Roth IRAs - worthless? (moving, 2015, single, benefits)

[NewbieHere]

Originally Posted by carnivalday

Ive never made a lot of money, but when I opened my Roth 30 years ago, I figured no matter what happened between then and retirement, it had to be a good thing if my retirement money grew and would be taken out tax free. Possibly the best decision I ever made in my lifetime.

Wow, I must have missed it, I didn't know it was available 30 years ago.

[NewbieHere]

Originally Posted by BellaDL

reneeh63,

We have tried to contribute to Roth IRA the moment it was made available. Unfortunately, the ratios of our Roth IRAs to our IRA + 401K are very small due the fact that our incomes were higher than the max limits for Roth IRA contributions.
From my POV, I see Roth IRAs benefits everybody whether they are well off or not.

I've been contributing to non deductible tIRA and then immediately converted to Roth. But only did that in the last 10 years. Small sum compare to my 401k. And recently my 401k allows a Roth 401k but I decided it's not worth the hassle so I kept contributing to 401k.

[carnivalday]

Well now you made me go check it out. Im really confused, it says Roth IRAS were created in 1997, which would be only 18 years. I could have sworn I had it much longer than that.

Its really hard to believe, considering the size of my Roth IRA. I guess thats living proof that it makes sense to start saving early.

Really? Only 18 years??

[jlawrence01]

Originally Posted by carnivalday

Well now you made me go check it out. Im really confused, it says Roth IRAS were created in 1997, which would be only 18 years. I could have sworn I had it much longer than that.

Traditional IRAs existed long before that. The Roth IRA was championed by Sen. William Roth (R-Del.) and was implemented during his last term in Congress.

[mathjak107]

Originally Posted by GeoffD

I really wish I'd known all this stuff years ago. It's a no-brainer for me to shift my $24,000/year "catch-up" contribution over to a Roth 401(k) for my last 8 work years.

not the same thing as now you lost 20-30 years of ramping up to these levels and doing the roth . conversions are not he same thing near the end of the game .

[mathjak107]

Originally Posted by NewbieHere

Wow, I must have missed it, I didn't know it was available 30 years ago.

The Roth IRA was established by the Taxpayer Relief Act of 1997 (Public Law 105-34) and named for its chief legislative sponsor, Senator William Roth of Delaware.

[Robyn55]

Originally Posted by reneeh63

Whenever I see a thread on Roth IRAs they seem to get trounced by most everyone. How did they ever come about when they seem to be recommended in no circumstances? Or perhaps it's just that everyone on here (and other financial interest websites/forums) are so well-off that it doesn't work for THEM?

I'm trying to hedge my bets a little by having both traditional and Roth - in a 75% / 25% proportion. I'm hopefully 10 years out from retiring and in the 25% bracket - expecting the usual SS and a moderate pension.

What tax bracket are you in now? Do you pay a state income tax now? And do you think those situations will remain the same in the future?

I think the single most important thing in an analysis like this is what is the effective tax rate you're paying on your after-tax Roth contributions now. Which includes not only the above - but things like deductions that are subject to % limits of income (like the medical expense deduction). What is the "cost" of every dollar you put into your Roth?

The second most important thing is figuring out how much money you'd have between now and then (whenever then may be). Using the same rate of return assumptions. And taking into account the RMD age requirements of regular IRAs.

IOW - if you're in a 50% combined tax bracket now (just to take a round number) - for every $2 you earn you can put $2 into a regular IRA tax free. With a Roth - it's only $1 (the other $1 goes to pay taxes). $2 with an added $2 compounded every year for X years is always more than $1 plus another $1 added every year for X years.

Then - you have to look at the withdrawal side. How much you'll have in your IRAs. How much you think you'll want to withdraw. And when. How much you have to withdraw when it comes to RMDs. What taxes you might owe on withdrawals from IRAs (keeping other income in mind). This will involve more speculation/guessing (about the future) than other things (other than the investment assumptions).

I think the main retirement/senior taxation issues are almost irrelevant when it comes to this. These are the rules when it comes to taxation of SS benefits:

No one pays federal income tax on more than 85 percent of his or her Social Security benefits based on Internal Revenue Service (IRS) rules. If you:

• file a federal tax return as an "individual" and your combined income* is
  • between $25,000 and $34,000, you may have to pay income tax on up to 50 percent of your benefits.
  • more than $34,000, up to 85 percent of your benefits may be taxable.
• file a joint return, and you and your spouse have a combined income* that is
  • between $32,000 and $44,000, you may have to pay income tax on up to 50 percent of your benefits
  • more than $44,000, up to 85 percent of your benefits may be taxable.

