Is Investing in Roth IRA worth it?

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StevenNJ1
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Is Investing in Roth IRA worth it?

Post by StevenNJ1 » Mon Jun 03, 2019 4:07 pm

No disrespect to this great community that I've been a part of for some years now.
Yes, I know that it makes sense to do Roth IRA, in general. Yes, it's tax free growth. But how much and at what cost?

Using the calculator here (https://www.bankrate.com/calculators/re ... lator.aspx), I select $5,500/yr contribution for the next 30 years. I know contributions increase, but for now sticking with a set $5,500.

At conservative 6% growth, after investing $165k, at 30yr mark you get $460k.

Now, all this may looks great, however. Inflation! So a dirty, non scientific calculation is, after 30yr, that $460k is more like 230k. And my 165k invested now and throughout 30yrs is more like $110k.

So, after all is done, you're at approximately $120k. Fine, even if it's $140k, still this is pretty small.

Please share your thoughts on this. Have you yourself done similar type of calculation to justify Roth IRA?
thank you.

retiredjg
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Re: Is Investing in Roth IRA worth it?

Post by retiredjg » Mon Jun 03, 2019 4:09 pm

What's the other alternative? If the money does not go to Roth IRA, where would you put it?

new2bogle
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Re: Is Investing in Roth IRA worth it?

Post by new2bogle » Mon Jun 03, 2019 4:13 pm

retiredjg wrote:
Mon Jun 03, 2019 4:09 pm
What's the other alternative? If the money does not go to Roth IRA, where would you put it?
Exactly. You put it in taxable and since same investments are available in Roth/taxable you still get 6% and end in same place (actually worse since you have to pay tax on it).

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Phineas J. Whoopee
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Re: Is Investing in Roth IRA worth it?

Post by Phineas J. Whoopee » Mon Jun 03, 2019 4:22 pm

I'm not attempting to convince anybody they should do one thing or another, but I have two responses.

First, it's possible to invest, including in a Roth IRA, in inflation-protected securities. Stocks have a history of higher returns, but in the medium-term often are hurt by inflation. A person should take those facts into account when designing a portfolio.

Second, the difference between a traditional IRA and a Roth IRA has to do with taxation, and if we hold all other things equal they're equivalent. No, not all other things are always equal, but that's the way to isolate and analyze a single variable as explained in the wiki.

I'll give the standard example. Imagine a person who pays 25% income tax before and after retirement, who has a pre-tax $4,000 to invest in a tax-advantaged account. In a traditional IRA she invests the whole amount. In a Roth IRA, after paying 25% income tax there's $3,000 left to invest.

Imagine she invests in the same thing in either case, and by the time she's ready to take distributions the investment's total return means it's doubled in value. The traditional IRA holds $8,000, but the Roth IRA holds $6,000.

By distribution of the whole $8,000 from the traditional IRA, and paying 25% income tax (remember we're holding all else equal) there's $6,000 after tax.

From the Roth IRA, worth $6,000, there's $6,000 after tax.

The traditional vs. Roth discussion is about paying different tax rates at different times. There is an argument that in retirement having both options to draw from gives some flexibility, year by year, that might not otherwise be available.

I hope that's helpful.

PJW

GT99
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Re: Is Investing in Roth IRA worth it?

Post by GT99 » Mon Jun 03, 2019 4:43 pm

No disrespect intended, but this is a very strange way to look at it. Inflation will impact your true investment returns no matter how you invest it. Why are you using that specifically as a mark against Roth IRAs?

Using your example, you've made $295k return on your investment. Let's pretend you're in the 12% tax bracket in retirement. You have $35,400 more via the Roth IRA than you would in a taxable account. If you're in the 22% bracket, it's $64,900 more with the Roth.

OK, so the difference in present day value is smaller due to inflaction. It's still more money in the end with the Roth.

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TomatoTomahto
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Re: Is Investing in Roth IRA worth it?

Post by TomatoTomahto » Mon Jun 03, 2019 4:53 pm

OP, you have started a number of threads, often asking questions that conflate safety, tax treatment, returns, nominal/real, etc.

I respectfully suggest that you spend an evening reading the wiki.
Okay, I get it; I won't be political or controversial. The Earth is flat.

jminv
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Re: Is Investing in Roth IRA worth it?

Post by jminv » Mon Jun 03, 2019 5:03 pm

StevenNJ1 wrote:
Mon Jun 03, 2019 4:07 pm
No disrespect to this great community that I've been a part of for some years now.
Yes, I know that it makes sense to do Roth IRA, in general. Yes, it's tax free growth. But how much and at what cost?

