Roth vs traditional ira poll

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.

Roth vs traditional for general public(not your situation, but average investors)

The roth is actually going to to cause more tax to general public
16
18%
The roth will save the general public's retirement by lower taxes
35
39%
Dont know or don't care
38
43%
 
Total votes : 89

Roth vs traditional ira poll

Postby Johm221122 » Tue May 21, 2013 9:55 pm

With the average amount Americans save for retirement, Do you think the Roth is in the long run is worse for the average persons retirement?Before the site went down, I asked question about how much it would take in traditional to pay zero tax.It was over 500k (with no other income) for couple. How many couples actually will save this?Is general public mislead by roth?
Last edited by Johm221122 on Wed May 22, 2013 11:00 am, edited 1 time in total.
Johm221122
 
Posts: 4682
Joined: Fri May 13, 2011 7:27 pm

Re: Roth vs traditional ira poll

Postby Dopey » Tue May 21, 2013 10:01 pm

I put "don't know, don't care."

I very well could be wrong, but I've told myself as long as I'm at or below the 25% tax bracket, I'll contribute to a Roth IRA.

Once I reach the 28% bracket, I'll contribute to a Traditional IRA.

Unless I can be absolutely convinced this is wrong, I'll stay with this plan as I like the tax diversity it gives me when coupled with my Trad 401k.
Dopey
 
Posts: 100
Joined: Thu Oct 25, 2012 9:41 pm

Re: Roth vs traditional ira poll

Postby Johm221122 » Tue May 21, 2013 10:07 pm

Rammer wrote:I put "don't know, don't care."

I very well could be wrong, but I've told myself as long as I'm at or below the 25% tax bracket, I'll contribute to a Roth IRA.

Once I reach the 28% bracket, I'll contribute to a Traditional IRA.

Unless I can be absolutely convinced this is wrong, I'll stay with this plan as I like the tax diversity it gives me when coupled with my Trad 401k.

This is my point, I assume you will have above average retirement savings. It will work for you.The Roth is/was sold as the answer to the general publics retirement problem, but for the AVERAGE American investors will it?
John
Johm221122
 
Posts: 4682
Joined: Fri May 13, 2011 7:27 pm

Re: Roth vs traditional ira poll

Postby Dopey » Tue May 21, 2013 10:08 pm

Johm221122 wrote:
Rammer wrote:I put "don't know, don't care."

I very well could be wrong, but I've told myself as long as I'm at or below the 25% tax bracket, I'll contribute to a Roth IRA.

Once I reach the 28% bracket, I'll contribute to a Traditional IRA.

Unless I can be absolutely convinced this is wrong, I'll stay with this plan as I like the tax diversity it gives me when coupled with my Trad 401k.

This is my point, I assume you will have above average retirement savings. It will work for you.The Roth is/was sold as the answer to the general publics retirement problem, but for the AVERAGE American investors will it?
John


I see. I stand by my original vote then.

:|
Dopey
 
Posts: 100
Joined: Thu Oct 25, 2012 9:41 pm

Re: Roth vs traditional ira poll

Postby jidina80 » Tue May 21, 2013 10:10 pm

I believe the Roth can lower most people's lifetime federal income tax because it allows us to choose when to take the tax hit (investing in Roth) and when to minimize taxes by withdrawing Roth instead of declaring income from Traditional IRAs (TIRA) or taxable gains.

This flexibility means a lot to me, converting TIRA to Roth in my low-tax early retirement, while lowering my later Required Minimum Distributions from the TIRA and reducing my Social Security income that will be taxes.
User avatar
jidina80
 
Posts: 692
Joined: Wed Feb 24, 2010 6:05 pm
Location: Fiji

Re: Roth vs traditional ira poll

Postby ruralavalon » Tue May 21, 2013 10:16 pm

I don't know. I believe that most non-Bogleheads choose the Roth over traditional without really considering the long-term tax consequences of paying the tax up front.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started
User avatar
ruralavalon
 
Posts: 4706
Joined: Sat Feb 02, 2008 11:29 am
Location: Illinois

Re: Roth vs traditional ira poll

Postby grabiner » Tue May 21, 2013 10:28 pm

I would expect that for the general public, the Roth is better because they don't think about taxes in planning. With a $5500 contribution limit, people will believe that this is the correct amount to save, and will contribute $5500 whether it is traditional or Roth (and spend the tax savings from a traditional IRA). When they retire, the Roth will give a higher standard of living.