IOW - if you're at all reasonably middle class in retirement - and most people with SS and a pension are - you will pay taxes on 85% of your benefits. When it comes to paying more for Medicare - only individuals with a modified adjusted gross income higher than $85k or couples with a MAGI of $170k pay more. So - unless your IRAs are really huge - you won't have this problem either. (And - overall - this isn't a bad problem to have .)

Also - when you're 70-80-90 - you may have large deductible medical expenses. Like living in a skilled nursing home. Or having home health aides. Or even paying what you have to pay for regular Medicare and some expensive drugs. So - even if you have a relatively high income - you may owe little or nothing in taxes because of your deductions.

We are all in different tax brackets. The lower your current tax rates are - the more the Roth makes sense. And vice versa. The longer the period between now and retirement - assuming you're in a fairly low tax bracket now - the more the Roth makes sense too. Note that are many (on-line) calculators where you can do these compound interest calculations quickly and easily.

FWIW - I have a pretty large conventional IRA. When Roths came around in 1997 - I did a small % partial conversion. Even at the time - it didn't make much sense (and - to the extent that it did - it was because you could spread the tax over a 2 year period - a one time thing). I haven't had earned income since 1997 - so I haven't contributed to retirement plans since then. But math is still math. And I know I have a lot more money in my IRA today because I contributed with pre-tax dollars - not after-tax dollars - way back when (like starting 40 years ago). Robyn

[Robyn55]

Originally Posted by mathjak107

...will your social security get taxed with roths or not is a major issue , don't know ? err on the side of caution and shoot for as much tax free income in retirement as you can because getting tens of thousands of dollars taxed a year at 85% when you didn't have to get any taxed is a huge issue ...

You would have to be pretty low income to avoid paying taxes on SS income - since part of SS income is included in the computation that determines whether SS is taxable.

will you retire at 62 and need medical insurance ? a subsidized aca plan is tied to taxable income . had i had roth income i would be getting a few thousand a year from 62 to 65 in medical insurance subsidy.

Normal retirement age is still 65 (or perhaps 66 if you're talking about FRA). When Medicare kicks in. I don't consider ACA subsidies to be a retirement issue.

if your taxable income goes over certain levels you pay more for medicare - as much as almost 2x.

At fairly high income limits. Don't know anyone who is complaining about it (especially married couples) .

what will happen when those rmd's kick in at 70-1/2 ? how will your tax rate jump and will any of the above trigger points be hit?

There are worse things than making money and paying taxes . Also note that RMDs are spread over many many years - decades.

what will you do with the money you have to take out in rmd's ? if you are going to reinvest it in a taxable account then you get hit there tax wise forever going forward . a roth would have all future gains and distributions tax free with no rmd's . that reinvested rmd mone you had to take by not having roths is now going to be taxed forever going forward from 70-1/2 on.

As a mostly fixed income investor - rates on taxable and tax-free stuff are about the same these days. So no difference there. Robyn

[mathjak107]

you don't consider retiring at 62 a retirement problem when it comes to medical ? i think you are quite wrong there .

while there are worse things than making money and paying taxes , your fair share of taxes is whatever you can legally figure out you have to pay . you want to pay more then you have to ? we thank you for it.


i disagree again on the income amount having to be low.

with enough in roths and your taxable accounts which already have most of the taxes paid you could easily escape a few years of getting your ss taxed if not longer , as well as being in the zero capital gains brackets tool . you can easily hit 6 figures and no taxes on ss .


while it may not apply to you as far as rmd's i can tell you it certainly apply's to those who hold equity funds . having to rebuy the same equity funds in a taxable account as you had in a traditional because of rmd's can have big tax ramifications going forward as all gains and dividends are taxable . not everyone has to spend the rmd's . all gains and dividends at this stage are all forever tax free .

so we are pretty much in disagreement across the board .

[magicturtle]

Originally Posted by reneeh63

Whenever I see a thread on Roth IRAs they seem to get trounced by most everyone. How did they ever come about when they seem to be recommended in no circumstances? Or perhaps it's just that everyone on here (and other financial interest websites/forums) are so well-off that it doesn't work for THEM?

I'm trying to hedge my bets a little by having both traditional and Roth - in a 75% / 25% proportion. I'm hopefully 10 years out from retiring and in the 25% bracket - expecting the usual SS and a moderate pension.

I think you can also look at a Roth IRA as that emergency savings account everyone says you need...since you can take the contributions back out without penalty. I am with you about hedging bets. I feel like many people will probably be able to make use of tax free income at some point in their life.