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Thanks for upholding the argument and go to great length to explain the facts, bikebum. Hope everyone else finds the statement more obvious now.
Thanks for the math, AmFest and bikebum, very useful insight about Roth's higher effective limit.
After a year of playing in the stock market, I finally got interested in IRA (yeah, 10 yrs ago ROTH was being pushed hard).
But what mathjak107 said makes a lot of sense for a lot of Americans.
Recap: (using $5k limit)
Roth: $7250: $5K goes to Roth, $1250 goes to IRS each year via 15-25% tax rate
tIRA: $7250: $5K goes to tIRA, $1250 goes to other investments or back into savings.
So Roth's pros (a higher effective limit) comes at a price: a 15-25% tax rate, later on 28% (as income rises).
Look at tIRA's pros: that $1250 carries a 15-25-28% tax rate, but the person is not locked into it,
he can bring his income down to a 15% tax bracket comes retirement and get to keep the difference.
For those who fall in the 25% bracket or higher, tIRA makes more sense.
As for me (working PT), my foreseeable tax brackets: 10% -> 25% -> 28% -> 15% by retirement.
I was really into Roth (again, 10 yrs ago it was all over the media), but now tIRA is a better deal.
Roth is best for those in the 10% (how do you live?) or 15% bracket.
Side note: I've narrowed it down to:
Vanguard's (in order of attractiveness) all min $3K (won't max until in 25% bracket, simply too poor)
Wellington - might open with this, seems very popular
500 Index Fund - performs as well as the first choice
LifeStrategy Growth Fund - (for me) lost out to first two
REIT Index Fund - rents rarely go down (yep, that's the extent of my knowledge here)
Health Care Fund - like gov, money grows on trees
Thanks for the math, AmFest and bikebum, very useful insight about Roth's higher effective limit.
After a year of playing in the stock market, I finally got interested in IRA (yeah, 10 yrs ago ROTH was being pushed hard).
But what mathjak107 said makes a lot of sense for a lot of Americans.
Recap: (using $5k limit)
Roth: $7250: $5K goes to Roth, $1250 goes to IRS each year via 15-25% tax rate
tIRA: $7250: $5K goes to tIRA, $1250 goes to other investments or back into savings.
So Roth's pros (a higher effective limit) comes at a price: a 15-25% tax rate, later on 28% (as income rises).
Look at tIRA's pros: that $1250 carries a 15-25-28% tax rate, but the person is not locked into it,
he can bring his income down to a 15% tax bracket comes retirement and get to keep the difference.
For those who fall in the 25% bracket or higher, tIRA makes more sense.
As for me (working PT), my foreseeable tax brackets: 10% -> 25% -> 28% -> 15% by retirement.
I was really into Roth (again, 10 yrs ago it was all over the media), but now tIRA is a better deal.
Roth is best for those in the 10% (how do you live?) or 15% bracket.
Side note: I've narrowed it down to:
Vanguard's (in order of attractiveness) all min $3K (won't max until in 25% bracket, simply too poor)
Wellington - might open with this, seems very popular
500 Index Fund - performs as well as the first choice
LifeStrategy Growth Fund - (for me) lost out to first two
REIT Index Fund - rents rarely go down (yep, that's the extent of my knowledge here)
Health Care Fund - like gov, money grows on trees
With that, Merry Xmas y'all!!!
There is another route here as well. Instead of using the IRA if you have access you can use your 401k
My wife and I max our 401k @ 35,000
Our tax savings @ 28% = 9,800
We also max our roths @ 11,000
Our tax savings pays for all but 1200 of our Roth funding
I can't even max out my (expectant) IRA contri...
Well, when I hit that 25% bracket in less than 2 yrs from now, 401K will be my next target.
Ques: why did you go with Roth instead of tIRA?
A couple reason.
