Dave Ramsey over simplifying Roth vs. Traditional IRA?

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stemikger
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Re: Dave Ramsey over simplifying Roth vs. Traditional IRA?

Post by stemikger » Mon Aug 08, 2016 8:18 am

I didn't read the other replies yet, but I would not listen to Dave Ramsey when it comes to investing advice. If you need motivation to get out of debt, he is good at that, but his investing advice is not very good and can even be harmful.
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Re: Dave Ramsey over simplifying Roth vs. Traditional IRA?

Post by White Coat Investor » Mon Aug 08, 2016 8:31 am

MikeT wrote:I was listening to a Dave Ramsey podcast in which he was comparing the tax benefits of Roth over traditional IRA.

For example, if you put $5,000 per year into a traditional IRA, at the end you have to pay say 25% in taxes.
In contrast, for the Roth, ultimately, there is no taxes due.

However, he didn't address the point that for a Roth, in order to net $5,000 into the Roth, you have to gross $6,666 (thus paying $1,666 in taxes each year).

I'm sure the Roth is better from a tax perspective, but was it fair to omit the taxes paid all along?

Just curious,
Mike
Dave's Roth vs traditional advice is generally quite wrong. Unfortunate.
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Re: Dave Ramsey over simplifying Roth vs. Traditional IRA?

Post by ValueInvestor99 » Mon Aug 08, 2016 12:36 pm

[quote="KlangFool"][quote="Engineer250"]@cherijoh and @klangfool

I am talking about traditional IRA versus Roth IRA. Not about traditional 401k.[/quote]

Engineer250,

Why would someone consider Trad. IRA before Trad. 401K? Please note that a person will need to know a lot more about tax in order to contribute to Trad. IRA. It is a lot easier to contribute to Roth IRA.

KlangFool[/quote]

An IRA gives you full investing options but your 401k may be limited to certain funds.

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Re: Dave Ramsey over simplifying Roth vs. Traditional IRA?

Post by BUBear29 » Sat Feb 24, 2018 11:00 am

Reviving this theead because I listen to Dave Ramsey to stay grounded.

I have no debt and save over 25% for retirement mostly into traditional.

Yesterday he told every single person to save for retirement in a roth. Even people with almost NO 401k savings at age 52. This is completely wrong based on effective tax rate at retirement. Possibly wrong based on marginal tax rate for some of those folks.

Has anyone ever thought to call in to Dave and straighten him out? Or is the boglehead investing advice too advanced for most Ramsey listeners?

Also heard him say not to invest in Target Dates or S&P 500 index funds. Nuts!
There is no dignity quite so impressive, and no one independence quite so important, as living within your means.

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FiveK
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Re: Dave Ramsey over simplifying Roth vs. Traditional IRA?

Post by FiveK » Sat Feb 24, 2018 12:15 pm

BUBear29 wrote:
Sat Feb 24, 2018 11:00 am
Possibly wrong based on marginal tax rate for some of those folks.
Because the marginal rate is what they will pay for withdrawals based on any new contributions, that's the one to use when deciding.

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Re: Dave Ramsey over simplifying Roth vs. Traditional IRA?

Post by JBTX » Sat Feb 24, 2018 1:03 pm

I don’t listen to DR but if you want to be simplistic about it a Roth IRA is often the way to go if you put aside a lot of the nuance and typical assumptions made here.

If you are investing the max amount, the Roth will do better because you will end up with more after tax. I understand in theory you can take the tax savings of a traditional and invest it for decades and that may give you a better result. But that assumes tax rates won’t increase a lot, that assumes you manage capital gains efficiently, that assumes you will leave the taxable account there for 30 years untouched. How realistic is that for a Dave Ramsey listener? Practically it is just easier to tuck into a Roth, isolated in an IRA so you are less likely to touch it, don’t have to worry about managing a taxable account and don’t have to worry about keeping your hands off it, and running all kinds of scenarios on online calculators to optimize future withdrawal. All that stuff is fine for a die hard BH but probably not appropriate for the typical
DR listener who got there because they didn’t have the self control to run up their 19.9% credit cards in the first place.

Also most of these people aren’t going to retire early with big 7 figure portfolios and unless you are above 28% marginal you aren’t likely to lose much vs the traditional if you don’t have a big early retirement window.

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Re: Dave Ramsey over simplifying Roth vs. Traditional IRA?

Post by deltaneutral83 » Sat Feb 24, 2018 2:09 pm

JBTX wrote:
Sat Feb 24, 2018 1:03 pm
I don’t listen to DR but if you want to be simplistic about it a Roth IRA is often the way to go if you put aside a lot of the nuance and typical assumptions made here.
Yes, DR incorporates behavior into all of his suggestions, which drives BH types nuts, as it's 100% about the math to us. The other pesky 85% of the population need hand holding and to create barriers to protect themselves from....themselves. The Roth advice he gives to his listeners is simply a mechanism to get people to invest period. If I can get someone to deduct into a Roth from their paycheck, then I don't even give that individual the opportunity to do something stupid with it and it's already been taxed and 30 years later, voila. If I have 401k or tIRA deductions, well, I'm going to be paying the tax man later and "have less" than with a Roth. His "12% a year" is strictly to troll BH types. He knows good and well that's a ridiculous assumption but the tool he is using is to entice people to invest when he says "ditch your $500 car payment, it will make you $3 million over 40 years" or however it goes. We've all used techniques like this on children to get them to do something for their own good which is how 85% of the country behaves with money and 100% of us have behaved like a child with money in at least one instance.

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Re: Dave Ramsey over simplifying Roth vs. Traditional IRA?

Post by JBTX » Sat Feb 24, 2018 2:31 pm

deltaneutral83 wrote:
Sat Feb 24, 2018 2:09 pm
JBTX wrote:
Sat Feb 24, 2018 1:03 pm
I don’t listen to DR but if you want to be simplistic about it a Roth IRA is often the way to go if you put aside a lot of the nuance and typical assumptions made here.
Yes, DR incorporates behavior into all of his suggestions, which drives BH types nuts, as it's 100% about the math to us. The other pesky 85% of the population need hand holding and to create barriers to protect themselves from....themselves. The Roth advice he gives to his listeners is simply a mechanism to get people to invest period. If I can get someone to deduct into a Roth from their paycheck, then I don't even give that individual the opportunity to do something stupid with it and it's already been taxed and 30 years later, voila. If I have 401k or tIRA deductions, well, I'm going to be paying the tax man later and "have less" than with a Roth. His "12% a year" is strictly to troll BH types. He knows good and well that's a ridiculous assumption but the tool he is using is to entice people to invest when he says "ditch your $500 car payment, it will make you $3 million over 40 years" or however it goes. We've all used techniques like this on children to get them to do something for their own good which is how 85% of the country behaves with money and 100% of us have behaved like a child with money in at least one instance.
His general theme is to simplify and get out of all future financial obligations. Pay off debt. Pay off mortgage. To that extent putting in Roth is consistent, in you have rid yourself of future tax obligations ( barring some radical and punitive changes in tax law). Owe as little as possible to anybody.

For many that isn’t a bad mindset. It is forced saving. Paying off a mortgage is forced savings. Doing Roth is forced savings.

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Re: Dave Ramsey over simplifying Roth vs. Traditional IRA?

