (if it's deductible) or 401K is likely to be a much better choice.

>> #3 People pushing Roths, generally have a financial interest i.e. they want to sell you something. <<

And people "pushing" conventional IRAs, 401Ks and (shudder) annuities aren't trying to sell you something?

How does "selling" a Roth get more for (say) Fidelity, Schwab or Vanguard than a conventional IRA or operating as a 401K custodian -- let alone selling annuities? So to me, this point, while true, is irrelevant compared to other options. ALL financial products have people who want to sell them to you.

>> #4 If one assume over the remainder of your life, the averages for inflation and investment returns since 1929 happen, the break even point for funds in a Roth vs a 401K is somewhere beyond 20 years -- i.e. you must not take funds out for at least 20 years, or you will loose. (This assumes your tax rate in retirement is the same as when working.) <<

Can't wrap my brain around this claim. I would love to see the math on that one. Because of the commutative property of multiplication, I don't see how it matters whether the tax is on the back end or the front end as long as the tax rate remains the same on both ends.

>> As an aside, if for you Roths are beneficial to you, you can transfer all your current IRA funds into a Roth today -- and pay taxes of course. <

Which may or may not be a good idea depending on current and expected future tax rates, and a little bit based on desire to avoid RMDs where applicable. You make it sound like paying taxes now instead of later is always a bad idea. Using this logic (the assumption that paying taxes *now* instead of later is a negative), I should hold high dividend stocks in a 401K so I don't have to "pay taxes on it today" -- and pay taxes on the dividends at my marginal rate later instead of capped at 15% now. Deferring taxes is a good thing usually, all else being equal, but all else is *not* always equal.

>> How many of those people advocate a person with no mortgage go to a bank and take out a loan for the purpose of creating a tax deduction? <<

Nice try, but a weak analogy. People who take out a mortgage they don't need are paying a dollar just to save (say) 15-35 cents on the back end. That is silly; they can NEVER come out ahead by spending a dollar they didn't have to spend just to save a quarter on taxes. Similarly, if you are in the 25% bracket today and expect to be in the 15% bracket in retirement, again, a Roth is probably silly compared to a 401K or conventional IRA because you're better off paying the 15% tax later than the 25% tax today.

There's never a case where paying a dollar in mortgage interest can save you more than a dollar in taxes. There's often a case where paying a dollar in tax for a Roth conversion today saves you MORE than a dollar in tax tomorrow.

Am I saying it's always the best choice for people? No. But it's sure as hell a lot better for many people than you are making it sound.

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