UnThreaded | Threaded | Whole Thread (24) | Ignore Thread Prev Thread | Next Thread
Author: marktyme Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 76080  
Subject: Roth or regular IRA Date: 3/30/1999 11:25 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
I am in the 15-18% tax bracket with no dependents and unable to participate in a 401k due to being a state employee. Which IRA would make more sense for me at this stage?
Print the post Back To Top
Author: TMFPixy Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 9586 of 76080
Subject: Re: Roth or regular IRA Date: 3/31/1999 9:25 AM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
Greetings, Marktyme, and welcome. You asked:

<<I am in the 15-18% tax bracket with no dependents and unable to participate in a 401k due to being a state employee. Which IRA would make more sense for me at this stage?>>

It depends on how you invest that money and the tax impacts of doing so. If you must use a nondeductible IRA, then a Roth IRA will be better; however, if you still fall within deductible limits, you need to run some numbers for yourself. For some of the things you should consider, see my analysis at http://www.fool.com/Money/AllAboutIRAs/AllAboutIRAsRothConsiderations.htm .

Regards..Pixy


Print the post Back To Top
Author: tonyw44 Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 9589 of 76080
Subject: Re: Roth or regular IRA Date: 3/31/1999 12:11 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
Well, in that tax bracket, it's likely that you can deduct your IRA contributions, so I'd go with the regular IRA for a while. Then, when you start making more money, convert that to a Roth.

That way, you get tax deductions now, and will convert it later when you make more money.

Print the post Back To Top
Author: Wavelength One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 9591 of 76080
Subject: Re: Roth or regular IRA Date: 3/31/1999 1:55 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
Well, in that tax bracket, it's likely that you can deduct your IRA contributions, so I'd go with the regular IRA for a while. Then, when you start making more money, convert that to a Roth.
That way, you get tax deductions now, and will convert it later when you make more money.


Funny, but I would give exactly the opposite advice, for the same reasons! The biggest case for the Roth can be made if you expect to be in a higher tax bracket in retirement than you are in currently. You pay lower taxes now (and end up with a higher total net investment) than you would if you withdraw a regular IRA in the future. The same goes for conversion. Why use the deduction now, which saves you only 15%, only to pay more taxes (on the contribution and its earnings) when you convert in the future and are in a higher tax bracket?

BTW, if you're going to put $2000.00 in a retirement account, and this will be your only investment money put away, then I still think it's a no brainer to invest in a Roth. In ALL situations. You'll have exactly the same account balance as a regular IRA when you're ready to retire, only it will all be tax free. The Traditional IRA should only be an option (when the only consideration is maximizing your net withdrawal amount at retirement) if you will be investing the tax savings - in a separate taxable account - you receive as a result of the deduction. If this is true, then there are some senarios where the Traditional IRA will result in a higher net withdrawal amount.

Wavelength

Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Print the post Back To Top
Author: tonyw44 Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 9592 of 76080
Subject: Re: Roth or regular IRA Date: 3/31/1999 3:08 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
Well, think about it for a second. If you're in the 18 percent tax bracket, you need to come up with $2360 to put into a Roth IRA because you won't get the benefit of the tax deduction. That extra $360 is a real chunk of change for those in that tax bracket. So, if you do just $2000 and it's tax deductible, you're really only having to pony up $1640.

You're not going to have the tax deduction forever, because you will experience salary growth. So take the deduction now, while you can, and save money now. Then convert it later, when you can no longer enjoy the tax deduction.

Print the post Back To Top
Author: Encoly One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 9593 of 76080
Subject: Re: Roth or regular IRA Date: 3/31/1999 3:17 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
Well, think about it for a second. If you're in the 18 percent tax bracket, you need to come up with $2360 to put into a Roth IRA because you won't get the benefit of the tax deduction. That extra $360 is a real chunk of change for those in that tax bracket. So, if you do just $2000 and it's tax deductible, you're really only having to pony up $1640.

Huh? Either way you have to come up with $2000. With a traditional, you get the $360 back when you file. That said, I agree with Wavelength - go with the Roth while your tax bracket is low, as it is only going to get higher.

