[Roth IRA vs Traditional IRA]

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pkcrafter
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[Roth IRA vs Traditional IRA]

Post by pkcrafter »

It may not be a total no-brainer...

Roth could be a worse choice - Money

https://money.com/roth-ira-traditional-ira-choice/

Roth vs traditional IRA - Nerd Wallet

https://www.nerdwallet.com/article/inve ... ra-account


Paul
Last edited by Flyer24 on Thu Jun 10, 2021 6:02 pm, edited 1 time in total.
Reason: title clarity
When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.
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AllMostThere
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Re: [Roth IRA vs Traditional IRA]

Post by AllMostThere »

Can't wait to see the type of responses to these articles. :twisted:
IMO, ROTH IRA is the way to go as there is one main advantage and truth - "Future withdrawal's after 59.5 yrs of age will always be tax-free".
tIRA has one main disadvantage and truth - "Future withdrawal's after 59.5 yrs of age will always be taxed!"
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FiveK
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Re: [Roth IRA vs Traditional IRA]

Post by FiveK »

The first article is better than the second.

As the BH wiki on this says, Neither is inherently better, as either one may be a better choice in different situations.
Ddd7651
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Re: [Roth IRA vs Traditional IRA]

Post by Ddd7651 »

A big difference not talked about much is that 6k put into a Roth IRA is more money than 6k put into a traditional IRA. You are able to get more money into a retirement account by going Roth. Not in a literal sense but the point is there. As someone else said, they are for different situations as you can simply invest the money from a tax write off from a traditional IRA and invest it and keep up with the Roth. About the same at retirement after the tax dust has settled.
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David Jay
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Re: [Roth IRA vs Traditional IRA]

Post by David Jay »

Neither article addresses the issue we encounter a lot here at BH - the impact of taxable withdrawals (i.e. increased MAGI) from an IRA caused by RMDs in later retirement. The increased income not only bumps your tax bracket, it can also create an IRMAA surcharge on your Medicare premium.
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jeffyscott
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Re: [Roth IRA vs Traditional IRA]

Post by jeffyscott »

AllMostThere wrote: Thu Jun 10, 2021 6:14 pm Can't wait to see the type of responses to these articles. :twisted:
IMO, ROTH IRA is the way to go as there is one main advantage and truth - "Future withdrawal's after 59.5 yrs of age will always be tax-free".
tIRA has one main disadvantage and truth - "Future withdrawal's after 59.5 yrs of age will always be taxed!"
Not quite true, some TIRA money may come out tax free, there's a standard deduction (and, potentially, itemized deductions) to consider. If you are withdrawing 3.5%, withdrawals would be offset by the standard deduction with a balance of about $350K per person and so those withdrawals could be tax-free. Also if one happens to need long term care, those medical expenses may be tax deductible medical expenses and so the money used to pay it could come out tax free.

In addition, it's not just about the tax rate when the money comes out, it's about tax rate going in vs. tax rate coming out. Yes Roth tax rate on money coming out is 0%, but TIRA tax rate on money going in is 0%.

You can also move money in TIRA to Roth at a time of your choosing, based on the tax rate that would apply to the conversion. Our money going into TIRA equivalent, employer plans would have been taxed at 25% Federal and some of that money is now being moved to Roth at a Federal tax rate of 12%.
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atdharris
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Re: [Roth IRA vs Traditional IRA]

Post by atdharris »

I have a Roth IRA and traditional 401k because I have no idea what my tax rate will be in retirement.
tomdickorharry
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Re: [Roth IRA vs Traditional IRA]

Post by tomdickorharry »

jeffyscott wrote: Fri Jun 11, 2021 9:34 am
AllMostThere wrote: Thu Jun 10, 2021 6:14 pm Can't wait to see the type of responses to these articles. :twisted:
IMO, ROTH IRA is the way to go as there is one main advantage and truth - "Future withdrawal's after 59.5 yrs of age will always be tax-free".
tIRA has one main disadvantage and truth - "Future withdrawal's after 59.5 yrs of age will always be taxed!"
Not quite true, some TIRA money may come out tax free, there's a standard deduction (and, potentially, itemized deductions) to consider. If you are withdrawing 3.5%, withdrawals would be offset by the standard deduction with a balance of about $350K per person and so those withdrawals could be tax-free. Also if one happens to need long term care, those medical expenses may be tax deductible medical expenses and so the money used to pay it could come out tax free.

In addition, it's not just about the tax rate when the money comes out, it's about tax rate going in vs. tax rate coming out. Yes Roth tax rate on money coming out is 0%, but TIRA tax rate on money going in is 0%.

