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Originally posted by cooger:
A financial planner told me he recommends regular IRAs. He said since the money is pretax you can put more money into it, therefore, you have more money to gain growth/interest on.

I hope you're not paying for that advice, because it's false.

Whether you use a "traditional" IRA, a Roth IRA, or a combination of the two, the amount you can invest does not change. The limit on contributions for IRAs in 2018, was $5500, and for 2019 is $6000 (not including people eligible to make "catch up" contributions after age 50).

No need to take my word for it, it's all explained here:
https://www.irs.gov/retirement...-contribution-limits

So you absolutely cannot "put more money into it," if you use a "traditional" IRA.

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Originally posted by cooger:

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Originally posted by 6guns:

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Originally posted by cooger:

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Originally posted by sasquatch28:
This is not advice, but why not have the best of both worlds if a 401k or equivilent is available to you?

What are the advantages of the 401k? I do have that available to me.

Contributions to your company 401k often get matched up to a certain point by the company. And your contribution lowers your taxable income....it comes right off the top.

Ahhh, my employer doesn’t match 401k contributions.

While "matching funds" is generally considered to be the biggest benefit of 401(k) plans, there is another big benefit, the ability to go beyond the aforementioned IRA limits, in sheltering retirement investments from taxes.

For tax year 2018 you could put $18500 in a 401(k) plan, and for 2019 you can put $19000 in a 401(k) plan. Again, that does not account for "catch up" contributions for people over 50 years old.

The law now allows for both "traditional" and "Roth" 401(k) accounts. Although some employers do not offer both options in their plans.

https://www.irs.gov/retirement...-contribution-limits

Since the general advice is to invest 10-20% of your gross pay for retirement, even without matching funds, a 401(k) plan would allow people who are trying to put that much away to access the tax advantages offered by deferring the taxes in "traditional" plan, or the "tax free withdrawals" of a Roth plan.

What the Financial Planner was trying to explain is that it takes less after tax dollars to fully fund the Traditional IRA because the Treasury is subsidizing your contribution through the tax break. For example, lets say you put $6,000 into a Trad IRA but as a result you reduce your tax bill by 1,000. Your net, after tax, cost to have a 6,000 account balance is 5,000. Roth on the other hand takes the full 6,000 of after tax money to get you a 6,000 account balance.

Don’t overlook the HSA if that’s available to you and you can invest the money.

HSA may be the best thing going for a retirement investment even though it is intended for Health Care.

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Originally posted by Sailor1911:
What the Financial Planner was trying to explain is that it takes less after tax dollars to fully fund the Traditional IRA because the Treasury is subsidizing your contribution through the tax break. For example, lets say you put $6,000 into a Trad IRA but as a result you reduce your tax bill by 1,000. Your net, after tax, cost to have a 6,000 account balance is 5,000. Roth on the other hand takes the full 6,000 of after tax money to get you a 6,000 account balance.

Yeah, that's not what was said by cooger. His statement was the planner said, and again this is his quote, "since the money is pretax you can put more money into it, therefore, you have more money to gain growth/interest on." That's not what you're describing. Everyone that knows even the basics of "traditional" v. "Roth" plans, understands what you've said about current year tax savings, but that is NOT what cooger was describing.

Mikey, a quick web search claims ROTH inheritors have to take minimum distributions.But that may perhaps be only to convert the funds into their own ROTH?

If I had to lower my taxable income, I'd definitely sock money into a Traditional IRA. Fortunately, I've yet to be troubled with that situation.

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Originally posted by cooger:

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Originally posted by sasquatch28:
This is not advice, but why not have the best of both worlds if a 401k or equivilent is available to you?

What are the advantages of the 401k? I do have that available to me.

All I was saying was, if you have a 401k through work, that you can experience the benefits of both a tax deffered and tax free (post tax) retirement account. A 401k allows you to reduce current tax liability and the Roth prevents future tax liability.

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Originally posted by cooger:
What are the advantages of the 401k? I do have that available to me.

