How do they get away with posting bad info like this.
Quoted from the article: "To put $4,000 into a Roth, you have to effectively earn $6,000," because of taxes, Manarin said. "To put $4,000 into a regular [deductible] IRA, your take-home pay goes down by $3,000. What a huge difference," he said. "Let's turn it around: You put $4,000 in a Roth, that's the equivalent of putting $6,000 in a regular IRA. There's just no comparison."
Then, "you compound that difference over 20, 30 years. Now I'm facing retirement, I'm going to be in a lower tax bracket, I've got three times the money in my regular IRA versus the person in the Roth," Manarin said.
In the example he is figuring a 33% tax bracket, okay fine not many fall in there.
But the line about 3X more money in traditional vs. ROTH, how does Yahoo publish that crap.
His example:
ROTH $4,000 Initial Deposit $4,000 Annual Contribution (I know limits will change, but just for complexity sake) 30 years 8% = $529,634.10
Traditional $6,000 Initial Deposit $6,000 Annual Contribution 30 years 8% = $794,451.15
$794,451.15 * (1-.33) = 532,282.27 when you take it out
Good luck managing to stick $6K a year in a traditional IRA! And good luck staying in a low tax bracket during retirement with investment income, required minimum distributions from your retirement accounts, and minimal deductions (no dependants, mortgage interest, etc).
It is all about the difference in tax brackets between contribution and distribution. If you are in a higher tax bracket during retirement, the Roth is better!
This article is the opposite of the truth (what's that? untruth?). A Roth IRA allows you to contribute MORE money. $4000 after-tax is more than $4000 pre-tax. On the other hand if you can't max them out them which one is better depends only on your tax bracket, and they are equal if you assume a constant tax bracket.
quaters said: Traditional $6,000 Initial Deposit $6,000 Annual Contribution 30 years 8% = $794,451.15 You can't contribute $6k to a Traditional IRA. Well, you can but if you do, $2k of it will still be after-tax money.
Your comparison would be $4k in a ROTH ($6k less 33% tax) vs $5,320 in a Traditional ($6k less 33% tax on the non-deductable $2k). Or $4k in a Traditional vs $2,680 in a Roth ($4k less 33% tax).
The biggest difference doesnt come from the tax-deductable/tax-deferred/tax-free stuff, it comes from what you do with the current taxes saved by deducting your contribution. Put $4k in your Traditional and invest the $1,320 tax savings in a separate taxable account, the combined end result will be better than a Roth (then the game of predicting tax brackets comes into play). But if you blow the tax savings and only invest that $4k, in the end the Roth will win every time.
frootmall
Senior Member - 1K
posted: Dec. 13, 2007 @ 1:41a
Glitch99 said: quaters said: Traditional $6,000 Initial Deposit $6,000 Annual Contribution 30 years 8% = $794,451.15 You can't contribute $6k to a Traditional IRA. Well, you can but if you do, $2k of it will still be after-tax money.
Your comparison would be $4k in a ROTH ($6k less 33% tax) vs $5,320 in a Traditional ($6k less 33% tax on the non-deductable $2k). Or $4k in a Traditional vs $2,680 in a Roth ($4k less 33% tax).
The biggest difference doesnt come from the tax-deductable/tax-deferred/tax-free stuff, it comes from what you do with the current taxes saved by deducting your contribution. Put $4k in your Traditional and invest the $1,320 tax savings in a separate taxable account, the combined end result will be better than a Roth (then the game of predicting tax brackets comes into play). But if you blow the tax savings and only invest that $4k, in the end the Roth will win every time. If you contribute $6k to a traditional IRA, you will pay a 6% excess contribution tax on the extra $2k every year until you withdraw it. If you put $5320 in a TIRA, you will pay the 6% annual excess contribution tax on the $1320 every year.
To be fair, the person quoted in the article spoke of contributing to a Roth IRA as compared to a TIRA or 401k. You CAN contribute $6k to a 401k.