Using the calculator here (https://www.bankrate.com/calculators/re ... lator.aspx), I select $5,500/yr contribution for the next 30 years. I know contributions increase, but for now sticking with a set $5,500.

At conservative 6% growth, after investing $165k, at 30yr mark you get $460k.

Now, all this may looks great, however. Inflation! So a dirty, non scientific calculation is, after 30yr, that $460k is more like 230k. And my 165k invested now and throughout 30yrs is more like $110k.

So, after all is done, you're at approximately $120k. Fine, even if it's $140k, still this is pretty small.

Please share your thoughts on this. Have you yourself done similar type of calculation to justify Roth IRA?
thank you.
That's an odd way to look at it. Would you rather put 5500/year into your taxable account or traditional ira or is the point not to save at all since it's all pointless and spend the money now? I don't understand why you're focused on Roths. Or is just that you think 460k in 30 years is pointless? I'd rather have 460k than nothing. You say you know Roth contribution limits would also increase with time but you then compare the terminal value adjusted for inflation. I'd say it would be more like having 460k in inflation adjusted dollars if you incorporated likely contribution increases which is a nice amount of money.

This kind of thinking is why people don't save for retirement at all. It's a self-justification not to save and instead to spend it now. They think that even if they save what to them is a large amount of money that it won't be all that much in the end. That's fine if what you want to do.

Flyer24
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Re: Is Investing in Roth IRA worth it?

Post by Flyer24 » Mon Jun 03, 2019 5:33 pm

What else do you propose then? Put it under a mattress and lose even more to inflation?

Blender
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Re: Is Investing in Roth IRA worth it?

Post by Blender » Mon Jun 03, 2019 6:00 pm

StevenNJ1 wrote:
Mon Jun 03, 2019 4:07 pm
No disrespect to this great community that I've been a part of for some years now.
Yes, I know that it makes sense to do Roth IRA, in general. Yes, it's tax free growth. But how much and at what cost?

Please share your thoughts on this. Have you yourself done similar type of calculation to justify Roth IRA?
thank you.
The same types of investments exist for Roths as for other accounts, so return %/inflation/etc. have no real bearing in this discussion. This discussion should be about taxes and tax planning. If you plan to be in a higher tax bracket at retirement then a Roth is a no brainer, if you are likely to be in the same tax bracket at retirement then things get a little more complicated to figure out (technically to "guess"), and if you plan on being in a lower bracket then a Roth may not make sense.

Larry2623
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Re: Is Investing in Roth IRA worth it?

Post by Larry2623 » Mon Jun 03, 2019 6:32 pm

this is totally illogical...what is other choice pay taxes or just spent it instead of save????

RetiredAL
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Re: Is Investing in Roth IRA worth it?

Post by RetiredAL » Mon Jun 03, 2019 7:49 pm

My wife and I contributed to our Roth's since just after their creation thru 2017. Today, they are worth $250,000. Those contributions were taxed as MFJ 15%. Our Roth's will be our last dollars spent and if they had been in our IRA/401K, they MOST LIKELY would be taxed as Single 25% when used. I'm pleased with my choice to put $ into our Roth's.

mikeyzito22
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Re: Is Investing in Roth IRA worth it?

Post by mikeyzito22 » Mon Jun 03, 2019 8:10 pm

Although the OP thinks 160K or so is small peanuts if you have a spouse it becomes 320K. Also, for humble beginners, it is nice to know that you can take out your contributions without having a taxable event. For example, if you have contributed $6000 (the max) for three years and made $2000 on it say, now you have $20,000. You are able to take up to $18000 out of it if you really need it. I realize withdrawing from retirement accounts is not advisable, but the knowledge that it could be withdrawn easily makes us less fortunate people sleep better at night regardless of allocation.

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celia
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Re: Is Investing in Roth IRA worth it?

Post by celia » Mon Jun 03, 2019 8:16 pm

I just wanted to comment that no-one "invests in a Roth IRA". You, instead, invest in a security, mutual fund, bond, or whatever you choose. The investment is irrelevant because the Roth IRA is a "container", a "title" on an account indicating that the assets in the account were purchased using contributions that were previously taxed when the money entered the account. As you likely know, all future growth will be tax-free as long as you wait to withdraw until you are over 59.5 and the account has been open 5 years.

Go ahead and buy the same security, mutual fund, bond, or whatever you choose in another type of account. The investment will grow the same no matter which account holds it. But you will usually pay taxes in the other types of accounts.

I just want you to be clear that the "Roth IRA" ISN'T AN INVESTMENT and the account type doesn't impact the value of what is contained in the account.

alter
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Re: Is Investing in Roth IRA worth it?