With the same after-tax contribution, the traditional IRA is usually better; the exception is those workers who are in a 15% tax bracket (or 25% bracket without any other phase-outs) while working, and who retire at a 27.75% marginal tax rate because of the phase-in of Social Security taxation.
David Grabiner
User avatar
grabiner
Advisory Board
 
Posts: 12982
Joined: Wed Feb 21, 2007 12:58 am
Location: Columbia, MD

Re: Roth vs traditional ira poll

Postby StormShadow » Wed May 22, 2013 12:23 am

ruralavalon wrote:I believe that most non-Bogleheads choose the Roth over traditional without really considering the long-term tax consequences of paying the tax up front.

Its investment psychology. Do you feel more comfortable paying taxes now on a smaller amount of income, or paying taxes on a larger amount of deferred income in the future?

I think people just look at the $$$ and immediately decide that they would feel more comfortable paying the tax now and never have to deal with paying additional tax ever again. It certainly explains why high income earners elect to do backdoor Roths. Could they be losing out? Possibly. But I don't think you can put a price-tag on peace of mind. It feels nice knowing you don't have to pay future taxes.

grabiner wrote:With a $5500 contribution limit, people will believe that this is the correct amount to save, and will contribute $5500 whether it is traditional or Roth (and spend the tax savings from a traditional IRA). When they retire, the Roth will give a higher standard of living.

More importantly, with a Roth IRA folks are able to contribute more for that tax year. You have a higher cost basis with $5,500 post-tax than $5,500 pre-tax.
StormShadow
 
Posts: 256
Joined: Thu Feb 09, 2012 7:20 pm

Re: Roth vs traditional ira poll

Postby Default User BR » Wed May 22, 2013 1:14 am

Probably many here are like me, and there is no choice. I can't deduct a Traditional, so a Roth is the only sensible choice. I don't need to do any analysis.

Furthermore, MyMegaCorp doesn't offer a Roth 401(k), so I don't even need to consider that. I max the Roth IRA, put all I can in the deferred 401(k), then as much as the company will let me into after-tax contributions that I roll out to Roth.


Brian
Default User BR
 
Posts: 7503
Joined: Mon Dec 17, 2007 8:32 pm

Re: Roth vs traditional ira poll

Postby Johm221122 » Wed May 22, 2013 9:20 am

jidina80 wrote:I believe the Roth can lower most people's lifetime federal income tax because it allows us to choose when to take the tax hit (investing in Roth) and when to minimize taxes by withdrawing Roth instead of declaring income from Traditional IRAs (TIRA) or taxable gains.

This flexibility means a lot to me, converting TIRA to Roth in my low-tax early retirement, while lowering my later Required Minimum Distributions from the TIRA and reducing my Social Security income that will be taxes.

I understand the flexibility means a lot to us, but the average retiree saves 220, 000

http://www.forbes.com/sites/learnvest/2 ... -your-age/
A couple comes to 440 k (this is probably high) , they could withdraw 5% a year and pay no tax
John
Johm221122
 
Posts: 4682
Joined: Fri May 13, 2011 7:27 pm

Re: Roth vs traditional ira poll

Postby Johm221122 » Wed May 22, 2013 9:22 am

ruralavalon wrote:I don't know. I believe that most non-Bogleheads choose the Roth over traditional without really considering the long-term tax consequences of paying the tax up front.

This is the unfortunate truth and many will be penalized for this with extra tax
John
Johm221122
 
Posts: 4682
Joined: Fri May 13, 2011 7:27 pm

Re: Roth vs traditional ira poll

Postby Johm221122 » Wed May 22, 2013 9:35 am

grabiner wrote:I would expect that for the general public, the Roth is better because they don't think about taxes in planning. With a $5500 contribution limit, people will believe that this is the correct amount to save, and will contribute $5500 whether it is traditional or Roth (and spend the tax savings from a traditional IRA). When they retire, the Roth will give a higher standard of living.

With the same after-tax contribution, the traditional IRA is usually better; the exception is those workers who are in a 15% tax bracket (or 25% bracket without any other phase-outs) while working, and who retire at a 27.75% marginal tax rate because of the phase-in of Social Security taxation.

I believe many are just blindly choosing Roth.The average investor would pay no tax in retirement with 220, 000 and this is probably really overstating there savings.The Roth 401 is probably really misunderstood by investors
John
Johm221122
 
Posts: 4682
Joined: Fri May 13, 2011 7:27 pm

Re: Roth vs traditional ira poll

Postby Johm221122 » Wed May 22, 2013 9:58 am

StormShadow wrote:
ruralavalon wrote:I believe that most non-Bogleheads choose the Roth over traditional without really considering the long-term tax consequences of paying the tax up front.

Its investment psychology. Do you feel more comfortable paying taxes now on a smaller amount of income, or paying taxes on a larger amount of deferred income in the future?