Another factor for many people to consider is the tax on Social Security benefits. Basically, the higher your AGI (Adjusted Gross Income), the higher the percentage of your SS benefits that gets taxed (until it reaches 85% of benefits). Taxable withdrawals from a TIRA increase your AGI, qualified distributions from a Roth do not. (Of course, this won't be a factor if you would already already have reached the 85% cap.)
yanks0114
Senior Member - 1K
posted: Dec. 13, 2007 @ 7:11a
I personally think there is an even bigger flaw. The author seems to assume that the tax brackets will be the same 20-30 years from now. Taxes are only going one direction, and thats up.
You have to look at all sides. One year my husband was laid off for 4 months by putting in a tradition IRA it we ended up getting an extra $500 in our packets from EIC so sometimes traditonal is best. Also for someone in a lower tax bracket who can only put a small amount away its better to pay taxes later as you always get your standard and personal deductions before you pay taxes on anything.
NYSEguru
New Member
posted: Dec. 13, 2007 @ 7:48a
Anyone have the author and/or editor's email address?
yanks0114 said: I personally think there is an even bigger flaw. The author seems to assume that the tax brackets will be the same 20-30 years from now. Taxes are only going one direction, and thats up.
The higher future rates, the better the benefit of a non-taxable Roth IRA will be.
JennaG
Tired Member
posted: Dec. 13, 2007 @ 8:55a
Reading the whole article, it looks like the tax counterpoint is presented: "We have a multitude of financial crises -- health care, the death of defined-benefit pensions, 78 million aging baby boomers -- somebody's got to pay for this ...Taxes have to go up. We're probably in the lowest tax rates we'll ever see in our lifetime," Slott said.
"Having a Roth removes the uncertainty of what future tax rates might be," he said. Plus, he pointed out another benefit to Roth IRAs: "Once you hit age 70 1/2, with traditional IRAs, you have to take the money out and pay the tax," Slott said. "With Roths, there are no required distributions. That money can stay growing tax free for the rest of your life."
It also looks like this guy Manarin is making the point that if you can only afford 4k pretax (or the equivalent lower amount post-tax), that could be better to go with the Traditional IRA. He also says:Still, to Manarin's mind, the benefit of Roths is overblown. "What drives me wild is when they talk people into cashing in their IRA, paying all those taxes and putting the money into a Roth. It just makes zero sense to do that."
The quote in the OP is still rather irresponsible.
xCarsonx
Senior Member
posted: Dec. 13, 2007 @ 9:37a
"To put $4,000 into a Roth, you have to effectively earn $6,000," because of taxes, Manarin said. "To put $4,000 into a regular [deductible] IRA, your take-home pay goes down by $3,000. What a huge difference," he said. "Let's turn it around: You put $4,000 in a Roth, that's the equivalent of putting $6,000 in a regular IRA. There's just no comparison."
I believe the 6,000 is equivalent after tax money. He says putting 4000 in a roth is like putting 6000 in an IRA. So its all an equivalency problem. Not how much money you would retire with.
This is a timely discussion as I've been mulling this over recently.
Perhaps someone can provide imput regarding my situation. I expect to have an AGI just under the minimum for Roth ($150K). I'm married and my wife doesn't work. I'm currently investing 5% salary in TSP (federal govt. 401k basically) and my employer matches it. I can choose to put in another 5% pre-tax salary that the employer will NOT match. Should I open a Roth and contribute the max $8000 per year as long as my AGI requirements are met (under 150K annually) or max out my TSP?
I'm going to wait until I do my taxes for 2007 to see if I even qualify for a Roth. If I will, I was planning to open one and fund with with $16,000 (2007 and 2008 contribution). Or should I invest that money elsewhere and max out my TSP? I can't comfortably afford to do both but I could possibly go down that road.
Other thing that puzzles me is where they get that $6000 pre-tax equals $4000 after tax. In the highest tax bracket 33%, that's true but not for lower income households. At those high AGIs, you run into being limited by the contribution limits. Advantage Roth there (see below).
Anyway, most people will be in the 25% of below tax brackets. In the 25% tax bracket $4000 after tax = $5333 pre-tax. For people in the 15% bracket (argument for those who cannot put lots of money aside), that $4000 after tax = $4705 pre-tax. Not quite the same as $6000.