Encoly

Print the post Back To Top
Author: WilliamLipp Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 9601 of 76080
Subject: Re: Roth or regular IRA Date: 4/1/1999 12:21 AM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
tonyw44 Date: 3/31/99 3:08 PM Number: 9592
Well, think about it for a second. If you're in the 18 percent tax bracket, you need to come up with $2360 to put into a Roth IRA because you won't get the benefit of the tax deduction.

He would have to earn $2439 before taxes, and pay 18% of that in taxes to have $2000 to deposit in the Roth IRA.

So, if you do just $2000 and it's tax deductible, you're really only having to pony up $1640.

To keep the comparison on an even basis, you would have to earn $2000 before taxes to make this deposit.

That extra $360 is a real chunk of change for those in that tax bracket.

It's patronizing to assume someone can afford the first $2000 but not the next $439 based solely on their income. Individual circumstances vary greatly.

Let's suppose you are correct, and he can only afford $2000 of pre-tax income, and pick a scenario. Your plan is to invest it a few years, then convert it to a Roth IRA at a high tax rate. Say 5 years? Say 28%? What return on the investment - say 15%?

Deductible IRA, then Roth
$2000 * 1.15^5 * 0.72 = $2896 in Roth IRA

Straight Roth:

$2000 * 0.82 * 1.15^5 = $3299 in Roth IRA

Expressed like this, it's clear the only difference comes from the two tax factors, which then leads to the insight that as long as the limits aren't different it's best to go to Roth immediately so the contributions are taxed at the lower rate.

If he can afford to invest $2439 pretax dollars, the comparison is harder because the deductible IRA must invest the $439 in a taxable account. The taxable account could be used to pay the conversion tases, though. Let's assume the same 15% returns, all growth realized annually as long term capital gains and taxed at 10%. Each year $1 would grow to $1.15, then the 15 cents would be taxed 1.5 cents, leaving 1.135, so the after tax growth rate is 13.5%. So the deductible IRA then Roth has in a taxable account
$439*0.82*1.135^5=$678.

Before conversion, the traditional IRA has
$2000*1.15^5=$4023.
The conversion tax is 28% of this, or $1126.
So the Roth IRA will have 4023-1126+678=$3575

The straight, immediate Roth IRA will have
2439*.82*1.15^5=$4023

A careful study of the algebra (I hope I finally got this right - I changed many numbers as I proof-read this) shows the difference is that the taxable account grows more slowly and is taxed at a higher rate.

Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Print the post Back To Top
Author: Rayvt Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 9666 of 76080
Subject: Re: Roth or regular IRA Date: 4/4/1999 12:24 AM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
<<Well, in that tax bracket, it's likely that you can deduct your IRA contributions, so I'd go with the regular IRA for a while.>>

Maybe, maybe not. Probably not.
The point has been made (www.ricedelman.com and www.fairmark.com) that a Roth is *bigger* than a regular IRA.

When you put $2000 in a regular, it's $2000.

When you put $2000 in a Roth, it's equivalent to putting in $2777 (28% bracket) or $2353 (15% bracket).

In both cases, you have $2000 to invest. But when you withdraw the money, some (28%) of the withdrawal from the ordinary IRA gets siphoned off to taxes, but none of the ROTH withdrawal does.

In effect, you can put a larger amount of money into a ROTH than a regular IRA.

Ray

Print the post Back To Top
Author: tonyw44 Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 9691 of 76080
Subject: Re: Roth or regular IRA Date: 4/4/1999 6:15 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
You guys don't get it, do you? You get the tax deduction NOW. Take advantage of it while you can. Then, when you make too much money to take the tax deduction, convert the regular IRA to a Roth IRA. In that way, you get the best of both worlds. You get to reduce your taxes NOW, and then you convert to a Roth when you're making too much to deduct it. You will pay taxes on it then, but then you have the benefit of tax free withdrawals later.

In short, for a little pain in the middle, you get a benefit in the beginning, and a benefit at the end.

