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Author: TMFTaxes Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 121114  
Subject: Re: Traditional IRA vs Roth IRA Date: 10/13/1997 10:45 AM
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<<The Strong Family of mutual Funds has a calculator functionality that will help you look at the issue of whether you want a traditional IRA or a Roth IRA.

See the URL http://www.strong-funds.com/strong/Retirement/iraroth.htm>>

Thanks for the information, Eric. Much appreciated.

<<PS, for TMFTaxes--Strong's literature seems to agree with TRPrice's in that Strong also seems to say that the rollover amount into a Roth does not count against AGI in the testing of the eligibility of the rollover.>>

Yup. I believe that this has now become the universal view. And I've jumped on the bandwagon. Thanks again for the update, Eric.

TMF Taxes
Roy
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Author: ckelly7279 One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 514 of 121114
Subject: Re: Traditional IRA vs Roth IRA Date: 10/15/1997 11:14 AM
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If you assume that you contribute the same amount (after taxes for the Roth), get the same ROR and are in the same tax bracket now and at retirement, the returns for a Roth-IRA ($1,320) and a deductible IRA ($2,000) are IDENTICAL. I'm sick and tired of reading syndicated coloumists, like Janyne Bryant Quinn, who leap to the assumption that Roth-IRAs are better (Can you explain why Jane). The only article I read which compares apples to apples is in this months issue of Mutal Funds Magazine. (It also has a good artilce which shows why Tax Deferred Annuities should now be history because of the new Cap gains rate).

Assuming 33% tax brackets, "if" you can pony up the full $2,000 for the Roth-IRA you will be better off than putting $2,000 in an IRA and investing the $666 in a taxable account.

If you are putting in "identical" amounts (i.e., $1320 vs. $2000), there is no right answer. With an IRA, you know you are getting a tax deduction NOW, who knows about the future. Tax laws can change alot (no they probably couldn't tax Roth income but they could possibly have it reduce your ss income, increase your rate of tax for other taxable income or tax you with some new AMT tax). But, I believe are current tax rates are historically low. All in all, the idea of tax-free retirement income is awful appealing.

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Author: Number35 Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 520 of 121114
Subject: Re: Traditional IRA vs Roth IRA Date: 10/17/1997 3:56 AM
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>If you assume that you contribute the same amount (after taxes for the
>Roth), get the same ROR and are in the same tax bracket now and at
>retirement, the returns for a Roth-IRA ($1,320) and a deductible IRA
>($2,000) are IDENTICAL. I'm sick and tired of reading syndicated
>coloumists, like Janyne Bryant Quinn, who leap to the assumption that
>Roth-IRAs are better (Can you explain why Jane).

>Assuming 33% tax brackets, 'if' you can pony up the full $2,000 for the
>Roth-IRA you will be better off than putting $2,000 in an IRA and
>investing the $666 in a taxable account.

I came up with different numbers than you did. In fact, my numbers indicate that the Roth IRA is always better than a deductible IRA (as long as your tax rate remains the same).

Using your example of a 33% tax rate, a 10% ROR, and a 10 and 20 year period. Your Roth IRA grows to $4716 after 10 years and $12232 after 20 years. A standard deductible IRA grows to $4555 ($4716 - $1556 tax, and your side investment of $660 compounds to $1556, of which $896 is taxable, and a tax bite of $161 given a 18% cap gain tax) after 10 years and $11624 after 20 years ($12232 - $4036 tax, and your side investment of $660 compounds to $4036, of which $3376 is taxable, and a tax bite of $608 given a 18% cap gain tax). A difference of $161 and $608. Not huge amounts, of course, but still better nonetheless.

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Author: TMFTaxes Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 524 of 121114
Subject: Re: Traditional IRA vs Roth IRA Date: 10/17/1997 2:42 PM
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In reply to message number 552 by Number35 :

<<A difference of $161 and $608. Not huge amounts, of course, but still
better nonetheless.>>

I really don't want to get into posting a bunch of computations and
calculations, attacking and defending different methods of computations,
etc....so I won't.

Instead, lets apply a little critical thinking.

First off, I dislike ANY statement (especially relative to tax issues) that
"A is ALWAYS better than B". Why? Because included in the "always" are
various assumptions (in some cases, a BUNCH of assumptions) that may ignore
real life.

In the regular vs. Roth IRA debate, if you make the assumption that your tax
rate will remain the same over the next 20 years, you can certainly make the
point that the Roth is a better deal. But does that reflect real life? Are
tax rates likely to go up over the next 10 or 20 years? And how about your
own PERSONAL tax rate? Many people who may be able to shelter a regular IRA
at a 39.6% rate may be at a 28% rate (or lower) in future years. These facts
of life will obviously impact the computations.