Post by Jags4186 » Sat Feb 24, 2018 2:37 pm

Apples to oranges the Roth makes you save more. If someone simply says "I'm going to save $5500 should I put it in Roth or Traditional?" The Roth is more saved because you've prepaid the taxes. If someone in the 25% tax bracket said "I'm going to save $5500 in a Roth or $5500 in a traditional plus $1375 into a taxable account" I would consider telling them to do the traditional + taxable. I view having nominally more money better than less money in a Roth as a better scenario. Of course I'm of the opinion that, in general, taxes will go down for most people over the long run. That is a bet I'm willing to make.

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Re: Dave Ramsey over simplifying Roth vs. Traditional IRA?

Post by drk » Sat Feb 24, 2018 3:02 pm

BUBear29 wrote:
Sat Feb 24, 2018 11:00 am
Yesterday he told every single person to save for retirement in a roth. Even people with almost NO 401k savings at age 52. This is completely wrong based on effective tax rate at retirement. Possibly wrong based on marginal tax rate for some of those folks.
I've had coworkers say similar things. They also tended to have trouble saving. The Roth-vs-Traditional decision comes down to one thing: investing the tax savings from the Traditional IRA deduction. If you do that, the Traditional is almost always better. If one has trouble voluntarily saving, though, that tax deduction will go straight to the spending account. In that sense, it may be good advice for his audience.
BUBear29 wrote:
Sat Feb 24, 2018 11:00 am
Also heard him say not to invest in Target Dates or S&P 500 index funds. Nuts!
That's bad advice for everyone and especially bad advice for his audience.

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Re: Dave Ramsey over simplifying Roth vs. Traditional IRA?

Post by FiveK » Sat Feb 24, 2018 4:27 pm

deltaneutral83 wrote:
Sat Feb 24, 2018 2:09 pm
Yes, DR incorporates behavior into all of his suggestions, which drives BH types nuts, as it's 100% about the math to us.
Yes. One could equally say "BH incorporates math into all of its suggestions, which drives DR types nuts, as it's 100% about assumed behavior to them."

One ignores both math and human behavior at one's peril. ;)

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Re: Dave Ramsey over simplifying Roth vs. Traditional IRA?

Post by essbeer » Sat Feb 24, 2018 4:38 pm

BUBear29 wrote:
Sat Feb 24, 2018 11:00 am
Yesterday he told every single person to save for retirement in a roth. Even people with almost NO 401k savings at age 52. This is completely wrong based on effective tax rate at retirement. Possibly wrong based on marginal tax rate for some of those folks.

Has anyone ever thought to call in to Dave and straighten him out? Or is the boglehead investing advice too advanced for most Ramsey listeners?

Also heard him say not to invest in Target Dates or S&P 500 index funds. Nuts!
I'm naturally very cynical. Traditional IRAs fall under the DOL Fiduciary rule and Roth IRAs don't. That means AUMs, 12b-1, loads, etc. will have to be clearly disclosed in a Traditional IRA. Does Dave Ramsey make money from any of those things?

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Re: Dave Ramsey over simplifying Roth vs. Traditional IRA?

Post by ryman554 » Sat Feb 24, 2018 4:55 pm

joebh wrote:
Sun Aug 07, 2016 5:46 pm
Better2bWise wrote: All annualized returns (not arithmetic mean):
Jan 1929 - Dec 1944 before inflation returns of SP500 5.6% (after inflation 4.9%)
Jan 1938 - Dec 1944 before inflation returns of SP500 9.6% (after inflation 6.5%)
Jan 1914 - Dec 1944 before inflation returns of SP500 10.4% (after inflation 8.4%)

Jan 2000 - Dec 2015 before inflation returns of SP500 3.5% (after inflation 5.78%)
Jan 2009 - Dec 2015 before inflation returns of SP500 15.3% (after inflation 13.42%)
Jan 1985 - Dec 2015 before inflation returns of SP500 12.5% (after inflation 9.6%)

Jan 1929 - Dec 1979 before inflation returns of SP500 10.2% (after inflation 7.0%)
Jan 1965 - Dec 2015 before inflation returns of SP500 11.2% (after inflation 6.96%)
Jan 1929 - Dec 2015 before inflation returns of SP500 11.3% (after inflation 8.0%)

Plug in any 30 year period and you'll find before inflation annualized returns are always near 12% (after inflation vary). Is this a characteristic of the growth potential of the USA?
Is 9.58% near 12% ?

http://www.doughroller.net/investing/th ... y-matters/
https://www.bogleheads.org/wiki/S%26P_500_index
No. And note that 7/9 of the.above is less than 12%. Near 12% isn't 12%, and in the game of compounding, these little differences matter a lot.

The real returns of 7-8% seem more reasonable. And that's the number to report, since it better tracks the lifestyle.

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Re: Dave Ramsey over simplifying Roth vs. Traditional IRA?

Post by willthrill81 » Sat Feb 24, 2018 5:00 pm

BUBear29 wrote:
Sat Feb 24, 2018 11:00 am
Reviving this theead because I listen to Dave Ramsey to stay grounded.

I have no debt and save over 25% for retirement mostly into traditional.

Yesterday he told every single person to save for retirement in a roth. Even people with almost NO 401k savings at age 52. This is completely wrong based on effective tax rate at retirement. Possibly wrong based on marginal tax rate for some of those folks.
Actually, considering that the overwhelming majority of the general population will be in a lower tax bracket in retirement than in their working years, the traditional IRA will usually come out significantly ahead of the Roth. But as others have pointed out, he's probably recommending this to people because he doesn't believe that they will save the immediate tax-savings of the TIRA. But to be honest, it's going to be difficult for most people to properly fund their retirement with only IRA money unless rollovers are used somewhere along the way.
BUBear29 wrote:
Sat Feb 24, 2018 11:00 am
Has anyone ever thought to call in to Dave and straighten him out?
Boglehead-type folks have called in to question him on his numbers, and he gets super defensive. He is not a fan of the Bogleheads in any way. He doesn't like index funds, he doesn't like real calculators, he doesn't like historical evidence that contradicts his advice, etc.
BUBear29 wrote:
Sat Feb 24, 2018 11:00 am
Or is the boglehead investing advice too advanced for most Ramsey listeners?
Some of it certainly is, but there's nothing complicated about the three-fund portfolio, the VPW, or the basics of traditional vs. Roth accounts. One could give much better advice than DR without getting deep into the weeds the way that many do here.
BUBear29 wrote:
Sat Feb 24, 2018 11:00 am
Also heard him say not to invest in Target Dates or S&P 500 index funds. Nuts!
Again, he's not a fan of index funds, probably because his pay-to-play 'endorsed local providers' don't make much money with those investments. They recommend front-loaded (usually 5.75%) mutual funds with high expense ratios. In truth, most of the general population who isn't interested in learning anything about investing would do well to use target date funds exclusively.

DR's advice regarding getting out of debt is usually pretty good and has certainly benefited many people. But his investment and especially his retirement income advice is beyond horrific (e.g. he recommends an 8% withdrawal rate in retirement, roughly double what is prudent and leading his followers to only accumulate half as much as they really need) and should be steered clear of with a very wide berth.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Dave Ramsey over simplifying Roth vs. Traditional IRA?

Post by FiveK » Sat Feb 24, 2018 5:03 pm

essbeer wrote:
Sat Feb 24, 2018 4:38 pm
Traditional IRAs fall under the DOL Fiduciary rule and Roth IRAs don't.
Hadn't heard that. Couldn't find it in Federal Register :: Investment Advice Fiduciaries and Employee Benefit Plans and IRAs...?