Print the post Back To Top
Author: WilliamLipp Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 9699 of 76080
Subject: Re: Roth or regular IRA Date: 4/4/1999 11:38 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
tonyw44 Date: 4/4/99 6:15 PM Number: 9691
You guys don't get it, do you? You get the tax deduction NOW. Take advantage of it while you can. Then, when you make too much money to take the tax deduction, convert the regular IRA to a Roth IRA. In that way, you get the best of both worlds.

I found your arguemnt interesting. But when I tried numbers, it became clear it was wrong.

Suppose you start with $2000 of pre-tax money, suppose you can grow it at 20% per year for five years. Suppose you tax rate is now15% and in five years it will be 28%.

You'll take the tax deduction now, convert in 5 years, and have

$2000*1.2*1.2*1.2*1.2*1.2*(1-.28) = $3583 in your Roth.

I will pay the tax now. In five years I will have

$2000*(1-.15)*1.2*1.2*1.2*1.2*1.2 = $4230 in my Roth.

These examples are an honest comparison; we seed a pot with $2000 and we pay all taxes out of the pot. The best "sound bite rationale" I have found is that you took a 15% tax deduction now, while I took a 28% tax deduction at the future conversion.

If you still don't agree that the Roth is the way to go, please compose a numerical example that demonstrates your case.

Print the post Back To Top
Author: tonyw44 Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 9708 of 76080
Subject: Re: Roth or regular IRA Date: 4/5/1999 11:16 AM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
You forgot one huge thing. You're assuming that I'm taking money out of the Roth to pay for the taxes. I'm not. I'm paying those taxes with my own regular money. So, for five years, I get the tax benefit of $300. Let's say I put that into a mutual fund that gets me 15 percent a year. That's worth $2,022.

Now, at conversion time, assuming that I'm in the 28 percent bracket and I'm getting 15 percent a year, I have to pay taxes on $13,484. That's $3,775, but that's five years down the road. So that's a difference of $1,752.

Now, bear with me here. What is the current value of $1,752 five years from now? Well, assuming that we have a five percent inflation rate, that's $1,373.

So, essentially, you're giving up $1,373 five years from now for what could turn out to be $2,022. Okay, to be fair, let's discount that as well. It's $1,584.

That's enough math for today. My brain is spinning.

Print the post Back To Top
Author: WilliamLipp Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 9709 of 76080
Subject: Re: Roth or regular IRA Date: 4/5/1999 12:57 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
tonyw44 Date: 4/5/99 11:16 AM Number: 9708
You forgot one huge thing. You're assuming that I'm taking money out of the Roth to pay for the taxes. I'm not.

No, I didn't forget it. I left it out because it complicates the analysis and does not change the results. But don't take my word for. Here are the numbers with external money used to pay for the Roth conversion.

To make this comparison we need to create a "black box" that has identical inputs but different internal strategies. In addition to the previous assumptions, we will assume the addition of sufficient pre-tax dollars at the end year five. So the assumptions are:

15% tax rate now
28% tax rate in 5 years.
Growth at 20% in the retirement accounts
$2000 pre-tax dollars available now
$1935 pre-tax dollars availabe in year 5.

Inside your black you do this:
Put the $2000 in a traditional deductible IRA
Grow for 5 years to $4977
Convert, with income of $4977+1935=$6912
Pay 28% income tax on $6912=1935
Final result: Roth IRA with $4977.

Inside my black box I do this:
Pay 15% tax = $300 on $2000
Start a Roth IRA with $1700
Grow at 20% per year to $4230
Pay 28% tax on the $1935 = $542.
Deposit the remaining $1393 in my Roth IRA
Final result: Roth IRA with $5623



Print the post Back To Top
Author: tonyw44 Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 9717 of 76080
Subject: Re: Roth or regular IRA Date: 4/5/1999 9:39 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
You didn't put the full $2000 in every year, and you didn't calculate tax savings over the first five years. Anyway, I believe that you should defer taxes wherever possible. Hopefully, you will make too much to take the deduction in a few years, so it won't matter as much. And, our analysis is flawed. You can deduct the IRA for a while when you're in the 28 percent bracket. Now we have to figure that out as well.