Now a more meaningful comparison is someone (say in the 25% tax bracket) putting $4000 in a Traditional IRA + $1333 in a taxable account vs $4000 in a Roth IRA. Assuming tax bracket is the same at retirement, the Roth IRA comes out ahead because all is invested in a tax-deferred account while with Traditional IRA, you cannot put more into it than the maximum.
Oh but wait, there is the 401k vs Roth IRA case where limit for 401k is much higher. Apples and oranges. The real comparison is 401k vs Roth 401k which was discussed on FWF just a few days ago. Again without speculating on what tax bracket you're gonna pay at retirement vs now (which is the real decider for most cases not close to max contributions) since the dollar amount limit is the same, you can make the exact same case as Traditional IRA vs Roth IRA.
Both of us are putting together $31k into our Roth 401k accounts per year (on top of $8k, $10k next year in Roth IRAs). In our tax bracket, that'd be $41.3k available for putting into our 401(k)s except we're still limited to $31k per year. The extra $10k would have to go into a taxable account. Assuming 15% capital gain tax every year on those $10k, eventually that'd mean Roth 401k ends up better unless taxes at time of our retirement are significantly lower than now.
It's pretty scary to see how much bias or inaccurate information is in the article OP linked. IMO the only piece of decent advice in it was that breaking a traditional IRA to put into a Roth IRA doesn't make any sense due to the penalties involved.
quaters said: In the example he is figuring a 33% tax bracket, okay fine not many fall in there.If you're in the 33% bracket, the point is moot, anyhow.
lorcha said: quaters said: In the example he is figuring a 33% tax bracket, okay fine not many fall in there.If you're in the 33% bracket, the point is moot, anyhow.
NO ROTH FOR YOU!No so fast. Only Roth IRA's have income limits, while Roth 401K's have none. The same logic applies to contributions to IRA's and 401K's, so the point is anything but moot.
theman2 said: And good luck staying in a low tax bracket during retirement with investment income, required minimum distributions from your retirement accounts, and minimal deductions (no dependants, mortgage interest, etc).What you are saying in the quote above is certainly true but it is also true that there are a lot of reasons that many people will find themselves in a lower tax bracket when they retire without sacrificing their standard of living. In your working years, you only spend a portion of your earnings and put away the rest. Once you retire, you won't have the need to put anything away, so you will be able to maintain the same standard of living as before on much lower taxable income.
There are also other reasons that you may very well find yourself in a lower tax bracket in retirement. You may very well live in a more expensive area now, which allows you to earn higher income. In retirement, you may choose to move to a lower cost area with lower cost of housing, lower taxes, etc...
Another reason that many people (even those who can afford to max out the roth) are often better off contributing to traditional accounts is because it gives them the ability to convert that account to a roth in a year where they are temporarily in a lower tax bracket. Most people experience those lower tax bracket years in their lives -- people go back to school, get married to non-working spouses, have kids, lose jobs, take sabbaticals, decide to work part-time, etc... Converting all or a portion of a traditional account to a roth in such a lower tax bracket environment can save quite a bit of money.
Please note that there is an existing active thread in which we have discussed all of these issues.
Shandril said: It's pretty scary to see how much bias or inaccurate information is in the article OP linked. IMO the only piece of decent advice in it was that breaking a traditional IRA to put into a Roth IRA doesn't make any sense due to the penalties involved.Actually, there are no penalties as long as your MAGI is low enough to do a rollover from traditional to Roth IRA. You pay income taxes on the distribution for the rollover at your marginal tax rate but the question of whether that is worth doing is effectively the same as choosing between contributing to a Roth or Traditional IRA.
Ummm.... I use the roth as a risky savings account. I can get my deposits back at anytime... I invest 4k in, I can get 4k out. With the IRA...not so simple. tax tax.
What if you get a little lucky in your Roth. example:
google stock at 100/per share. Now you would have done very well...and no taxes.
But I do understand the benefits of the tax deductions which can send you into a lower tax bracket.