I think people just look at the $$$ and immediately decide that they would feel more comfortable paying the tax now and never have to deal with paying additional tax ever again. It certainly explains why high income earners elect to do backdoor Roths. Could they be losing out? Possibly. But I don't think you can put a price-tag on peace of mind. It feels nice knowing you don't have to pay future taxes.

grabiner wrote:With a $5500 contribution limit, people will believe that this is the correct amount to save, and will contribute $5500 whether it is traditional or Roth (and spend the tax savings from a traditional IRA). When they retire, the Roth will give a higher standard of living.

More importantly, with a Roth IRA folks are able to contribute more for that tax year. You have a higher cost basis with $5,500 post-tax than $5,500 pre-tax.

It is the psychology, the Roth is pushed as pay no tax, when plenty of people would pay little or no tax with traditonal.Invest in Roth you can take contributions out, but will taking money out help you In retirement. The Roth will allow you to leave money tax free to heirs, will the average American leave anything?
John
Johm221122
 
Posts: 4682
Joined: Fri May 13, 2011 7:27 pm

Re: Roth vs traditional ira poll

Postby Johm221122 » Wed May 22, 2013 10:05 am

Default User BR wrote:Probably many here are like me, and there is no choice. I can't deduct a Traditional, so a Roth is the only sensible choice. I don't need to do any analysis.

Furthermore, MyMegaCorp doesn't offer a Roth 401(k), so I don't even need to consider that. I max the Roth IRA, put all I can in the deferred 401(k), then as much as the company will let me into after-tax contributions that I roll out to Roth.


Brian

Brian as first posters reply, you are probably will be nowhere near average in savings at retirement. But how many kids will graduate college and put 10% in Roth 401 and give up there 0% taxable withdraws in retirement? I feel Americans will pay a lot of unnecessary taxes just as they pay unnecessary fees now
John
Johm221122
 
Posts: 4682
Joined: Fri May 13, 2011 7:27 pm

Re: Roth vs traditional ira poll

Postby Iorek » Wed May 22, 2013 10:11 am

StormShadow wrote:
ruralavalon wrote:I believe that most non-Bogleheads choose the Roth over traditional without really considering the long-term tax consequences of paying the tax up front.

Its investment psychology. Do you feel more comfortable paying taxes now on a smaller amount of income, or paying taxes on a larger amount of deferred income in the future?

I think people just look at the $$$ and immediately decide that they would feel more comfortable paying the tax now and never have to deal with paying additional tax ever again. It certainly explains why high income earners elect to do backdoor Roths. Could they be losing out? Possibly. But I don't think you can put a price-tag on peace of mind. It feels nice knowing you don't have to pay future taxes.



High income earners do back door Roths because it is a tax exemption for earnings that would have been in a taxable account or nondeductible IRA (they are choosing between paying taxes now vs paying taxes now and later).
Iorek
 
Posts: 602
Joined: Fri Mar 08, 2013 10:38 am

Re: Roth vs traditional ira poll

Postby Peter Foley » Wed May 22, 2013 10:14 am

Perhaps I'm being confused by the wording of the poll. With many individuals not saving for retirement, they will not be affected by Roth or TIRA. Their taxes in retirement will be low because they have little in assets and SS is their only income in retirement. Is this the average American?

If the question is limited to those who are saving for retirement, the answer is dependent on current and future tax rates as well as an individual's knowledge of their tax rate and their ability to forcast (and manage) future tax rates. My best guess is that this is not a high percentage of the population. IMHO this is certainly not the average American.
User avatar
Peter Foley
 
Posts: 2226
Joined: Fri Nov 23, 2007 11:34 am
Location: Lake Wobegon

Re: Roth vs traditional ira poll

Postby englishgirl » Wed May 22, 2013 10:21 am

Default User BR wrote:Probably many here are like me, and there is no choice. I can't deduct a Traditional, so a Roth is the only sensible choice. I don't need to do any analysis.


This.
Sarah
User avatar
englishgirl
 
Posts: 2105
Joined: Thu Mar 01, 2007 6:34 pm
Location: FL

Re: Roth vs traditional ira poll

Postby IlliniDave » Wed May 22, 2013 10:22 am

I voted "don't know". The answer is too complicated for me to figure out. :) I can only even hazard a guess on how it would shake out for me, and it really doesn't affect what I do. I max out 401k, can't do deductible IRA, and backdoor Roth beats the pants off non-deductible IRA so I do the conversion. I'm using every nickel of tax advantaged account contributions I'm allowed to the best of my knowledge outside of annuities and other insurance products, so there's no trade space--I'm saying 'yes' to all.
Don't do something. Just stand there!
IlliniDave
 
Posts: 1313
Joined: Fri May 17, 2013 8:09 am

Re: Roth vs traditional ira poll

Postby Johm221122 » Wed May 22, 2013 10:29 am

Peter Foley wrote:Perhaps I'm being confused by the wording of the poll. With many individuals not saving for retirement, they will not be affected by Roth or TIRA. Their taxes in retirement will be low because they have little in assets and SS is their only income in retirement. Is this the average American?

