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Old 10-10-2010, 03:32 PM
 
125 posts, read 633,659 times
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[quote=AtlantaGal;16208939]
So basically - the "income" during retirement years is a combination of pension (if app.), retirement vehicles, and $$ from other investments (rental income, dividends..).. right?[/quote]

Can someone, please, just say 'yay' or 'nay' to the above statement? This is really my underlying question as I already know the pros and cons.. I just need to know the answer to the above before analysis... thanks!!
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Old 10-10-2010, 05:03 PM
 
105,983 posts, read 107,937,321 times
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yes yes yes......

its whatever you will be living on... there are many retirement calculators you can play with that will ball park roughly what you may get from various asset combinations . firecalc and fidelity investments have some pretty comprehensive ones but they are all based on what was and that may or may not be what will be.
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Old 05-15-2011, 04:05 PM
 
Location: ABQ
3,771 posts, read 7,065,789 times
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I don't quite understand the love affair with the Roth.

Here's what I'd like to contribute that doesn't appear in these conversations much.

I think about my contributions to my retirement based on % of income, not $ amount. In a Roth IRA, since you're paying tax on your income BEFORE placing it in your account, you should contemplate your Traditional-IRA placement as being more $ (same % of income) than your potential Roth contribution.

For simplicity's sake, let's say you intend to place $4,000 per year into your Roth-IRA.

For a true comparison, you should calculate your Traditional-IRA contribution as being more: $5,320 (33%), or maybe $4,920 (23%). Why do we treat the contributions as the same dollar amount when the burden for the same amount into a Roth-IRA would be a higher % of your gross income?

It's not simply a debate regarding what tax bracket you are in now vs what tax bracket you'll be in while retired - it's also about the compounding monies that you'll be earning.

Roth-IRA with 5% return on $4,000 per year: roughly $507k over 40 years
vs
Traditional IRA with 5% return on $4,900 per year: roughly $589k. (Both were kept in the same tax bracket equaling 23%)

*Note: A more liberal earnings chart as well as a higher tax rate for both provide even larger gains using the same method provides even greater earnings for the Traditional-IRA user.

In an apples to apples comparison (I even skewed some of the attributes TOWARD the Roth by keeping the retirement tax bracket the same), you still have more money for your retirement in a tax-deferred account than a Roth. For MOST people, their taxable income will be less when you're retired than it is now, regardless of one's deductions since most people take the standardized deductions.

In addition, we haven't mentioned the tax savings by deducting that $4,900 per year from your yearly gross income.

If we run the same numbers utilizing a lesser retirement tax bracket, the savings quickly go into the mid-6 figures over a 40-year period.

For me, it's no question: a traditional-IRA wins nearly every time.
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Old 05-15-2011, 05:01 PM
 
105,983 posts, read 107,937,321 times
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it all depends on your taxes at withdrawl and overal taxable income at retirement.its possible by using a roth to avoid having a lifetime of social security taxed. that trumps most taxable deductions now.

the roth is awesome for wealth transfering to heirs.

you can get more money invested in a roth since you are actually using 6600.00 of pretax income to get 5k in a roth. you would have to be able to put 6600 in the traditional to equal it out but you cant put in that much.

in the 25% tax bracket 6600 in a 401k vs a roth 5k would be a more accurate comparison. assuming the same tax bracket in and out and same gains they work out identical to the penny.

im not a roth lover though unless your situation warrants it. for most of america i think they will come up on the short end of the stick with the roth as how many are going to be in a higher tax bracket with no pay checks coming in than they are with 2 paychecks in many families.
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Old 05-15-2011, 07:41 PM
 
Location: ABQ
3,771 posts, read 7,065,789 times
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Quote:
Originally Posted by mathjak107 View Post
it all depends on your taxes at withdrawl and overal taxable income at retirement.its possible by using a roth to avoid having a lifetime of social security taxed. that trumps most taxable deductions now.

the roth is awesome for wealth transfering to heirs.

you can get more money invested in a roth since you are actually using 6600.00 of pretax income to get 5k in a roth. you would have to be able to put 6600 in the traditional to equal it out but you cant put in that much.

in the 25% tax bracket 6600 in a 401k vs a roth 5k would be a more accurate comparison. assuming the same tax bracket in and out and same gains they work out identical to the penny.

im not a roth lover though unless your situation warrants it. for most of america i think they will come up on the short end of the stick with the roth as how many are going to be in a higher tax bracket with no pay checks coming in than they are with 2 paychecks in many families.
Theoretically, $6,600 in a traditional vs $5,000 in a Roth evens out on the part of the investor, but it doesn't even out once inside the fund because of the compounds, though.

