How much is a Roth worth?

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metrunt
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How much is a Roth worth?

Post by metrunt » Tue May 29, 2018 6:00 pm

How much is a Roth worth? I mean this in the sense that what sort of premium, if any, would you pay to contribute money to an account that would grow tax free and whose withdrawals would be tax-free? Would you pay 5% fee to deposit $1,000 into a Roth? 10%? 20%?

I suspect this will depend on the estimated tax bracket at withdrawal and estimated time until withdrawal. And return rate. (assume 7%)

If so, assume 25 years until withdrawal and a 25% tax bracket. Or choose your own numbers. What tax rate / time combo would make it worthwhile to pay a 20% fee?

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Alexa9
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Re: How much is a Roth worth?

Post by Alexa9 » Tue May 29, 2018 6:06 pm

The most common comparison is a
1. Roth (not deductible - tax free growth - tax free withdrawal- worth the most)
2. Traditional (tax deductible now - tax free growth - taxable later - worth less)
3. Taxable (taxed on dividends, long term, and short term gains - worth the least)
As to what the ratio of how valuable these are, it depends on the taxes in your state and at the federal level both now and in retirement (impossible to predict - an advantage to Roth)

https://www.bogleheads.org/wiki/Traditional_versus_Roth
https://www.bogleheads.org/wiki/Tax-eff ... _placement

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arcticpineapplecorp.
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Re: How much is a Roth worth?

Post by arcticpineapplecorp. » Tue May 29, 2018 7:39 pm

metrunt wrote:
Tue May 29, 2018 6:00 pm
How much is a Roth worth? I mean this in the sense that what sort of premium, if any, would you pay to contribute money to an account that would grow tax free and whose withdrawals would be tax-free? Would you pay 5% fee to deposit $1,000 into a Roth? 10%? 20%?

I suspect this will depend on the estimated tax bracket at withdrawal and estimated time until withdrawal. And return rate. (assume 7%)

If so, assume 25 years until withdrawal and a 25% tax bracket. Or choose your own numbers. What tax rate / time combo would make it worthwhile to pay a 20% fee?
Why do you even need to know this? You can deposit a $1000 into a Roth at Vanguard for 0% fee. Why would you put Roth money into anything that charges a fee when you can put it into no load mutual funds that are low cost? Are you an international investor and have no access to anything other than loaded funds? I pay 0% to fund my Roth. Why start way behind the starting gate if you don't have to? If you pay a fee for deposit, you have to earn enough to equal the fee just to break even. What's the point of this?

People do this of course. State farm charges a 5% commission (sales charge or load) and an expense ratio of 0.64% annually for a S&P500 index fund. That's madness if you ask me. But people are sold this. I wouldn't touch it with a 10 foot pole:

https://www.statefarm.com/finances/mutu ... index-fund
"Invest we must." -- Jack Bogle | “The purpose of investing is not to simply optimise returns and make yourself rich. The purpose is not to die poor.” -- William Bernstein

Church Lady
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Re: How much is a Roth worth?

Post by Church Lady » Tue May 29, 2018 8:02 pm

Why would I pay a fee to deposit money into a Roth when there are plenty of custodians who will accept my deposit for free? :confused
He that loveth silver shall not be satisfied with silver; nor he that loveth abundance with increase: this is also vanity. Ecclesiastes 1:8

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neurosphere
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Re: How much is a Roth worth?

Post by neurosphere » Tue May 29, 2018 8:29 pm

arcticpineapplecorp. wrote:
Tue May 29, 2018 7:39 pm
Why do you even need to know this?
I can imagine a situation where one has a large loan balance, perhaps student loans. Wouldn't a Roth contribution, vs loan paydown, be a "fee" of sorts?

Or imagine someone has an Rollover IRA of $3000, without the ability to roll it into an employer account. A roth conversion may 'unlock' future backdoor Roth IRA contribution. Converting the existing IRA might be considered a "fee", but then Roth contributions become "fee free" once there is no existing pre-tax SEP/Rollover/SIMPLE/Traditional IRA balances.

Is paying taxes now to convert the IRA "worth it" to be able to make subsequent Roth IRA contributions for a period of X years?
If you have to ask "Is a Target Date fund right for me?", the answer is "Yes".