If the question is limited to those who are saving for retirement, the answer is dependent on current and future tax rates as well as an individual's knowledge of their tax rate and their ability to forcast (and manage) future tax rates. My best guess is that this is not a high percentage of the population. IMHO this is certainly not the average American.

My poll is for American saving for retirement. I feel that Roth is just assumed to always be the beginners choice.With inflation what will be the standard and personal deductions in 30 years? I guess this is my pet peeve, How much would you need in traditional/401 to pay 0% tax and are investors taking advantage of it before Roth?
John
Johm221122
 
Posts: 4682
Joined: Fri May 13, 2011 7:27 pm

Re: Roth vs traditional ira poll

Postby Johm221122 » Wed May 22, 2013 10:33 am

englishgirl wrote:
Default User BR wrote:Probably many here are like me, and there is no choice. I can't deduct a Traditional, so a Roth is the only sensible choice. I don't need to do any analysis.


This.

IlliniDave wrote:I voted "don't know". The answer is too complicated for me to figure out. :) I can only even hazard a guess on how it would shake out for me, and it really doesn't affect what I do. I max out 401k, can't do deductible IRA, and backdoor Roth beats the pants off non-deductible IRA so I do the conversion. I'm using every nickel of tax advantaged account contributions I'm allowed to the best of my knowledge outside of annuities and other insurance products, so there's no trade space--I'm saying 'yes' to all.

Most people on this forum will probably not be in 0% tax rate in retirement, but for the average American saving for retirement a lot of them will pay unnecessary tax
Most boglehead are not average savers, but probably in top 10%
John
Johm221122
 
Posts: 4682
Joined: Fri May 13, 2011 7:27 pm

Re: Roth vs traditional ira poll

Postby stupidkid » Wed May 22, 2013 10:41 am

Iorek wrote: High income earners do back door Roths because it is a tax exemption for earnings that would have been in a taxable account or nondeductible IRA (they are choosing between paying taxes now vs paying taxes now and later).


Exactly. I can only contribute to a non-deductible IRA. The option of the backdoor Roth gives me an additional "tax-advantaged" space, or as Iorek more eloquently stated "paying taxes now and later".
stupidkid
 
Posts: 56
Joined: Wed Oct 12, 2011 8:11 pm

Re: Roth vs traditional ira poll

Postby sometimesinvestor » Wed May 22, 2013 4:00 pm

Below 60k a Roth seems clear. Sadly there are other types of taxes such as a vat tax that may mean the tax burden may not be lower.
User avatar
sometimesinvestor
 
Posts: 878
Joined: Wed May 13, 2009 7:54 am

Re: Roth vs traditional ira poll

Postby joe8d » Wed May 22, 2013 10:03 pm

To John:

I agree with your many comments on the subject and I am in the RMD phase of my investment life.
All the Best, | Joe
User avatar
joe8d
 
Posts: 3372
Joined: Tue Feb 20, 2007 9:27 pm
Location: Buffalo,NY

Re: Roth vs traditional ira poll

Postby Johm221122 » Thu May 23, 2013 9:11 am

joe8d wrote:To John:

I agree with your many comments on the subject and I am in the RMD phase of my investment life.

Thank you
I think some don't understand, so let me tell what brought this on
A lady I know in mid 50's showed me her Roth 401 statement asking what to invest in.She only had 7k and maybe puts in 2k a year tops l said why not use regular, she said she will never pay tax on roth :oops: I explained but there is probably plenty more cases just like this.Some people are going to suffer for no reason
John
Johm221122
 
Posts: 4682
Joined: Fri May 13, 2011 7:27 pm

Re: Roth vs traditional ira poll

Postby pennstater2005 » Thu May 23, 2013 9:02 pm

I don't know. That's why I put mine into a Roth and my wife's into a Traditional. Is that the right way to do it? I have no idea :oops:
To hell with circumstances; I create opportunities. - Bruce Lee
User avatar
pennstater2005
 
Posts: 1249
Joined: Wed Apr 11, 2012 9:50 pm
Location: PA

Re: Roth vs traditional ira poll

Postby Johm221122 » Thu May 23, 2013 9:17 pm

pennstater2005 wrote:I don't know. That's why I put mine into a Roth and my wife's into a Traditional. Is that the right way to do it? I have no idea :oops:

You have to make an educated guess at what income you will have at retirement, the Roth only makes sense if you will be in higher tax rate at retirement. Most people are in lower tax rate in retirement.Nobody knows future, but at a safe withdraw rate you need a larger than average retirement savings for Roth to make sense.Most people on this board are way past average in retirement savings
John
Johm221122
 
Posts: 4682
Joined: Fri May 13, 2011 7:27 pm

Re: Roth vs traditional ira poll

Postby Watty » Thu May 23, 2013 10:25 pm

When you look at this question you need to remember that the median household income in the US is only a little bit over $50,000.

http://en.wikipedia.org/wiki/Household_ ... ted_States

And that a large percentage of people that are working do not pay any income tax they either have low income or a lot of deductions and credits.

