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I am over 59 1/2 and I have a Roth that has been open and funded for over 5 years. My income level allows me to contribute the full $6K per year. It seems to me that I should be maxing out my Roth contribution each year as every penny I make on Roth investments is tax free, correct? And there is also no limit on how much I can withdraw or when I withdraw. So, for example, I could have a dividend paying investment in my Roth that pays me quarterly, tax free, and I can withdraw those dividends for my use, also with no tax consequences or penalties. Am I correct?
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I should be maxing out my Roth contribution each year as every penny I make on Roth investments is tax free, correct? And there is also no limit on how much I can withdraw or when I withdraw. So, for example, I could have a dividend paying investment in my Roth that pays me quarterly, tax free, and I can withdraw those dividends for my use, also with no tax consequences or penalties. Am I correct?



interesting idea .. i think you're exactly right (but i'm no tax expert)
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Yes. In fact, in 2010, I converted all the stock (not cash) in my SEP-IRA to my Roth for just that reason. Most of the stocks in my IRA were income-producing stocks and I wanted to be able to withdraw the dividends tax-free if needed.

Donna
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I tend to disagree

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.

I have read several different studies on Roths and all of them say a few things.

#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.)

#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.

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

#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.)

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. I mention this as a counter point -- there are people who say mortgages are a good idea because you can deduct interest expense. 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?

Gordon
Atlanta
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All your points are well taken, but the thing that struck me is that at my age, I have a choice of investing through a standard brokerage account (depositing post-tax money and paying taxes on all gains) or I can put that same money (up to 6K per year) in a Roth and pay no taxes on future gains. In both accounts, I have no limitations on withdrawals. I just realized these facts a month ago and am glad I did before April 15 so that I was able to get my 2011 contribution made. Before I realized this, I was wary of putting too much in "retirement" accounts because of the mistaken idea that I would be penalized for withdrawals prior to "retirement". But the trigger for no-penalty withdrawals is 59 1/2 and 5 years of having a Roth, not "retirement". It was a revelation for me.
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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.

Another note - We/I never converted trad IRAs to Roths because I felt taxes were as high as they were going to get. What I failed to consider but also should play into conversion decisions is that eventually a couple will end up being one and tax rates will also be different - in my case somewhat controllable until 70.5 and lower.

The Roth conversion push was pretty strong over the past few years and there was rarely a counterpoint - TwoCybers, it was good you provided one.
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>> 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.

#29
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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.

Which is why is it rare anyone says any negative about Roths. I do wish for the days of TMF where it was more about teaching people how to fish than feeding them.
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One huge advantage of the Roth is that it does not count in the calculations of how much of your social security will be taxed.

For example if you are in the 25% tax bracket then you could put $133 into a deductable IRA or $100 into a Roth(and pay $33 in taxes) while you are working.

Years later when you are retired and the money has grown ten times then if you are in the same 25% tax bracket you could take $1,333 out of the IRA and pay $333 in taxes to net $1,000 or if you had used the Roth then you could just withdraw the $1,000 tax free.

That sounds like it is the same either way but if you are at the income level where every dollar of income causes an additional $0.50 or $0.85 of your social security to be taxes then that $1,333 in taxable IRA income could also cause an additional $666(1333*.5) to $1133 (133*.85) of your social security to be taxed. In the 25% tax bracket that would cost you an additional $166 to $283 in taxes so in the $1,333 taxable IRA withdraw you would only net $834 (1333-333-166) to $717 (1333-333-283) compared to the $1,000 you would get from the Roth.

For details on how social security is taxed see;
http://www.bogleheads.org/wiki/Taxation_of_Social_Security_b...

This often is not as bad as it sounds since these taxes will only affect people with more than a certain amount of taxable income and after a you get above a certain amount then the maximum amount of social security is already be taxes so any additional income will not add more taxes on your social security.

Personally when I get close to retiring I will running the numbers to see just how much taxable income I can have without paying taxes on the social security and then I will try to adjust my portfolio to minimize the additional taxes on the social security.

Greg
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I think this all depends on tax rates. Many are surprised to their tax rate increases in retirement between Social Security, pensions, investment income, and eventually mandatory distributions.

If you are working and in a low tax bracket, Roth usually makes a decent investment. If you have a low income period (one or more tax years) partial Roth conversion to soak up all of your lowest tax brackets makes a lot of sense.

But to make Roth conversion on a large account that incurs a sizable tax bill at upper bracket rates is not worth it. I'd rather wait and pay later--waiting for something better to come along.
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I think this all depends on tax rates. Many are surprised to their tax rate increases in retirement between Social Security, pensions, investment income, and eventually mandatory distributions.


i was surprised how much my taxes dropped ..


But to make Roth conversion on a large account that incurs a sizable tax bill at upper bracket rates is not worth it. I'd rather wait and pay later--waiting for something better to come along.


maybe part of the 'confusion' in this thread:
large conversion v
small conversion v
contributions (before and after age 59.5?)