Run the same calculations assuming current tax savings at 39.6% over the next
5 years, and a "withdrawal" rate of 28% after a 10 and 20 year period.
You'll find that the Regular IRA is a much better deal. Turn that same
equasion around (using a 28% rate for the contribution years, and a 39.6%
rate for the withdrawal years), and the Roth IRA becomes a "no brainer".

And how about that IRA that will NEVER be substantially withdrawn (due to an
early death...or just good planning). It is possible that the beneficiaries
will be in the 15% rate when they receive their inherited distributions.
Compare that to tax savings at 39.6% currently. Makes the deductible IRA a
"no brainer".

I was pointing all of these variables out to a client just last night. As
much as we would all like a direct, compact, easy answer, there ain't no such
thing. Each person must review his/her individual situation and make
assumptions that are valid for THEIR life and future. That is really, IMHO,
the ONLY way that this question can be answered. What may be very, very
right for you, may be very, very WRONG for me.

And if you REALLY want heartburn, try to throw all of the implied assumptions
into a regular IRA ROLLOVER into a Roth IRA. The assumptions and possible
outcomes are staggering. Your brain could explode.

So I'll just exit this thread with those thoughts. I'll leave the number
crunching up to others.

TMF Taxes
Roy


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Author: TMFPixy Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 525 of 121114
Subject: Re: Traditional IRA vs Roth IRA Date: 10/17/1997 3:42 PM
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<<I was pointing all of these variables out to a client just last night. As
much as we would all like a direct, compact, easy answer, there ain't no such
thing. Each person must review his/her individual situation and make
assumptions that are valid for THEIR life and future. That is really, IMHO,
the ONLY way that this question can be answered. What may be very, very
right for you, may be very, very WRONG for me.>>

So, Roy, I guess it's like Pixy always sez: Ya makes your choices and ya lives with the results! And the emphasis is on the "ya."

Best....Dave

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Author: Hax Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 526 of 121114
Subject: Re: Traditional IRA vs Roth IRA Date: 10/17/1997 5:04 PM
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The Roth IRA beats out the regular IRA if you are above the deductible IRA AGI limit though, right? Or am I missing something?

Foolin' in the bayou,

-Hax

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Author: Number35 Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 527 of 121114
Subject: Re: Traditional IRA vs Roth IRA Date: 10/17/1997 8:38 PM
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>In the regular vs. Roth IRA debate, if you make the assumption that your
>tax rate will remain the same over the next 20 years, you can certainly
>make the point that the Roth is a better deal. But does that reflect
>real life? Are tax rates likely to go up over the next 10 or 20 years?
>And how about your own PERSONAL tax rate? Many people who may be able
>to shelter a regular IRA at a 39.6% rate may be at a 28% rate (or lower)
>in future years. These facts of life will obviously impact the
>computations.
> [snip, snip...]
>I was pointing all of these variables out to a client just last night.
>As much as we would all like a direct, compact, easy answer, there ain't
>no such thing. Each person must review his/her individual situation and
>make assumptions that are valid for THEIR life and future. That is
>really, IMHO, the ONLY way that this question can be answered. What may
>be very, very right for you, may be very, very WRONG for me.

Very true. Everyone's circumstances are different and that affects their decisions accordingly. Of course, I did qualify my statements by indicating under what circumstances the Roth IRA should be better than a traditional deductible IRA. My point of view is that if anyone has to step down to a lower tax bracket when they retire, something went wrong with "The Plan". I certainly expect to be in the highest tax bracket when I retire. Of course, I might not make it but I'm planning that to be the case.

I guess to sum it up, everyone's mileage will vary according to their circumstances and take every statement with a grain of salt. Do your own analysis and make your own judgements. The only person responsible for what happens to you is yourself.

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Author: TMFTaxes Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 532 of 121114
Subject: Re: Traditional IRA vs Roth IRA Date: 10/20/1997 11:41 AM
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<<So, Roy, I guess it's like Pixy always sez: Ya makes your choices and ya lives with the results! And the emphasis is on the 'ya.'>>

Right again, Pixy...

It's just too bad that too many people, having made a choice, refuse to want to live with it. My experience is that this choice is usually made on verly little information and/or a "shoot from the hip" answer from somebody who should know better. All of a sudden, these people become a "victim" of circumstances.

