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Author: kavio One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 76418  
Subject: Roth vs. Traditional IRA Date: 8/29/2003 11:40 AM
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I'm 29, employed and just starting to save for retirement. I'm trying to decide between a Roth IRA and Traditional IRA. I read the articles here on Fool and also did the calculator, which told me a Traditional IRA would be better for me. However, most of the articles I've read seem to suggest Roth is a better option for someone in my circumstances. I'm confused. Can someone please help?

I plan to contribute the maximum each year, I use Mechanical Investing strategies developed on the MI boards here, I make $60k/year, I'm single and I have $12k in savings and $16k in student loan debt (at 3.25% interest locked in). No credit card debt.

Thanks
CK
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Author: reallyalldone Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 37056 of 76418
Subject: Re: Roth vs. Traditional IRA Date: 8/29/2003 11:48 AM
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However, most of the articles I've read seem to suggest Roth is a better option for someone in my circumstances. I'm confused. Can someone please help?

I would almost always say that if you qualify for a Roth, fully fund one, after funding a 401K fully to the match point. No match, fund the Roth. I think if you are successful financially, it is not that likely that you tax rate will be lower after retirement. If you think it will be, a traditional IRA may be better. Also, please take into account the recent change in the dividend and capital gains rates and the additional flexibility you might have in a taxable account.

rad





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Author: lbhargava Two stars, 250 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 37057 of 76418
Subject: Re: Roth vs. Traditional IRA Date: 8/29/2003 11:51 AM
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I agree with RAD. Funding a Traditional will give you tax advantages now but I don't think you need them now. For me, a tax-free withdrawl is always better than paying taxes.

LB



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Author: Greenerd Two stars, 250 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 37059 of 76418
Subject: Re: Roth vs. Traditional IRA Date: 8/30/2003 12:08 AM
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If Taxes will be lower when you retire then the traditional will be better than the Roth.

With your plan to use mechanical investing, based on my experience, you will probably be able to retire early. For me, the only way to go is using mechanical investing.

My parents are paying a higher tax rate now, in retirement, than they did when they were working and invested in IRA's.

Bob

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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: 37060 of 76418
Subject: Re: Roth vs. Traditional IRA Date: 8/30/2003 1:28 PM
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"My parents are paying a higher tax rate now, in retirement, than they did when they were working and invested in IRA's."

When your investment plan succeeds, this is often the outcome. But this is a wonderful problem to have. There are then numerous ways to consider to deal with those taxes. But at least you have the resources to play with.

If you knew this problem was likely to happen, LTBH (long term buy and hold) in a taxable account is a better plan--provided you can find investments you can hold long term and you have the discipline to stay with the plan. You pay taxes only at capital gains rates when you sell (if you select the right investments) and then at low, capital gains rates.

Money in IRA does give you great flexibility on when you will pay taxes. You can set it up only to pay taxes on what you spend. Then you can take larger distributions in years when your taxes are otherwise low. This helps minimize the tax burden, though it is true its difficult to completely avoid those taxes. For those mostly in index funds, taking distributions when stocks are low is another way to minimize those taxes while getting more shares out of the IRA. Similarly Roth conversions cost less when stocks are down.

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Author: reallyalldone Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 37061 of 76418
Subject: Re: Roth vs. Traditional IRA Date: 8/30/2003 2:16 PM
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Money in IRA does give you great flexibility on when you will pay taxes.

I disagree with this statement. You have forced distributions at 70.5 and there's very little flexibility from there on out. My husband is currently 51 and it's looking like a train wreck to me on money we put in a traditional IRA while they were deductible for us way back in our 20s.

rad

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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: 37067 of 76418
Subject: Re: Roth vs. Traditional IRA Date: 8/30/2003 11:39 PM
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I've also struggled to figure out which types of accounts are best and I did it by looking at the sources of retirement income. There were;

1) Traditional pension (which I don't have)
2) Income from part time or hobby work
3) Social security
4) Taxable retirement accounts (traditional IRA's, 401k, defined contribution pension)
5) Non-taxable retirement accounts (Roth IRA's)

What I finally decided was that since the tax laws and rates are subject to so much change it would be impossible to determine which of these is will be theoretical best investment when I retire. For that reason I've decided to put my money in a mixture of the different account types. Having a mixture of different types could give you flexibility in the future.