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Re: Dave Ramsey over simplifying Roth vs. Traditional IRA?

Post by JoeRetire » Sat Feb 24, 2018 8:03 pm

essbeer wrote:
Sat Feb 24, 2018 4:38 pm
I'm naturally very cynical. Traditional IRAs fall under the DOL Fiduciary rule and Roth IRAs don't.
Hmm. What leads you to believe that?

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Re: Dave Ramsey over simplifying Roth vs. Traditional IRA?

Post by Nate79 » Sat Feb 24, 2018 8:45 pm

The Roth is better than traditional is a very prominent view among the many financial podcast/shows out there. This is not a DR issue but is very widespread opinion.

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Re: Dave Ramsey over simplifying Roth vs. Traditional IRA?

Post by essbeer » Sat Feb 24, 2018 9:17 pm

JoeRetire wrote:
Sat Feb 24, 2018 8:03 pm
essbeer wrote:
Sat Feb 24, 2018 4:38 pm
I'm naturally very cynical. Traditional IRAs fall under the DOL Fiduciary rule and Roth IRAs don't.
Hmm. What leads you to believe that?
FiveK wrote:
Sat Feb 24, 2018 5:03 pm
essbeer wrote:
Sat Feb 24, 2018 4:38 pm
Traditional IRAs fall under the DOL Fiduciary rule and Roth IRAs don't.
Hadn't heard that. Couldn't find it in Federal Register :: Investment Advice Fiduciaries and Employee Benefit Plans and IRAs...?
https://www.investopedia.com/updates/do ... iary-rule/

Under "What isn't covered" :
"Taxable transactional accounts or accounts funded with after-tax dollars are not considered retirement plans, even if the funds are personally earmarked for retirement savings."

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Re: Dave Ramsey over simplifying Roth vs. Traditional IRA?

Post by JBTX » Sat Feb 24, 2018 9:43 pm

FiveK wrote:
Sat Feb 24, 2018 4:27 pm
deltaneutral83 wrote:
Sat Feb 24, 2018 2:09 pm
Yes, DR incorporates behavior into all of his suggestions, which drives BH types nuts, as it's 100% about the math to us.
Yes. One could equally say "BH incorporates math into all of its suggestions, which drives DR types nuts, as it's 100% about assumed behavior to them."

One ignores both math and human behavior at one's peril. ;)
It isn’t just math. Many Bogleheads make a lot of assumptions in the analysis. It’s a given to them that everybody thinks that way and most people will be able to follow those assumptions.

- Make good enough income to be above lowest tax brackets
- spend very modestly such that you can retire well before you draw SS
- assume you can and WILL retire a decade before SS and do Roth conversions
- assume tax rates won’t go up, even when they are scheduled by current tax law to go up
- generally ignore impact of SS on retirement marginal tax rate
- assume you won’t have any other significant income in retirement
- assume both you and spouse will BOTH retire long before either draws SS
- assume all tax savings from traditional will be diligently held in taxable account until retirement
- assume taxable accounts are managed efficiently from a tax perspective.


That’s a lot of assumptions. I don’t doubt that some here who make those assumptions will diligently follow all those assumptions. But for many at least a couple of these assumptions won’t hold

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Re: Dave Ramsey over simplifying Roth vs. Traditional IRA?

Post by FiveK » Sat Feb 24, 2018 9:59 pm

JBTX wrote:
Sat Feb 24, 2018 9:43 pm
That’s a lot of assumptions.
Indeed it is. One could develop a similar list of assumptions that underlie a "Roth is better" statement, and for many at least a couple of those assumptions also won’t hold.

People like rules of thumb, even when there are so many exceptions that one can reasonably question how helpful those "rules" are.

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Re: Dave Ramsey over simplifying Roth vs. Traditional IRA?

Post by JBTX » Sat Feb 24, 2018 10:10 pm

FiveK wrote:
Sat Feb 24, 2018 9:59 pm
JBTX wrote:
Sat Feb 24, 2018 9:43 pm
That’s a lot of assumptions.
Indeed it is. One could develop a similar list of assumptions that underlie a "Roth is better" statement, and for many at least a couple of those assumptions also won’t hold.

People like rules of thumb, even when there are so many exceptions that one can reasonably question how helpful those "rules" are.
I disagree. For most non bogleheads, if they asked - should I put my IRA money in Roth or traditional, I think the answer would be Roth. In terms of Traditional 401k or Roth 401k, that one is a bit more complex. Most people aren’t going to be able to retire early and do Roth conversions prior to SS.

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Re: Dave Ramsey over simplifying Roth vs. Traditional IRA?

Post by decapod10 » Sat Feb 24, 2018 10:28 pm

JBTX wrote:
Sat Feb 24, 2018 10:10 pm
FiveK wrote:
Sat Feb 24, 2018 9:59 pm
JBTX wrote:
Sat Feb 24, 2018 9:43 pm
That’s a lot of assumptions.
Indeed it is. One could develop a similar list of assumptions that underlie a "Roth is better" statement, and for many at least a couple of those assumptions also won’t hold.

People like rules of thumb, even when there are so many exceptions that one can reasonably question how helpful those "rules" are.
I disagree. For most non bogleheads, if they asked - should I put my IRA money in Roth or traditional, I think the answer would be Roth. In terms of Traditional 401k or Roth 401k, that one is a bit more complex. Most people aren’t going to be able to retire early and do Roth conversions prior to SS.
I think one point worth making is that Roth may or may not be better than traditional, but it's virtually always better than taxable, so I suppose it's not a huge mistake to go Roth, while in some corner cases traditional retirement accounts can be worse than taxable accounts.

I guess ultimately it comes to how you would define a typical "non-boglehead". We should probably define who that is first, and then once those assumptions are made, it's somewhat easier to make a rational decision as to whether Roth is preferred for a vast majority. My gut feeling though is a lot of people who need Dave Ramsey's advice may have much higher salaries than you are implying. I'm sure there are good number Ramsey listeners who are in the 22% tax bracket, and I think at 22% it's not so clear to me that Roth is better than traditional. Probably a good number in the 32% or even 35% tax brackets. I'm sure there are plenty of people making $250k struggling with debt and listening to Ramsey. It would be hard to argue in my mind that those people should prioritize Roth accounts over traditional. It would be 401k's we would be talking about of course at that point, but the basic tax numbers are the same (which are the same numbers that Ramsey appears to be doing incorrectly).

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Re: Dave Ramsey over simplifying Roth vs. Traditional IRA?

Post by 9-5 Suited » Sat Feb 24, 2018 10:35 pm

Ramsey once explained why he makes the sweeping Roth recommendation. It’s another in the long line of his behavioral tricks for the masses. He hypothesizes that most people will just max out $5,500 a year in an IRA and not think about the nuances between them (i.e. spend the difference from their tIRA tax savings).

So when viewed in that lens, it’s at least a worthwhile perspective to consider. It’s irrelevant and stupid for folks on this forum, but I know people who can’t even calculate interest and don’t know what a mutual fund is.

Certainly would be better if he made an effort to actually explain the difference and the relevant factors, but I’m sure he thinks that is too complex and intimidating. One size fits all is his strategy to get people past their do-nothing stage.

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Re: Dave Ramsey over simplifying Roth vs. Traditional IRA?

Post by FiveK » Sat Feb 24, 2018 10:42 pm

JBTX wrote:
Sat Feb 24, 2018 10:10 pm
For most non bogleheads....
Even "non bogleheads" comprises a variety of disparate populations.