OP is talking about the third




[ i've been doing small conversions trying to keep the taxes low in order to (1) minimize RMD and (2) leave more tax-free stuff to heirs
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I do wish for the days of TMF where it was more about teaching people how to fish than feeding them.



not much profit in teaching it would seem
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No other value? Here's a hint that has a LOT of value for some: no RMDs.


hard to believe (for those of us looking at RMD less that what we'll need for expenses ) but true --

as mentioned, IRA withdrawals increase the tax on SS (so RMDs kind of get taxed twice) and if big enough increase Medicare premiums..
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>> I do wish for the days of TMF where it was more about teaching people how to fish than feeding them. <<

No question about it. The business model of TMF has largely become what it debunked as "The Wise" in its first few years. It went from "here's the information you need to do it yourself" to "here's the stuff we want to sell you because you can't do it without us."

#29
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#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.)


but withdrawals from inherited IRA are taxed as income .

#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.


true if you're talking about converting largish IRA/401k .. maybe not if you're talking about small contributions
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No question about it. The business model of TMF has largely become what it debunked as "The Wise" in its first few years. It went from "here's the information you need to do it yourself" to "here's the stuff we want to sell you because you can't do it without us."



because there's little if any revenue from the former ..

BUT there are still a lot of posters working from that old model
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as mentioned, IRA withdrawals increase the tax on SS (so RMDs kind of get taxed twice) and if big enough increase Medicare premiums..

Not there yet but for some SS is only a component of income so it's tax on income not just SS, right ?

Other comment on Roth/Trad/RMDs/etc -

I will start looking at RMD possibilities in 2 years when I hit 59.5 and will plan accordingly but I will also keep in mind the advantages of inheritance of a taxable brokerage account as they are then. Right now, there's no requirement to do anything at any age and a stepup basis on it(at least I think that is true at the moment).

All of this does presume having more than enough for a lifetime but it IS hard to predict death date.
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0x6a74:

<<<#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.)>>>

"but withdrawals from inherited IRA are taxed as income."

I do not believe that this statement is necessarily true with respect to Roth IRAs.

From Wikipedia:

"For income tax purposes, distributions from Roth IRAs to beneficiaries are not taxable if the Roth IRA was established for at least five years before the distribution occurs." citing IRS Publication 590 (2010), "What is a Qualified Distribution"

http://en.wikipedia.org/wiki/Roth_IRA

It is generally a true statement for traditional IRAs but only to the extent that there was no basis in the traditional IRA.

Regards, JAFO
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"but withdrawals from inherited IRA are taxed as income."

I do not believe that this statement is necessarily true with respect to Roth IRAs.




not at all true for Roth ..sloppy on my part


"but withdrawals from inherited traditional IRA are taxed as income."
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as mentioned, IRA withdrawals increase the tax on SS (so RMDs kind of get taxed twice) and if big enough increase Medicare premiums..

Not there yet but for some SS is only a component of income so it's tax on income not just SS, right ?


??

distributions from trad.IRA or 401k (or similar) are ordinary income;
add that to taxable dividends, interest and pensions
add that to capital gains (i think)

and that total goes into a bizarre formula* such that if it's small enough, no tax on SS, if big enough, 85% of SS is taxable.


zat make sense?



form 1040, line 20 Worksheet
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I do wish for the days of TMF where it was more about teaching people how to fish than feeding them.

not much profit in teaching it would seem

oh, are you a teacher too?

culcha
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No question about it. The business model of TMF has largely become what it debunked as "The Wise" in its first few years. It went from "here's the information you need to do it yourself" to "here's the stuff we want to sell you because you can't do it without us."


because there's little if any revenue from the former ..

BUT there are still a lot of posters working from that old model



And we posters are like loss leaders for The Motley Wise.


culcha
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And we posters are like loss leaders for The Motley Wise.


I guess it could look that way

but that I think most long-time
posters, if asked which Newsletter
to buy, would answer: "Run. Run!"



( not a teacher, but worked as one
for several years )
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No question about it. The business model of TMF has largely become what it debunked as "The Wise" in its first few years. It went from "here's the information you need to do it yourself" to "here's the stuff we want to sell you because you can't do it without us."

I got an email from TMF today saying they discovered a black box that gives you a "71.962% chance at DOUBLING" the stock market return. That's three decimile places worth of accuracy. It sent onto say that those were the best investing odds in the entire universe! In your face investors on Alpha Centari!
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IRA withdrawals increase the tax on SS

Let's get real here.
For MFJ, SS is not taxed if your taxable income is below $32,000
Between $32K & $44K it's taxed 50%.
Above $44K it's taxed 85%.

Unless you retire dirt-poor, your SS is going to be taxed at 85%.

Do you *really* want to have such a low income? And, heck, if you have to get a job as Walmart greeter, you're going to be pushed over the threshold.
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Let's get real here.
For MFJ, SS is not taxed if your taxable income is below $32,000
Between $32K & $44K it's taxed 50%.
Above $44K it's taxed 85%.