For anyone who does not have any income tax due the Roth is obviously a better choice.
User avatar
Watty
 
Posts: 4604
Joined: Wed Oct 10, 2007 4:55 pm

Re: Roth vs traditional ira poll

Postby Johm221122 » Fri May 24, 2013 9:47 am

Watty wrote:When you look at this question you need to remember that the median household income in the US is only a little bit over $50,000.

http://en.wikipedia.org/wiki/Household_ ... ted_States

And that a large percentage of people that are working do not pay any income tax they either have low income or a lot of deductions and credits.

For anyone who does not have any income tax due the Roth is obviously a better choice.

If someone is paying no tax a Roth is perfect.When kids grow up and then they start paying tax this is when people with low income start to save for retirement. They loose the time in the market and there portfolio tend to be smaller than what would be enough to get out of low (or 0%) tax bracket.For power savers like bogleheads or upper income salaries the roth is great.But the ones who need the most help in retirement saving could loose a lot of money in extra tax by picking Roth over traditional
John
Johm221122
 
Posts: 4682
Joined: Fri May 13, 2011 7:27 pm

Re: Roth vs traditional ira poll

Postby jay22 » Fri May 24, 2013 10:20 am

I am in the 28% tax bracket and don't have a 401 at work, so a traditional IRA is what I go with. Opened up another tIRA for my non working wife after I got married in Jan this year.
jay22
 
Posts: 292
Joined: Thu Aug 23, 2012 9:56 am

Re: Roth vs traditional ira poll

Postby sdelear » Sat May 25, 2013 3:32 am

Traditional IRAs allow for a reduction in AGI. This may have relevance when it comes to government benefits. If the drop innAGI means qualifying for expanded Medicaid under [Affordable Care Act --admin LadyGeek], the person doing the traditional may see a significant drop in monthly expenses.
sdelear
 
Posts: 5
Joined: Wed May 22, 2013 2:35 pm

Re: Roth vs traditional ira poll

Postby Johm221122 » Sat May 25, 2013 10:04 am

sdelear wrote:Traditional IRAs allow for a reduction in AGI. This may have relevance when it comes to government benefits. If the drop innAGI means qualifying for expanded Medicaid under [Affordable Care Act --admin LadyGeek], the person doing the traditional may see a significant drop in monthly expenses.

This is a good point.It also lowers AGI to get savers credit
John
Johm221122
 
Posts: 4682
Joined: Fri May 13, 2011 7:27 pm

Re: Roth vs traditional ira poll

Postby enderland » Sat May 25, 2013 10:27 am

Johm221122 wrote:This is my point, I assume you will have above average retirement savings. It will work for you.The Roth is/was sold as the answer to the general publics retirement problem, but for the AVERAGE American investors will it?
John


Assuming the options are mutually exclusive and simply mathematically whether pretax (401k, etc) vs Roth, then this question makes more sense.

But for the average investor, I suspect the options are not simply Roth vs non-Roth to maximize overall benefit. I suspect there is a third option of "not saving at all" and if a Roth IRA/401k can convince some of these folks to actually contribute something because you can "pay no taxes later!," it might be more beneficial to those average investors to have the Roth option. Even if this mathematically costs them more long-term than pretax.
enderland
 
Posts: 194
Joined: Sat Mar 23, 2013 12:36 pm

Re: Roth vs traditional ira poll

Postby Johm221122 » Sat May 25, 2013 10:46 am

enderland wrote:
Johm221122 wrote:This is my point, I assume you will have above average retirement savings. It will work for you.The Roth is/was sold as the answer to the general publics retirement problem, but for the AVERAGE American investors will it?
John


Assuming the options are mutually exclusive and simply mathematically whether pretax (401k, etc) vs Roth, then this question makes more sense.

But for the average investor, I suspect the options are not simply Roth vs non-Roth to maximize overall benefit. I suspect there is a third option of "not saving at all" and if a Roth IRA/401k can convince some of these folks to actually contribute something because you can "pay no taxes later!," it might be more beneficial to those average investors to have the Roth option. Even if this mathematically costs them more long-term than pretax.