NoHeat
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Re: How much is a Roth worth?

Post by NoHeat » Tue May 29, 2018 8:33 pm

I think the OP’s mention of the word “fee” has confused some, here.

Perhaps the OP meant to ask what is the relative worth of $1 that’s already in a Roth account, vs $1 that’s already in another kind of account. And that question was answered in the second post.

sesq
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Re: How much is a Roth worth?

Post by sesq » Tue May 29, 2018 9:13 pm

I tax adjust my asset allocation and net worth. To do this I treat the roth assets as a $1 is a $1. For tax deferred assets I book a liability for future taxes at 30% (estimated fed/state/means testing) so $1 is worth $0.70. For my taxable account I track my lots separately and do ST or LT capital gains and book a liability accordingly. So for the gain portion, LT gains $1 is worth about 80 cents and each $1 of basis is worth $1.

Not sure if that is what you are asking?

metrunt
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Re: How much is a Roth worth?

Post by metrunt » Wed May 30, 2018 9:05 am

I'm interested in the value of a Roth-style tax advantaged retirement account. Nothing about account fees or actual Roths. This isn't traditional vs Roth question.
neurosphere wrote:
Tue May 29, 2018 8:29 pm
Is paying taxes now to convert the IRA "worth it" to be able to make subsequent Roth IRA contributions for a period of X years?
This is the closest to what I'm getting at. Thank you.

This rumination started because over whether it's worth it to take income, pay 15.2% in SE taxes (for someone who will never use SS or Medicare), and pay income taxes, just to be able to put money an account that will grow tax free and can be withdrawn tax free (via a mega backdoor roth). Or not pay the SE taxes, just pay income tax, and put the money in a taxable account.

In this scenario, the SE tax is a 15.2% "fee". I ran some numbers and found to my surprise, that it was worth it more often than not. I didn't know if my calculations are accurate and since I found paying 15% for the ability to contribute to a Roth-style account to be worthwhile surprising, I wanted other's intuitions before explaining all of this.

At a 15.2% 'fee', 6% growth rate, 25 years, a 20% marginal at withdrawal makes this break even.

I know there are nuances here (variable rates of return, uncertainty of tax rates, etc). But many of us are trying to decide what the best choice is for something that pays of 20-30-40 years away, which has inherent uncertainty.

The biggest influence on a justifiable fee seems to be marginal rate at withdrawal, over time and rate of return.

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neurosphere
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Re: How much is a Roth worth?

Post by neurosphere » Wed May 30, 2018 9:31 am

metrunt wrote:
Wed May 30, 2018 9:05 am
This rumination started because over whether it's worth it to take income, pay 15.2% in SE taxes (for someone who will never use SS or Medicare), and pay income taxes, just to be able to put money an account that will grow tax free and can be withdrawn tax free (via a mega backdoor roth). Or not pay the SE taxes, just pay income tax, and put the money in a taxable account.
This is confusing. What do you mean "take income"? Are you referring to a decision about how/whether to pay yourself a salary via an s-corp? A mega backdoor roth implies you already have income, and have access to an employer plan. Or perhaps you are self-employed with the ability to open a plan which allows after-tax amounts?

It's not clear how you have the ability to decide whether to pay SE taxes on a specific set of income/compensation, and why this affects your ability to contribute to a Roth (via whatever method).

This raises a question in my head I've never thought of, about a self-employed person with access to an employer 401k account which allows after-tax contributions. Suppose salary is $10,000 and profits not subject to FICA tax are $90,000. Is there a limitation to how much money can be contributed to the 401k, and among sub account (e.g. tax-deductible vs after-tax, and $18,500 limit vs $55,000 overall limit)?
If you have to ask "Is a Target Date fund right for me?", the answer is "Yes".

metrunt
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Re: How much is a Roth worth?

Post by metrunt » Wed May 30, 2018 10:00 am

neurosphere wrote:
Wed May 30, 2018 9:31 am
It's not clear how you have the ability to decide whether to pay SE taxes on a specific set of income/compensation, and why this affects your ability to contribute to a Roth (via whatever method).
I am not asking for advice in my specific situation (though the answer has to do with deciding how to split business income between an owner and spouse). I appreciate the interest, but I am wondering about the value of a Roth-style account.

