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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: of 75794  
Subject: Re: Roth vs Common Stocks as Retirement Vehicle Date: 2/19/2004 12:58 PM
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Welcome, zzyxxyzz. Glad you could join us.

Yes, you are essentially correct. The Roth IRA contributions are not tax deductible. Hence, you can only contribute tax paid money. However, the account it is never taxed provided you take distributions according to the rules usually after age 59-1/2.

Investing in a taxable account in the Foolish lingo is known as Long Term Buy and Hold (LTBH). You want to select investments that don't pay large distributions or if they do that are taxed at low capital gains or qualified dividends rates. Then your investment grows tax free until you sell. Then you are taxed at capital gains rates.

The big problem in LTBH is selecting investments that you can truely hold long term. How many people bought into stocks like say Enron and intended to hold them long term, but then when it got bumpy hesitated to sell for fear of capital gains taxes.

Taxed managed mutual funds are probably the best choice. An S&P 500 Index fund is quite good because its diversified and pays low distributions. Individual stocks are fine, but you have to choose them well and for the long term.

An advantage of the Roth is that you can move funds around within the account--selling one stock and buying another--if one goes out of favor for example--all without paying any taxes. So it gives you more flexibility to adapt to unforseen changes.

The biggest problem with the Roth is its low contribution limits. 401Ks are better in that their contribution limits allow you to accumulate more invested funds. So those who want to retire early often will need to max their Roth, max their 401K and make significant after tax investments in a taxable account.

The key to early retirement success is usually to start young, make a disciplined approach to keep your spending well below your income, and gradually increase your rate of investing.

The statement you make that causes me some concern is this one--

"As I understand it, earnings on the non-Roth would not be taxed so long as I continue to use them for investing...restated, taxes on earnings are deferred until they are used for consumption (realized?)...Am I totally off base here?"

Any earnings you make within your Roth will not be taxed. However, in your non-Roth taxable investment, capital gains taxes will be due anytime you sell. So no, you cannot reinvest after a sale tax free. That is true in the Roth, its true of some real estate (house you live in and one vacation home), but not of taxable investments.

You seem to be well on the way to a comfortable retirement.

Best of luck to you.
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