1. You can't make deductible contributions to a tIra if you are covered employer offered plan unless your modified adjusted gross income is less than 116k. My wife and I are above that
2. I like the diversity of having both pretax and post tax monies at retirement to give flexability on withdraw strategies and taxes
3. I won't owe any taxes on the Roth monies in 30 years or however long it is until I need it
4. I can take my Roth contributions back out at anytime with any taxes or penalties
1. You can't make deductible contributions to a tIra if you are covered employer offered plan unless your modified adjusted gross income is less than 116k. My wife and I are above that
2. I like the diversity of having both pretax and post tax monies at retirement to give flexability on withdraw strategies and taxes
3. I won't owe any taxes on the Roth monies in 30 years or however long it is until I need it
4. I can take my Roth contributions back out at anytime with any taxes or penalties
1. yes
2. flexibility is always
4. yes, on principal
3. but aren't you taxed at 28% to make that Roth contribution?
It doesn't matter that it is possible for your taxable investment to come out ahead. That is a straw man argument. The point is you lose the opportunity to get that money in a tax-advantaged account.
It's a math problem. I'll try to pitch it another way. You are comparing contributions of equal amounts, which gets messy, because it takes more money to get an equal amount in the Roth. If you do it this way, you have to add the money you save with a deduction on the Traditional. It's kind of messy.
Compare contributions of different dollar amounts using an assumed tax rate. At 25% tax rate, $100 in the Trad is the same as $75 in the Roth. They both take the same money and get you the same thing in the end. That is just math. The IRS would see a lower contribution in the Roth, even though you really did an equivalent contribution.
I will gladly admit I'm wrong if you, or someone else, can prove so with a calculation; it is a math problem. Hey, maybe you could just show, with numbers, a flaw in my calculations. I think you know I'm right, but just don't want to admit it at this point.
I'm only beating it to death because you and others kinda ganged up on the OP, who was actually correct.
Since people seem to jump in and continue arguing with the straw man, let me restate the claim: A Roth IRA has a higher "effective" contribution limit than a Traditional IRA.
Yes. The two options for the "post tax equivalent" dollars are 1) all in roth, or 2) some in traditional and some in taxable.
If we assume the same tax rates now and in retirement, the two would be equivalent if the taxable account worked like a traditional IRA.
But it doesn't. The difference is that with a traditional IRA/taxable combo, some of the money is visible to the eyes of Uncle Sam.
The contribution is only the money in tax-favorable accounts, NOT the total in all investments. Thus the t-IRA effective contribution is less than the Roth.
I'd be taxed on that money no matter what I spent it on
maybe ,maybe not. depending on when you take ss and the planning leading in to retirement.
a couple can draw out 22k a year tax free from traditional ira's and up to as much as 42k and pay as little as 1500 bucks tax.
you may have written that off when 2 paychecks were coming in at far higher rates.
you can also leverage your ira money with life insurance leaving a spouse tax free life insurance never taxed while spending far less in taxes buying that policy with ira money.
there are ways of manipulating those traditional accounts to get far more out at lower taxes . it will be a situation by situation thing which is why most folks really need a planner well verserd in the 2nd half of the game.
for my son who is an attorney roths do not carry as much weight as traditionals especially 401k's where amounts can be evened out . entering the workforce he is already close to the highest tax rates. his average tax rate over his lifetime will likely not average out all that low so odds are he would be in a lower bracket at retirement than his lifetime average.
me on the other hand took 30 or 40 years of working to finally ramp up to my higher brackets. had roths existed my average tax rate over my 40 years would be far lower than just my final years. odds are i would be in a higher tax rate at retirement than that average ramping up over a career so a roth would win hands down.
there are aspects most amateurs do not even think about when comparing the 2 or doing conversions.
Last edited by mathjak107; 12-25-2014 at 03:31 AM..
maybe ,maybe not. depending on when you take ss and the planning leading in to retirement.
There is no maybe, no matter what I did with that income in the current year I would be taxed on it. It wouldn't matter if I spent it on hookers or a Roth IRA contribution
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