How much would you pay to contribute (more than you already can) to a Roth-style account?
neurosphere wrote:
Wed May 30, 2018 9:31 am
This raises a question in my head I've never thought of, about a self-employed person with access to an employer 401k account which allows after-tax contributions. Suppose salary is $10,000 and profits not subject to FICA tax are $90,000. Is there a limitation to how much money can be contributed to the 401k, and among sub account (e.g. tax-deductible vs after-tax, and $18,500 limit vs $55,000 overall limit)?
I'm pretty sure you can't contribute to an employer plan more than you've earned with that employer. But the only profits that wouldn't be subject to FICA are those that push the total compensation over the $127,200 limit.




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Epsilon Delta
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Re: How much is a Roth worth?

Post by Epsilon Delta » Wed May 30, 2018 10:06 am

metrunt wrote:
Wed May 30, 2018 9:05 am
This rumination started because over whether it's worth it to take income, pay 15.2% in SE taxes (for someone who will never use SS or Medicare),
It's not clear why they would never use SS or Medicare, but if the reason is that they are not a US person there are several kettles of stinking fish to work through.

DSInvestor
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Re: How much is a Roth worth?

Post by DSInvestor » Wed May 30, 2018 10:25 am

We have tricky tax rules for retirement accounts and Roth contributions do not always come at a cost in higher taxes. For example, a taxpayer is covered by an employer plan like 401k and has income that a) does not allow any TIRA deduction and b) allows for full Roth IRA contribution. In this case, the taxpayer can max out Traditional 401k to get max tax deduction and Roth IRA. Had this taxpayer contributed to Roth 401k, there would have been a reduction in his Traditional 401k which would cost him extra taxes.
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neurosphere
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Re: How much is a Roth worth?

Post by neurosphere » Wed May 30, 2018 11:00 am

metrunt wrote:
Wed May 30, 2018 10:00 am
I am not asking for advice in my specific situation (though the answer has to do with deciding how to split business income between an owner and spouse). I appreciate the interest, but I am wondering about the value of a Roth-style account.
Ah, the bolded part makes sense. The reason I was asking was to ensure there was not a miscommunication or knowledge deficit about eligibility for Roth contributions. Without invoking a spouse (and some possible leeway on how to apportion job duties and income), I couldn't easily see how SE taxes would be involved.

So now I understand the question a little bit better and can offer one additional variable to consider (but no good answers!): One value of having Roth monies is for tax diversification. This has some "worth" separate from the intrinsic tax benefits of the Roth alone. That is, with an unknown future, a combination of pre-tax, Roth, and taxable investments is useful. The optimal ratio can't be known in advance of course. If your current investments are overwhelmingly taxable+pre-tax, than one might consider Roth dollars to be relatively more valuable than say, if one already has substantial Roth accounts, proportionally.

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grabiner
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Re: How much is a Roth worth?

Post by grabiner » Wed May 30, 2018 9:23 pm

metrunt wrote:
Tue May 29, 2018 6:00 pm
How much is a Roth worth? I mean this in the sense that what sort of premium, if any, would you pay to contribute money to an account that would grow tax free and whose withdrawals would be tax-free? Would you pay 5% fee to deposit $1,000 into a Roth? 10%? 20%?
Equal to your marginal tax rate when you withdraw the money, compared to a traditional account.

If you will retire in a 25% tax bracket, then $3000 in a Roth IRA and $4000 in a Traditional IRA will provide you the same return if invested the same way. Thus it was worth paying $1000 to invest in the Roth IRA, which would be the cost you paid if you could have deducted the $4000 Traditional IRA contribution in a 25% tax bracket.

The premium for a Roth over a taxable account varies over time. If you invest in taxable stock, you will pay tax on the dividends every year, and then capital-gains tax when you sell. If you invest in bonds, you will pay tax every year, or lose the difference between muni and corporate yields if you hold munis to avoid the tax. I usually estimate about 25% for a very-long-term investment.
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EnjoyIt
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Re: How much is a Roth worth?

Post by EnjoyIt » Wed May 30, 2018 9:46 pm

Maybe I am misunderstanding your scenario, but you can put money in your spouses Roth IRA without the spouse being employed. It is called . . . Spousal IRA

https://www.investopedia.com/retirement ... ributions/

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