Is roth ira better?

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Is roth ira better?

Postby Peijen » Tue Oct 02, 2007 9:10 pm

We have been told by financial articles that roth ira is better for you and stuff, but is it true? What do you think?

My gut instinct is telling no. It's because of the tax rate difference of when you save vs when you withdraw.

I am going to try to run some numbers later and see how it turns out.
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Postby Jonathan » Tue Oct 02, 2007 9:26 pm

It's like 4k/yr. Max it out already.
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Postby VLSmooth » Tue Oct 02, 2007 9:53 pm

As always, it depends.

Please correct me if I'm wrong, but normal IRAs are taxed at maturation/withdrawal while Roth IRAs are taxed immediately.

Therefore, at maturation/withdrawal time, IRAs are better if:
  • You expect to have a lower income tax rate (ie. retired)
  • You expect to have less "real value" out of your investment (hopefully not)
Conversely, Roth IRAs are better if:
  • You expect to have a higher income tax rate (ie. not retired)
  • You expect the "real value" of your investment to grow
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Postby Peijen » Tue Oct 02, 2007 9:58 pm

Dwindlehop wrote:It's like 4k/yr. Max it out already.
sorry, i meant roth vs traditional
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Postby quantus » Wed Oct 03, 2007 12:23 am

You can deposit 4k either way and as you said, one way gets taxed at the end, the other doesn't so it's not an easy apples to apples comparison to make. Assuming you're paying around 33% tax, then a traditional IRA is like making a $5333 investment because of the $1333 in tax you save. What you need to figure out is if you could take that $1333 difference and make more money with it than the tax you'll end up paying at the end. Remember though that the gains on that $1333 will be taxed along the way, so it could be hard to do better. The other difference between the two is the max AGI that you can have in order to make the investment, which makes my choice much easier.
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Postby Vyrosama » Wed Oct 03, 2007 2:47 pm

quantus wrote:The other difference between the two is the max AGI that you can have in order to make the investment, which makes my choice much easier.


Yup, and here's a quick reference:

IRA:
$52,000 to $62,000 for single or head of household filers

meaning if you make less than 52k, the contribution is fully deductible
and as you hit closer to 62k, the less you can deduct

Roth IRA:
Single filers: $99,000-$114,000 (to be eligible for a partial contribution)

meaning if you make less than 99k you can contribute the max amount per tax year, and as you approach 114k the less you can put in.

also to note that you can withdraw from a Roth IRA at anytime w/o penalty.
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Postby Peijen » Wed Oct 03, 2007 5:14 pm

Vyrosama wrote:also to note that you can withdraw from a Roth IRA at anytime w/o penalty.

That is a damn lie. Ok, maybe not so much, but it's inaccurate
Roth IRA contributions can always be withdrawn at any time without penalty.
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Postby Peijen » Wed Oct 03, 2007 5:23 pm

IRA AGI

Damn it, I know I was missing something. Yeah, I dont' think I can push the AGI down to 62k even with maxed out 401k contribution.

Oh well save me the trouble from running the number. For some reason I thought IRA's AGI limit is higher than Roth IRA's limit.
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Postby VLSmooth » Wed Oct 03, 2007 5:58 pm

quantus wrote:The other difference between the two is the max AGI that you can have in order to make the investment, which makes my choice much easier.

Sorry, I'm still a financial newbie in this regard. What is the consequence of this statement? Max AGI = max adjusted gross income? I'm sure that's relevant, but I don't know how. I know Chuck followed up on this, but I don't see why it's not fully tax deductible unless that's just arbitrary.
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Postby Peijen » Wed Oct 03, 2007 6:59 pm

VLSmooth wrote:I don't see why it's not fully tax deductible unless that's just arbitrary.

It's the law. No really, it is the law. Basically once you hit the AGI limit your maximum tax sheltered* limite decreases and phase out eventually. And yes, it is somewhat arbitrary in our eyes. I am sure the congress has some complex forumla it uses to deteremine that amout; like 10000d20 or something.

*Tax deduction for IRA and contribution limit for Roth IRA.
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Postby VLSmooth » Wed Oct 03, 2007 9:18 pm

That sucks.

So... is there any reason to get an IRA if you make over $62,000?

Also, from Chuck's post, if someone makes over $114,000 does that prevent them from making any Roth IRA contributions?

