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Author: slip66 Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 75340  
Subject: Roth vs Traditional Date: 1/21/2013 7:37 PM
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My available investment funds are equally divided between a traditional IRA and a Roth. Any thoughts as to if there are preferable investments for either/or...does it matter?
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Author: ferjen Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 71280 of 75340
Subject: Re: Roth vs Traditional Date: 1/21/2013 7:48 PM
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If you're young, Roth all the way. Buy dividend growth stocks and reinvest the dividends tax free.

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Author: TwoCybers Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 71281 of 75340
Subject: Re: Roth vs Traditional Date: 1/21/2013 8:13 PM
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The first rule of IRAs is get any matching possible -- if for example an employer will match, that may be in a traditional IRA - do that first. The advantages of tax free for a Roth are clear enough. But you must use after tax funds where as a traditional IRA lets you save untaxed funds. Keep in mind Congress can change the rules and 30 years is a long time. Personally I did not use Roths until I was retired.

Gordon
Atlanta

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Author: MurrayS Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 71282 of 75340
Subject: Re: Roth vs Traditional Date: 1/21/2013 8:20 PM
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If you're young, Roth all the way

I disagree. If you're young and your marginal tax rate is below 25%, yes, Roth all the way, but I firmly believe that it's a great idea to defer taxes of 25% or more.

Consider that if, like me, you don't have a pension or other retirement income, that some of your withdrawals from a traditional 401k/IRA will not be taxed at all, some at 10%, some at 15% and so on. Consider a married couple withdrawing $80k from a traditional IRA would pay about 11% effective tax on the withdrawals.

As for the investments in either, I'd choose the same investments in both.

-murray

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Author: slip66 Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 71283 of 75340
Subject: Re: Roth vs Traditional Date: 1/21/2013 8:37 PM
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Thanks for your responses. I should have clarified a little bit, I just retired in June. I was able to contribute to a Roth and traditional in the 403b form through my employer the only caveat being we were restricted to Fidelity funds. In reality,this didn't work out bad for me but I also wanted the opportunity to invest in individual companies. I just rolled out of the 403b and became a Fool in SA so I was curious if there were any stocks that were more beneficial for Roth vs Traditional. I won't have to take disbursements on the IRA for another five years. Thanks again and glad I'm here.

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Author: MurrayS Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 71284 of 75340
Subject: Re: Roth vs Traditional Date: 1/21/2013 8:45 PM
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I won't have to take disbursements on the IRA for another five years.

Your at the other end of my "plan". I'll personally be pulling out of my traditional IRAs early and often so long as my tax rate is below 15%. IMHO, too many people focus on tax dollars paid and not percent tax paid. While it may feel good to pay 0% tax, it's an opportunity blown to get money out of IRAs at a low tax rate. At the very least, I'd convert some to a Roth.

-murray

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Author: pauleckler Big funky green star, 20000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 71285 of 75340
Subject: Re: Roth vs Traditional Date: 1/21/2013 8:48 PM
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If you're young and your marginal tax rate is below 25%, yes, Roth all the way, but I firmly believe that it's a great idea to defer taxes of 25% or more.

Well said, Murray. But keep in mind the need to make those payments last for your lifetime probably keeps your balance large. But mandatory distributions in a traditional IRA at age 70-1/2 can take a big hit--especially if Social Security payments are taxable and consume your lowest tax brackets.

It is probably a good idea to use some of that surplus 15% bracket you describe to do partial Roth conversions and minimize mandatory distributions when you can.

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Author: MurrayS Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 71286 of 75340
Subject: Re: Roth vs Traditional Date: 1/21/2013 9:01 PM
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Well said, Murray. But keep in mind the need to make those payments last for your lifetime probably keeps your balance large. But mandatory distributions in a traditional IRA at age 70-1/2 can take a big hit--especially if Social Security payments are taxable and consume your lowest tax brackets.

It is probably a good idea to use some of that surplus 15% bracket you describe to do partial Roth conversions and minimize mandatory distributions when you can.


I agree, but a couple thoughts...

I expect we'll have close to $1M in distributions before RMDs kick in.

I've reviewed the RMD tables and I'll consider myself fortunate if I'm forced into our current 33% bracket since that will mean we're pretty much set for the rest of our lives.

-murray

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Author: CABob Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 71287 of 75340
Subject: Re: Roth vs Traditional Date: 1/21/2013 10:48 PM
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Ideally, the investments in a Roth should be those that create what would be otherwise taxable gains such as non qualified dividends. Unfortunately it is usually difficult to determine in advance what those might be. REITs are one type that are often appropriate in a Roth.

