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Author: gigsi Two stars, 250 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 75339  
Subject: To Roth or not.. Date: 12/27/1999 5:43 AM
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As a self employed, I've contributed to either IRA's or Keoghs each year since returning to the working world and at age 59 did a small Roth conversion/ contribution so as to have a future parking place for any not- immediately- needed mandatory withdrawals when that time comes.

Looking forwards, should I concentrate my efforts on regular or Roth IRA's for the next 5 1/2 years until retirement? I am really not sure if I understand all the ramifications, just trying to do the best I can. Any input would be greatly appreciated.
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Author: JLC Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 16943 of 75339
Subject: Re: To Roth or not.. Date: 12/27/1999 8:19 PM
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<<<Looking forwards, should I concentrate my efforts on regular or Roth IRA's for the next 5 1/2 years until retirement? I am really not sure if I understand all the ramifications, just trying to do the best I can. Any input would be greatly appreciated. >>>

I would continue to put into a Roth IRA instead of traditional if I met the requirements for the Roth. The future tax advantages are too great to pass up. Also have the benefit of being able to pass more on to your heirs.

At 59, you could live another 30 years, that 10k+ invested now could be worth a million easy in 30 years, and that would ALL be TAX FREE!

JLC

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Author: tgiletto Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 16946 of 75339
Subject: Re: To Roth or not.. Date: 12/27/1999 9:21 PM
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To Roth or not.

I personally believe the Roth is a scam by the Federal Government to get people to pay taxes up front instead of later (as with a tax-defered IRA). It's exactly what you would expect a cash-strapped government to do.

Consider $1,000 invested in one or the other. (I intentional chose less than the maximum.)

In a tax defered IRA, $1,000 would grow over 10 years at 12% to $3,106. If you paid 28% in tax when you took it out, you would pay $870 in tax and you would be left with $2,236.

In a Roth IRA, you would pay 28% of the $1,000 up front leaving you with $720 to grow over 10 years at 12% to $2,236.

No slight-of-hand here! Oh, sure there are SUBTLE differences between a Roth and traditional IRA. For instance, the maximum contributions are slightly different. The ACTUAL maximum contribution of a Roth is a little higher because you can contribute $2,000 after tax, rather than $2,000 tax-defered. In other words the full $2,000 that you contribute to a Roth is yours, while a portion (15% or 28%)of the $2,000 that you contribute to a tax-defered IRA goes to Uncle Sam.

Also, to guess whether you'll be in a higher or lower tax braket 20 or 30 years from now is futile. (I understand the original post was for someone quite close to retirement)

There are also slight differences in when you must make withdrawals.

Don't be fooled. There really isn't that much difference.

Tony

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Author: LTPlayer One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 16962 of 75339
Subject: Re: To Roth or not.. Date: 12/28/1999 9:36 AM
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Tony,

I set up a spreadsheet because I didn't believe your numbers. You are right; with your assumptions, it doesn't matter how many years you hold the investment in either IRA. The amount you have after taxes is always identical.

However, there is still an advantage to using a Roth IRA. Per your figures and assumptions, a traditional IRA never performs better than a Roth. Assuming that one has sufficient funds to invest, it is the $2000 cap that controls how much can be invested each year in the IRA. Therefore, one can invest $2000 pre-tax dollars in a traditional IRA and $2778 in a Roth IRA (assuming a 28% tax bracket).

An IRA's tax advantages always allows it to get a better post-tax return than any standard investment (assuming one gets the same return in either vehicle). In a standard investment, one has to pay income tax up front, plus pay capital gains when they redeem it. Over 30 or so years an IRA will have a post-tax value about 27% greater than a non-tax-advantaged investment.

It is that one can invest more pre-tax dollars in a Roth that makes it better than a traditional IRA.

LT

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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: 16976 of 75339
Subject: Re: To Roth or not.. Date: 12/28/1999 11:50 AM
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I personally believe the Roth is a scam by the Federal Government to get people to pay taxes up front instead of later (as with a tax-defered IRA). It's exactly what you would expect a cash-strapped government to do.

This may or may not be true, but when you compare a $2000 Roth to a $2000 taxable account (i.e. not eligible for a standard IRA) then it is a big win.



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Author: tgiletto Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 17015 of 75339
Subject: Re: To Roth or not.. Date: 12/28/1999 6:43 PM
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>>This may or may not be true, but when you compare a $2000 Roth to a $2000 taxable account (i.e. not eligible for a standard IRA) then it is a big win.

I really don't see the "big win"?

Please explain.

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Author: LTPlayer One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 17044 of 75339
Subject: Re: To Roth or not.. Date: 12/29/1999 9:22 AM
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tgiletto,

>>This may or may not be true, but when you compare a $2000 Roth to a $2000 taxable account (i.e. not eligible for a standard IRA) then it is a big win.

I really don't see the "big win"?

Please explain.


I posted this before, but I can't find the link to it, so I will post this information again:

If one compares a Roth to a taxable account, assuming they get the same rate of return, the Roth comes out ahead because there is no capital gains tax on its increase in value.

I set up a spreadsheet with the following assumptions:

Tax Bracket - 28%
Annual Rate of Return - 12%
Capital Gains Tax - 20%

Here is the spreadsheet. The % Difference column is how much more the Roth returns over the Regular account. As you determined, a traditional IRA returns the same as a Roth after taxes.

Year Roth Regular % Difference
Investment

1 2240 2192 2%
2 2509 2407 4%
3 2810 2648 6%
4 3147 2918 8%
5 3525 3220 9%
6 3948 3558 11%
7 4421 3937 12%
8 4952 4362 14%
9 5546 4837 15%
10 6212 5369 16%
11 6957 5966 17%
12 7792 6634 17%
13 8727 7382 18%
14 9774 8219 19%
15 10947 9158 20%
16 12261 10209 20%
17 13732 11386 21%
18 15380 12704 21%
19 17226 14180 21%
20 19293 15834 22%
21 21608 17686 22%
22 24201 19760 22%
23 27105 22084 23%
24 30357 24686 23%
25 34000 27600 23%
26 38080 30864 23%
27 42650 34520 24%
28 47768 38614 24%

Hope this helps.

LT

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Author: tgiletto Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 17046 of 75339
Subject: Re: To Roth or not.. Date: 12/29/1999 10:27 AM
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Sorry LT

I miss read the post. I thought the comparison was between a Roth and a Tax-defered IRA.

I failed to realize that the comparison was between a Roth and a "taxable" account. Of course, the capital gains will kill you.



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