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Author: OneLostFool Two stars, 250 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 75381  
Subject: Roth VS Traditional Date: 7/8/2004 3:28 AM
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I'm planning on re-starting my contributions to an IRA this year. I missed the deadline for my company's 401K, so this seems the best route for me for now.

I'm curious, though, about which type to open. At my age and income, I think most financial advisors would recommend a Roth, since I'm still (relatively) young and my income will be more in the future than at present. However, a former IRS employee and friend of the family made a comment that I keep dwelling on. She said that she always recommends that people go for the Traditional, because it will be some time before I can retire, and by then the tax laws may have changed. (She cites the fact that CC interest used to be tax deductible as well-plus other examples I can't remember right now, and that the urge to tax any and every income seems to be on the rise.) She thinks it's always better to take the tax break you know you will get right now over the one you may get in the future. This is somewhat like the risk you take whenever you invest anywhere, but I must admit she has a point.

I'm curious what the Fools think. Any comments?
OLF
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Author: pekinrobin Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 41507 of 75381
Subject: Re: Roth VS Traditional Date: 7/8/2004 9:09 AM
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I agree with your tax advisor. The tax break you get today is better than the tax break you may, or may not, receive on some distant day years or decades in future.

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Author: agg97 Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 41508 of 75381
Subject: Re: Roth VS Traditional Date: 7/8/2004 10:03 AM
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I'm curious what the Fools think. Any comments?

As a general rule, I base my decisions on what the current law allows instead of what the law might say in the future.

There's been a few discussions in the past regarding this, and the general consensus is that once the money is in a Roth, it will be grandfathered in regardless of future tax law changes.

FWIW, I fund my Roth instead of a traditional IRA.

-Agg97

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Author: yobria Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 41509 of 75381
Subject: Re: Roth VS Traditional Date: 7/8/2004 10:56 AM
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If your tax rate is a static 30%, deferring $3000 in a Roth is like deferring $4286 in a TIRA, since the Roth money has already been taxed.

The Roth simply provides a larger tax shelter, and you can take out the principal anytime tax/penalty free.

Nick

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Author: wcfenton Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 41510 of 75381
Subject: Re: Roth VS Traditional Date: 7/8/2004 12:02 PM
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OLF...

This calculator may or may not help in your decision whether to go with a Traditional or Roth IRA, but it can be programmed with "what-ifs" to give you some food for thought:

http://www.calcbuilder.com/cgi-bin/calcs/IRA1.cgi/themotleyfool?Question=Income

The Fairmark Press "Tax Guide For Investors" Site may help as well:

http://www.fairmark.com/rothira/rothvreg.htm


Regards,
Bill

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Author: Fuskie Big funky green star, 20000 posts Top Favorite Fools Old School Fool Ticker Guide SC1 Red Winner of the 2010 Rule Breakers Challenge Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 41511 of 75381
Subject: Re: Roth VS Traditional Date: 7/8/2004 12:55 PM
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I'm planning on re-starting my contributions to an IRA this year. I missed the deadline for my company's 401K, so this seems the best route for me for now.

This is the second time I have heard this. Usually, enrollment in a 401k is any time after a 30 window when you start employment. This idea of a deadline for 401k contributions is confusing to me.

I'm curious, though, about which type to open. At my age and income, I think most financial advisors would recommend a Roth, since I'm still (relatively) young and my income will be more in the future than at present. However, a former IRS employee and friend of the family made a comment that I keep dwelling on. She said that she always recommends that people go for the Traditional, because it will be some time before I can retire, and by then the tax laws may have changed. (She cites the fact that CC interest used to be tax deductible as well-plus other examples I can't remember right now, and that the urge to tax any and every income seems to be on the rise.) She thinks it's always better to take the tax break you know you will get right now over the one you may get in the future. This is somewhat like the risk you take whenever you invest anywhere, but I must admit she has a point.

The question is not whether you will making more later in your employed life but what your income will be in your retirement. If your retirement income will be more than today, then you would have less tax liability on that money today. But I don't really pay attention to that. I like the Roth because you can invest in dividend growth stocks and funds and never pay taxes on the income. It is the tax savings on the gains that makes the Roth worthwhile. Eat the contribution tax now and have no liability on retirement.

Fuskie
Who has contributed to a Roth every year except last year...

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Author: Watty56 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 41512 of 75381
Subject: Re: Roth VS Traditional Date: 7/8/2004 1:01 PM
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In very rough figures something like the first $40,000 or so of retirement income for a couple will be taxed at relatively low rates after deductions are accounted for. If you think that the safe withdrawal rate is 4% then you will need to have over $1,000,000 (in current dollars )in taxable accounts when you retire to have to start worrying about being taxed highly.

For most people there is a significant risk that they will end up withdrawing the Roth funds when they are in a low tax bracket anyway so unless you are a very high income individual with lots of assets then it is safer to go with a traditional IRA or 401k for the bulk of your retirement investing.

I would personally prefer to retire earlier on a comfortable income rather than waiting and retiring later(and much richer)so the Roth is less attractive to me.

Greg


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Author: PosFCF Big gold star, 5000 posts Top Recommended Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 41514 of 75381
Subject: Re: Roth VS Traditional Date: 7/8/2004 7:53 PM
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OLF

I'm curious what the Fools think. Any comments?