CycloneFW
Senior Member
posted: Dec. 13, 2007 @ 6:44p
kriskos4 said: I'm married and my wife doesn't work. ... Should I open a Roth and contribute the max $8000 per year as long as my AGI requirements are met (under 150K annually) or max out my TSP?
I'm going to wait until I do my taxes for 2007 to see if I even qualify for a Roth. If I will, I was planning to open one and fund with with $16,000 (2007 and 2008 contribution). Or should I invest that money elsewhere and max out my TSP? I can't comfortably afford to do both but I could possibly go down that road.
Thanks!
Sorry, had to give you red on this one. If you understood the distinction I am about to make, then I am sorry for negging you.
Just b/c you have a non-working spouse does not mean you can open a Roth IRA with $16k for 2007 & 2008. You actually open an $8k Roth IRA for yourself, and a $8 spousal ROTH IRA for your spouse. Although you are part of the same household and you are making the contributions, the other $8k is your souses.
Again, if you understood the distinction, sorry about the neg. If things have changed, I will gladly be corrected.
CycloneFW
Senior Member
posted: Dec. 13, 2007 @ 6:49p
frootmall said: Glitch99 said: You can't contribute $6k to a Traditional IRA. Well, you can but if you do, $2k of it will still be after-tax money./Q]
If you contribute $6k to a traditional IRA, you will pay a 6% excess contribution tax on the extra $2k every year until you withdraw it. If you put $5320 in a TIRA, you will pay the 6% annual excess contribution tax on the $1320 every year.
That was my understanding as well. You cannot put in a $4k ROTH or Trad IRA contribution and also make a non-deductible IRA contribution. But as frootmall pointed out, you can make a $4k Roth and a regular taxable deposit earmarked for retirement.
CycloneFW said: kriskos4 said: I'm married and my wife doesn't work. ... Should I open a Roth and contribute the max $8000 per year as long as my AGI requirements are met (under 150K annually) or max out my TSP?
I'm going to wait until I do my taxes for 2007 to see if I even qualify for a Roth. If I will, I was planning to open one and fund with with $16,000 (2007 and 2008 contribution). Or should I invest that money elsewhere and max out my TSP? I can't comfortably afford to do both but I could possibly go down that road.
Thanks!
Sorry, had to give you red on this one. If you understood the distinction I am about to make, then I am sorry for negging you.
Just b/c you have a non-working spouse does not mean you can open a Roth IRA with $16k for 2007 & 2008. You actually open an $8k Roth IRA for yourself, and a $8 spousal ROTH IRA for your spouse. Although you are part of the same household and you are making the contributions, the other $8k is your souses.
Again, if you understood the distinction, sorry about the neg. If things have changed, I will gladly be corrected.
What is the difference whether there is $16,000 in my name or $8000 in my wife's and $8000 in my name? Maybe this is an issue to those not happily married but I am and plan to stay that way. And 1) why red somebody, then 2) apologize for it? It takes a little more than red to hurt my feelings.
frootmall
Senior Member - 1K
posted: Dec. 13, 2007 @ 7:06p
kriskos4 said: What is the difference whether there is $16,000 in my name or $8000 in my wife's and $8000 in my name? Maybe this is an issue to those not happily married but I am and plan to stay that way. Very simple: If you put all of the money in your name a) Your IRA custodian will refuse to accept it. You can work around this by using two custodians. b) You will pay an excess contribution tax every year until you remove the amount over $8000.
The tax law says $4000 per person per year. You can't take somebody else's $4000 and put it in your name even if you happen to be married to that person.
WalStMonky
Happy Member
posted: Dec. 13, 2007 @ 9:18p
quaters said: ROTH $4,000 Initial Deposit $4,000 Annual Contribution (I know limits will change, but just for complexity sake) 30 years 8% = $529,634.10
Traditional $6,000 Initial Deposit $6,000 Annual Contribution 30 years 8% = $794,451.15
Not 3X the money at all...
Not to mention the unpaid tax liability in the traditional IRA. Then again, it's well established that the end difference between the two is your tax rate when it come time to withdraw.