Good point.When Roth first came out, I felt is was aimed at the every day person. They well published that high income folks can't even invest in it, you will withdraw tax free at retirement and if you had any left the kids will get tax free money.The more I look at it now, I feel for most savers with average or below average salaries they will get short changed unless they are educated about there financial situation. Personally for me and savers like people on this board it's great, but it was presented that way
John
Johm221122
 
Posts: 4682
Joined: Fri May 13, 2011 7:27 pm

Re: Roth vs traditional ira poll

Postby Peter Foley » Sat May 25, 2013 11:59 am

Johm221122 wrote:
You have to make an educated guess at what income you will have at retirement, the Roth only makes sense if you will be in higher tax rate at retirement. Most people are in lower tax rate in retirement.Nobody knows future, but at a safe withdraw rate you need a larger than average retirement savings for Roth to make sense.Most people on this board are way past average in retirement savings
John


I think few people truly understand the impact of SS income and their marginal tax rate in retirement. If you have funds in a Roth many individuals would provide themselves the opportunity to control their tax rate during a portion of the withdrawal phase.
User avatar
Peter Foley
 
Posts: 2226
Joined: Fri Nov 23, 2007 11:34 am
Location: Lake Wobegon

Re: Roth vs traditional ira poll

Postby sharx » Sat May 25, 2013 12:08 pm

One fact that I think is often overlooked is that a traditional IRA contribution saves you taxes calculated with your marginal tax rate, while Ira distributions are taxed at your effective tax rate during retirement. If one were to have identical tax rates throughout their lives, including during retirement (via Ira distributions) the traditional Ira outperforms the Roth.
sharx
 
Posts: 12
Joined: Fri May 17, 2013 5:35 pm

Re: Roth vs traditional ira poll

Postby steadyeddy » Sat May 25, 2013 1:03 pm

Johm221122 wrote:I feel that Roth is just assumed to always be the beginners choice.


I would say it's a fantastic beginners choice. A 24 year old kid putting their savings in a Roth account generally has lower income AND time to let compounding do its thing. It's the 50-year-old woman in your later example that is making a mistake by contributing to a Roth.
User avatar
steadyeddy
 
Posts: 453
Joined: Tue Mar 31, 2009 6:01 pm
Location: The Alps of the Midwest

Re: Roth vs traditional ira poll

Postby NorCalDad » Sat May 25, 2013 6:32 pm

We may or may not be in a lower tax bracket in retirement, but we use Roths in addition to our maxed 401ks as a way to diversify tax options down the road. Roths also have greater flexibility than a tIRA should we need to withdraw funds for college or otherwise before retirement. I may be wrong, but I also believe we face limits on tIRA participation due to income level and employer-covered plans.
NorCalDad
 
Posts: 582
Joined: Mon Mar 26, 2012 12:14 am
Location: Northern California

Re: Roth vs traditional ira poll

Postby Johm221122 » Sat May 25, 2013 8:54 pm

NorCalDad wrote:We may or may not be in a lower tax bracket in retirement, but we use Roths in addition to our maxed 401ks as a way to diversify tax options down the road. Roths also have greater flexibility than a tIRA should we need to withdraw funds for college or otherwise before retirement. I may be wrong, but I also believe we face limits on tIRA participation due to income level and employer-covered plans.
steadyeddy wrote:
Johm221122 wrote:I feel that Roth is just assumed to always be the beginners choice.


I would say it's a fantastic beginners choice. A 24 year old kid putting their savings in a Roth account generally has lower income AND time to let compounding do its thing. It's the 50-year-old woman in your later example that is making a mistake by contributing to a Roth.

NORCALDAD, you are most likely no were near average saver and you will, along with most posters here benefit from Roth
STEADYEDDY, you make a valid point.I just think paying unnecessary taxes by blindly picking Roth is the same as paying unnecessary fees pointed out in "The retirement gamble".It will hamper many Americans in retirement
John
Johm221122
 
Posts: 4682
Joined: Fri May 13, 2011 7:27 pm

Re: Roth vs traditional ira poll

Postby grabiner » Sun May 26, 2013 9:17 am

sharx wrote:One fact that I think is often overlooked is that a traditional IRA contribution saves you taxes calculated with your marginal tax rate, while Ira distributions are taxed at your effective tax rate during retirement. If one were to have identical tax rates throughout their lives, including during retirement (via Ira distributions) the traditional Ira outperforms the Roth.


The decision should use the marginal rate at both ends, because you make it separately for every dollar (and every year). If you have a 15% marginal tax rate now, but expect to retire with a 22.5% marginal tax rate because of the phase-in of Social Security taxation, you should use a Roth even though the total tax you pay in retirement may be only 10% of your IRA withdrawals. Suppose that you have the choice between contributing $100 to a Traditional IRA or $85 to a Roth, and your investment quadruples in value. The Roth will give you $340 to spend. The Traditional IRA will give you $400 to withdraw, but when you withdraw that last $400 in retirement, it will make another $200 of your SS taxable, so you will owe $90 in tax and have only $310 to spend. Thus putting your last $85 in a Roth is better.