One often overlooked aspect of the pros and cons of the taxable and non-taxable accounts is that when you are fully retired you will still have your standard deduction and any property taxes that can be deducted on your income taxes so the first 20 thousand dollars of taxable income is taxed at a very low effective rate. You really want to have some taxable income when you retire to take advantage of your deductions each year.

As someone pointed out you will eventually need to make minimum withdrawals from the traditional IRA but if your minimum withdrawal after age 70.5 is enough to but you in a painfully high tax bracket then you have probably should have retired earlier.

I would suggest investing in the following order;

1)401k up to any company match.

2)If you don't already have a house, and you think you will want to buy one, you might want to save up enough have %20 percent down on a home purchase before any more retirement savings.

3)An amount equal to the 401k comtribution in a Roth IRA

4)Equal amounts in a Traditional IRA(or the 401k if you have good investment choices) and a Roth IRA.

You might want to contribute something like $1.30 to the traditional IRA or 401K for every dollar contributed to the Roth IRA to make them equal after the traditional IRA tax deduction.


Greg


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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: 37068 of 76418
Subject: Re: Roth vs. Traditional IRA Date: 8/31/2003 12:16 AM
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.... My husband is currently 51 and it's looking like a train wreck to me on money we put in a traditional IRA while they were deductible for us way back in our 20s. ...


I took a look at the table that I found;

http://www.irs.gov/pub/irs-pdf/p590.pdf
Page 101

said the life expectancy at age 70 was 27.4 years, at 80 it is about 18.7 years. (it also says that a 100 yeat old has a life expectancy of 6.3 years!)

If having to withdraw 1/27 to 1/18 (about 4 to 6 percent) of your traditional IRA each year qualifies as a train wreck then I envy you.

If there is that much money in the IRA you should look into retiring early if you haven't already and taking the “substantially equal distributions” to avoid the 10% penalty.

Greg

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Author: buzman Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 37069 of 76418
Subject: Re: Roth vs. Traditional IRA Date: 8/31/2003 4:02 PM
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I disagree with this statement. You have forced distributions at 70.5 and there's very little flexibility from there on out. My husband is currently 51 and it's looking like a train wreck to me on money we put in a traditional IRA while they were deductible for us way back in our 20s.

rad


1. There are no mandatory distributions from a Roth. You may want to look into a conversion.

2. People grumble about the RMD, but remember you got a deduction. Plus you have had 20+ years of growth without the drag of taxes. I define a train wreck as a portfolio that was worth 1.5M in 1999 and now is worth 500k (so much for DIY). Very different from your circumstances.

3. Besides those were the rules when you started contributions, it just seems immature to want to complain now AFTER your investment grew.

buzman





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Author: reallyalldone Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 37070 of 76418
Subject: Re: Roth vs. Traditional IRA Date: 8/31/2003 5:09 PM
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1. There are no mandatory distributions from a Roth. You may want to look into a conversion.

We haven't been eligible to convert since Roths came into being.

2. People grumble about the RMD, but remember you got a deduction. Plus you have had 20+ years of growth without the drag of taxes. I define a train wreck as a portfolio that was worth 1.5M in 1999 and now is worth 500k (so much for DIY). Very different from your circumstances.

Can't comment on other's investing strategies.

3. Besides those were the rules when you started contributions, it just seems immature to want to complain now AFTER your investment grew.

I'm wounded - not ! Actually when we contributed to traditional IRAs, everything was different and especially the tax brackets. There was no way to see that the tax structure would all change. My current opinion is to take all retirement and estate planning with a grain of salt because if you wait a few years, everything will change.

Sorry you've had such bad luck with your investments. I hope your tax savings help ease the bitterness.

rad



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Author: dsemmler Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 37071 of 76418
Subject: Re: Roth vs. Traditional IRA Date: 8/31/2003 11:17 PM
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Greg wrote,

4)Equal amounts in a Traditional IRA(or the 401k if you have good investment choices) and a Roth IRA.