Print the post Back To Top
Author: WilliamLipp Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 9723 of 76080
Subject: Re: Roth or regular IRA Date: 4/5/1999 10:59 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
tonyw44 Date: 4/5/99 9:39 PM Number: 9717
You didn't put the full $2000 in every year, and you didn't calculate tax savings over the first five years. Anyway, I believe that you should defer taxes wherever possible. Hopefully, you will make too much to take the deduction in a few years, so it won't matter as much. And, our analysis is flawed. You can deduct the IRA for a while when you're in the 28 percent bracket. Now we have to figure that out as well.

Tony:

I'm doing all the work here. I've worked out the complete details of three scenarios. I can see how it goes together to ALWAYS favor the Roth unless you are going to be in a lower tax bracket in a future year.

None of these additional details matter. They are just combinations of the scenarios that we have already analyzed. And I haven't yet pointed out the worst flaw with your analysis - inside your Black Box, you have maximized your IRA contribution. Inside my Black Box I have outperformed your IRA with the same inputs, and I have not maximized my contributions. If I can afford it, I can put away even more money on top of outperforming you.

It's not good enough to sling words anymore. I've provided complete numerical proof that you are wrong for three scenarios that you suggested. I given a tutorial on how to do comprehensive comparisons. If you don't see it yet, it's your turn to crunch some numbers.

Anyway, I believe that you should defer taxes wherever possible

Here is our fundamental difference. I believe you should defer taxes when it will make you wealthier to defer taxes. In those rare circumstances where paying taxes early makes you wealthier, I believe in paying taxes earlier. This is one of those rare situations.

Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Print the post Back To Top
Author: Rayvt Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 9726 of 76080
Subject: Re: Roth or regular IRA Date: 4/5/1999 11:48 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
<<Inside my black box I do this:
Pay 15% tax = $300 on $2000
Start a Roth IRA with $1700
Grow at 20% per year to $4230
Pay 28% tax on the $1935 = $542.
Deposit the remaining $1393 in my Roth IRA
Final result: Roth IRA with $5623>>

Ah, yes. But you forgot one teensy-weensy little tidbit.

The part where Dick Gephart is elected President and vows to tax all those "people who have won life's lottery" of their unfair tax-free gains. After all, it's not fair that a millionaire gets to withdraw money and not pay taxes while Betty the Waitress at the all-night diner has to pay taxes on her paycheck, is it?



Print the post Back To Top
Author: WilliamLipp Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 9727 of 76080
Subject: Re: Roth or regular IRA Date: 4/6/1999 12:19 AM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
Rayvt Date: 4/5/99 11:48 PM Number: 9726
The part where Dick Gephart is elected President and vows to tax all those "people who have won life's lottery" of their unfair tax-free gains. After all, it's not fair that a millionaire gets to withdraw money and not pay taxes while Betty the Waitress at the all-night diner has to pay taxes on her paycheck, is it?

I think the instability of our tax code is a serious issue when considering a Roth conversion. But unless Gephardt is going for a 110% tax, I don't think it matters on this thread. Both the Roth and the traditional IRA will be paying out retirement funds that have not been taxed. I think the worst case scenario is that they get taxed identically, and you are still better off to pick the method that maximizes the amount in the retirement fund.

Print the post Back To Top
Author: mcadoo11 One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 9729 of 76080
Subject: Re: Roth or regular IRA Date: 4/6/1999 12:35 AM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
Rayvt wrote:
Ah, yes. But you forgot one teensy-weensy little tidbit.

The part where Dick Gephart is elected President and vows to tax all those "people who have won life's lottery" of their unfair tax-free gains. After all, it's not fair that a millionaire gets to withdraw money and not pay taxes while Betty the Waitress at the all-night diner has to pay taxes on her paycheck, is it?