But that's another story...
TMF Taxes
Roy

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Author: TMFTaxes Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 533 of 121114
Subject: Re: Traditional IRA vs Roth IRA Date: 10/20/1997 11:45 AM
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<<The Roth IRA beats out the regular IRA if you are above the deductible IRA AGI limit though, right? Or am I missing something?>>

Nope, Hax, you're not missin' a thing. If your only options are:

1. Non-deductible IRA contribution; or
2. Roth IRA

it is virtually certain that you'll elect the Roth IRA.

The problems arise when you look at the current deduction (regular IRA) vs. the future tax free issues (Roth IRA) and attempt to compare and contrast. But when your options are limited, based upon your question, the answer is much easier to get to.

TMF Taxes
Roy

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Author: TMFTaxes Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 534 of 121114
Subject: Re: Traditional IRA vs Roth IRA Date: 10/20/1997 11:48 AM
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<<I guess to sum it up, everyone's mileage will vary according to their circumstances and take every statement with a grain of salt. Do your own analysis and make your own judgements. The only person responsible for what happens to you is yourself.>>

BINGO!!!!
This is a statement that I'll agree with EACH AND EVERY time.

TMF Taxes
Roy

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Author: ckelly7279 One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 539 of 121114
Subject: Re: Traditional IRA vs Roth IRA Date: 10/20/1997 2:06 PM
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<<I came up with different numbers than you did. In fact, my numbers indicate that the Roth IRA is always better than a deductible IRA (as long as your tax rate remains the same).>>

You came up with the numbers I was too lazy to calculate.
I said that if you can pony up the full $2,000 for the Roth IRA, you would be better off than putting $2,000 in a traditional IRA and investing the $660 difference. Your numbers support that statement (even assuming the taxable account didn't pay cap. gain taxes until the end). (Note: I think you used 9 and 19 vs 10 and 20 but you were consistent).

My point was that if someone only had $1,000 (after-tax) to put into a Roth-IRA. The result would be identical to putting $1,500 (before taxes) in an IRA. The jist of my complaint was that some writers don't explain this, and I question whether they took the time to understand it themselves (which I believe they didn't) or if they omit a complete discussion of it because it would too difficult for "us" to understand. The author of the article I referenced in MF MAG (Nov.97) did a great job in about two pages.



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Author: Hax Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 544 of 121114
Subject: Re: Traditional IRA vs Roth IRA Date: 10/21/1997 4:35 PM
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<<Nope, Hax, you're not missin' a thing. If your only options are:

1. Non-deductible IRA contribution; or
2. Roth IRA

it is virtually certain that you'll elect the Roth IRA.>>

Thanks for the advice! That's what I thought; it looks like my choices are either (a) pay taxes now & later for the regular IRA; (b) just pay taxes now on the Roth IRA. Pretty easy choice. :)

That said, going through all of the tax laws are pretty overwhelming for me... I'm a Canadian (obligatory 'eh' inserted here) who recently moved down to the states. Do you have any advice as to where I should go to get information about the implications of investments in various retirement savings plans (IRA, 401k, ...), as well as non-retirement investment portfolios such as DRIPs?

Thanks again for the help; the message boards are truly an invaluable resource to me.

Foolin' in the bayou,

-Hax

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Author: TMFTaxes Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 548 of 121114
Subject: Re: Traditional IRA vs Roth IRA Date: 10/22/1997 12:27 PM
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<<That said, going through all of the tax laws are pretty overwhelming for me... I'm a Canadian (obligatory 'eh' inserted here) who recently moved down to the states. Do you have any advice as to where I should go to get information about the implications of investments in various retirement savings plans (IRA, 401k, ...), as well as non-retirement investment portfolios such as DRIPs?>>

Hey, Hax...the laws are pretty overwhelming to us citizens also. So don't feel like the Lone Ranger.

As far as the information that you are looking for, I'm not clear if you are looking for investment information or tax information. If it is the tax issues you are talking about, probably your cheapest source of information would be the IRS Publications. You can find our more about IRAs in IRS Pub 590. Simplified Employee Pension Plans are discussed in Pubs 535 and also 590. Self employed retirement plans are discussed in Pub 560. You can get these publications by calling IRS at 1-800-TAX FORM, or you can point your web browser to: http://www.irs.ustreas.gov

But if you want a better, more concise overview of these issues from a tax standpoint, I believe that your local bookstore (or Amazon.com, your local cyber-bookstore) would be a better place to begin. It'll cost you a few dollars, but you'll get much better information and potential tax techniques.

If you have any other specific questions, please post 'em here.

TMF Taxes
Roy

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