Unless you retire dirt-poor, your SS is going to be taxed at 85%.
jj



dunno, I've been living on SS for seven
years and don't feel dirt poor

last yr the first where SS taxed a
lot ..but I am single --maybe that's
the diff
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Rayvt writes,

Let's get real here.
For MFJ, SS is not taxed if your taxable income is below $32,000
Between $32K & $44K it's taxed 50%.
Above $44K it's taxed 85%.

Unless you retire dirt-poor, your SS is going to be taxed at 85%.

</snip>


Most people do. The median family income for 65-year-olds and up is $46,000/yr. The median for singles is $19,000.

See page 10 of this report.
http://www.aoa.gov/aoaroot/aging_statistics/Profile/2011/doc...

intercst
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....IRA withdrawals increase the tax on SS

Let's get real here.
For MFJ, SS is not taxed if your taxable income is below $32,000
Between $32K & $44K it's taxed 50%.
Above $44K it's taxed 85%.

Unless you retire dirt-poor, your SS is going to be taxed at 85%.

Do you *really* want to have such a low income? And, heck, if you have to get a job as Walmart greeter, you're going to be pushed over the threshold.


....


At $32K of taxable income for a couple that would be;

$32,000 taxable income
14,200 standard deduction for over 65
7,600 personal exemptions
36,200 (ballpark social security)
5,000 spending down assets (like stock sales)
-----------
95,000 Total

Combined with a having a paid off house by then, no more retirement savings, no more social security and medicare taxes, no more kids or college expenses and being in a much lower tax bracket, that would likely provide a better lifestyle than someone in their 40's that makes $200,000 and still has to pay for all the other things.

I wanna be "dirt poor" like that when I retire !!!!!! : )


Greg
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>>
Let's get real here.
For MFJ, SS is not taxed if your taxable income is below $32,000
Between $32K & $44K it's taxed 50%.
Above $44K it's taxed 85%.

Unless you retire dirt-poor, your SS is going to be taxed at 85%.

Do you *really* want to have such a low income?
<<

My 76-year-old mom is right around $44K a year. She lacks for nothing, has a paid off home, chooses to live simply and frugally, and has no problem at all living on that.

And that incomer includes over $10,000 in RMDs that she merely pulls out of an IRA and into a taxable account, never touching it.

Depending on how your life is configured and what your debts and expenses are, $44K isn't necessarily a "low income" lifestyle.

#29
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Wow! I guess my idea of the "dirt-poor" threshold is quite different from a lot of people's.

It doesn't make sense to me to intentionally keep your income low in order to keep your SS from being taxed. And I'm aware of how little income you need if your only significant expenses are food, property tax, gas, and utilities.

The amount of tax you can save isn't really all that much, either.
Avg SS benefit is $1230/mo. 85% of that is $1045. In the 15% bracket the tax is $156/mo. In comparison, my average electric bill (including electric heat) is $280/mo. Also in comparison, our average water/sewer/garbage bill is $160 every 2 months.

Granted, $156 is not pocket-change, but if you have an income of $75K (as do 25.9% of 65+ households) or $95K, it's a roundoff error.

And you know what? With a 75K-95K income, you don't HAVE to live frugally. You can, if you so choose, spend $20,000 for a 38 day cruise from Singapore to Athens. Which you cannot really do on a 46K income.
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It doesn't make sense to me to intentionally keep your income low in order to keep your SS from being taxed. And I'm aware of how little income you need if your only significant expenses are food, property tax, gas, and utilities.


mostly agree, but it depends on the effort --

OP is talking about saving into a Roth rather than Taxable (or trad.IRA?) to save on taxes --close to zero effort

i was talking about converting *some* t.IRA to Roth to minimize RMDs (emphasis on the 'R' -- if you end up taking distributions to pay expenses, no gain) --some effort, maybe not worth it

[
In comparison, my average electric bill (including electric heat) is $280/mo. Also in comparison, our average water/sewer/garbage bill is $160 every 2 months.

just curious --where do you live? those bills are close to double mine and i live in SF BAy area that's supposedly super expensive
]


And you know what? With a 75K-95K income, you don't HAVE to live frugally. You can, if you so choose,

doesn't take much frugal to live on 35K .. but since i don't choose to take a cruise, not doing it doesn't seem 'frugal'
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Depending on how your life is configured and what your debts and expenses are, $44K isn't necessarily a "low income" lifestyle.

Shoot, I work Full time in LE and make less than 44K in a year. Been in this career for 14 years. If I could FIRE on 44K, I'd feel rich. :-)
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And you know what? With a 75K-95K income, you don't HAVE to live frugally. You can, if you so choose,

doesn't take much frugal to live on 35K .. but since i don't choose to take a cruise, not doing it doesn't seem 'frugal'


If there's a contest to see who can live the cheapest in retirement(or otherwise), I definitely want to be the biggest loser. I can't take it with me and my kids expect to be left nothing except good memories.
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