Author Topic: Any reason for us to use a roth?  (Read 7933 times)

themagicman

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Any reason for us to use a roth?
« on: December 11, 2014, 12:56:11 PM »
My wife and I currently make about $90k between the two of us. We are currently maxing out my 401k and both of our IRAs. As I see it, there is no reason for us to use a Roth IRA instead of our traditional. I was hoping that anyone could point out anything that I am not thinking about as a reason that I should use a roth for at least one of us.

We would like to retire around 40 (About 15 years away) Right now we are easily in the 15% bracket and there is no way that next year will be above or below that. Also, during retirement, I can not see us ever being over the 15% bracket because that would require us to spend over $90k a year. Also the traditional IRA seems to be better for getting the majority of it out before 59.5 We would have to option to roll it over into a roth ira in retirement and wait 5 years to pull it out. This would be advantagous over the roth because we would only be able to pull out the contributions from the roth and would never be able to get to the interest. Also if a need came up where we would need to start taking all of the retirement sooner there is less of a penalty for taking it out of the tradional. (Tax rate +10% and is the same for the roth BUT you have already paid the taxes up front with the roth so they get you both ways)

Also, we currently have about $25k in roth contributions that we would be able to withdraw in an emergency or in retriement penalty free.

Does anyone see any reason that one or both of us should do Roth IRAs? Anything that I am not thinking of? Thanks!

svi

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Re: Any reason for us to use a roth?
« Reply #1 on: December 11, 2014, 01:25:46 PM »
I agree with your reasoning completely. I think that the Roth is only useful in very narrow circumstances. Traditional IRAs and 401ks are the way to go to minimize your tax burden now, when you are in your prime income generating years. The way I see it, you cannot predict your tax bracket in retirement, but you KNOW your tax bracket now, why pay taxes now to gain a nebulous benefit in the future that may or may not materialize (i.e. much higher tax rates in retirement).

themagicman

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Re: Any reason for us to use a roth?
« Reply #2 on: December 11, 2014, 02:27:37 PM »
I agree with your reasoning completely. I think that the Roth is only useful in very narrow circumstances. Traditional IRAs and 401ks are the way to go to minimize your tax burden now, when you are in your prime income generating years. The way I see it, you cannot predict your tax bracket in retirement, but you KNOW your tax bracket now, why pay taxes now to gain a nebulous benefit in the future that may or may not materialize (i.e. much higher tax rates in retirement).

Yeah, I feel that our low spending will always keep us in the lower bracket but just not sure what the income about for that bracket will be. I definitely like getting the known benefit, while I can!

krishnamba

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Re: Any reason for us to use a roth?
« Reply #3 on: December 11, 2014, 02:35:53 PM »
I am lost if you are maxing out

   1. 401k for 2 people 17.5k x 2=35k
   2. IRA for 2 people   5.5k x 2 =11k

Roth is better because any amount taken out is tax free regardless how much you make from 401k take outs.

I would use 401k (72T) from 40 to 55 which will allow your roth ira to compound much more (15 yrs).

If you feel you are frugal and dont want that extra money, do what MMM is by giving to charities of choice,or local projects to help
your community.

nereo

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Re: Any reason for us to use a roth?
« Reply #4 on: December 11, 2014, 02:46:37 PM »
I am lost if you are maxing out

   1. 401k for 2 people 17.5k x 2=35k
   2. IRA for 2 people   5.5k x 2 =11k

Roth is better because any amount taken out is tax free regardless how much you make from 401k take outs.
What the OP would be missing by putting money in a ROTH is a reduction in their tax bill of $2750 (assume 25% top rate)
The logic here is that in ER it's likely they will be in a lower bracket, living off a combination of capitol gains from taxable accounts and withdrawls from their 401(k) and IRA accounts.  It's entirely possible they will pay 10% tax on IRA withdrawls during retirement - in other words they get $2750 for every $11,000 they put in, and have to pay $1,100 when they take the same amount out years later.

Congress of course could always change tax rates.  ROTH withdrawls also have fewer strings - those are two advantages to investing in a ROTH vs IRA.

themagicman

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Re: Any reason for us to use a roth?
« Reply #5 on: December 11, 2014, 02:50:51 PM »
Congress of course could always change tax rates.  ROTH withdrawls also have fewer strings - those are two advantages to investing in a ROTH vs IRA.

What do you mean by fewer strings? Just the ability to withdraw contributions from the roth penalty free at any time for any reason? Are there any other strings I am missing?

nereo

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Re: Any reason for us to use a roth?
« Reply #6 on: December 11, 2014, 02:53:24 PM »
Congress of course could always change tax rates.  ROTH withdrawls also have fewer strings - those are two advantages to investing in a ROTH vs IRA.

