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My financial consultant doesn't care for Roth IRAs at all. Her philosophy is that she'd rather have all your money working for you rather than after-taxed money. Opinions anyone?

Also, I have money invested with Smith Barney (Unit trusts and one mutual fund), money invested in a Fool4 setup with Datek, and participate in my company's 401K plan. I have about $6000 to invest right now. Any suggestions?

Jim
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Jim,

If your Dr. gave you advice you found questionable, you would check with another Dr. to confirm the diagnosis. In this case, you might want to invest a little money talking with another finncial advisor.

I am curious as to why your advisor thinks a Roth IRA would prevent having all your money working for you. Ask her what other alternatives she can suggest. Ask her how making money tax-free in a Roth impacts these approach(es). After all, almost everything you can do outside a Roth IRA, you can do inside.

GP
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My financial consultant doesn't care for Roth IRAs at all. Her philosophy is that she'd rather have all your
money working for you rather than after-taxed money. Opinions anyone?


There are a number of sites (one I've seen is www.vanguard.com) that offer on-line comparisons between conventional and Roth IRAs, based on a simplified set of parameters that you provide -- things like your current tax rate, the tax rate you expect when you retire, etc. I think the Vanguard model calculates a "break-even" retirement tax rate -- the tax rate you would have to get in retirement (applied to a conventional IRA) to equal the income from the tax-free Roth. While the scenarios are very simple, it does provide some basis for comparison. It's not just a case of which tax bracket is higher.

I'd like to see some quantitative justification for your financial consultant's opinion. She may be right for your situation, but not for another.
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Helo Jimmy83

Your financial advisor may be right, but on the other hand, is he voicing an opinion, or has he considered and discussed the comparisons?

Everyone has a different situation with different goals.

A Roth is always a winner over the long term, but how long is your investment horizon?

Paying your marginal tax rate in taxes on $2,000 a year up front is likely to cost you a lot less overall than paying your marginal tax rate on a considerably greater amount after a number of years outside a Roth.

Is this money you are planning to access soon or much later or not at all (saving it for your heirs)?

Set up several scenarios and check them out on one of the various Roth calculators on line.

You should always take advise but act on your own decisions.
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Alr writes:

<<My financial consultant doesn't care for Roth IRAs at all. Her philosophy is that she'd rather have all your money working for you rather than after-taxed money. Opinions anyone?>>

You might suggest she do some further reading. While a Roth IRA certainly isn't for everyone in all cases, it certainly has some distinct advantages that might better serve your needs. Have her explain why a Roth is inappropriate in your case. I, for one, would be very interested in what she has to say. In particular, you should demand she run some comparisons for you. IMHO her philosophy leaves much to be desired if it's not supported by any analysis based on your situation.

Regards….Pixy
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TrudyKAS, you said:

<<Everyone has a different situation with different goals.

A Roth is always a winner over the long term, but how long is your investment horizon?>>


Always is too strong a word in this instance. :-)

I could construct a number of situations where a Roth is a loser regardless of term. It's really your first sentence that's true. In general, I think for annual contribution purposes a Roth has a far better chance of being the winner. I just am hesitant about saying "always." I'd rather say "generally, normally, usually" and "provided" certain conditions exist, that's true.

<<You should always take advise but act on your own decisions.>>

Always is not too strong here. :-) And I especially agree on the last part of that sentence.

Regards…..Pixy
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Jim,

A Roth IRA is not for everyone. Especially if you are a person that wants to retire early. Except for a couple of cases, the Roth IRA is not tax/penalty free until age 59. In this sense it is more restrictive than a regular IRA/401K, which can be distributed before age 59 without penalty.

I think the government is really missing the ball on retirement investing. Not everyone will fit the mold that they create for the traditional "retiree". I never really liked all the rules/hoops that the government makes you go through. If you have the discipline and sense to invest long term, these restrictive investing mechanisms are not necessary. I would prefer to see a change that would make these programs obeslete: eliminate all capital gains taxes.

Don't misunderstand me, a Roth is a not bad idea, especially for the uninitiated investor. The amount that can be contributed is small, relatively speaking. I just wouldn't want all my long term investments tied up in these government programs.

rustedSoul
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Pixy,

Thanks for your information. I haven't talked to my financial "advisor" anymore about this. It sounds as if I should. I was wondering, though, since I participate actively in my company's 401K, have investments (1 stock, 3 unit trusts, and 1 international mutal fund) with Smith Barney (with the "advisor"), and a Foolish 4 portfolio with Datek, should I invest in a Roth? I currently invest more than $2000 a year, and that's NOT including the 401K. Actually, I have about $6000 I'm looking into investing now. I was going to investigate the other portfolios, i.e., Rule Maker, Rule Breaker, etc. Any suggestions? Oh, I'm 42 if that makes any difference.

Jim
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Pixy, I stand corrected.

Rather than saying an unqualified "always", I should have said, for an initial Roth IRA; "Over the long term, if taxes are paid from moneys outside the annual $2,000.00 investment, the results will "almost always" be more profitable than a regular Roth, unless you are going from an extremely high marginal tax bracket to a very small one. Even then, if you are looking to use the Roth as part of your estate, and your beneficiaries opt to take the distributions over their life expectancy, there would be very little chance of the regular IRA working out to either your or your beneficiaries' advantage.