You can also move money in TIRA to Roth at a time of your choosing, based on the tax rate that would apply to the conversion. Our money going into TIRA equivalent, employer plans would have been taxed at 25% Federal and some of that money is now being moved to Roth at a Federal tax rate of 12%.
But with Roth you've only paid taxes on what you put in - no taxes on the growth, which should be substantially larger than what you put in. With Traditional you're paying taxes on what you put in and all the growth as well, the whole pie. I thought that was the main advantage?

Of course, as you said, immediate circumstances actually dictate your tax at the time, which could be tax free anyway, which would make TIRA better, obviously.
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David Jay
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Re: [Roth IRA vs Traditional IRA]

Post by David Jay »

tomdickorharry wrote: Fri Jun 11, 2021 10:21 amBut with Roth you've only paid taxes on what you put in - no taxes on the growth, which should be substantially larger than what you put in. With Traditional you're paying taxes on what you put in and all the growth as well, the whole pie. I thought that was the main advantage?
This is not correct. The gains happen either way, it’s the commutative property of multiplication.

Example:
  • Tax Rate: 24% (i.e. you get to keep 76% or .76)
  • Lifetime gains: 500% (5x)
  • Starting balance: $50,000
Put the money in Roth (tax rate was paid before you got your paycheck): 50,000 x .76 x 5 = 190,000
Put the money in a tIRA (you got a back tax deduction for contributing): 50,000 x 5 x .76 = 190,000

The tax rate needs to change in one or the other formulas to change the outcome.
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius
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FiveK
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Re: [Roth IRA vs Traditional IRA]

Post by FiveK »

tomdickorharry wrote: Fri Jun 11, 2021 10:21 am But with Roth you've only paid taxes on what you put in - no taxes on the growth, which should be substantially larger than what you put in. With Traditional you're paying taxes on what you put in and all the growth as well, the whole pie. I thought that was the main advantage?
Nothing to add to David Jay's explanation, other than noting you are hardly alone with that thought. It's the second of two Common misconceptions discussed in that section.
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teen persuasion
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Re: [Roth IRA vs Traditional IRA]

Post by teen persuasion »

atdharris wrote: Fri Jun 11, 2021 9:58 am I have a Roth IRA and traditional 401k because I have no idea what my tax rate will be in retirement.
We also have Roth IRA and traditional employer accounts (401k, 403b, SIMPLE IRA) - the traditional employer plans help us increase our refundable credits, but IRAs are worthless for this, so Roth is the best IRA to contribute to for us (and, no tax cost - the refunds fund the Roth IRA).

But the part I bolded is what I see as the biggest void in both articles - no mention of employer plans, only IRAs. They are NOT equivalent, as my refundable credits experience shows.
an_asker
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Re: [Roth IRA vs Traditional IRA]

Post by an_asker »

pkcrafter wrote: Thu Jun 10, 2021 5:59 pm It may not be a total no-brainer...

Roth could be a worse choice - Money

https://money.com/roth-ira-traditional-ira-choice/

Roth vs traditional IRA - Nerd Wallet

https://www.nerdwallet.com/article/inve ... ra-account


Paul
Didn't closely read all responses and only read the first article above, which - if I understood it correctly - appears to state that the tIRA is a pre-tax contribution and so the Roth IRA needs more income to contribute the maximum. So, Roth IRA is not really better than the tIRA.

Does not make sense for those who cannot deduct the tIRA, in which case Roth IRA is hands down the better option.

PS: If I've misunderstood the article, I take back my comment!
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pkcrafter
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Re: [Roth IRA vs Traditional IRA]

Post by pkcrafter »

an_asker wrote: Fri Jun 11, 2021 9:24 pm
pkcrafter wrote: Thu Jun 10, 2021 5:59 pm It may not be a total no-brainer...

Roth could be a worse choice - Money

https://money.com/roth-ira-traditional-ira-choice/

Roth vs traditional IRA - Nerd Wallet

https://www.nerdwallet.com/article/inve ... ra-account


Paul
Didn't closely read all responses and only read the first article above, which - if I understood it correctly - appears to state that the tIRA is a pre-tax contribution and so the Roth IRA needs more income to contribute the maximum. So, Roth IRA is not really better than the tIRA.

Does not make sense for those who cannot deduct the tIRA, in which case Roth IRA is hands down the better option.

PS: If I've misunderstood the article, I take back my comment!
Here's a little more information that may help.

https://www.nerdwallet.com/article/inve ... -ira-taxes

Paul
When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.
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