What do you mean by fewer strings? Just the ability to withdraw contributions from the roth penalty free at any time for any reason? Are there any other strings I am missing?
Those were the "strings" i was referring to.  You can still access money in a tIRA, but it's harder to do without paying penalties.  Or so I read - never withdrawn any money from mine yet.

MoneyCat

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Re: Any reason for us to use a roth?
« Reply #7 on: December 11, 2014, 03:26:31 PM »
The Roth IRA is a nice option for people making more average money, because it allows you a lot more flexibility.  You cannot withdraw anything from a Traditional IRA or 401k without an early withdrawal penalty and tax penalty.  You can withdraw your contributions from a Roth IRA or Roth 401k at any time, because you already paid the taxes on it.  That's nice if you are on a very small budget and you have a massive emergency.  That's not really an issue for the people on easy street making $200k a year, but it's useful for someone making only $35-40k a year.

svi

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Re: Any reason for us to use a roth?
« Reply #8 on: December 11, 2014, 03:39:00 PM »
The Roth IRA is a nice option for people making more average money, because it allows you a lot more flexibility.  You cannot withdraw anything from a Traditional IRA or 401k without an early withdrawal penalty and tax penalty.  You can withdraw your contributions from a Roth IRA or Roth 401k at any time, because you already paid the taxes on it.  That's nice if you are on a very small budget and you have a massive emergency.  That's not really an issue for the people on easy street making $200k a year, but it's useful for someone making only $35-40k a year.

I disagree. Look at it this way: When you are in that income bracket, you absolutely need an emergency fund (more so than if you make 200k). Any emergency fund should be very liquid. This precludes  investing your roth IRA into vehicles that give you any kind of significant return. If you keep your emergency savings in a Roth at sub 1% then the fact that the earnings are tax free becomes irrelevant.

It is a better play to build an emergency fund outside of a roth, and put all the dollars you can into your retirement savings in a way that reduces your tax liability thus increasing your real earnings and savings. I think the only people that Roth is in any way useful for are those who have maxed out their Traditional 401k, but make too much money to contribute to a traditional IRA. This is the band of income of agi 70-129k for single 96-191 for married.

beltim

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Re: Any reason for us to use a roth?
« Reply #9 on: December 11, 2014, 03:42:59 PM »
It is a better play to build an emergency fund outside of a roth, and put all the dollars you can into your retirement savings in a way that reduces your tax liability thus increasing your real earnings and savings. I think the only people that Roth is in any way useful for are those who have maxed out their Traditional 401k, but make too much money to contribute to a traditional IRA. This is the band of income of agi 70-129k for single 96-191 for married.

There are many other categories of people for whom a Roth IRA is incredibly useful.  Off the top of my head: people currently in the 0% tax bracket, people with currently low incomes who expect significantly higher incomes in the future, and people who expected significant pensions in retirement.

Eric

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Re: Any reason for us to use a roth?
« Reply #10 on: December 11, 2014, 03:52:56 PM »
The Roth IRA is a nice option for people making more average money, because it allows you a lot more flexibility.  You cannot withdraw anything from a Traditional IRA or 401k without an early withdrawal penalty and tax penalty.  You can withdraw your contributions from a Roth IRA or Roth 401k at any time, because you already paid the taxes on it.  That's nice if you are on a very small budget and you have a massive emergency.  That's not really an issue for the people on easy street making $200k a year, but it's useful for someone making only $35-40k a year.

I disagree. Look at it this way: When you are in that income bracket, you absolutely need an emergency fund (more so than if you make 200k). Any emergency fund should be very liquid. This precludes  investing your roth IRA into vehicles that give you any kind of significant return. If you keep your emergency savings in a Roth at sub 1% then the fact that the earnings are tax free becomes irrelevant.

A Roth is liquid.  You can access your contributions without penalty at any point.  About the only thing more liquid is cash under your mattress.  I'm not sure how/why you move from liquidity to riskiness, but I agree you wouldn't want to waste Roth space with a 1% return.  That's why you'd invest in index funds, even if this was your emergency fund.  Still liquid, but with a significant return potential.  Now you'll want to have enough contributed so that you can still have the proper amount available in the event of a market crash, but that's a small issue that's automatically resolved over time.

Keep in mind that emergency funds are for emergencies only.  The chance that you'd have to dip into it is probably pretty small, especially in the OP's situation with a dual income.


The Mad Fientist has a good post (or two) about the differences and benefits:

http://www.madfientist.com/traditional-ira-vs-roth-ira/

svi

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Re: Any reason for us to use a roth?
« Reply #11 on: December 11, 2014, 03:54:26 PM »
It is a better play to build an emergency fund outside of a roth, and put all the dollars you can into your retirement savings in a way that reduces your tax liability thus increasing your real earnings and savings. I think the only people that Roth is in any way useful for are those who have maxed out their Traditional 401k, but make too much money to contribute to a traditional IRA. This is the band of income of agi 70-129k for single 96-191 for married.