Now, you can repeat this decision for the next $85. Eventually, you will reach a point at which the Roth is no longer better, either because the Roth contributions raise your current income to the 25% bracket (and thus you can only put $75 in the Roth), or because the Roth withdrawals drop your retirement income out of the Social Security phase-in range (and thus $400 in the IRA becomes $340 after tax).
David Grabiner
User avatar
grabiner
Advisory Board
 
Posts: 12982
Joined: Wed Feb 21, 2007 12:58 am
Location: Columbia, MD

Re: Roth vs traditional ira poll

Postby WHL » Sun May 26, 2013 9:13 pm

Voted don't know / don't care.

I plan on having so much money in my tIRA / 401k accounts that my RMD's will easily push me into the 25-28% bracket in retirement, so I have no issues with maxing my rIRA annually. An added bonus is that my Roth contributions can be withdrawn at any time, penalty free, whereas a tIRA withdrawal would have some fees and taxes associated with it. If for some reason I retire before the 59.5 (or whatever it is in 30 years) age limit, that Roth money could come into play.

Regarding the general public, any tactics that get them to save for retirement are a good thing in my book. Where you may or may not be right about the topic of this thread, 5k into a Roth IRA is better than 0 into a tIRA that they have never heard of.
WHL
 
Posts: 589
Joined: Mon Dec 10, 2012 3:22 pm

Re: Roth vs traditional ira poll

Postby dharrythomas » Mon May 27, 2013 12:43 pm

Don't know, don't care.

It allows us the manage some of the timing on taxes and withdrawals and allows us to effectively save/invest more by paying the taxes up front. I'll have two pensions that wiil bring in enough that I'll have to pay taxes on withdrawals. So we're investing in Roth IRA and TSP. I'll have traditional funds that we'll have to withdraw and pay taxes on but as much as possible our new contributions are going Roth. We'll hold the Roth for last so that IF there is anything for the kids, it will be in a very tax advantaged account.

IF the tax rates are the same, it's a wash but we've put a little more away. If the tax rates move up, I win. If tax rates move down, it won't be the only time I made the sub-optimal decision.

For the most part, if you live below your means, save money, manage (avoid) debt, and invest in broad-based funds with less than 1% expense ratio you'll be OK. The rest is a discussion of optimization. If you get that right, tax efficiency has impact but won't kill you. If you get the first four wrong, tax efficiency isn't going to bail you out.
dharrythomas
 
Posts: 531
Joined: Tue Jun 19, 2007 5:46 pm

Re: Roth vs traditional ira poll

Postby Blues » Mon May 27, 2013 12:49 pm

I think that's well put, dht. :beer
“Tactics without strategy is the noise before defeat.” - Sun Tzu | "Everybody has a plan until they get punched in the mouth." - Mike Tyson
User avatar
Blues
 
Posts: 1229
Joined: Wed Dec 10, 2008 12:58 pm

Re: Roth vs traditional ira poll

Postby Nukeboilermaker » Mon May 27, 2013 1:02 pm

I have a number of coworkers all very young who are putting into roth blindly 401k and IRA, this would be great if they made 40k/yr, but they make 100k+/yr and are locking in high tax rates (filing single). I have mentioned this site to a few and one really heard and understood my strategy of traditional 401k and Roth IRA (as I'm not and he soon will not be eligible for tIRA) especially since one has greater control of taxation in retirement. I live in IL and have 0 intentions of staying here for retirement, so taking advantage of deferred taxes until I can move to a more resident friendly state for retirement. Some of my fellow young earners understand this flexibility and others don't.
Nukeboilermaker
 
Posts: 282
Joined: Mon Apr 11, 2011 10:49 am

Re: Roth vs traditional ira poll

Postby mike143 » Mon May 27, 2013 1:06 pm

I use a Roth as a worst case, emergency fund, and best case, a retirement fund, on top of my 401k. I don't evaluate it beyond that, maybe in 5 years I will answer differently.
Nothing is free, someone pays.
User avatar
mike143
 
Posts: 1221
Joined: Thu Feb 02, 2012 9:55 pm

Re: Roth vs traditional ira poll

Postby gatsby11 » Mon May 27, 2013 6:07 pm

Most of the previous posters have hit it right on the head. I think in general people simplify the calculations too much, so those who know about the ROTH tend to think it's always a better choice. Much of the decision depends on your income and retirement savings.
gatsby11
 
Posts: 30
Joined: Sun May 26, 2013 2:58 pm

Re: Roth vs traditional ira poll

Postby tetractys » Mon May 27, 2013 6:32 pm

I think it's somewhere around 6 of 1 and half dozen of the other, or equal. That's because is seems reasonable to me that the populous is capable of choosing their own best cutoff overall, similar to the way market efficiency functions over longer time horizons. But there's no poll choice for that! -- Tet
User avatar
tetractys
 