Ray,

You have always been a great help to me on all of the boards -- particularly the Workshop board. However, like James Glassman (who writes a killer business column in the Washington Post but whose Op-Ed's are often lacking or ill-informed, particularly when he tries to write about health care and clearly is just carrying the insurance industry's water), I would urge you to stick with what you know best -- good stock advice and methods.

Dick Gephardt is NOT running for President...
REPEAT...Dick Gephardt is NOT running for President.

Also, remember that Betty the waitress cheats on her taxes and never reports all of her tips. Yet, since we like her service, we would never audit her.

mcadoo11

Print the post Back To Top
Author: WilliamLipp Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 9730 of 76080
Subject: Re: Roth or regular IRA Date: 4/6/1999 12:47 AM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
mcadoo11 Date: 4/6/99 12:35 AM Number: 9729
Dick Gephardt is NOT running for President...
REPEAT...Dick Gephardt is NOT running for President.


I hope to see many more presidential elections before I exhaust my retirement accounts. Which ones is D.G. not running in?

Print the post Back To Top
Author: tonyw44 Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 9733 of 76080
Subject: Re: Roth or regular IRA Date: 4/6/1999 10:23 AM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
Yup. I'll take the money now, because I have no idea what's going to happen in the future. And, we assumed that you'd be sitting at the 15 percent bracket. How stupid of both of us. You can fully deduct an IRA in a large part of the 28 percent bracket. Then, the value of the deduction jumps from $300 a year to $560.

I always take money now versus more money in the future.

Print the post Back To Top
Author: markr33 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 10450 of 76080
Subject: Re: Roth or regular IRA Date: 5/10/1999 2:59 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
Yup. I'll take the money now, because I have no idea what's going to happen in the future. And, we
assumed that you'd be sitting at the 15 percent bracket. How stupid of both of us. You can fully deduct an
IRA in a large part of the 28 percent bracket. Then, the value of the deduction jumps from $300 a year to
$560.


Can most people [fully] deduct their IRA contribution while in the 28%
bracket ? AGI also goes up !!!

Print the post Back To Top
Author: tonyw44 Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 10451 of 76080
Subject: Re: Roth or regular IRA Date: 5/10/1999 4:43 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
You can deduct your IRA with an AGI of up to, I believe, 30K. That's definitely in the 28 percent bracket.

Print the post Back To Top
Author: markr33 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 10489 of 76080
Subject: Re: Roth or regular IRA Date: 5/11/1999 2:40 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
You can deduct your IRA with an AGI of up to, I believe, 30K. That's definitely in the 28 percent
bracket.


How can you say that with such certainty ? Your tax bracket is mostly
related to your taxable income, NOT your AGI !!!

Print the post Back To Top
Author: tonyw44 Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 10502 of 76080
Subject: Re: Roth or regular IRA Date: 5/12/1999 9:35 AM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
Excuse me, what? Your taxes are related to your income, not your AGI? I'll be sure to tell that to the IRS the next time. Hey, I need to pay more taxes because I had deductions that reduced my AGI. Go and look at a tax table. It says, if your AGI (found in line X) is a certain amount, you pay a certain amount.

Print the post Back To Top
Author: intercst Big funky green star, 20000 posts Top Favorite Fools Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 10504 of 76080
Subject: Re: Roth or regular IRA Date: 5/12/1999 9:51 AM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
tonyw44 wrote,

Excuse me, what? Your taxes are related to your income, not your AGI? I'll be sure to tell that
to the IRS the next time. Hey, I need to pay more taxes because I had deductions that reduced
my AGI. Go and look at a tax table. It says, if your AGI (found in line X) is a certain amount,
you pay a certain amount.


Actually, you don't pay taxes on your AGI. You pay them on your "taxable income."

If you look at IRS Form 1040, adjusted gross income (AGI) is on line 33. Lines 36, deductions and line 38, exemptions are subtracted from AGI to get you to Line 39, taxable income. You enter the tax tables to find what you owe using the "taxable income" figure.

intercst



Print the post Back To Top
UnThreaded | Threaded | Whole Thread (24) | Ignore Thread Prev Thread | Next Thread
Advertisement