There can be restrictions on the deductibility on IRA contributions for those who are covered by retirement plans, above a certain income level. There's a reasonably good discussion of this here: link

The 401K vs IRA vs Roth IRA question depends very strongly on your situation and expectations of future earnings/tax bracket, and whether the smaller annual contribution limit of the IRAs ($6K, generally) vs a 401K ($19K, generally) is a concern. If employer matching is available, that can tilt the analysis strongly toward the 401k. Details matter.

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Originally posted by joel9507:


The 401K vs IRA vs Roth IRA question depends very strongly on your situation and expectations of future earnings/tax bracket, and whether the smaller annual contribution limit of the IRAs ($6K, generally) vs a 401K ($19K, generally) is a concern. If employer matching is available, that can tilt the analysis strongly toward the 401k. Details matter.

this +100

either can be a better choice depending on individual specifics. as do the FEES associated with the offerings.

bottom line pick one asap and START INVESTING now ! the future ramifications may or may NOT come to fruition but the amount saved over time is what matters most ... you can always make adjustments down the road to offset tax implications

full disclosure - I have all the above (401k + Roth + Trad IRA) - and am happy to be able to have the flexibility in that regard.

----------------------------------------

I have mixed thoughts on this topic.

First, my financial planner recommends pre-tax (non-Roth) contributions.

Most people who compare Roth vs. traditional try to calculate in the long run which is better, by making forecasts on the tax rates when the money is earned vs. when it is withdrawn. I look at it differently.

If you have lots of money in traditional IRAs/401(k)s, when you are retired, you are guaranteed to have taxes taken out of your savings. This means although it may look like you have lots of money saved, not all of it belongs to you - you must surrender a significant portion to the Government.

With a Roth, of course, all of it belongs to you. To me, I'd rather pay the tax bill while I am still working, rather than when I am retired and no longer making a significant income. In effect, with a Roth, you are making more money available to you when you are retired and no longer working, because you don't have a big tax bill to pay. Even if they tax Roth withdrawals in the future, it's not likely to be nearly as much as the taxes on traditional IRAs/401(k)s.

Once you are retired, and either can't work, or don't want to work, do you really care if you did better in the long run? I suspect not - you're going to care more that you have more funds available - and you get that with a Roth.

I guess what I am saying - is don't let tax considerations dictate the savings method - instead, use the savings vehicle that's going to give you more money during retirement - and that's Roth.

Being over 50, I am maxing out my 401(k) contributions, as well as the "catch-up" contributions.

Now, given that my financial advisor and I differ on this matter, I am splitting the difference. I have retirement savings in Roth, traditional, and non-tax-sheltered accounts. So, I am "diversifying" across different types of accounts.

That's my take.

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Originally posted by DMF:

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Originally posted by Sailor1911:
What the Financial Planner was trying to explain is that it takes less after tax dollars to fully fund the Traditional IRA because the Treasury is subsidizing your contribution through the tax break. For example, lets say you put $6,000 into a Trad IRA but as a result you reduce your tax bill by 1,000. Your net, after tax, cost to have a 6,000 account balance is 5,000. Roth on the other hand takes the full 6,000 of after tax money to get you a 6,000 account balance.

Yeah, that's not what was said by cooger. His statement was the planner said, and again this is his quote, "since the money is pretax you can put more money into it, therefore, you have more money to gain growth/interest on." That's not what you're describing. Everyone that knows even the basics of "traditional" v. "Roth" plans, understands what you've said about current year tax savings, but that is NOT what cooger was describing.

Although I didn’t describe it very well this is what the financial planner was trying to say.

Roth Roth Roth!

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Originally posted by Woodman:
Mikey, a quick web search claims ROTH inheritors have to take minimum distributions.But that may perhaps be only to convert the funds into their own ROTH?

Thanks Woodman - I was wrong.

ROTH: Spouse does not have to take distributions. Others do. None of them have to pay any tax on the distributions.

TRADITIONAL: Spouse and others have to take RMDs. And all RMDs are taxable.

I like having the Roth option, as it allows you to choose your tax rate that you will pay in retirement.

Withdraw $20K from 401K, and $20K from your Roth IRA. Your income for the year is $40K, but you only pay taxes on $20K.