The advantage of a conversion IRA will vary according to the existing growth of the regular IRA and how high the ratio of the already taxed basis is to the conversion amount.

All of this is assuming, of course, that you have gains in your Roth and are not burying it in a poorly producing investment.
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> Except for a couple of cases, the Roth IRA is not tax/penalty free
> until age 59. In this sense it is more restrictive than a regular IRA/401K, which
>can be distributed before age 59 without penalty.

As I understand it, you can take out any of the initial money you've invested in a Roth IRA AT ANY TIME without a penalty. It is just the earnings (dividends, earnings and capital gains) that are subject to the restrictions.

While of course I'd like to think that initial money will soon be miniscule compared to the overall value :-), it is still good to know that you can easily pull out the initial $2K/yr contribution if needed.

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RustedSoul sez:

<<A Roth IRA is not for everyone. Especially if you are a person that wants to retire early. Except for a couple of cases, the Roth IRA is not tax/penalty free until age 59. In this sense it is more restrictive than a regular IRA/401K, which can be distributed before age 59 without penalty.>>

I think you missed something here. If anything, a Roth IRA is less restrictive than a traditional IRA. You can take your contributions at any time and at any age with no tax ramifications. That cannot be done in a tradtional IRA. When they're gone, you can take the earnings prior to age 59 1/2 under the same rules as you can with a traditional IRA. If you take them under Section 72(t) of the Infernal (sic) Revenue Code, you will pay taxes but no early withdrawal penalty. Therefore, I'm puzzled why you think this could possibly be more strict than it would be with a traditional IRA. The rule is exactly the same.

Regards….Pixy
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Jim asks:

<<Pixy,

Thanks for your information. I haven't talked to my financial "advisor" anymore about this. It sounds as if I should. I was wondering, though, since I participate actively in my company's 401K, have investments (1 stock, 3 unit trusts, and 1 international mutal fund) with Smith Barney (with the "advisor"), and a Foolish 4 portfolio with Datek, should I invest in a Roth? I currently invest more than $2000 a year, and that's NOT including the 401K. Actually, I have about $6000 I'm looking into investing now. I was going to investigate the other portfolios, i.e., Rule Maker, Rule Breaker, etc. Any suggestions? Oh, I'm 42 if that makes any difference.>>


I'll leave the investment decisions strictly up to you. I suggest, though, that you ensure you have taken maximum advantage of any matching contribution your employer may make to your 401k account. If you haven't reached that level yet, then IMHO that should be your first priority. After that, consider other alternatives based on a tax-equivalent comparison of potential results between your 401k and anything else under consideration by you. If you maintain the same discipline in alternative investments as you do within the 401k (i.e., regular contributions that increase as your pay does), it's entirely possible that you will do better in that alternative than you will within the limited choices available within your 401k plan. To be sure, though, you have to run the numbers. I suggest one way to do that analysis in Step 4 of the 13 Steps to Foolish Retirement Planning available at http://www.fool.com/Retirement/Retirement.htm .

Regards…..Pixy
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TrudyKas wrote:

<<Rather than saying an unqualified "always", I should have said, for an initial Roth IRA; "Over the long term, if taxes are paid from moneys outside the annual $2,000.00 investment, the results will "almost always" be more profitable than a regular Roth, unless you are going from an extremely high marginal tax bracket to a very small one. Even then, if you are looking to use the Roth as part of your estate, and your beneficiaries opt to take the distributions over their life expectancy, there would be very little chance of the regular IRA working out to either your or your beneficiaries' advantage.

The advantage of a conversion IRA will vary according to the existing growth of the regular IRA and how high the ratio of the already taxed basis is to the conversion amount.

All of this is assuming, of course, that you have gains in your Roth and are not burying it in a poorly producing investment.>>


That was said very well. :-) Short, factual, and to the point. Congrats on an excellent comment.

Regards…..Pixy

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When they're gone, you can take
the earnings prior to age 59 1/2 under the same rules as you can with a traditional IRA.
If you take them under Section 72(t) of the Infernal (sic) Revenue Code, you will pay
taxes but no early withdrawal penalty.


Pixy,

What I was referring to was the "substantially equal payment" option on the regular IRA. Under this distribution option, there are no penalties under age 59.

In all the literature I have read, I could not find any indication of the "substantially equal payment option" for a Roth IRA.

rustedSoul
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RustedSoul sez:

<<What I was referring to was the "substantially equal payment" option on the regular IRA. Under this distribution option, there are no penalties under age 59.

In all the literature I have read, I could not find any indication of the "substantially equal payment option" for a Roth IRA.>>


I have no idea what you have read, but be assured that you may take distributions of Roth IRA earnings prior to age 59 1/2 under the "substantially equal periodic payments" prescribed by Section 72(t) of the Infernal (sic) Revenue Code. While you will escape the early withdrawal penalty in doing so, the withdrawal will be taxed as ordinary income because it is not considered a qualified withdrawal for Roth IRA purposes. Thus, it cannot be tax-free.

Regards….Pixy

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