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Author: rkmacdonald Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 76079  
Subject: Traditional vs. Roth Date: 5/8/2005 3:21 PM
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One thing that is often overlooked when comparing Roth IRAs to Traditional IRAs is the fact that you can shelter more money in the Roth.

This is because you are allowed to contribute the same amount to either one each year. Then, when you take distributions during retirement, you must pay taxes on the Traditional, while the Roth is tax-free.

If two people, one with a Traditional and one with a Roth, contribute exactly the same amount of money to their respective accounts, each year while they are working, and they make the same investments, the Roth and Traditional will end up equal. However, the person with the traditional still has to pay taxes. This makes the effective value of the Traditional IRA less than the Roth IRA.

I have obviously ignored the initial cost of funding the Roth, which was higher, because taxes were paid ahead of time. Again, the point I'm trying to make is that the person with the Roth ends up with more retirement money after taxes are considered.

Russ
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Author: Landog Three stars, 500 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 46000 of 76079
Subject: Re: Traditional vs. Roth Date: 5/8/2005 4:16 PM
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One other thing not to overlook is the current tax break one gets when contributing to a Traditional IRA. When comparing the two, this must be taken into account.

Cheers,
Landog

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Author: rkmacdonald Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 46001 of 76079
Subject: Re: Traditional vs. Roth Date: 5/8/2005 4:22 PM
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One other thing not to overlook is the current tax break one gets when contributing to a Traditional IRA. When comparing the two, this must be taken into account.

I didn't overlook it. That's what I meant when I said there is a higher cost of funding the Roth.

Again, the whole point of my post was to point out that you will end up with more spending money using a Roth than a Traditional. That's a point that most people don't know.

Russ

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Author: bighairymike Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 46002 of 76079
Subject: Re: Traditional vs. Roth Date: 5/8/2005 4:41 PM
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Russ - here is one way to look at it. It gets down to your definition of "starting with same amount".

If you start with a $1000 in a traditonal and start with a $1000 in a Roth, then I get what you are saying and agree.

However if you back up and start with the $1000 dollars at the time you earn it, then you can either put the $1000 into the traditonal OR you can give the IRS $280 and put the remaining $720 in a Roth. In this case you have less with the Roth because you gave up the earning power of the $280 you paid to the IRS up front.

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Author: MrCromulent 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: 46003 of 76079
Subject: Re: Traditional vs. Roth Date: 5/8/2005 5:49 PM
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It all depends on whether you think your tax bracket will be higher now or when you retire. If it's the former, try to put more into a traditional. If the latter, go with the Roth. </oversimplification>

-MC

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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: 46004 of 76079
Subject: Re: Traditional vs. Roth Date: 5/8/2005 6:05 PM
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Another good feature of the Roth is that there are no required distributions. This means you can time your distributions for your own benefit. (Maybe you want to let a particular investment run--let it run; OTOH, maybe you want to use that Roth money so as not to have to take 401(k) money--which you'd have to pay taxes on and which may push you into a higher bracket ...) The lack of required distributions gives you an added flexibility when you're using the funds in retirement.

--SirTas

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Author: rkmacdonald Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 46006 of 76079
Subject: Re: Traditional vs. Roth Date: 5/8/2005 8:41 PM
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Author: bighairymike | Date: 5/8/05 4:41 PM | Number: 46002
If you start with a $1000 in a traditonal and start with a $1000 in a Roth, then I get what you are saying and agree.

Actually, I'm talking about maxing them out. The maximum you can put into either one is currently $4000 a year. So, if you compare a maxed out Traditional IRA to a maxed out Roth IRA, the Roth would have much more money in it at retirement.

The point is, again, that the Roth is better, because it allows you to shelter more money. But, it costs you more to do it up front, and I am talking about people who can afford to contribute the full $4000 in after tax money.

However if you back up and start with the $1000 dollars at the time you earn it, then you can either put the $1000 into the traditonal OR you can give the IRS $280 and put the remaining $720 in a Roth. In this case you have less with the Roth because you gave up the earning power of the $280 you paid to the IRS up front.

This is the normal way to compare them, and it is a perfectly valid analysis, if you cannot afford to max them out. However, if you can afford to max them out, you would be leaving government money on the table if you used the Traditional IRA instead of the Roth.

Russ

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Author: rkmacdonald Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 46007 of 76079
Subject: Re: Traditional vs. Roth Date: 5/8/2005 8:46 PM
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Author: MrCromulent | Date: 5/8/05 5:49 PM | Number: 46003
It all depends on whether you think your tax bracket will be higher now or when you retire. If it's the former, try to put more into a traditional. If the latter, go with the Roth. </oversimplification>

You are not getting my point.

I am not talking about which one is the better investment. Your comments are perfectly valid.

I am simply stating that the Roth allows you to shelter more money. If you can afford to fully fund the Roth, then you will have more sheltered money during retirement.