I'll take a stab at this from a different angle than the other excellent answers you've gotten.

I'm an agressive investor. I want my money to grow much faster than seems to be possible by adhering to "conventional" approaches. I've taken the time to learn how to be a good investor and the learning process will probably only end when I do. I've gotten quite good at it and have rates of return I'm happy with.

That is all prelude to the approach I've taken to answering the Traditional vs Roth IRA debate.

If one is going to take a "slow and steady as she goes" route in investing the assets in the IRA, I think the advice of going with the Traditional has a lot of weight to it. I mean why pay 15-30% in taxes on an account that will likely yield much less than that in returns?

However, if one has the skillset, the personality, the risk tolerance, and the performance results that offer that person the likelihood of better than average returns, then the Roth IRA makes more sense to me. Especially so if one has a decent time horizon until retirement.

Another feature about the Roth that I like is that there is no mandatory age at which distributions must start and no mimimums that have to be taken out. If I don't need it in early retiremnet, I want it to keep growing tax-deferred.

I have all of my IRAs as Roths.

Don't recommend my approach for anyone, just throwing another viewpoint into the ring for consideration.

PosFCF


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Author: yobria Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 41519 of 75381
Subject: Re: Roth VS Traditional Date: 7/9/2004 10:02 AM
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However, if one has the skillset, the personality, the risk tolerance, and the performance results that offer that person the likelihood of better than average returns, then the Roth IRA makes more sense to me.

I always challenge those who claim to have "above average performance results" to post their performance beating investments on this or another board ahead of time, so that we may see them in action. No one takes me up on it though.

Personally I find that active investors end up with less money than the "slow and steady" crowd, since they incur greater tax and transaction costs, and waste time analyzing stocks when they could be doing something profitable/productive.

Nick


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Author: PosFCF Big gold star, 5000 posts Top Recommended Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 41521 of 75381
Subject: Re: Roth VS Traditional Date: 7/9/2004 11:06 AM
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yobria

I was careful in my response to the original poster to frame my answer such that it was clearly only applicable to me. I was also clear to state that if anyone else were to use good performance results as part of their reason, that they had to have already established for themselves that their investment selection process produced superior results for them.

I always challenge those who claim to have "above average performance results" to post their performance beating investments on this or another board ahead of time, so that we may see them in action. No one takes me up on it though.

I don't usually post my trades on any board because it's not about the trade, it's about the selection process, methodology and thought behind it. Investment selections and their results are highly individualized. While basic principles may be common to the highly successful, each blends those principles into their own unique style.

In 2003 on the Foolish Collective, I participated in their FunPort bit of a learning contest. If you care to review those results, perhaps you won't spout off so freely with people you don't know. I know, one year does not a lifetime make, and the past is no predictor of the future. However, this is a case where trades were publicly posted ahead of time.

Additionally, on that thread, I do occasionally mention companies that I've researched and selected and a brief reasoning as to why.

No one takes me up on it though.

Any other absolutes?

PosFCF


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Author: omadhaun Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 41523 of 75381
Subject: Re: Roth VS Traditional Date: 7/10/2004 6:03 PM
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Not to pick at nits, but why does your friend think that the Roth rules can change but the traditional IRA rules won't change?

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Author: rookieJoe Two stars, 250 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 41932 of 75381
Subject: Re: Roth VS Traditional Date: 8/11/2004 1:38 PM
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Sounds like Bush thinks abolishing or reducing income tax in favor of sales tax is worth considering.

A quote from Bush:
You know, I'm not exactly sure how big the national sales tax is going to have to be, but it's the kind of interesting idea that we ought to explore seriously

The chances are probably slim to none that this will actually happen any time soon, but if it did... Ouch! Everyone who did ROTH conversions would have basicly made a donation to uncle sam. They voluntarily pay income tax to convert to a ROTH, then income tax goes away, then we can pay extra sales tax in retirement.

-Joe

http://money.cnn.com/2004/08/11/news/economy/election_bush_tax.reut/index.htm?cnn=yes

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Author: JAFO31 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 41933 of 75381
Subject: Re: Roth VS Traditional Date: 8/11/2004 2:03 PM
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rookieJoe: "Sounds like Bush thinks abolishing or reducing income tax in favor of sales tax is worth considering.

A quote from Bush:
You know, I'm not exactly sure how big the national sales tax is going to have to be, but it's the kind of interesting idea that we ought to explore seriously

The chances are probably slim to none that this will actually happen any time soon, but if it did... Ouch! Everyone who did ROTH conversions would have basicly made a donation to uncle sam. They voluntarily pay income tax to convert to a ROTH, then income tax goes away, then we can pay extra sales tax in retirement."


Fairtax has looked at this, and their revenue neutral number is a sales tax of nearly 30% (they call it 23% inclusive, which means that if total bill, including tax is 100, then tax is 23; by normal calculations of sales tax that would be 23/77 = 29.87% sales tax).

See www.fairtax.org

And it would be a huge hit for Roth IRAs, but also for traditional IRAs too because a large number of people have a marginal FIT below 30%.

Regards, JAFO



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