You might want to contribute something like $1.30 to the traditional IRA or 401K for every dollar contributed to the Roth IRA to make them equal after the traditional IRA tax deduction.


You did not indicate this point and I just want to clarify for others but you can only contribute a maximum of $3000 (or $3500 depending on your age) to all IRA accounts.

I am not quite sure why you advocate making contributions to a Traditional IRA and a Roth IRA. In your example, you would have $1500 in a TIRA and $1500 in a Roth IRA. Can you explain the benefit to that versus putting the max in just the Roth (if you qualify)?

Just to recap, you are limited to a total contribution of $3000 (or $3500 depending on age) to ALL IRA accounts. You cannot contribute the max to a Traditional IRA and the max to a Roth IRA.

dt

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Author: billjam Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 37072 of 76418
Subject: Re: Roth vs. Traditional IRA Date: 9/1/2003 7:55 AM
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I love the Roth but wonder about it's future. In the early 80's a conservative banker friend told me he didn't expect IRA's to last as they were structured at the time. His reasoning was that their success would cost the government too much immediate income. Sure enough a few years later Congress changed the rules and my contributions were no longer deductible.

I worry that the same thing will happen when people start taking withdrawals from Roth IRA's and not paying taxes on the gains. Congress, facing huge budget deficits, will change the rules and tax that income.

Remember when social security benefits were completely tax free?


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Author: buzman Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 37073 of 76418
Subject: Re: Roth vs. Traditional IRA Date: 9/1/2003 8:28 AM
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Sure enough a few years later Congress changed the rules and my contributions were no longer deductible.

Only if you are a participant in a DC plan or eligible to participate in a DB plan, subject to income limitations.

I worry that the same thing will happen when people start taking withdrawals from Roth IRA's Yeah, but you will pull your hair out worrying about things you have no control over. Make plans, enjoy life, plan on dealing with Plan B.

buzman



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Author: buzman Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 37074 of 76418
Subject: Re: Roth vs. Traditional IRA Date: 9/1/2003 8:41 AM
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Sorry you've had such bad luck with your investments.

Thank you for your concern but they are misplaced.

"I'm no schoolboy, but I'm doin' all right!" Brown Sugar, Rolling Stones

I live in Santa Rosa Beach Florida.

It ain't Boca Raton, but it's home to me.


buzman



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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: 37077 of 76418
Subject: Re: Roth vs. Traditional IRA Date: 9/2/2003 12:23 PM
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Can you explain the benefit to that versus putting the max in just the Roth (if you qualify)?

That is a good point about needed to take the IRA maximum into account. It many cases an unmatched 401K could be used just like a traditional IRA if it is available and the limits have been reached.

Here is some more detail about what I was talking about assuming that the IRA maximum is not an issue. There are three different scenarios with the following assumptions;

1) The contributions will reduce the take home pay by $2000
2) The marginal tax rate is 30%.
3) The money will be invested in the retirement accounts long enough to double four times to be 16 times the original amount.
4) There is not any other taxable income at retirement.
5) Everything is in current dollars.(no inflation adjustments)

Scenario 1 : Everything in a Roth

Contribution: $2,000
Final amt(x16) $32,000
Taxes $0
Rtirement income $32,000

Scenario 2 : Everything in a Traditional IRA

Contribution: $2,857
Tax refund $857
Final amt(x16) $45,714
Deductions $10,000
Taxable inc. $33,714
Taxes 30% $10,714
Retirement income $35,000

Scenario 3 : Evenly split

Roth
Contribution: $1,000
Final amt(x16) $16,000
Taxes $0
Retirement income $16,000
Traditional IRA
Contribution: $1,429
Tax refund $429

Final amt(x16) $22,857
Deductions $10,000
Taxable inc. $12,857
Taxes 10% $1,286
Retirement income $21,571

(note: lower tax 10% tax bracket even if the tax rate were still 30% there would be a $3,000 ($10,000*.3)difference)

Total Retirement income:$21,571+16,000=$37,571 which is about 17% more than scenario one.