If it really is a deduction change instead of a contribution change, I can see a Roth IRA still being worthwhile since gains aren't taxed.
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Postby VLSmooth » Wed Oct 03, 2007 9:24 pm

Aha!
Fidelity Investor's Weekly 2006-01-13 wrote:When it comes to knowing the facts about Individual Retirement Accounts (IRAs), misperceptions can lead to missed opportunities.

Today's workers may face rising health care costs when they retire, as well as declining pension benefits and a higher cost of living. It's important to save as much as possible, and as early as possible, in tax-advantaged accounts like a 401(k) or an IRA.

What follows is the debunking of 10 common myths that keep some investors from saving in an IRA.

Myth #1: I can only save $1,000 in an IRA
An overwhelming 96% of American retirement savers don't know the correct IRA limits, with some guessing as low as $1,000.1 The fact is, for tax years 2005 and 2006, the annual contribution limit for IRAs has increased to $4,000, up from the $3,000 limit for 2004.

Myth #2: My 401(k) savings should be enough
One-third of Americans in their prime savings years who have not yet opened an IRA account think their 401(k) savings will be sufficient for retirement.1 However, Fidelity estimates that retirees will need 85% to 100% of their pre-retirement income to live comfortably,2 so using an IRA now to supplement workplace programs can help investors pursue long term growth throughout retirement. Fidelity's Retirement Quick Check3 is a great way to help project if savings are on track to meet retirement income goals.

Myth#3: I have to come up with thousands of dollars all at once to open an IRA
For the one-in-four non-IRA owners who say they can't afford the initial required investment to open an IRA,4 opportunities to save even more for the 2005 and 2006 tax years ($4,000 vs. $3,000 for Tax Year 2004) may be daunting. But, getting started without an initial lump sum may be possible.

Myth#4: If I make too much money to qualify for a tax deduction, an IRA isn't right for me
While it's true that a 2005 IRA contribution of $4,000 made by April 17, 2006, is only fully tax deductible for households earning less than $70,000 annually5, 95% of American households are eligible to contribute to a Roth IRA6—-the only non-workplace retirement savings vehicle available today that allows for the potential of federal tax-free withdrawals.7

Myth #5: Retirement is 20 years away, so I have plenty of time to save in an IRA
Nearly two-thirds of young adults have started to save for retirement before age 30.8 That's good news, since starting to save as early as possible is one of the best ways to prepare for the future. A hypothetical investor age 25 who puts $200 a month in an IRA that earns a hypothetical 8% annual rate of return until age 70 1/2 could end up with as much as $1 million for retirement.

(This example assumes annual tax-deferred compounding in an IRA. An individual's account may earn more or less. Final account balances are prior to any distributions, and taxes may be due upon distribution. The example also does not represent the performance of any security. Distributions from retirement accounts prior to age 59 1/2 may be subject to a 10% early withdrawal penalty. Periodic investment plans do not ensure a profit or protect against a loss in a declining market.)

Myth#6: Skipping a year of IRA contributions won't make much of a dent in my future savings
Nearly one-third of American retirement savers share this false belief.9 Given the same hypotheticals mentioned above, delaying a $4,000 contribution just one year—from age 25 to age 26, for example—could mean more than $100,000 less at retirement.

Myth#7: I am self-employed, so I am not eligible for an IRA
Good news: Virtually anyone with earned income can save in an IRA. Better news: Self-employed individuals can contribute up to 25 percent of compensation or $42,000 in a SEP-IRA for 2005 and $44,000 for 2006.

Myth #8: My investments are diversified because I have several IRAs and 401(k)s from old jobs
More than half of American investors juggle their retirement savings across three or more accounts.10 In actuality, this does not ensure diversification. Consolidating assets with one provider makes it easier to analyze an overall portfolio and helps ensure investments are properly diversified.

Myth#9: I am approaching retirement, so my IRA savings years are over
Experts predict that those retiring within 15 years will face the beginning of a $45 billion shortfall in American retirement income.11 To help pre-retirees save as much tax-advantaged cash now as possible, the government created IRA catch-up provisions. These allow workers age 50 and over by year end to contribute $500 more in an IRA for 2005—$1,000 more in 2006—to help make up for lost time.

Myth#10: I'm getting a 2005 tax-filing extension, so I can wait until then to fund my IRA for 2005
Waiting past Tax Day would mean skipping your 2005 IRA contribution, since those made after April 17, 2006, will be applied as contributions to a 2006 IRA.12 Although it may be a good idea to get a jump on next year's contribution—which could potentially reap additional compounding—funding your 2005 contribution may provide even more savings.