There are many other categories of people for whom a Roth IRA is incredibly useful.  Off the top of my head: people currently in the 0% tax bracket, people with currently low incomes who expect significantly higher incomes in the future, and people who expected significant pensions in retirement.

That is a fair point. I do still think that these cases are an exception rather than the rule. I think that unless a good argument can be made in a specific circumstace for the roth, like in the examples you give, Trad IRA should be the default choice - but I would love to hear more.

svi

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Re: Any reason for us to use a roth?
« Reply #12 on: December 11, 2014, 04:00:23 PM »


A Roth is liquid.  You can access your contributions without penalty at any point.  About the only thing more liquid is cash under your mattress.  I'm not sure how/why you move from liquidity to riskiness, but I agree you wouldn't want to waste Roth space with a 1% return.  That's why you'd invest in index funds, even if this was your emergency fund.  Still liquid, but with a significant return potential.  Now you'll want to have enough contributed so that you can still have the proper amount available in the event of a market crash, but that's a small issue that's automatically resolved over time.
[/quote]

By liquid I mean low risk and liquid. I think that this might be a risk tolerance disagreement. I don't think your emergency fund should be invested - some emergencies, such as a job loss, often coincide with market corrections, which won't resolve over time if you take out the money to feed the dog or whatever.

jjcamembert

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Re: Any reason for us to use a roth?
« Reply #13 on: December 11, 2014, 04:20:49 PM »
One reason I started a Roth was as a place to save at least $10k to use the tax-free gains as a first-time home buyer. Of course if you already have a house or plan on buying one in less than 5 years this is n/a.

nereo

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Re: Any reason for us to use a roth?
« Reply #14 on: December 11, 2014, 09:24:30 PM »
re: using a ROTH as an emergency fund

one thing that hasn't been discussed is that you can hold funds in both a ROTH and an tIRA. 
For example, you could place $8000 into a ROTH once as an ER fund and then put all future earnings into a tIRA get the tax immediate tax benefits.  There's no reason to choose one and never use the other.
Couples filing together are stlll limited to a maximum of $11k/year in contributions total (you cannot contrubte $11k to one AND $11k to another)

themagicman

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Re: Any reason for us to use a roth?
« Reply #15 on: December 12, 2014, 07:40:17 AM »
So if I already have a stand alone emergency fund and $25k of previous roth contributions to withdraw in an emergency. Then there is no reason for the roth and should go 100% tradtional?

boarder42

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Re: Any reason for us to use a roth?
« Reply #16 on: December 12, 2014, 07:54:54 AM »
If you invest in funds with qualifying divendends and only withdraw Lt capital gains. A taxable account acts like a more liquid Roth account if you stay in the 15% bracket while retired. If you don't earn too much I would go t IRA and put the tax savings in a taxable.

Cromacster

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Re: Any reason for us to use a roth?
« Reply #17 on: December 12, 2014, 07:57:53 AM »
It sort of depends on what strategies you plan to use when you reach FIRE.  If you plan to save a majority of your stache in tax advantaged accounts (401(k) tIRA etc) you need about 5 years worth of expenses some where.  Either principle in a Roth, taxable investments, or a combination of both.

Madfientist: Retire Even Earlier

Quote
Thanks to the way Traditional IRA to Roth IRA conversions work, you are able to withdraw converted money five years after the conversion date, tax and penalty free. So in this example, assume that he converts his entire 401(k) to a Traditional IRA when he achieves FI and then, every year after that, he moves $9,750 from his Traditional IRA into his Roth IRA. He would only need to do this for five years before he could then start withdrawing $9,750 per year, tax and penalty free!
« Last Edit: December 12, 2014, 08:07:35 AM by Cromacster »

themagicman

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Re: Any reason for us to use a roth?
« Reply #18 on: December 12, 2014, 08:03:15 AM »
If you invest in funds with qualifying divendends and only withdraw Lt capital gains. A taxable account acts like a more liquid Roth account if you stay in the 15% bracket while retired. If you don't earn too much I would go t IRA and put the tax savings in a taxable.

This is a great point that I didn't think of! Being in the 15% bracket, taxable accounts are pretty much roth ira's without restrictions (Assuming that they keep these tax rates on dividends and LT gains)

It sort of depends on what strategies you plan to use when you reach FIRE.  If you plan to use the Roth pipeline strategy you will need about 5 years worth of expenses saved somewhere.  Either principle in a Roth, taxable investments, or a combination of both.