E.g., many of the TaxAide clients we see have 0% of their SS benefits taxable, and/or 0% federal taxable. Many of those have no IRA benefits also, but if they had been in the 15% bracket when working and made IRA contributions, traditional would probably have been best for them.

But yes, it is possible to have "too much" in traditional accounts so "all traditional all the time" is not always correct. Neither is "all Roth all the time." If contribution and withdrawal marginal rates are close, it makes little practical difference which one chooses.

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Re: Dave Ramsey over simplifying Roth vs. Traditional IRA?

Post by willthrill81 » Sat Feb 24, 2018 10:48 pm

FiveK wrote:
Sat Feb 24, 2018 10:42 pm
If contribution and withdrawal marginal rates are close, it makes little practical difference which one chooses.
If there isn't a significant tax arbitrage opportunity, I'd lean toward the Roth due to the lack of RMDs and favorable tax treatment for heirs.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Dave Ramsey over simplifying Roth vs. Traditional IRA?

Post by FiveK » Sat Feb 24, 2018 10:54 pm

essbeer wrote:
Sat Feb 24, 2018 9:17 pm
JoeRetire wrote:
Sat Feb 24, 2018 8:03 pm
essbeer wrote:
Sat Feb 24, 2018 4:38 pm
I'm naturally very cynical. Traditional IRAs fall under the DOL Fiduciary rule and Roth IRAs don't.
Hmm. What leads you to believe that?
FiveK wrote:
Sat Feb 24, 2018 5:03 pm
essbeer wrote:
Sat Feb 24, 2018 4:38 pm
Traditional IRAs fall under the DOL Fiduciary rule and Roth IRAs don't.
Hadn't heard that. Couldn't find it in Federal Register :: Investment Advice Fiduciaries and Employee Benefit Plans and IRAs...?
https://www.investopedia.com/updates/do ... iary-rule/

Under "What isn't covered" :
"Taxable transactional accounts or accounts funded with after-tax dollars are not considered retirement plans, even if the funds are personally earmarked for retirement savings."
The key word in "What isn't covered" is likely "Taxable" - as opposed to "tax-advantaged" plans such as traditional or Roth 401k and IRA plans, and HSAs.

Nowhere in Federal Register :: Definition of the Term “Fiduciary”; Conflict of Interest Rule-Retirement Investment Advice does the word "Roth" occur. If the intent was to exclude Roth plans, one would expect that to be explicit.

See Definition of Plan Includes IRAs and Other Non-ERISA Plans.

See also https://www.federalregister.gov/d/2016-07924/p-517
(ii) The term “IRA” means any account or annuity described in Code section 4975(e)(1)(B) through (F), including, for example, an individual retirement account described in section 408(a) of the Code and a health savings account described in section 223(d) of the Code.
and
26 U.S. Code § 408A - Roth IRAs.
Last edited by FiveK on Sat Feb 24, 2018 11:00 pm, edited 1 time in total.

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Re: Dave Ramsey over simplifying Roth vs. Traditional IRA?

Post by FiveK » Sat Feb 24, 2018 10:59 pm

willthrill81 wrote:
Sat Feb 24, 2018 10:48 pm
FiveK wrote:
Sat Feb 24, 2018 10:42 pm
If contribution and withdrawal marginal rates are close, it makes little practical difference which one chooses.
If there isn't a significant tax arbitrage opportunity, I'd lean toward the Roth due to the lack of RMDs and favorable tax treatment for heirs.
A reasonable position. I'd lean toward the traditional, due to the better downside if that ends up being the "wrong" decision. In other words, if one has less money than expected, traditional will have been the correct choice. If one has more money than expected, oh well, Roth would have been better....
One pays one's money and takes one's chances. :beer

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Re: Dave Ramsey over simplifying Roth vs. Traditional IRA?

Post by Better2bWise » Sat Feb 24, 2018 10:59 pm

Spewin wrote:
Fri Aug 05, 2016 10:28 am
Clark Howard is another radio personality who recommends Roth without paying attention to the nuanced analysis that goes on here. He was once called out on it and he said that he knows that it's not technically right, but that for most people, it will result in more savings (after tax) for retirement and that that is why he is ok ignoring this. Specifically, he tricks people into saving more. This is actually a good strategy, since most people will not be investing the additional tax savings from a traditional account.

I'm not sure Dave has ever considered this. He seems to have a very low understanding of any advanced topics. However, he has also said (about the 12% return thing) that his point is to get people going the right direction, not to help them optimize their lives. Dave will often give completely BS reasons to convince someone to do something that is actually the correct behavior. And most people probably end up better off by following his Roth/traditional advice.
I have heard Dave explain that with a Roth 403b you can put more dollars into a Tax advantage account than with a 403b (pretax) as both have identical limits. Roth 403b to the limit increases the savings rate of an individual.

I agree with the idea that savings rate is the key to accumulation especially when you don't know the performance of investments.

JBTX
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Re: Dave Ramsey over simplifying Roth vs. Traditional IRA?

Post by JBTX » Sat Feb 24, 2018 11:14 pm

9-5 Suited wrote:
Sat Feb 24, 2018 10:35 pm
Ramsey once explained why he makes the sweeping Roth recommendation. It’s another in the long line of his behavioral tricks for the masses.He hypothesizes that most people will just max out $5,500 a year in an IRA and not think about the nuances between them (i.e. spend the difference from their tIRA tax savings).

So when viewed in that lens, it’s at least a worthwhile perspective to consider. It’s irrelevant and stupid for folks on this forum, but I know people who can’t even calculate interest and don’t know what a mutual fund is.

Certainly would be better if he made an effort to actually explain the difference and the relevant factors, but I’m sure he thinks that is too complex and intimidating. One size fits all is his strategy to get people past their do-nothing stage.
That most people won’t save all their tax savings in a pretax account until retirement, and invest it in an appropriate asset allocation, is more likely than not. It isn’t at all an unreasonable assumption.

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Re: Dave Ramsey over simplifying Roth vs. Traditional IRA?

Post by JBTX » Sat Feb 24, 2018 11:20 pm

FiveK wrote:
Sat Feb 24, 2018 10:59 pm
willthrill81 wrote:
Sat Feb 24, 2018 10:48 pm
FiveK wrote:
Sat Feb 24, 2018 10:42 pm
If contribution and withdrawal marginal rates are close, it makes little practical difference which one chooses.
If there isn't a significant tax arbitrage opportunity, I'd lean toward the Roth due to the lack of RMDs and favorable tax treatment for heirs.
A reasonable position. I'd lean toward the traditional, due to the better downside if that ends up being the "wrong" decision. In other words, if one has less money than expected, traditional will have been the correct choice. If one has more money than expected, oh well, Roth would have been better....
One pays one's money and takes one's chances. :beer
This is an interesting argument I never thought about before coming here. I think I saw KlangFool post it.

One problem with it is due to the unusual marginal tax rate curve impact of social security taxability, less income in retirement may or may not put you at a lower rate. Unlike federal income tax rates, the impact isn’t always progressive and may even be regressive.

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Re: Dave Ramsey over simplifying Roth vs. Traditional IRA?

Post by JBTX » Sat Feb 24, 2018 11:33 pm

decapod10 wrote:
Sat Feb 24, 2018 10:28 pm
JBTX wrote:
Sat Feb 24, 2018 10:10 pm
FiveK wrote:
Sat Feb 24, 2018 9:59 pm
JBTX wrote:
Sat Feb 24, 2018 9:43 pm
That’s a lot of assumptions.
Indeed it is. One could develop a similar list of assumptions that underlie a "Roth is better" statement, and for many at least a couple of those assumptions also won’t hold.