Post by alter » Mon Jun 03, 2019 8:19 pm

Roths are not subjected to RMD so all other things being equal, Roth is superior to Traditional for long term growth.

RetiredAL
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Re: Is Investing in Roth IRA worth it?

Post by RetiredAL » Mon Jun 03, 2019 9:50 pm

mikeyzito22 wrote:
Mon Jun 03, 2019 8:10 pm
Although the OP thinks 160K or so is small peanuts if you have a spouse it becomes 320K.

The impact of Roth savings extends far beyond one's retirement date and the end to one's contributions. In my case, since it's the last to spend money, after 20 years of retirement that $250,000 would become $660,000 with a linear 5% annual return. All tax free based on current law!

RMD's will push our income out of the mid teens tax bracket. If both I and my wife survive those 20 years, our RMD will be substantially into the mid 20's tax bracket due to expected growth. If one of us was to decease, about 1/2 the RMD, which starts next year, would taxed at 22% initially, then going higher depending on the whims of those I don't control.

Thus I am glad I put money into our Roth's instead of maximizing my 401K and DW's IRA. And all of this is before considering any impact to our kids who will inherit the remaining Roth $.

Edit to add: I understand what made sense to me may have no basis to someone else.
Last edited by RetiredAL on Mon Jun 03, 2019 9:55 pm, edited 1 time in total.

MathWizard
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Re: Is Investing in Roth IRA worth it?

Post by MathWizard » Mon Jun 03, 2019 9:51 pm

I like my ROTH IRA just fine. As of 2019, the limit is $6K not $5500, and after 50, you can contribute $1K more.
For a married couple, yo both can contribute.

My wife and I started when the limit was $2K/person, and did not contribute for 6 of the years when our kids were in college,
and after 20 years, we still have between $250K and $300K between us in ROTH IRAs.

Do what you want, but ROTH's are good for us, in combination with ta deferred. I haven't used taxable since they upped the
ROTH contribution limit above $3K/yr.

Topic Author
StevenNJ1
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Re: Is Investing in Roth IRA worth it?

Post by StevenNJ1 » Tue Jun 04, 2019 8:34 am

Appreciate everyone's comments.
I should clarify a few things.

I currently invest almost maximum allowed in 401k, and since I am in the highest tax bracket (over 150k salary, file as single), I see value in 401k.

Obviously, if my choice was to put money under the mattress or invest "via" Roth IRA, I'd go with Roth IRA. My hesitation is that I could also start buying rental properties, and at average of $140k for a 1-2bd apartment, down payment being 20% (28k), that at least gives me assets that are not so volatile. With average return figures mentioned by others, you assume that by the time you need your Roth, market will be on the high end instead of in a dip that can last for years until it recovers. I guess, good thing that they don't require you to withdraw as soon as you retire.

The point about the lack of required minimum withdrawal for Roth, mentioned above is a valid one, and something I did not consider. Also, if one is a bit aggressive with their Roth IRA, meaning, 50% into index fund and the rest into blue chip stocks (Microsoft, JPMorgan, etc), that could "hopefully" produce higher return than the 6% I used for my calculation.

All in all, for some reason, I just thought/hoped/assumed that Roth IRA would produce a higher return after 30 years of contributions. Considering inflation and limit on how much you can invest, I see that it's better than nothing, but ultimately Government making sure that the elderly don't drain it's budget. That's all.

For me, I guess the word to use is "diversification". Do 401k, do a bit (3-4k/yr) of Roth IRA and buy a few properties to rent out.

jminv wrote:
Mon Jun 03, 2019 5:03 pm
StevenNJ1 wrote:
Mon Jun 03, 2019 4:07 pm
No disrespect to this great community that I've been a part of for some years now.
Yes, I know that it makes sense to do Roth IRA, in general. Yes, it's tax free growth. But how much and at what cost?

Using the calculator here (https://www.bankrate.com/calculators/re ... lator.aspx), I select $5,500/yr contribution for the next 30 years. I know contributions increase, but for now sticking with a set $5,500.

At conservative 6% growth, after investing $165k, at 30yr mark you get $460k.

Now, all this may looks great, however. Inflation! So a dirty, non scientific calculation is, after 30yr, that $460k is more like 230k. And my 165k invested now and throughout 30yrs is more like $110k.

So, after all is done, you're at approximately $120k. Fine, even if it's $140k, still this is pretty small.