WalStMonky
Happy Member
posted: Dec. 13, 2007 @ 9:27p
Other thing that puzzles me is where they get that $6000 pre-tax equals $4000 after tax. In the highest tax bracket 33%
Perhaps your state doesn't have an income tax? Mine is 7.5%, add that to 25% and that's pretty darn close to 1/3.
lscharen
Member
posted: Dec. 13, 2007 @ 11:46p
frootmall said: If you contribute $6k to a traditional IRA, you will pay a 6% excess contribution tax on the extra $2k every year until you withdraw it. If you put $5320 in a TIRA, you will pay the 6% annual excess contribution tax on the $1320 every year.
Late to the thread, but I did want to follow up on this point. I hadn't heard of the 6% excess contribution tax, so I looked it up quickly. I appears that the tax remains fixed based on the size of the excess year over year. That raises the question: Is there a case where it is advantageous to pay the tax and let the contribution grow?
I mean, if one takes the long-term return of the market to be 10-11% (just for the sake of argument), then pay the 6% penalty each year and let the principle grow. Since you're not taxed on the compounded growth of the excess contribution, the tax becomes a smaller and smaller percentage of the account every year.
It's probably a razor-thin advantage (or disadvantage) once you figure in the opportunity cost of the 6% compounded over the years in a taxable account, so I wrote a quick program to compute how the two scenarios play out over 30 years with the following parameters
tax rate = 28% yearly IRA contribution = $4,000 yearly excess contribution = $2,000 excess penalty = 6% rate of return = 10% tax costs on taxable account = 0.45% (3% yield taxed at 15%)
This assumes that, in the case were no excess contribution is made, all that money going into an account that throws off zero capital gains -- the ultimate buy-and-hold account and the only taxes paid are on dividends.
First scenario (over contribute every year)
yearly IRA contribution: $6,000 ($4,000 + $2,000 excess) total in IRA: $986,964 total penalties paid: $52,200
grand total = $934,764
Second scenario (contribute max and place remainder in taxable account)
yearly IRS contribution: $4,000 yearly taxable savings: $2,000 total in IRA: $657,976 total in taxable account: $302,203
grand total = $960,179
So, in this case, playing by the rules is a winner! However, I think it's more realistic to pay a higher portion of the taxable account in capital gains every year. Especially if it is held in a mutual fund, for instance. Let's say that 10% of the taxable account growth is in capital gains that are paid at the 28% marginal rate. Now the second scenario looks like this
yearly IRS contribution: $4,000 yearly taxable savings: $2,000 total in IRA: $657,976 total in taxable account: $195,857
grand total = $853,834
Which is nearly $90,000 less than what you get by "breaking the rules".
You have to pay higher taxes for the money in the IRA than the money in taxable (15% LTCG vs. marginal tax rates), plus you have to pay the taxes on a smaller amount for the taxable money (much of it has already been taxed). And if returns are lower you'll do even worse.
lscharen
Member
posted: Dec. 14, 2007 @ 12:57a
czarandy said: You have to pay higher taxes for the money in the IRA than the money in taxable (15% LTCG vs. marginal tax rates), plus you have to pay the taxes on a smaller amount for the taxable money (much of it has already been taxed). And if returns are lower you'll do even worse.
I remember doing these calculations way back when.. I don't have the numbers but I remember my conclusion. You can put $4k in Roth or in Traditional IRA. The net in hand when you retire will exactly be the same as long as you remain in the same tax bracket. Period.
The only thing that WILL change your net-in-hand during retirement is tax rate. So forget about any calculations. Just try to estimate if you will be in a higher tax bracket or lower when you retire. Amongst other things, do consider 1. USA is amongst the lowest taxing countries of the industrialized world and the tax rate may not remain that low. (Favor Roth) 2. Social Security shortfall will cause tax hikes (Favor Roth) 3. Government can tweak rules anytime. Government can simply say Roth Distributions are not directly taxed but they will be included in your AGI. Don't believe that...? Remember at one point, social securiity benefits were not taxable. So get your tax break now rather hoping to get it in future. (Favors Traditional) 4. A fair number of FWF folks are savers and are unfortunately in the minority in this country. The voting population may clamour for higher taxes on (comparitively) rich folks. Politicians always oblige vote-banks and may hike taxes. (Favors Roth)
All this is very hard to estimate. So I would say, just split 50-50. And I mean, not just the 4k of contribution of a given year but do consider all your retirement savings. So if you have a fair sized 401k plan at work, put your 4k in Roth.