Bob

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Author: MurrayS Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 71288 of 75340
Subject: Re: Roth vs Traditional Date: 1/21/2013 11:03 PM
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Ideally, the investments in a Roth should be those that create what would be otherwise taxable gains such as non qualified dividends. Unfortunately it is usually difficult to determine in advance what those might be. REITs are one type that are often appropriate in a Roth.

Why would those be better in a Roth than in a traditional IRA? I believe you want to maximize returns in both, no?

-murray

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Author: ptheland Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 71289 of 75340
Subject: Re: Roth vs Traditional Date: 1/21/2013 11:26 PM
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I think there is a small difference between the ideal choices for investments between Roth, Traditional, and after tax investing. But it's really only a question when you are doing all three kinds of accounts.

In your traditional IRA, all of your gains are eventually taxed as ordinary income. So you are best served by avoiding items that would be taxed at preferential tax rates. If you have a choice, put things that generate ordinary income in your traditional IRA. Capital gains and qualified dividends are better off in your taxable account.

Never buy anything that generates tax free income in a traditional IRA. It loses it's tax-free status and will be taxed as ordinary income when you withdraw the money.

There's some argument that more complex investments are convenient to put in your IRA - either traditional or Roth. REITS, REMICS and some other investments create complexity on your tax return. You avoid that complexity by putting them in an IRA. But be careful that you don't also forego significant tax benefits by doing so.

Partnerships are a possible exception to the complexity issue. They often generate income that is potentially taxable to your IRA if you hold them in an IRA. You can google Unrelated Business Taxable Income (UBTI) if you care to investigate that issue. Keep your UBTI under $1000, and you don't have a problem. The problem is knowing how much UBTI a partnership will generate before it generates the income. A good crystal ball would be handy for that. ;-) And some partnerships generate good cash flows that are tax-free (or more often, tax deferred). Those are better off outside of an IRA.

The planned non-taxable nature of Roth IRAs negate some of the issues with a traditional IRA. So capital gains and qualified dividends aren't as much of an issue there. I still wouldn't put tax-free interest income in a Roth. Yes, qualified distributions are also tax-free. But if you ever need to make a taxable distribution from a Roth (life happens!), you would again be converting tax-free income into taxable income. Ditto for the cap gains and qualified dividends. But you will reach a point in your life when you have met the qualifications for Roth withdrawals. At that point, these investments are fine in your Roth, as you no longer have the risk of taxable withdrawals.

These are all subtle issues. None of them will make or break your retirement. At best, they might add a small percentage to your available funds during retirement. But a small percentage is better than none, so the issues are worth keeping an eye on.

--Peter

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Author: CABob Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 71301 of 75340
Subject: Re: Roth vs Traditional Date: 1/22/2013 10:32 PM
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I said:
Ideally, the investments in a Roth should be those that create what would be otherwise taxable gains such as non qualified dividends. Unfortunately it is usually difficult to determine in advance what those might be. REITs are one type that are often appropriate in a Roth.

murray responded:

Why would those be better in a Roth than in a traditional IRA? I believe you want to maximize returns in both, no?

Mainly because I want the maximized returns withdrawn without future taxes. But in this case it probably wouldn't make a big difference overall. Peter answered it better than I did.

Bob

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Author: MurrayS Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 71302 of 75340
Subject: Re: Roth vs Traditional Date: 1/23/2013 7:35 PM
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Mainly because I want the maximized returns withdrawn without future taxes. But in this case it probably wouldn't make a big difference overall. Peter answered it better than I did.

Yeah, you're right. Given a asset allocation of 50% bond, 50% stock and equal amounts in a Roth & Traditional, I'd probably put the bonds in the Traditional.

I must have been looking at this from a wrong perspective.

-murray

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Author: pauleckler Big funky green star, 20000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 71303 of 75340
Subject: Re: Roth vs Traditional Date: 1/24/2013 4:18 PM
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But by putting the bonds in traditional IRA, their interest gets taxed at ordinary income tax rates in retirement. Roth can be preferred as no further income tax is due.

However, considering origin of the bonds, the traditional IRA can be with tax deductible contributions (but not in the 33% income tax bracket) meaning more principal available for bond investing. The Roth is always after tax. If your IRA contributions are not deductible, Roth is the clear choice.

But if your IRA is a rollover from a 401k, Roth conversion may not be worth it unless you can manage it in lower tax brackets.

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