People like rules of thumb, even when there are so many exceptions that one can reasonably question how helpful those "rules" are.
I disagree. For most non bogleheads, if they asked - should I put my IRA money in Roth or traditional, I think the answer would be Roth. In terms of Traditional 401k or Roth 401k, that one is a bit more complex. Most people aren’t going to be able to retire early and do Roth conversions prior to SS.
I think one point worth making is that Roth may or may not be better than traditional, but it's virtually always better than taxable, so I suppose it's not a huge mistake to go Roth, while in some corner cases traditional retirement accounts can be worse than taxable accounts.

I guess ultimately it comes to how you would define a typical "non-boglehead". We should probably define who that is first, and then once those assumptions are made, it's somewhat easier to make a rational decision as to whether Roth is preferred for a vast majority. My gut feeling though is a lot of people who need Dave Ramsey's advice may have much higher salaries than you are implying. I'm sure there are good number Ramsey listeners who are in the 22% tax bracket, and I think at 22% it's not so clear to me that Roth is better than traditional. Probably a good number in the 32% or even 35% tax brackets. I'm sure there are plenty of people making $250k struggling with debt and listening to Ramsey. It would be hard to argue in my mind that those people should prioritize Roth accounts over traditional. It would be 401k's we would be talking about of course at that point, but the basic tax numbers are the same (which are the same numbers that Ramsey appears to be doing incorrectly).
In this context I use non boglehead almost literally, and as you point out, can include a wide variety of people. This would include me before I came here. I’ve always considered myself financially savvy but never thought through the various scenarios of Roth vs traditional as they are discussed here.

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Re: Dave Ramsey over simplifying Roth vs. Traditional IRA?

Post by JBTX » Sat Feb 24, 2018 11:39 pm

willthrill81 wrote:
Sat Feb 24, 2018 10:48 pm
FiveK wrote:
Sat Feb 24, 2018 10:42 pm
If contribution and withdrawal marginal rates are close, it makes little practical difference which one chooses.
If there isn't a significant tax arbitrage opportunity, I'd lean toward the Roth due to the lack of RMDs and favorable tax treatment for heirs.
The fact that you don’t have RMDs and can pass them on tax free to heirs is known by most people who follow this stuff. But Bruce Steiner posted one of his articles explaining how a Roth could be advantageous for people passing on money to heirs in taxable trusts. The tax rates of these trusts are compressed and are quite high, quickly reaching the maximum rate. But if coming from a Roth there is no tax. In our situation that could be very advantageous down the road.

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Re: Dave Ramsey over simplifying Roth vs. Traditional IRA?

Post by FiveK » Sun Feb 25, 2018 12:33 am

JBTX wrote:
Sat Feb 24, 2018 11:20 pm
...due to the unusual marginal tax rate curve impact of social security taxability, less income in retirement may or may not put you at a lower rate. Unlike federal income tax rates, the impact isn’t always progressive and may even be regressive.
Fortunately those high marginal rates are present over a limited income range, after which things drop back to "normal". See Taxation of Social Security benefits for a couple of example charts.

One could, for example, take a relatively large tIRA withdrawal one year (to get well beyond the SS taxation "hump" that year), then several years of withdrawing just short of that hump, then repeat.

It's a good point that without being aware, folks could be paying those high marginal rates year after year when, with some planning, they could be avoided.

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Re: Dave Ramsey over simplifying Roth vs. Traditional IRA?

Post by JBTX » Sun Feb 25, 2018 12:40 am

FiveK wrote:
Sun Feb 25, 2018 12:33 am
JBTX wrote:
Sat Feb 24, 2018 11:20 pm
...due to the unusual marginal tax rate curve impact of social security taxability, less income in retirement may or may not put you at a lower rate. Unlike federal income tax rates, the impact isn’t always progressive and may even be regressive.
Fortunately those high marginal rates are present over a limited income range, after which things drop back to "normal". See Taxation of Social Security benefits for a couple of example charts.

One could, for example, take a relatively large tIRA withdrawal one year (to get well beyond the SS taxation "hump" that year), then several years of withdrawing just short of that hump, then repeat.

It's a good point that without being aware, folks could be paying those high marginal rates year after year when, with some planning, they could be avoided.
To your last point, exactly. Most people don’t have a clue. Even many people who are reasonably versed on issues of personal finance don’t have a clue about the marginal tax rate impact of social security. As such, if they have Roth instead it just takes the issue off the table.

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Re: Dave Ramsey over simplifying Roth vs. Traditional IRA?

Post by essbeer » Sun Feb 25, 2018 12:43 am

FiveK wrote:
Sat Feb 24, 2018 10:54 pm
The key word in "What isn't covered" is likely "Taxable" - as opposed to "tax-advantaged" plans such as traditional or Roth 401k and IRA plans, and HSAs.

Nowhere in Federal Register :: Definition of the Term “Fiduciary”; Conflict of Interest Rule-Retirement Investment Advice does the word "Roth" occur. If the intent was to exclude Roth plans, one would expect that to be explicit.

See Definition of Plan Includes IRAs and Other Non-ERISA Plans.

See also https://www.federalregister.gov/d/2016-07924/p-517
(ii) The term “IRA” means any account or annuity described in Code section 4975(e)(1)(B) through (F), including, for example, an individual retirement account described in section 408(a) of the Code and a health savings account described in section 223(d) of the Code.
and
26 U.S. Code § 408A - Roth IRAs.
The confusion seems due to the Rule saying it's using the ERISA definitions, which seems to require income deferral to be a qualified plan. Frankly they could have done a lot better job of explaining what they think is qualified and what isn't. Does an Inherited IRA get the Rule or not?

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Re: Dave Ramsey over simplifying Roth vs. Traditional IRA?

Post by JoeRetire » Sun Feb 25, 2018 5:27 pm

essbeer wrote:
Sat Feb 24, 2018 9:17 pm
JoeRetire wrote:
Sat Feb 24, 2018 8:03 pm
essbeer wrote:
Sat Feb 24, 2018 4:38 pm
I'm naturally very cynical. Traditional IRAs fall under the DOL Fiduciary rule and Roth IRAs don't.
Hmm. What leads you to believe that?
FiveK wrote:
Sat Feb 24, 2018 5:03 pm
essbeer wrote:
Sat Feb 24, 2018 4:38 pm
Traditional IRAs fall under the DOL Fiduciary rule and Roth IRAs don't.
Hadn't heard that. Couldn't find it in Federal Register :: Investment Advice Fiduciaries and Employee Benefit Plans and IRAs...?
https://www.investopedia.com/updates/do ... iary-rule/

Under "What isn't covered" :
"Taxable transactional accounts or accounts funded with after-tax dollars are not considered retirement plans, even if the funds are personally earmarked for retirement savings."
Sorry, but you are misinterpreting or misunderstanding that section.