Keep in mind that investing involves risk. The value of your investment will fluctuate over time and you may gain or lose money.

1 "Retirement Trends by Generation," ORC for Fidelity Investments, February 2005.

2 "Improving America's Retirement Readiness," Greer and Harlow, Fidelity Management and Research Company, 2005.

3 Retirement Quick Check is an educational tool developed by Strategic Advisers Inc., a registered investment adviser and a Fidelity Investments company, and offered for use by Fidelity Brokerage Services LLC, member NYSE, SIPC, or by Fidelity Investments Institutional Services Company, Inc.

The tool’s illustrations result from running a minimum of 250 hypothetical market simulations. The market return data used to generate the illustration is intended to provide you with a general idea of how asset mixes have performed historically. Our analysis assumes a level of diversity within each asset class consistent with a market index benchmark that may differ from the diversity of your own portfolio. Please note that the projections do not reflect the impact of any transaction costs or management and servicing fees (except variable annuities); if these had been included, the projected account balances would have been lower.

IMPORTANT: The projections or other information generated by Retirement Quick Check regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results and are not guarantees of future results. Results may vary with each use and over time.

4 "Retirement Trends for Every Generation," ORC for Fidelty Investments, February 2005.

5 Deductibility subject to retirement plan participation status and adjusted gross income (AGI limits).

6 Based on household income data from the 2002 U.S. Census.

7 A qualified distribution is generally, any payment or distribution made after the 5-taxable-year period beginning with the first year for which a contribution was made to a Roth IRA set up for you, and that is made on or after you reach age 59 1/2, made because you are disabled, made to a beneficiary or to your estate after your death, or that is made to buy, build, or rebuild a first home.

8" Retirement Trends for Every Generation," ORC for Fidelity Investments, February 2005.

9 Ibid.

10 Fidelity estimate based on internal market research.

11 The Employee Benefit Research Institute predicts the shortfall to begin in 2020.

12 Exceptions apply for persons serving in officially sanctioned combat zones.

Fidelity Investments Institutional Services Company, Inc., 82 Devonshire Street, Boston, MA 02109

425109
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Postby VLSmooth » Wed Oct 03, 2007 9:26 pm

Fidelity Investor's Weekly 2006-01-13 wrote:Myth#4: If I make too much money to qualify for a tax deduction, an IRA isn't right for me
While it's true that a 2005 IRA contribution of $4,000 made by April 17, 2006, is only fully tax deductible for households earning less than $70,000 annually5, 95% of American households are eligible to contribute to a Roth IRA6—-the only non-workplace retirement savings vehicle available today that allows for the potential of federal tax-free withdrawals.7
So yeah, I answered my own question and understand Joe's IRA comment. Still fuzzy on the Roth though.
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Postby Jonathan » Wed Oct 03, 2007 9:52 pm

Roth has two parts:
They changed the way tax is applied.
They arbitrarily increased the income limit.

So you pretty much have to use Roth if you want IRA. Otherwise, you're just saving your money without any tax advantages. Which is fine.
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Postby quantus » Wed Oct 03, 2007 9:57 pm

Dude, it's simple. If you make more than 62k, you can't deduct your contributions to an IRA. If you make more than 114k you can't make any contributions to a Roth IRA.

The lower limits are the beginning of a phaseout period. It's linear, so if your AGI is 106.5k, you're half way through the phaseout for the Roth IRA and can only contribute up to half of the max. This is slightly simplified since it's really a fine-stepped staircase, instead of a perfect line ($100 steps iirc, maybe $50, look it up for me!). Anyways, too much straight income sucks, and it would be nicer to get employer 401k matching, which my employer won't do since they "want to leave the savings decisions up to our employees" which is BS.

Myth#7: I am self-employed, so I am not eligible for an IRA
Good news: Virtually anyone with earned income can save in an IRA. Better news: Self-employed individuals can contribute up to 25 percent of compensation or $42,000 in a SEP-IRA for 2005 and $44,000 for 2006.

WOW!
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Postby Vyrosama » Thu Oct 04, 2007 4:05 pm

quantus wrote: "want to leave the savings decisions up to our employees"


lol, If I ever open up my own company, I'll use that line just to see if I can get away with it :twisted:
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