This example is clearly a bit simplistic and could vary greatly depending on which assumptions are made.

Greg


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Author: SirTas Big gold star, 5000 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 37086 of 76418
Subject: Re: Roth vs. Traditional IRA Date: 9/2/2003 8:42 PM
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I love the Roth but wonder about it's future. In the early 80's a conservative banker friend told me he didn't expect IRA's to last as they were structured at the time. His reasoning was that their success would cost the government too much immediate income. Sure enough a few years later Congress changed the rules and my contributions were no longer deductible.

I worry that the same thing will happen when people start taking withdrawals from Roth IRA's and not paying taxes on the gains. Congress, facing huge budget deficits, will change the rules and tax that income.


Isn't there a purely practical problem here since people aren't keeping track of their cost basis and gains?

--SirTas


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Author: billjam Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 37087 of 76418
Subject: Re: Roth vs. Traditional IRA Date: 9/3/2003 12:06 AM
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billjam wrote "I love the Roth but wonder about it's future. In the early 80's a conservative banker friend told me he didn't expect IRA's to last as they were structured at the time. His reasoning was that their success would cost the government too much immediate income. Sure enough a few years later Congress changed the rules and my contributions were no longer deductible.

I worry that the same thing will happen when people start taking withdrawals from Roth IRA's and not paying taxes on the gains. Congress, facing huge budget deficits, will change the rules and tax that income."


Sir Tas asked "Isn't there a purely practical problem here since people aren't keeping track of their cost basis and gains?"

--------------

There are records of contributions. Everything else is a gain. Roth contributions could be handled similar to non-deductible contributions to a traditional IRA. Or they could just tax a percentage of all withdrawals similar to tax on SS benefits. Between Congress and the IRS they'll figure something out if the opportunity arises.


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Author: Latinus Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 37267 of 76418
Subject: Re: Roth vs. Traditional IRA Date: 9/22/2003 11:18 PM
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3. Besides those were the rules when you started contributions, it just seems immature to want to complain now AFTER your investment grew.

"those were the rules" would not be true if they began their IRA before 1987.
Recently I asked a rep at Vanguard when the RMD was invented.
The answer: As part of the "Tax Reform and Simplification Act" of 1986.
-
My guess is that retired folks should blame the late Senator Moynihan for the RMD hassle.
A few hears ago I heard him bragging on TV that it was he who had proposed taxing social-security benefits.


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Author: Aubiemoney One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 37443 of 76418
Subject: Re: Roth vs. Traditional IRA Date: 10/9/2003 10:10 AM
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A question,
One post on this thread reccomended that one should consider saving for a house before investing in an IRA. But isn't there a provision which allows you to allocate IRA funds towards the purchase of a house. If this were true wouldn't it make more sense to just start contributing to a Roth right away?

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Author: CAMPCITY CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 37656 of 76418
Subject: Re: Roth vs. Traditional IRA Date: 11/1/2003 7:06 PM
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CK,
There are a couple of ways to look at it..........

A Roth contribution is made with after tax money and does not benefit your tax liability for your 60K paycheck. However, the principle you contribute and the earnings are not taxed when withdrawn provided you are 59 & 1/2 and have had the account open for 5 years.

Traditional IRA contributions are made with pre-tax contributions and lowers your tax liability on your 60K i.e., if you contribute $3000 to a traditional IRA this year you will be taxed on 57K. But, Uncle Sam is not one to be denied forever! When you are old and grey and begin to withdraw a traditional IRA, the withdrawal is taxed as income.


If I were 29 years old and qualified for a Roth (hopefully in the future you will make too much money to qualify)and had about 30 years to accumulate tax free forever earnings I would go for the Roth! Imagine starting your retirement with maybe $750,000 tax free money! That is if you invest Foolishly for the next 30 years.

For a full discussion of IRAs go to: http://www.fool.com/money/allaboutiras/allaboutiras03.htm

Good Luck,
campcity


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