From the same article:
"Covered retirement plans include:

- Individual Retirement Accounts (IRAs)"

It doesn't say "some IRAs". It doesn't say "(only traditional IRAs)".

https://www.nerdwallet.com/blog/investi ... vestments/
"What’s considered a ‘retirement account’ under this rule?
Traditional and Roth IRAs, 401(k)s and — this is a surprise — some health savings accounts."

https://www.cnbc.com/2016/04/05/how-the ... works.html
"Who's impacted?
The rule covers all financial professionals offering investment advice for retirement accounts — including 401(k)s and IRAs. Under the new rule, your advisor must follow the "fiduciary standard" in recommending investments for your traditional or Roth IRA..."

http://time.com/money/4809060/fiduciary ... what-know/
"And even the new fiduciary rule will apply only to advisors working with your retirement assets—for most people, that’s a 401(k), or a Roth or traditional IRA. "

I could go on.

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Re: Dave Ramsey over simplifying Roth vs. Traditional IRA?

Post by 9-5 Suited » Tue Feb 27, 2018 6:49 pm

JBTX wrote:
Sat Feb 24, 2018 11:14 pm
9-5 Suited wrote:
Sat Feb 24, 2018 10:35 pm
Ramsey once explained why he makes the sweeping Roth recommendation. It’s another in the long line of his behavioral tricks for the masses.He hypothesizes that most people will just max out $5,500 a year in an IRA and not think about the nuances between them (i.e. spend the difference from their tIRA tax savings).

So when viewed in that lens, it’s at least a worthwhile perspective to consider. It’s irrelevant and stupid for folks on this forum, but I know people who can’t even calculate interest and don’t know what a mutual fund is.

Certainly would be better if he made an effort to actually explain the difference and the relevant factors, but I’m sure he thinks that is too complex and intimidating. One size fits all is his strategy to get people past their do-nothing stage.
That most people won’t save all their tax savings in a pretax account until retirement, and invest it in an appropriate asset allocation, is more likely than not. It isn’t at all an unreasonable assumption.
Yep, that was my point. Dave’s position isn’t quite as dumb as it seems, it just isn’t good advice for people with care and knowledge about personal finance, like Bogleheads.

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Re: Dave Ramsey over simplifying Roth vs. Traditional IRA?

Post by decapod10 » Tue Feb 27, 2018 7:02 pm

9-5 Suited wrote:
Tue Feb 27, 2018 6:49 pm
JBTX wrote:
Sat Feb 24, 2018 11:14 pm
9-5 Suited wrote:
Sat Feb 24, 2018 10:35 pm
Ramsey once explained why he makes the sweeping Roth recommendation. It’s another in the long line of his behavioral tricks for the masses.He hypothesizes that most people will just max out $5,500 a year in an IRA and not think about the nuances between them (i.e. spend the difference from their tIRA tax savings).

So when viewed in that lens, it’s at least a worthwhile perspective to consider. It’s irrelevant and stupid for folks on this forum, but I know people who can’t even calculate interest and don’t know what a mutual fund is.

Certainly would be better if he made an effort to actually explain the difference and the relevant factors, but I’m sure he thinks that is too complex and intimidating. One size fits all is his strategy to get people past their do-nothing stage.
That most people won’t save all their tax savings in a pretax account until retirement, and invest it in an appropriate asset allocation, is more likely than not. It isn’t at all an unreasonable assumption.
Yep, that was my point. Dave’s position isn’t quite as dumb as it seems, it just isn’t good advice for people with care and knowledge about personal finance, like Bogleheads.
That's a perfectly reasonable position for him to have, but if he's going to say that, then he shouldn't back it up with incorrect math. He should say "I recommend all of my listeners to max out their Roth IRA. There are times when a traditional IRA might be better, but I think that the differences between the two are not as important as how much you save." Or "There are times when a traditional IRA might be better than a Roth IRA, but a Roth IRA is always better than a taxable account, so go ahead and max out the Roth IRA every year and don't worry about it." For the people who don't really care, they will max out the Roth IRA. For the people who do care, they will look more into the differences between the two.

It makes it feel like he doesn't/didn't know the correct math and only came up with that answer after someone who knew better challenged him on it.

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Re: Dave Ramsey over simplifying Roth vs. Traditional IRA?

Post by JBTX » Tue Feb 27, 2018 8:03 pm

decapod10 wrote:
Tue Feb 27, 2018 7:02 pm
9-5 Suited wrote:
Tue Feb 27, 2018 6:49 pm
JBTX wrote:
Sat Feb 24, 2018 11:14 pm
9-5 Suited wrote:
Sat Feb 24, 2018 10:35 pm
Ramsey once explained why he makes the sweeping Roth recommendation. It’s another in the long line of his behavioral tricks for the masses.He hypothesizes that most people will just max out $5,500 a year in an IRA and not think about the nuances between them (i.e. spend the difference from their tIRA tax savings).

So when viewed in that lens, it’s at least a worthwhile perspective to consider. It’s irrelevant and stupid for folks on this forum, but I know people who can’t even calculate interest and don’t know what a mutual fund is.

Certainly would be better if he made an effort to actually explain the difference and the relevant factors, but I’m sure he thinks that is too complex and intimidating. One size fits all is his strategy to get people past their do-nothing stage.
That most people won’t save all their tax savings in a pretax account until retirement, and invest it in an appropriate asset allocation, is more likely than not. It isn’t at all an unreasonable assumption.
Yep, that was my point. Dave’s position isn’t quite as dumb as it seems, it just isn’t good advice for people with care and knowledge about personal finance, like Bogleheads.
That's a perfectly reasonable position for him to have, but if he's going to say that, then he shouldn't back it up with incorrect math. He should say "I recommend all of my listeners to max out their Roth IRA. There are times when a traditional IRA might be better, but I think that the differences between the two are not as important as how much you save." Or "There are times when a traditional IRA might be better than a Roth IRA, but a Roth IRA is always better than a taxable account, so go ahead and max out the Roth IRA every year and don't worry about it." For the people who don't really care, they will max out the Roth IRA. For the people who do care, they will look more into the differences between the two.

It makes it feel like he doesn't/didn't know the correct math and only came up with that answer after someone who knew better challenged him on it.
For a particular fixed contribution amount, the Roth will always be better, period. Why complicate it for his listeners?

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Re: Dave Ramsey over simplifying Roth vs. Traditional IRA?

Post by FiveK » Tue Feb 27, 2018 8:41 pm

JBTX wrote:
Tue Feb 27, 2018 8:03 pm
For a particular fixed contribution amount, the Roth will always be better, period.
Except it won't, assuming we define "better" as "more spendable dollars after all taxes".

I don't think there is any debate about the Roth result: [(Pre-tax amount) * (1-tax_now)] * Growth.

Ah, but the traditional result....

The Traditional versus Roth wiki assumes that either the commutative property of multiplication applies, or that one uses a taxable side account if the pre-tax amount is greater than the IRS maximum for traditional contribution.

Here we assume that no "taxable side account" is used. Rather, we assume the amount contributed to traditional is the same as contributed to Roth (see amounts within square brackets). Thus, Traditional result (part 1): [(Pre-tax amount) * (1-tax_now)] * Growth * (1-tax_later)

But there is a part 2: even if some is not invested, we need to use the same pre-tax amount for the traditional case as for the Roth case. One pays tax immediately on the part not invested, but the after-tax amount is immediately spendable:

Traditional result (part 2): (Pre-tax amount) * (tax_now) * (1-tax_now)

One then adds the two traditional parts to compare with the Roth. E.g., if the pre-tax amount is 1, current tax rate is 12%, the future tax rate is 0%, and Growth - aka (1+r)^n - is 4, the traditional result is 3.63 while the Roth is 3.52.

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Re: Dave Ramsey over simplifying Roth vs. Traditional IRA?