Russ

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Author: rkmacdonald Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 46008 of 76079
Subject: Re: Traditional vs. Roth Date: 5/8/2005 9:12 PM
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Author: SirTas | Date: 5/8/05 6:05 PM | Number: 46004
Another good feature of the Roth is that there are no required distributions. This means you can time your distributions for your own benefit. (Maybe you want to let a particular investment run--let it run; OTOH, maybe you want to use that Roth money so as not to have to take 401(k) money--which you'd have to pay taxes on and which may push you into a higher bracket ...) The lack of required distributions gives you an added flexibility when you're using the funds in retirement.

Good points.

Also, estate planning is better with the Roth. There are no taxes when passing a Roth on to your heirs.

Russ


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Author: NiceGuyMax Three stars, 500 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 46009 of 76079
Subject: Re: Traditional vs. Roth Date: 5/8/2005 10:44 PM
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When the year starts, I fill my Roth as fast as I can.
All the while putting some contributions into my 401(k).
When my Roth is filled for the year, I up my 401(k) contributions
in an attempt to fill that up also. I never do put the max in, but I try. :)
I want the tax free withdrawal and/or not have to take a required distribution at 70 1/2. Plus when I'm worm food my kids can have funds without estate tax sucking money off.

-- MrMax --

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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: 46010 of 76079
Subject: Re: Traditional vs. Roth Date: 5/8/2005 11:22 PM
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If two people, one with a Traditional and one with a Roth, contribute exactly the same amount of money to their respective accounts, each year while they are working, and they make the same investments, the Roth and Traditional will end up equal

You are missing part of the equation. The person who contributed to the traditional IRA would also have a tax savings this year of up to $1,000 or so. To make a fair comparison you should also assume that the $1,000 it is invested in something like an S&P500 index fund so that at retirement the person with the TIRA would have the same amount in the TIRA as the ROTH plus an S&P 500 index fund that has been appreciating for a number of years.

For what it is worth, I suspect that a lot of people who invest in Roth IRA's to get the deferred tax advantages because they expecting to be excessively rich during their retirement will be disappointed.

Greg


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Author: alstroemeria Big gold star, 5000 posts Top Recommended Fools Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 46012 of 76079
Subject: Re: Traditional vs. Roth Date: 5/9/2005 10:01 AM
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Plus when I'm worm food my kids can have funds without estate tax sucking money off.

Are you among the lofty 2% of Americans who leave estates large enough to get hit by the estate tax? Wow, I'm impressed!

=Alstro, millionaire but far from that level herself

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Author: MrCromulent 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: 46013 of 76079
Subject: Re: Traditional vs. Roth Date: 5/9/2005 10:19 AM
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You are not getting my point.

I am not talking about which one is the better investment. Your comments are perfectly valid.

I am simply stating that the Roth allows you to shelter more money. If you can afford to fully fund the Roth, then you will have more sheltered money during retirement.


I am totally 'getting your point.' However my counterpoint is that you yourself are not taking into account current taxes. You are picking an arbitrary starting point, which in this case is "money we have after we pay our current taxes." That is no more valid than what I'm saying.

Anyways, I understand your point, and do not want to turn this thread into a flame war, so I'm going to drop the whole thing.

-MC

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Author: PanemetCircenses Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 46015 of 76079
Subject: Re: Traditional vs. Roth Date: 5/9/2005 1:16 PM
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It all depends on whether you think your tax bracket will be higher now or when you retire. If it's the former, try to put more into a traditional. If the latter, go with the Roth. </oversimplification>

There are also instances of "cliffs" in the tax code under which it might make sense to favor a traditional IRA over a Roth. One example is the saver's credit where it is quite possible to be eligible for the credit by reducing your MAGI through contributing to a Traditional IRA and be ineligible if funding a Roth.

--B+C

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Author: jrr7 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: 46019 of 76079
Subject: Re: Traditional vs. Roth Date: 5/9/2005 2:49 PM
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Suppose you have plenty of money but aren't covered by a retirement plan.

You can put $4000 in a Roth and there are no tax impacts ever.

Or, you can put $4000 in a traditional and owe tax on it later -- but you get a tax deduction that reduces your taxes by (say) $1000. If you put this in a low-fee annuity (is there such a thing?), you've sheltered $5000 , and you'll owe taxes on everything (less $1000) when you retire. If when you retire you're in the 18% bracket, you come out ahead with the traditional (by 2.5%).

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Author: jrr7 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: 46020 of 76079
Subject: Re: Traditional vs. Roth Date: 5/9/2005 2:50 PM
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Also, estate planning is better with the Roth. There are no taxes when passing a Roth on to your heirs.

Just the inheritance tax, same as with a Traditional IRA.

Both Roths and Traditionals have RMDs if inherited by anyone other than the spouse.

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Author: rkmacdonald Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 46028 of 76079
Subject: Re: Traditional vs. Roth Date: 5/9/2005 10:11 PM
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Author: jrr7 | Date: 5/9/05 2:50 PM | Number: 46020
>>Also, estate planning is better with the Roth. There are no taxes when passing a Roth on to your heirs.<<

Just the inheritance tax, same as with a Traditional IRA.