You can work the numbers in your favor, so that you are in the income tax bracket that is most advantageous to you in your retirement.

The only thing I use Roth for these days is something that my financial adviser calls a "back door Roth conversion" to skirt income limits for contributions. I do have some Roth accounts from before and think it's smart to have some tax free retirement dollars just in case.

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Originally posted by Broadside:
If it is inevitable that taxes will go up like you say, then why do you think that Congress will not try to tax Roth IRA's in the future?

I'm not saying they couldn't, but at least the Roth's have already paid the tax man. I find it less likely that this money would be taxed again. The higher probability is that tax rates will increase vs. decrease. As deep in debt that we are, I can see congress raiding our accounts to pay their bills in the future.

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Originally posted by cooger:

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Originally posted by DMF:

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Originally posted by Sailor1911:
What the Financial Planner was trying to explain is that it takes less after tax dollars to fully fund the Traditional IRA because the Treasury is subsidizing your contribution through the tax break. For example, lets say you put $6,000 into a Trad IRA but as a result you reduce your tax bill by 1,000. Your net, after tax, cost to have a 6,000 account balance is 5,000. Roth on the other hand takes the full 6,000 of after tax money to get you a 6,000 account balance.

Yeah, that's not what was said by cooger. His statement was the planner said, and again this is his quote, "since the money is pretax you can put more money into it, therefore, you have more money to gain growth/interest on." That's not what you're describing. Everyone that knows even the basics of "traditional" v. "Roth" plans, understands what you've said about current year tax savings, but that is NOT what cooger was describing.

Although I didn’t describe it very well this is what the financial planner was trying to say.

Honestly, that is very shortsighted advise, but without having a full profile on your age, long term outlook, education, housing, spending habits, retirement needs, etc, it is hard for anyone to give you good advise. Simply comparing a Roth to a traditional IRA can be simple stripping away all else. If you put your money on the same asset for a similar amount of time, the historical comparison can be done.

For comparison, if in January 2004 you purchased $3,000 for a Traditional IRA of S&P 500 (I used SPY). IT would have purchased 26.795 shares of stock (after $5.95 trade). The price was 111.74 at close on 1/31/2004.

Assuming you use the tax savings (25% bracket) and reinvest those into the same stock (SPY) on the same day, it wold add an additional 6.659 shares. This stacked position would've you 33.454 shares.

If you were to buy $3,000 in a Roth on the same day of after tax money you would have 26.795 shares. but would not have to pay taxes when selling those shares in the future.

Forward 15 years to 1/31/2019, and the value per share is up to $269.93, meaning $9,030,12 for the Traditional, and $7,232.72 for the Roth. Assuming current tax tables, if you had to sell off your position, your would net $7,043 for the Traditional, and $7,232.72 for the Roth (again assuming a 22% (FINAL progressive) tax rate).

Another words, the results are almost identical over the same period of time.

HOWEVER, it means you would have to reinvest your upfront tax savings (ASSUMING YOU QUALIFY FOR THEM). That window gets smaller every year.

In 2018, Married filing jointly (MFJ) losses all value for tax write-off for a traditional IRA if you have over $101,000 in adjusted gross income (which also puts you into the 22% final income bracket). I use the final bracket because each additional $ of earning is taxed at that rate.

The only way you really win with traditional IRA is if you are willing to reinvest your tax savings into a brokerage account and not touch it. Say for example you put the $6,000 T-IRA funds aside today, and are in the 22% bracket, and get full use of the tax benefit (means you have a 401k at work, and have combined income of less than $80,000). The tax benefit would kick off $1,320 that would require you invest that back.

There are cutoffs for a Roth IRA as well, however there are end arounds for that. You can put it in as a traditional IRA, not take any tax benefits (because income is too high), then transfer the IRA from a traditional style over to a Roth after the first year. This is legal, and within the constraints as long as you did not benefit from upfront tax savings.

The best way to win on a Roth is to buy early in your career, while at a lower tax bracket. If you expect to sell while you are destitute and are in the 12% tax bracket, the traditional IRA will be the only advantage on a tax basis.