Post by welderwannabe » Tue Feb 27, 2018 8:44 pm

Im a big fan of Dave, but he sucks with investing advice. There was a caller last week who tried to ask him about doing a backdoor Roth if you have an existing rollover IRA (basically the Pro Rata rule or whatever it is called). The lady told him that her financial advisor told her she would have to pay taxes on part of the backdoor conversion due to the existence of the rollover IRA. His response was to tell her the FA was wrong and she needed to find a new FA.

He has a lot of good advice. His investing ideas are not among them.
I am not an investment professional, but I did stay at a Holiday Inn Express last night.

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Re: Dave Ramsey over simplifying Roth vs. Traditional IRA?

Post by JBTX » Tue Feb 27, 2018 9:12 pm

FiveK wrote:
Tue Feb 27, 2018 8:41 pm
JBTX wrote:
Tue Feb 27, 2018 8:03 pm
For a particular fixed contribution amount, the Roth will always be better, period.
Except it won't, assuming we define "better" as "more spendable dollars after all taxes".

I don't think there is any debate about the Roth result: [(Pre-tax amount) * (1-tax_now)] * Growth.

Ah, but the traditional result....

The Traditional versus Roth wiki assumes that either the commutative property of multiplication applies, or that one uses a taxable side account if the pre-tax amount is greater than the IRS maximum for traditional contribution.

Here we assume that no "taxable side account" is used. Rather, we assume the amount contributed to traditional is the same as contributed to Roth (see amounts within square brackets). Thus, Traditional result (part 1): [(Pre-tax amount) * (1-tax_now)] * Growth * (1-tax_later)

But there is a part 2: even if some is not invested, we need to use the same pre-tax amount for the traditional case as for the Roth case. One pays tax immediately on the part not invested, but the after-tax amount is immediately spendable:

Traditional result (part 2): (Pre-tax amount) * (tax_now) * (1-tax_now)

One then adds the two traditional parts to compare with the Roth. E.g., if the pre-tax amount is 1, current tax rate is 12%, the future tax rate is 0%, and Growth - aka (1+r)^n - is 4, the traditional result is 3.63 while the Roth is 3.52.

I shouldn't have said "better". I should have said "more". The Roth will always be more (or maybe in rare cases equal).

I fully understand the benefits of traditional, but as we've discussed a dozen times, the traditional is better if quite a few assumptions play out. For Bogleheads it is quite plausible that those assumptions do play out. For your typical DR listener probably not.

In most cases, it probably isn't going to be a big difference either way, unless you save up a lot, retire early, and do lots Roth conversions between early retirement and drawing social security. For those people, they can potentially pay quite a bit less taxes. But most people, such as DR listeners, aren't likely to retire too much earlier than SS retirement. For those people, in some cases the numbers for traditional still may work out a little bit better, if they were to manage it correctly, but the difference isn't huge, and you have the benefits of the Roth as a "retirement account" being a little bit less accessible than a taxable account that may ultimately give way to a new car or home remodel.

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Re: Dave Ramsey over simplifying Roth vs. Traditional IRA?

Post by haban01 » Tue Feb 27, 2018 9:38 pm

BW1985 wrote:
Fri Aug 05, 2016 9:13 am
Roth vs. Trad is situational not a one-size fits all, the problem is Ramsey wants everything one-size fits all so it's easier for his radio show and personalities to be consistent with their advice. He says Roth is ALWAYS better unless you're already in your 60-70's where it won't matter much either way. He never takes into account people's tax's brackets now vs. expected tax bracket at retirement, or the opportunity cost of the money spent in taxes upfront- what if that money was invested? He doesn't want to get into that level of detail, that's why Jill on Money is a much better show.
I was listening the other day and he talked about in 30 years that your contributions will only be about 5% of the total value.... I was laughing.....
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Re: Dave Ramsey over simplifying Roth vs. Traditional IRA?

Post by FiveK » Tue Feb 27, 2018 10:02 pm

JBTX wrote:
Tue Feb 27, 2018 9:12 pm
I shouldn't have said "better". I should have said "more". The Roth will always be more (or maybe in rare cases equal).
Except it won't, assuming we define "more" as "more spendable dollars after all taxes".
I fully understand the benefits of traditional, but as we've discussed a dozen times, the traditional is better if quite a few assumptions play out. For Bogleheads it is quite plausible that those assumptions do play out. For your typical DR listener probably not.
Agreed, conclusions depend on assumptions. That's why I'm not a big fan of any rules of thumb that consider only one's current bracket, let alone rules of thumb that don't even consider that.
In most cases, it probably isn't going to be a big difference either way, unless you save up a lot, retire early, and do lots Roth conversions between early retirement and drawing social security. For those people, they can potentially pay quite a bit less taxes.
Agreed - when the difference between current and future tax rates is small, the difference between using traditional vs. Roth is also small.
But most people, such as DR listeners, aren't likely to retire too much earlier than SS retirement.
Maybe, maybe not. They may not want to retire earlier, but sometimes things happen. Protecting against unexpected problems is why, if I had to, I'd suggest traditional as the default answer - but reasonable people can suggest otherwise, also for reasonable reasons.
...you have the benefits of the Roth as a "retirement account" being a little bit less accessible than a taxable account that may ultimately give way to a new car or home remodel.
Agreed that Roth is better than taxable, in part due to being less accessible. Traditional is even less accessible than Roth. Of course, if one assumes the person pays the 10 percent penalty anyway, then traditional gets that much worse....

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Re: Dave Ramsey over simplifying Roth vs. Traditional IRA?

Post by FiveK » Tue Feb 27, 2018 10:08 pm

haban01 wrote:
Tue Feb 27, 2018 9:38 pm
I was listening the other day and he talked about in 30 years that your contributions will only be about 5% of the total value.... I was laughing.....
Wow, that's only a 10.5% CAGR. Now, if you are good and get 12%, after 30 years your original contribution will be only 3.3% of the total. ;)

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Re: Dave Ramsey over simplifying Roth vs. Traditional IRA?

Post by PharmerBrown » Tue Feb 27, 2018 10:24 pm

In most cases, it probably isn't going to be a big difference either way, unless you save up a lot, retire early, and do lots Roth conversions between early retirement and drawing social security. For those people, they can potentially pay quite a bit less taxes.
Agreed - when the difference between current and future tax rates is small, the difference between using traditional vs. Roth is also small.

But the low end is where the greatest potential difference lies. When low savers fill zero tax space with Roth withdraws, it is a significant mistake. If you're only going to have SS and <200k in retirement accounts when you retire, you would be much better off having contributed 100% traditional vs. 100% Roth.

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Re: Dave Ramsey over simplifying Roth vs. Traditional IRA?

Post by JBTX » Tue Feb 27, 2018 10:59 pm

FiveK wrote:
Tue Feb 27, 2018 10:02 pm
JBTX wrote:
Tue Feb 27, 2018 9:12 pm
I shouldn't have said "better". I should have said "more". The Roth will always be more (or maybe in rare cases equal).
Except it won't, assuming we define "more" as "more spendable dollars after all taxes".
No, you are complicating it. $5000 in a Roth will always end up more than $5000 in a traditional, except in the rare case in retirement where marginal tax rate = 0%, and then it will be the same.

When you start introducing "more spendable dollars", then you are (presumably) introducing the assumption that tax savings will be invested until retirement. Maybe it will be, maybe it won't, but that is an assumption, and if you don't deliberately follow that assumption, the money will likely eventually be spent, especially in the Dave Ramsey world. In that world, people must be forced to save, pay off low rate mortgages, fund Roth's, etc, because the assumption is otherwise available dollars will be spent.