True, but there is no income tax on the Roth.

Both Roths and Traditionals have RMDs if inherited by anyone other than the spouse.

This is true, but the required withdrawal is taxfree with a Roth.

Russ

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Author: jrr7 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: 46030 of 76079
Subject: Re: Traditional vs. Roth Date: 5/9/2005 11:37 PM
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Just the inheritance tax, same as with a Traditional IRA.

True, but there is no income tax on the Roth.

There is no income tax to inherit a Traditional either -- you only pay the income tax when you take the distributions.

So one advantage of a Roth is if you die and your inheritors are at a higher marginal tax rate, you all come out ahead. (except that you personally area dead)

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Author: cliff666 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: 46031 of 76079
Subject: Re: Traditional vs. Roth Date: 5/10/2005 12:24 AM
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So one advantage of a Roth is if you die and your inheritors are at a higher marginal tax rate, you all come out ahead. (except that you personally area dead)

I'll let my heirs worry about themselves. Screw 'em.

cliff

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Author: NiceGuyMax Three stars, 500 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 46045 of 76079
Subject: Re: Traditional vs. Roth Date: 5/10/2005 5:08 PM
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Alstro.

I am a hundredaire.
But I am hopeful of being a thousandaire. lol
I'd have to win the lottery to be a millionaire.

-- MrMax --

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Author: alstroemeria Big gold star, 5000 posts Top Recommended Fools Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 46046 of 76079
Subject: Re: Traditional vs. Roth Date: 5/10/2005 5:34 PM
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Every millionaire had some sort of luck as well as smarts. In my case, I was smart & hard-working enough to eventually land a good-paying job and a husband with an even better paying job, and we both had some stock options that panned out (but most underwater).

Remember the power of compound interest over time. I'll never forget the day I suddenly realized that our investments were earning a significant amount--as I said to the hubster, "It's like there's a 3rd person in the marriage making money (but not spending any)!"

Good luck on your quest...and don't stress about the taxes ;-)

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Author: cliff666 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: 46047 of 76079
Subject: Re: Traditional vs. Roth Date: 5/10/2005 6:14 PM
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Alstro.

I am a hundredaire.
But I am hopeful of being a thousandaire. lol
I'd have to win the lottery to be a millionaire.

-- MrMax --

Your original post seemed very concerned with estate taxes, yet you really have no estate to speak of? Better to spend your time (and money) creating that estate than fussing about what happens if ...

The estate taxes are being reviewed and changed continuously. My hope is that they would hit upon something like $5 to $10 million is below the estate tax threshhold, and then put a reasonable COLA on the number and then LEAVE IT ALONE.

The original rationale for the tax was to prevent the accumulation of enormous family fortunes, handed from generation to generation, tax free, amounting to a moneyed nobility. It hasn't worked very well, because those with large family fortunes bought enough votes in congress to riddle it with loopholes. As it is, anyone with an estate large enough to trip the estate tax can set up a family trust to avoid the tax. Like it or not, the tax is a paper tiger, which the rich use as a boogie man to scare people. "The Death Tax isn't fair! Vote the rascals out!" That's about it. There are still people who sometimes get to pay estate taxes, but that's poor planning on their part, or they are extemely wealthy.

Not true a few years ago.

cliff

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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: 46048 of 76079
Subject: Re: Traditional vs. Roth Date: 5/10/2005 8:37 PM
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cliff666: "As it is, anyone with an estate large enough to trip the estate tax can set up a family trust to avoid the tax."

Can (and will) you elaborate how a family trust, in and of itself, allows for avoidance of the estate tax in all circumstances?

Curiously, JAFO



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Author: cliff666 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: 46049 of 76079
Subject: Re: Traditional vs. Roth Date: 5/10/2005 9:22 PM
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Can (and will) you elaborate how a family trust, in and of itself, allows for avoidance of the estate tax in all circumstances?

Curiously, JAFO

Would if I could, but I can't. My pitiful little estate falls under the exclusion in any case. My understanding is that the trust is a living entity, and that it affords considerable protection. Maybe a "family trust" is not the correct implement. I stand to be corrected here.

cliff

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Author: synchronicity 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: 46056 of 76079
Subject: Re: Traditional vs. Roth Date: 5/11/2005 2:49 PM
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As it is, anyone with an estate large enough to trip the estate tax can set up a family trust to avoid the tax.

Well, it's a little more complex than that, and you can't always "avoid the tax".

But yes, there are many ways to minimize one's estate tax liability, although to really do so one has to start planning a while before they pass on.

-synchronicity

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Author: decath Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 46064 of 76079
Subject: Re: Traditional vs. Roth Date: 5/12/2005 10:17 AM
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alstro:
Remember the power of compound interest over time. I'll never forget the day I suddenly realized that our investments were earning a significant amount--as I said to the hubster, "It's like there's a 3rd person in the marriage making money (but not spending any)!"


That's good!

decath

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