You're right - the biggest problem is that you can't put $6,600 in a traditional! That's a very good point.

So if we run the numbers just like we did in the previous post, but alter it to max out the Roth, we get:

$5,000 into a Roth annually with an average rate of return of 5% over 40 years: $634k
vs.
$5,000 into a Traditional annually with an average rate of return of 5% over 40 years and an 18% tax rate upon retirement: $636k (at 23%: $598)

Although your retirement figured are extraordinarily similar, you're investing LESS to get those numbers.

Over the 40-year life of your continued investment: you will have saved roughly $66,000 gross income (figuring at just under 33% income tax - federal and state). Figuring a 23% income tax rate, you would have saved $46,000 gross income.

And of course, using the yearly deductions (a considerable saving too, especially, as you mention, you're able to drop yourself into a lower tax bracket that year in doing so)

Surely most Americans would be best served maxing out a traditional IRA and using the extra savings in order to open up mutual funds, college funds, or simply having extra cash laying around, in my humble opinion.

Just my $0.02.
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Old 05-16-2011, 02:28 AM
 
105,983 posts, read 107,937,321 times
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up to contributing the max roths and iras are identical compounding if the amounts are equal, gains are equal and the tax rates are the same. the mis-match happens when you max out the roth since you are really spending 6600 in pretax money for the roth and only spending 5k in pretax money to fund the traditional.. your pre-paying the taxes with 1600.00 and putting 5k in the roth.

a roth and 401k would be the only way to do an exact match since a roth and traditional are utilizing different amounts of pretax income. however taking 5k pretax and putting it in a traditional deductable ira and taking another 1600 in after tax money to even up the amounts and putting it in a tax defered annuity or tax free bonds would almost even up that scenerio too.

even if you put the extra 1600 in your taxable account using tax efficiant mutual funds or index funds you would get very close to the same results.

a roths real power is not in whether you will be in a higher or lower tax rate later as thats a crap shoot. its in its amazing wealth passing ability.

even though the heirs have to withdraw that money over time the withdrawls over your kids lifetime can be so small that the gains may actually be more than the withdrawls leaving your kids at the end of a lifetime with even more than they started with. talk about defering taxes that can be almost 100 years.

the roth is also good if your at that dividing line where the rmd's will end up not only being taxed but your social security gets taxed too.

your right though , there is to much the roth is better because its tax free being spewed and it may not be the case for most of america.
there are 4 things working against the roth.

the first is very few will be in a higher tax bracket when 2 paychecks in a family stop.

the 2nd thing is tax brackets are rising every year and have been for 40 years allowing more and more income thru at lower and lower tax brackets.
today a married 65 year old couple can pay 1500 bucks on 35k in income with the extra exemption they get . see what you pay today on 35k with your paychecks.

3rd many live in high tax states now and pay lots in state taxes on their income. they will leave those states when they retire making a tax deduction now even more valuable.

lastly with 80 million retiring baby boomers i dont see it in the cards that any political party will tell the masses "by the way we are raising your income tax".

i do see every other tax soaring but for the masses income tax i think will be sacred ground for many decades despite the deficits.

Last edited by mathjak107; 05-16-2011 at 03:10 AM..
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Old 05-16-2011, 06:40 PM
 
20,793 posts, read 61,127,944 times
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The other advantage to a ROTH, no minimum distribution age. If you don't need the money, you can leave it in there. I know several people in the situation where they are forced to take money out of their traditional IRA that they don't need, thus incurring taxes they don't want, just because they are over 70 1/2.

It is somewhat of a crapshoot if you are going to be in a higher tax bracket when you retire or not. For us, we are in the lowest tax bracket we will probably ever see so contributing to a ROTH is a no brainer for us. We have a mortgage, rental property, kids, one in college so our effective tax rate is single digits. When we were just married, renting, no kids, high tax bracket, a traditional made sense.
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Old 05-16-2011, 09:06 PM
 
Location: ABQ
3,771 posts, read 7,065,789 times
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Quote:
Originally Posted by golfgal View Post
It is somewhat of a crapshoot if you are going to be in a higher tax bracket when you retire or not.
Most Americans will without question be in a lower tax bracket when they're retired. You're right - it might not be your case, though, in which case you've made the right choice for yourself.