I am doing it this way. This thread is making me renewing that debate in my mind. Good topic OP.
lscharen
Member
posted: Dec. 14, 2007 @ 2:21a
lscharen said: czarandy said: You have to pay higher taxes for the money in the IRA than the money in taxable (15% LTCG vs. marginal tax rates), plus you have to pay the taxes on a smaller amount for the taxable money (much of it has already been taxed). And if returns are lower you'll do even worse.
I meant to consider Roths, not Traditional IRAs.
Never mind. Upon a closer reading of the rule, I see that you are required to withdraw the excess contribution and the earnings associated with it and you have to pay regular income tax on those earnings.
I guess that settles it. Unless you are so bad at managing your taxable account that you end up paying everything at the short-term capital gains rate there is really no way to justify keeping an excess contribution in the IRA.
frootmall said: kriskos4 said: What is the difference whether there is $16,000 in my name or $8000 in my wife's and $8000 in my name? Maybe this is an issue to those not happily married but I am and plan to stay that way. Very simple: If you put all of the money in your name a) Your IRA custodian will refuse to accept it. You can work around this by using two custodians. b) You will pay an excess contribution tax every year until you remove the amount over $8000.
The tax law says $4000 per person per year. You can't take somebody else's $4000 and put it in your name even if you happen to be married to that person.
The point I was making is that I don't care if half of the IRA is in my wife's name. She's my wife and will continue to be into retirement. Or if we get divorced, she'll get at least half of my stuff (I'm generous) anyway. I'm not well versed on IRA's but I do know the contribution limits.
randian
Member
posted: Dec. 14, 2007 @ 9:08a
More reasons to like the Roth IRA over the Traditional:
1) No Required Minimum Distributions. 2) Much larger net for your heirs, after estate and income taxes. 3) Continued tax-free growth for your heirs.
randian said: More reasons to like the Roth IRA over the Traditional:
1) No Required Minimum Distributions. 2) Much larger net for your heirs, after estate and income taxes. 3) Continued tax-free growth for your heirs.These reasons, although accurate, may or may not be applicable to people's situations. There are quite a few people out there whose primary concern is to provide for comfortable retirements for themselves, rather than to leave a substantial inheritance to their heirs. If that's the case, they may very well find the above to be non-issues for them.
I will go out on a limb here to say that tax brackets rather than any other issues should be the primary deciding factors in the Roth vs. Traditional debate. Other issues, although potentially important, are nevertheless secondary.
Consequently, from a purely mathematic standpoint, a traditional account is more advantageous if you are in a higher tax bracket now than the bracket you anticipate entering upon your retirement. If the opposite is true, the roth is more advantageous. If you expect your tax brackets to remain the same, the roth and the traditional accounts will be exactly the same. You should of course keep in mind that you can make a larger effective after-tax contribution to a roth than you can to a Traditional account if you initially choose to allocate a larger amount towards your roth than the amount that would be required to be allocated towards a Traditional account.
To say it in a different way, it makes absolutely no difference whether you pay tax on your contributions up front and then let the interest accrue on that after-tax amount or whether you do not initially tax contributions but then tax everything at the time you withdraw the money. The ONLY thing that matters in this case is whether the tax bracket is lower at the time you contribute the money vs. when you withdraw it.
randian
Member
posted: Dec. 14, 2007 @ 1:10p
geo123 said: randian said: More reasons to like the Roth IRA over the Traditional:
1) No Required Minimum Distributions. 2) Much larger net for your heirs, after estate and income taxes. 3) Continued tax-free growth for your heirs.These reasons, although accurate, may or may not be applicable to people's situations. There are quite a few people out there whose primary concern is to provide for comfortable retirements for themselves, rather than to leave a substantial inheritance to their heirs. If that's the case, they may very well find the above to be non-issues for them. Even if you're only looking to provide for yourself, no RMD is a huge advantage. Not having to prematurely draw down the account and keeping your investment gains tax-free makes a substantial difference in the long-term value of the account, not to mention avoiding the 50% penalty if you screw up taking your RMD (the IRS is not forgiving).