I am planning on using taxable investments and part time work to cover my first 5 years!

teen persuasion

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Re: Any reason for us to use a roth?
« Reply #19 on: December 12, 2014, 08:59:33 PM »
It is a better play to build an emergency fund outside of a roth, and put all the dollars you can into your retirement savings in a way that reduces your tax liability thus increasing your real earnings and savings. I think the only people that Roth is in any way useful for are those who have maxed out their Traditional 401k, but make too much money to contribute to a traditional IRA. This is the band of income of agi 70-129k for single 96-191 for married.

There are many other categories of people for whom a Roth IRA is incredibly useful.  Off the top of my head: people currently in the 0% tax bracket, people with currently low incomes who expect significantly higher incomes in the future, and people who expected significant pensions in retirement.

That is a fair point. I do still think that these cases are an exception rather than the rule. I think that unless a good argument can be made in a specific circumstace for the roth, like in the examples you give, Trad IRA should be the default choice - but I would love to hear more.

We fund Roths for DH and me, since trad IRAs would be pointless for us.  After DH funds an HSA and his 401k, we are at 0 taxable.  Lowering our AGI even more with a traditional IRA would not increase our EITC (unlike the 401k), though it might be useful for FAFSA purposes to get to the magic EFC = 0 AGI (but only if we actually go below the bypass threshold, since retirement contributions are added back in during the calculations). 

Since our state also matches EITC at 30%, and the Child Tax Credit at 33%,  we get a decent tax refund, and turn around and use that to fund our Roths (so it was never taxed in the first place).  It also effectively shields assets from the FAFSA, since retirement accounts are not included in asset tests (unlike taxable accounts).

pzxc

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Re: Any reason for us to use a roth?
« Reply #20 on: December 12, 2014, 09:05:51 PM »
One important thing I haven't seen mentioned in this thread...

You asked for something you missed...

Here it is...

The government could easily raise taxes and there is no theoretical limit to how high they could raise them.  For that reason alone, I will always invest in a Roth IRA so long as I am eligible.

fartface

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Re: Any reason for us to use a roth?
« Reply #21 on: December 13, 2014, 09:22:18 AM »
I struggle with similar circumstances.

My DH retired 18 months ago at age 43. So for 2013 and 2014 we both contributed the max to our Roths as that was the first time in nearly our entire marriage we made it to 15% tax bracket.

I also converted another $6500 this year from his traditional IRA to his Roth b/c of our tax bracket.

I see both sides of this debate. I think in 2015, I'll still contribute to our ROTHs.

Many big IF's in the equation, but IF I start collecting my pension at age 55 + DH's SS + my SS...those amounts alone will put us into the 25% tax bracket IF tax rules stay what they are right now. So, in the end, I go w/the Roth.

nereo

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Re: Any reason for us to use a roth?
« Reply #22 on: December 13, 2014, 09:45:12 AM »

The government could easily raise taxes and there is no theoretical limit to how high they could raise them.  For that reason alone, I will always invest in a Roth IRA so long as I am eligible.
This gave me a good chuckle.  It's absolutely true the government could raise taxes in the future.  It's also absolutely true that taxes could be lowered or remain the same in future.  It's the great 'unknown' in the ROTH/Traditional decision.  In a way it comes down to a 'glass half full/glass half empty' approach.

If you believe that your future tax burden will be less than it is presently, a tIRA makes sense.  If you think it might be more, then go with a ROTH.  I tend to be an optimist, believing that a combination of lower spending in ER (compared to current income levels) along with a 'roughly equivalent' tax code will mean a tIRA will ultimately give me the greatest savings.
who knows (shrug) - not me.

Joel

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Re: Any reason for us to use a roth?
« Reply #23 on: December 13, 2014, 10:02:32 AM »
Another instance of when it is appropriate to contribute to a Roth IRA is when you have maxed your traditional 401k and your MAGI is too high to contribute to a traditional IRA but low enough to contribute to a Roth IRA.

devan 11

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Re: Any reason for us to use a roth?
« Reply #24 on: December 13, 2014, 05:39:46 PM »
  We are high level savers and have been so for a long time.  We are past the point of cheap taxes, future taxes will be at increased rates unless our government lowers tax rates by quite a bit.  I don't expect that, but it could happen.  We also want to leave some estate.  Roth is a better choice for estates in our circumstances and for most people.  Another point is to have at least some Roth to ensure that the five year rule is counting.  If we hit a bad patch with reduced income and losses in our securities, we will roll over as much as we can at low tax rates. We make enough to max out Roth 401k  and Roth IRA's.  Getting the tax bite done with for times when we may need to pay out for a big expenditure gives us flexibility to pull out of T IRA s until rates increase, then Roth IRA's for the excess.

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Re: Any reason for us to use a roth?
« Reply #25 on: December 13, 2014, 07:38:33 PM »
Tax diversification is key so Traditional 401K and Roth IRA is the way to go, in my opinion.