Posts: 4163
Joined: Sat Mar 17, 2007 4:30 pm
Location: Along the Salish Sea

Re: Roth vs traditional ira poll

Postby ursineogre » Tue Aug 13, 2013 4:30 pm

Johm221122, do you have a flowchart, checklist or similar in mind for making the choice? It seems ilke you have something in mind that investors should do one or the other then switch based on income/age/something. I've struggled with this decision myself over the years and see differing answers on this forum.
User avatar
ursineogre
 
Posts: 23
Joined: Fri Aug 10, 2012 8:17 am

Re: Roth vs traditional ira poll

Postby Johm221122 » Wed Aug 14, 2013 12:02 am

ursineogre wrote:Johm221122, do you have a flowchart, checklist or similar in mind for making the choice? It seems ilke you have something in mind that investors should do one or the other then switch based on income/age/something. I've struggled with this decision myself over the years and see differing answers on this forum.

Sorry I have nothing to help you with your desion.I just see the majority of Americans paying 0% tax in retirement..Most people are not Bogleheads, high earners or will have pensions in the future .With inflation the future 0% tax bracket will increase and be a sizeable portion of average persons retirement spending(this does not apply for your average poster on Bogleheads )
John
Johm221122
 
Posts: 4682
Joined: Fri May 13, 2011 7:27 pm

Re: Roth vs traditional ira poll

Postby 555 » Wed Aug 14, 2013 12:41 am

NorCalDad wrote:We may or may not be in a lower tax bracket in retirement, but we use Roths in addition to our maxed 401ks as a way to diversify tax options down the road. Roths also have greater flexibility than a tIRA should we need to withdraw funds for college or otherwise before retirement.


It is usually a BIG mistake to withdraw from a Roth IRA to pay for college. FAFSA counts such withdrawals a income, meaning it would be (FAFSA-)taxed at up to 47%.
555
 
Posts: 4147
Joined: Thu Dec 24, 2009 8:21 am

Re: Roth vs traditional ira poll

Postby manwithnoname » Wed Aug 14, 2013 1:57 am

grabiner wrote:
sharx wrote:One fact that I think is often overlooked is that a traditional IRA contribution saves you taxes calculated with your marginal tax rate, while Ira distributions are taxed at your effective tax rate during retirement. If one were to have identical tax rates throughout their lives, including during retirement (via Ira distributions) the traditional Ira outperforms the Roth.


The decision should use the marginal rate at both ends, because you make it separately for every dollar (and every year). If you have a 15% marginal tax rate now, but expect to retire with a 22.5% marginal tax rate because of the phase-in of Social Security taxation, you should use a Roth even though the total tax you pay in retirement may be only 10% of your IRA withdrawals. Suppose that you have the choice between contributing $100 to a Traditional IRA or $85 to a Roth, and your investment quadruples in value. The Roth will give you $340 to spend. The Traditional IRA will give you $400 to withdraw, but when you withdraw that last $400 in retirement, it will make another $200 of your SS taxable, so you will owe $90 in tax and have only $310 to spend. Thus putting your last $85 in a Roth is better.

Now, you can repeat this decision for the next $85. Eventually, you will reach a point at which the Roth is no longer better, either because the Roth contributions raise your current income to the 25% bracket (and thus you can only put $75 in the Roth), or because the Roth withdrawals drop your retirement income out of the Social Security phase-in range (and thus $400 in the IRA becomes $340 after tax).


Marginal tax rates are misleading in retirement when retirees receive periodic income from various sources that they have no discretion to control such as SS, pensions, MRDs, dividends, interest, etc. If you are receiving periodic income in retirement it doesn't matter which dollar is you first dollar taxed and your last dollar taxed because they are all taxed at your effective rate. My effective rate after Roth conversions is 20% of my marginal rate because my deductions, exemptions, qualified dividends, MLP distributions eliminate most of my income from taxation which places me in a low effective tax bracket. Being in a 30% marginal bracket is meaningless when only 1/3 of income is actually taxed. The opportunity cost of 6% in taxes on a roth conversion is outweighed by the 20X amount of tax free income that will be passed on to the next generation.

One of the best ways to maximize wealth is to reduce/eliminate taxation on investment assets and retirement benefits which will reduce taxes on the amount of ordinary income derived from pensions, social security, interest, etc.
manwithnoname
 
Posts: 1584
Joined: Mon Jul 22, 2013 8:52 pm

Next

Return to Investing - Theory, News & General

Who is online

Users browsing this forum: atwood, FinancialDave, tphp99 and 28 guests