Another reason to like Roths: distributions aren't AGI. Remember a lot of tax consequences trigger on AGI, like taxability of Social Security benefits and deduction phaseouts. AMT may also be at issue. Even if your Roth and Traditional have the same present value, a Roth may still be more valuable.
One thing to worry about: Congress getting greedy and stripping Roths entirely of their tax-exempt status, or subjecting Roth distributions to an AGI test that would make them taxable, like Social Security.
randian said: Even if you're only looking to provide for yourself, no RMD is a huge advantage. Not having to prematurely draw down the account and keeping your investment gains tax-free makes a substantial difference in the long-term value of the account, not to mention avoiding the 50% penalty if you screw up taking your RMD (the IRS is not forgiving).Again, it depends on your personal financial situation, the value of your account, your lifestyle, etc... A very significant percentage of people out there will be drawing far more than the minimum required under the current law.
Another reason to like Roths: distributions aren't AGI. Remember a lot of tax consequences trigger on AGI, like taxability of Social Security benefits and deduction phaseouts. AMT may also be at issue. Even if your Roth and Traditional have the same present value, a Roth may still be more valuable.Can we please stop discussing these axiomatic issues, which we have discussed to death in plenty of active threads? Your "another reason" is actually the same core difference between a Traditional and a Roth account that we are all aware of -- Roth distributions are not taxable income to you and do not, therefore, affect your AGI because these are post-tax accounts. As we have explained plenty of times in the past, sometimes having a post-tax retirement account is an enormous benefit, sometimes it is not and sometimes it makes no difference whether you have a post-tax or a pre-tax retirement account.
Let's just not describe the same exact post-tax feature of the Roth's in ways that imply that it is more than one feature.
dr3amboy1024
Member
posted: Dec. 14, 2007 @ 1:58p
kriskos4 said: frootmall said: kriskos4 said: What is the difference whether there is $16,000 in my name or $8000 in my wife's and $8000 in my name? Maybe this is an issue to those not happily married but I am and plan to stay that way. Very simple: If you put all of the money in your name a) Your IRA custodian will refuse to accept it. You can work around this by using two custodians. b) You will pay an excess contribution tax every year until you remove the amount over $8000.
The tax law says $4000 per person per year. You can't take somebody else's $4000 and put it in your name even if you happen to be married to that person.
The point I was making is that I don't care if half of the IRA is in my wife's name. She's my wife and will continue to be into retirement. Or if we get divorced, she'll get at least half of my stuff (I'm generous) anyway. I'm not well versed on IRA's but I do know the contribution limits.
It doesn't matter that you would like to be married to your wife for the rest of your life, that is not the point. The point is the law states a person can only contribute $4000 in a roth this year.
What you were asking is if you can put $8000 under your name and the answer to that is no, but you can have $4000 for you and $4000 for her.
wincheck
New Member
posted: Dec. 15, 2007 @ 7:42a
randian said:
One thing to worry about: Congress getting greedy and stripping Roths entirely of their tax-exempt status, or subjecting Roth distributions to an AGI test that would make them taxable, like Social Security.
I think a more likely scenario is Congress putting a balance cap on Roth accounts; for example, if the total of your Roth accounts is, say, $100,000 (it seems to be a magic number for Congress) you would not be able to make additional Roth contributions. This would put the bulk of the responsibility on investment firms, which would be barred from accepting Roth contributions for accounts exceeding the cap. The IRS would only need to focus on people with Roth accounts in multiple firms; the information needed for this is already being collected, as investment firms report retirement plan contributions and balances at the end of the year on Form 5498. This scenario would give Congress the luxury of saying it "protected" Roth accounts while not raising taxes (i.e., raising an existing rate or applying a new tax on previously untaxed income).
Another scenario is putting income limits on Roth contributions, much like the existing income limits on IRAs.
If either of these scenarios becomes reality, people might want to make Roth contributions while they still can.