Please share your thoughts on this. Have you yourself done similar type of calculation to justify Roth IRA?
thank you.
That's an odd way to look at it. Would you rather put 5500/year into your taxable account or traditional ira or is the point not to save at all since it's all pointless and spend the money now? I don't understand why you're focused on Roths. Or is just that you think 460k in 30 years is pointless? I'd rather have 460k than nothing. You say you know Roth contribution limits would also increase with time but you then compare the terminal value adjusted for inflation. I'd say it would be more like having 460k in inflation adjusted dollars if you incorporated likely contribution increases which is a nice amount of money.

This kind of thinking is why people don't save for retirement at all. It's a self-justification not to save and instead to spend it now. They think that even if they save what to them is a large amount of money that it won't be all that much in the end. That's fine if what you want to do.
Flyer24 wrote:
Mon Jun 03, 2019 5:33 pm
What else do you propose then? Put it under a mattress and lose even more to inflation?
celia wrote:
Mon Jun 03, 2019 8:16 pm
I just wanted to comment that no-one "invests in a Roth IRA". You, instead, invest in a security, mutual fund, bond, or whatever you choose. The investment is irrelevant because the Roth IRA is a "container", a "title" on an account indicating that the assets in the account were purchased using contributions that were previously taxed when the money entered the account. As you likely know, all future growth will be tax-free as long as you wait to withdraw until you are over 59.5 and the account has been open 5 years.

Go ahead and buy the same security, mutual fund, bond, or whatever you choose in another type of account. The investment will grow the same no matter which account holds it. But you will usually pay taxes in the other types of accounts.

I just want you to be clear that the "Roth IRA" ISN'T AN INVESTMENT and the account type doesn't impact the value of what is contained in the account.
retiredjg wrote:
Mon Jun 03, 2019 4:09 pm
What's the other alternative? If the money does not go to Roth IRA, where would you put it?

retiredjg
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Re: Is Investing in Roth IRA worth it?

Post by retiredjg » Tue Jun 04, 2019 8:45 am

StevenNJ1 wrote:
Tue Jun 04, 2019 8:34 am
For me, I guess the word to use is "diversification". Do 401k, do a bit (3-4k/yr) of Roth IRA and buy a few properties to rent out.
Well, that at least makes your original post make sense. :happy

Being a landlord is a great thing for people who have a passion for it. Doing it for any other reason is likely to be a huge mistake.

mikeyzito22
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Re: Is Investing in Roth IRA worth it?

Post by mikeyzito22 » Tue Jun 04, 2019 11:52 am

RetiredAL wrote:
Mon Jun 03, 2019 9:50 pm
mikeyzito22 wrote:
Mon Jun 03, 2019 8:10 pm
Although the OP thinks 160K or so is small peanuts if you have a spouse it becomes 320K.

The impact of Roth savings extends far beyond one's retirement date and the end to one's contributions. In my case, since it's the last to spend money, after 20 years of retirement that $250,000 would become $660,000 with a linear 5% annual return. All tax free based on current law!
Exactly, hopefully these accounts don't end at retirement, they help to supplement it. In my case I also have a pension that I will be using for living expenses so the Roth is hopefully just icing on the cake. Thank you for your comment Retired Al

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Phineas J. Whoopee
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Re: Is Investing in Roth IRA worth it?

Post by Phineas J. Whoopee » Tue Jun 04, 2019 2:22 pm

alter wrote:
Mon Jun 03, 2019 8:19 pm
Roths are not subjected to RMD so all other things being equal, Roth is superior to Traditional for long term growth.
All taking a required minimum distribution does is convert pre-tax money to post-tax money. One isn't required to spend it. One can invest it, taking tax efficiency into account across the whole portfolio.

PJW

alter
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Re: Is Investing in Roth IRA worth it?

Post by alter » Tue Jun 04, 2019 2:32 pm

Phineas J. Whoopee wrote:
Tue Jun 04, 2019 2:22 pm
alter wrote:
Mon Jun 03, 2019 8:19 pm
Roths are not subjected to RMD so all other things being equal, Roth is superior to Traditional for long term growth.
All taking a required minimum distribution does is convert pre-tax money to post-tax money. One isn't required to spend it. One can invest it, taking tax efficiency into account across the whole portfolio.

PJW
Exactly, which means it removes the tax advantages of being able to compound tax-free. Making the Roth superior since it can continue to maintain tax free compound growth and doesn't have the RMD restriction.

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grabiner
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Re: Is Investing in Roth IRA worth it?

Post by grabiner » Tue Jun 04, 2019 9:25 pm

Another advantage of a Roth IRA for the OP is that he lives in NJ. NJ does not allow a deduction for traditional IRAs, and does tax gains on them, which gives the Roth IRA a state tax advantage. (NJ does allow a deduction for contributions to 401(k)s, but not to other retirement accounts such as 403(b)s.)
Wiki David Grabiner

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