As to "more spendable dollars" - that is changing the definition. I am measuring what gives you the most money at the ultimate time of withdrawal, which in this case is retirement. I am not concerned with available dollars for spending at the time of investment. We are not measuring lifelong cumulative utility from spending. The fact that you can take the upfront tax savings and spend it right away on booze and other vices (or something of more merit or virtue) is not relevant to the discussion.



I fully understand the benefits of traditional, but as we've discussed a dozen times, the traditional is better if quite a few assumptions play out. For Bogleheads it is quite plausible that those assumptions do play out. For your typical DR listener probably not.
Agreed, conclusions depend on assumptions. That's why I'm not a big fan of any rules of thumb that consider only one's current bracket, let alone rules of thumb that don't even consider that.
In most cases, it probably isn't going to be a big difference either way, unless you save up a lot, retire early, and do lots Roth conversions between early retirement and drawing social security. For those people, they can potentially pay quite a bit less taxes.
Agreed - when the difference between current and future tax rates is small, the difference between using traditional vs. Roth is also small.
But most people, such as DR listeners, aren't likely to retire too much earlier than SS retirement.
Maybe, maybe not. They may not want to retire earlier, but sometimes things happen. Protecting against unexpected problems is why, if I had to, I'd suggest traditional as the default answer - but reasonable people can suggest otherwise, also for reasonable reasons.
I'm not exactly sure how traditional protects against unexpected problems. Perhaps you mean you end up unemployed for a long time, in a lower tax rate, and can draw it out then? Perhaps, but you have to contend with penalites of early withdrawal (and yes, I understand it still could be cheaper with penalties but no/low tax)

But again, you are making the implicit assumption that the up front tax savings was saved. The Roth will always have as least as much and probably more. In the Dave Ramsey world the assumption is his listeners lack control and will spend the upfront tax savings.
...you have the benefits of the Roth as a "retirement account" being a little bit less accessible than a taxable account that may ultimately give way to a new car or home remodel.
Agreed that Roth is better than taxable, in part due to being less accessible. Traditional is even less accessible than Roth. Of course, if one assumes the person pays the 10 percent penalty anyway, then traditional gets that much worse....

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Re: Dave Ramsey over simplifying Roth vs. Traditional IRA?

Post by FiveK » Tue Feb 27, 2018 11:17 pm

JBTX wrote:
Tue Feb 27, 2018 10:59 pm
$5000 in a Roth will always end up more than $5000 in a traditional, except in the rare case in retirement where marginal tax rate = 0%, and then it will be the same.

When you start introducing "more spendable dollars", then you are (presumably) introducing the assumption that tax savings will be invested until retirement.
I thought it was clear that assumption was not being made for this discussion - please reread.
As to "more spendable dollars" - that is changing the definition. I am measuring what gives you the most money at the ultimate time of withdrawal, which in this case is retirement. I am not concerned with available dollars for spending at the time of investment. We are not measuring lifelong cumulative utility from spending. The fact that you can take the upfront tax savings and spend it right away on booze and other vices (or something of more merit or virtue) is not relevant to the discussion.
We'll have to agree to disagree on this part.

Whether one spends half my money on gambling, alcohol and wild women - the other half I wasted now or later, it's spendable dollars.
I'm not exactly sure how traditional protects against unexpected problems. Perhaps you mean you end up unemployed for a long time, in a lower tax rate, and can draw it out then? Perhaps, but you have to contend with penalites of early withdrawal (and yes, I understand it still could be cheaper with penalties but no/low tax)
Yes.
But again, you are making the implicit assumption that the up front tax savings was saved. The Roth will always have as least as much and probably more. In the Dave Ramsey world the assumption is his listeners lack control and will spend the upfront tax savings.
I'm really not making that assumption. Quite the opposite: I am assuming the upfront tax savings are spent. Yes, I'm further assuming that spending now is equally valuable to spending later.

I suppose one could assume that future spending would be better spent due to one being older and wiser...?

JBTX
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Re: Dave Ramsey over simplifying Roth vs. Traditional IRA?

Post by JBTX » Tue Feb 27, 2018 11:38 pm

FiveK wrote:
Tue Feb 27, 2018 11:17 pm
JBTX wrote:
Tue Feb 27, 2018 10:59 pm
$5000 in a Roth will always end up more than $5000 in a traditional, except in the rare case in retirement where marginal tax rate = 0%, and then it will be the same.

When you start introducing "more spendable dollars", then you are (presumably) introducing the assumption that tax savings will be invested until retirement.
I thought it was clear that assumption was not being made for this discussion - please reread.
As to "more spendable dollars" - that is changing the definition. I am measuring what gives you the most money at the ultimate time of withdrawal, which in this case is retirement. I am not concerned with available dollars for spending at the time of investment. We are not measuring lifelong cumulative utility from spending. The fact that you can take the upfront tax savings and spend it right away on booze and other vices (or something of more merit or virtue) is not relevant to the discussion.
We'll have to agree to disagree on this part.

Whether one spends half my money on gambling, alcohol and wild women - the other half I wasted now or later, it's spendable dollars.
I'm not exactly sure how traditional protects against unexpected problems. Perhaps you mean you end up unemployed for a long time, in a lower tax rate, and can draw it out then? Perhaps, but you have to contend with penalites of early withdrawal (and yes, I understand it still could be cheaper with penalties but no/low tax)
Yes.
But again, you are making the implicit assumption that the up front tax savings was saved. The Roth will always have as least as much and probably more. In the Dave Ramsey world the assumption is his listeners lack control and will spend the upfront tax savings.
I'm really not making that assumption. Quite the opposite: I am assuming the upfront tax savings are spent. Yes, I'm further assuming that spending now is equally valuable to spending later.

I suppose one could assume that future spending would be better spent due to one being older and wiser...?
OK. At least we have isolated our point of contention. I can't say that you are wrong, you are just framing the issue differently than I.

I am talking about money available for spending, at retirement. I am ignoring money that is spent before that. Presumably that spending is discretionary. Discretionary spending may add short term utility to your life, but most discretionary spending does not add to happiness, and most does not add to long term financial well being (there are notable exceptions, such as spending on education, career advancement, investing in your business, paying off credit card debt, etc - and to a lesser degree paying off mortgage earlier, buying a tiny bit bigger house, etc)

Thanks for the intelligent discussion. I like to argue, but I also like to have my POV challenged. It helps me learn.

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FiveK
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Re: Dave Ramsey over simplifying Roth vs. Traditional IRA?

Post by FiveK » Wed Feb 28, 2018 12:01 am

JBTX wrote:
Tue Feb 27, 2018 11:38 pm
OK. At least we have isolated our point of contention. I can't say that you are wrong, you are just framing the issue differently than I.

I am talking about money available for spending, at retirement. I am ignoring money that is spent before that. Presumably that spending is discretionary. Discretionary spending may add short term utility to your life, but most discretionary spending does not add to happiness, and most does not add to long term financial well being (there are notable exceptions, such as spending on education, career advancement, investing in your business, paying off credit card debt, etc - and to a lesser degree paying off mortgage earlier, buying a tiny bit bigger house, etc)

Thanks for the intelligent discussion. I like to argue, but I also like to have my POV challenged. It helps me learn.
Agreed!
Cheers! :sharebeer

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