It is possible that Congress could tax Roth distributions in the future. It also seems to me that Congress could apply some sort of a surtax, say, 3% on *traditional* distributions in the future. Many people who make traditional contributions are in high tax brackets, knowing that they would take the distributions in a much lower bracket. Congress would claim that the surtax would close part of the "tax gap" between the brackets.
The point I'm making is that the future tax status of any retirement account cannot be assumed.
dr3amboy1024 said: kriskos4 said: frootmall said: kriskos4 said: What is the difference whether there is $16,000 in my name or $8000 in my wife's and $8000 in my name? Maybe this is an issue to those not happily married but I am and plan to stay that way. Very simple: If you put all of the money in your name a) Your IRA custodian will refuse to accept it. You can work around this by using two custodians. b) You will pay an excess contribution tax every year until you remove the amount over $8000.
The tax law says $4000 per person per year. You can't take somebody else's $4000 and put it in your name even if you happen to be married to that person.
The point I was making is that I don't care if half of the IRA is in my wife's name. She's my wife and will continue to be into retirement. Or if we get divorced, she'll get at least half of my stuff (I'm generous) anyway. I'm not well versed on IRA's but I do know the contribution limits.
It doesn't matter that you would like to be married to your wife for the rest of your life, that is not the point. The point is the law states a person can only contribute $4000 in a roth this year.
What you were asking is if you can put $8000 under your name and the answer to that is no, but you can have $4000 for you and $4000 for her.
Again, I understand that. It's semantics...the same thing to me. I can put in a total of $16,000 for years 2007 and 2008 if I qualify for Roth after doing my taxes. For clarity, that would be $8000 in my wife's name and $8000 in my name.
SeattleNative
Senior Member - 1K
posted: Jan. 10, 2008 @ 1:08p
Good topic - linked to FW Finance FAQ for IRA and 401(k).
Skipping 13 Messages...
makeinu
Thrifty Member
posted: Apr. 16, 2008 @ 5:02p
dmlavigne1 said: You are not saving money on taxes, you simply are deferring the taxes. The math is simple and works out the same. IT IS SIMPLY A TAX HEDGE, NOTHING MORE!
Simple example of 10% return for one year and 4K in IRA and 25% tax.
Roth: 4K*.75= 3K * 1.1 = 3.3K after one year Traditional 4K * 1.1 = 4.4K *.75 = 3.3K after taxes paid and one year.
The only advantage of a Roth is being able to access the deposited funds without penality.
Your example is wrong because you're putting 3K in the Roth instead of 4K. Your example raids the Roth to pay taxes before it even starts earning interest. Here is the correct simple example.
Roth: 4K*1.1-.25*4K*(1+.1*.75)=3.325K net gain after one year (subtraction is principal plus interest lost prepaying taxes) Traditional: 4K*1.1*.75=3.3k
Money in a taxable account today is worth less in tomorrow's dollars than money in a tax-free account today because the return of the taxable account is reduced by taxes. Therefore, even when tax rates do not change the Roth gives a better return because it allows you to pay the tax liability with less valuable assets.
Think about it this way: Suppose you have $200 and you buy two bonds, a 1-year $100 bond paying 5% and a 1-year $100 bond paying 4% (consider it 5%-1% tax). After purchasing the bonds you suddenly realize that you owe your friend $100. Which bond do you pay him with? The 4% one, obviously, because it is guaranteed to be worth less in 1-year. Thus, it is with IRAs. When you pay taxes owed on Roth contributions from a taxable account it is like giving him the 4% bond. If, however, you reason as you have and say "I paid $100 for each bond and I owe him a bond, so it doesn't matter which" and give him the 5% bond it is like opening a traditional IRA.
Disclaimer: By providing links to other sites, FatWallet.com does not guarantee, approve or endorse the information or products available at these sites, nor does a link indicate any association with or endorsement by the linked site to FatWallet.com.
Members of our community may attach files to a post in accordance with the User Agreement. FatWallet is not responsible for the content, accuracy, completeness or validity of any information contained in any attached file. Files have *not* been scanned for viruses. Be especially wary of Excel files which may contain malicious content.