Quote:
Originally Posted by golfgal View Post
For us, we are in the lowest tax bracket we will probably ever see so contributing to a ROTH is a no brainer for us
Agree, but it's not the only consideration because you're spending more money up front to invest the same amount over a long period of time.

It's not quite as drastic for someone maxing out a ROTH (see previous posts where mathjak and I threw out the numbers), nor is it as drastic for someone who's older in age and may not have the account as long, but for someone not maxing out a ROTH - in some cases, some can only afford to put in 100-200 a month (and that's admirable in itself) which totals out to $1,200-$2,400 contribution to their ROTH per year.

In a traditional, that same person would be compounding $400-$800 more every single year over a 40-year period.

Irregardless of the tax brackets at retirement, the compounding monies/interest in that investment will generate more long-term investment dollars in a traditional than a ROTH.

To get around the minimum age requirement, I'd simply begin moving funds at 59 1/2 wherein you have 10 years of easing your minimum distributions at 70 1/2.

Moving funds after 70 1/2 using the traditional IRA's minimum distribution isn't nearly as daunting as salesman of Roth's make it sound. For someone at 70 1/2, if they had roughly $500,000 in their Traditional IRA, the average minimum distribution they would have to remove each year would be just over $17,000 per year (dependant on their age). Truthfully, I'd want to remove far more voluntarily when I'm retired, as would most people. That minimum amount of monies isn't likely to rock anyone's tax brackets.

If heiring invested monies is the concern (most people do prefer simply leaving money in one place) - simply re-invest those minimum distributions in other investments - mutual funds, stock funds, bonds, CDs, etc.

Last edited by llowllevellowll; 05-16-2011 at 09:14 PM..
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Old 05-16-2011, 09:48 PM
 
30,871 posts, read 36,796,993 times
Reputation: 34446
Quote:
Originally Posted by Parti Rhinocéros View Post
I don't quite understand the love affair with the Roth.

Here's what I'd like to contribute that doesn't appear in these conversations much.

I think about my contributions to my retirement based on % of income, not $ amount. In a Roth IRA, since you're paying tax on your income BEFORE placing it in your account, you should contemplate your Traditional-IRA placement as being more $ (same % of income) than your potential Roth contribution.

For simplicity's sake, let's say you intend to place $4,000 per year into your Roth-IRA.

For a true comparison, you should calculate your Traditional-IRA contribution as being more: $5,320 (33%), or maybe $4,920 (23%). Why do we treat the contributions as the same dollar amount when the burden for the same amount into a Roth-IRA would be a higher % of your gross income?

It's not simply a debate regarding what tax bracket you are in now vs what tax bracket you'll be in while retired - it's also about the compounding monies that you'll be earning.

Roth-IRA with 5% return on $4,000 per year: roughly $507k over 40 years
vs
Traditional IRA with 5% return on $4,900 per year: roughly $589k. (Both were kept in the same tax bracket equaling 23%)

*Note: A more liberal earnings chart as well as a higher tax rate for both provide even larger gains using the same method provides even greater earnings for the Traditional-IRA user.

In an apples to apples comparison (I even skewed some of the attributes TOWARD the Roth by keeping the retirement tax bracket the same), you still have more money for your retirement in a tax-deferred account than a Roth. For MOST people, their taxable income will be less when you're retired than it is now, regardless of one's deductions since most people take the standardized deductions.

In addition, we haven't mentioned the tax savings by deducting that $4,900 per year from your yearly gross income.

If we run the same numbers utilizing a lesser retirement tax bracket, the savings quickly go into the mid-6 figures over a 40-year period.

For me, it's no question: a traditional-IRA wins nearly every time.
I do have some money in a Roth, but I tend to agree with you. It all really depends on what the taxation picture looks like for Roth IRAs down the line (the law can always be changed to where they start taxing them) and what happens with tax rates. It also depends on how long you live and how much you take out.

With all these variables that are impossible to know, I tend to err on the side of maxing out 401K, then maybe a Roth IRA after that. But if you can max out your 401k and still qualify for a traditional IRA (as I was able to do for a few years when my expenses were low) then doing both tax deferred retirement accounts is still worth considering.
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Old 05-17-2011, 01:41 AM
 
98 posts, read 238,773 times
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We are doing 50/50. With your case (33% traditional/66% Roth), I think it's fine and don't need to change what you are doing. Well, there's one; I would increase retirement savings to at least 15%.
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