Author Topic: Roth IRA vs. Standard Mutual Fund  (Read 5189 times)

Bease34

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Roth IRA vs. Standard Mutual Fund
« on: October 25, 2015, 02:27:38 PM »
My situation:
My financial life is pretty well managed at the moment.  Housing/Food/Property Taxes/Expenses are taken care of.  No debts and i will have surplus money to spend before the end of the year.  I'm 32, i've just purchased a home in February, i'm already maxing out a Simple IRA offered through work.     I am already investing the money that i have leftover in the VTSMX fund through Vanguard.    I will probably not need the money invested for 20+ years (knock on wood).

My Question: 
 Is it smarter to Max out a Roth IRA in addition to my Simple IRA?   Or should i just take that money and just keep investing it in mutual funds?     I've been trying to get some clarity on the issue, but my understanding is that the Roth IRA offers some tax advantages on dividends over simply investing in mutual funds, but on the flipside i'd only be able to access those funds at age 59.5.   Is my understanding correct?   Can anyone offer me some advice/clarity on the issue? 

Bracken_Joy

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Re: Roth IRA vs. Standard Mutual Fund
« Reply #1 on: October 25, 2015, 03:55:41 PM »
So is the question, max your Roth IRA or invest in non-tax advantaged accounts? Because mutual funds are a type of investment, not a type of "bucket". A Roth IRA or Simple IRA are "buckets", and you invest within those- to mutual funds or index funds or whatever else.

I guess I'm confused by the question.

Bease34

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Re: Roth IRA vs. Standard Mutual Fund
« Reply #2 on: October 25, 2015, 04:17:51 PM »
Yes, that's my question.   Sorry to confuse.   

What big advantage does having money in that Roth IRA do for me over having money in a non-tax advantaged account ?

I guess i'm not understanding the tax implications properly.    Do you think those tax advantages are worth not being able to access that money till age 59.5 since i'm already maxing out my simple IRA?

Gin1984

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Re: Roth IRA vs. Standard Mutual Fund
« Reply #3 on: October 25, 2015, 04:53:42 PM »
I'd go with a Roth over taxable, anytime.  First, you can access the money you deposit in the Roth as long as it has been open for five years. Second, you don't pay taxes on gains. 

MDM

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Re: Roth IRA vs. Standard Mutual Fund
« Reply #4 on: October 25, 2015, 05:26:11 PM »
Now that the Roth vs. taxable issue has been settled (Bease34, do you agree?) in favor of the Roth, here's another question: should you be putting the money into a Roth IRA or a traditional IRA?

See
http://forum.mrmoneymustache.com/investor-alley/deciding-between-roth-and-traditional-ira-based-on-marginal-tax-rate/,
https://www.bogleheads.org/wiki/Traditional_versus_Roth,  and
http://forum.mrmoneymustache.com/investor-alley/how-to-withdraw-funds-from-your-ira-and-401k-without-penalty-before-age-59-5/
for background.

Frs1661

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Re: Roth IRA vs. Standard Mutual Fund
« Reply #5 on: October 26, 2015, 02:39:59 AM »
This is another good perspective on the Roth: http://www.gocurrycracker.com/roth-sucks/

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MDM

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Re: Roth IRA vs. Standard Mutual Fund
« Reply #6 on: October 26, 2015, 07:38:29 AM »
This is another good perspective on the Roth: http://www.gocurrycracker.com/roth-sucks/
Yes, that is a good article.  One thing, however: ignore the part about using "overall" tax rate in retirement.  It's marginal rate - both when contributing and withdrawing - that matters.

Frs1661

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Re: Roth IRA vs. Standard Mutual Fund
« Reply #7 on: October 26, 2015, 10:44:47 AM »


This is another good perspective on the Roth: http://www.gocurrycracker.com/roth-sucks/
Yes, that is a good article.  One thing, however: ignore the part about using "overall" tax rate in retirement.  It's marginal rate - both when contributing and withdrawing - that matters.

MDM, can you elaborate? The 'last dollar principle' as applied here makes sense to me but maybe I'm missing something important.

Thanks

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MDM

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Re: Roth IRA vs. Standard Mutual Fund
« Reply #8 on: October 26, 2015, 11:29:25 AM »
This is another good perspective on the Roth: http://www.gocurrycracker.com/roth-sucks/
Yes, that is a good article.  One thing, however: ignore the part about using "overall" tax rate in retirement.  It's marginal rate - both when contributing and withdrawing - that matters.
MDM, can you elaborate? The 'last dollar principle' as applied here makes sense to me but maybe I'm missing something important.
The GCC article includes this (highlight added): "When we invest $1 in a 401k, that dollar is the last dollar we earned.  It is taxed at our highest marginal rate.  But when we withdraw $1 from our 401k years from now, it is our First Dollar."

No, it isn't, at least not usually.  In any given year there can be only one first dollar.  When you choose your annual contribution, that future First Dollar is likely already spoken for by your previous contributions, social security, pension, etc.  See http://forum.mrmoneymustache.com/investor-alley/deciding-between-roth-and-traditional-ira-based-on-marginal-tax-rate/ for more details.

Jack

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Re: Roth IRA vs. Standard Mutual Fund
« Reply #9 on: October 26, 2015, 12:53:46 PM »
Note that even if you agree with the GCC article -- and I see no reason why you shouldn't -- you should note that there are still some cases where Roth makes sense. For example, if you can get your tax liability to $0 via non-refundable credits (e.g. the Saver's Credit) and still have tax-advantaged space left, there's no downside whatsoever to using Roth contributions to fill up the rest of it.

Frs1661

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Re: Roth IRA vs. Standard Mutual Fund
« Reply #10 on: October 27, 2015, 03:51:10 AM »
Thanks MDM, very helpful link!

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shotgunwilly

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Re: Roth IRA vs. Standard Mutual Fund
« Reply #11 on: October 27, 2015, 01:14:15 PM »
I'd go with a Roth over taxable, anytime.  First, you can access the money you deposit in the Roth as long as it has been open for five years. Second, you don't pay taxes on gains.

This is wrong.  You can withdraw contributions at anytime, whether it's been open 5 years or not.

Gin1984

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Re: Roth IRA vs. Standard Mutual Fund
« Reply #12 on: October 27, 2015, 01:47:39 PM »
I'd go with a Roth over taxable, anytime.  First, you can access the money you deposit in the Roth as long as it has been open for five years. Second, you don't pay taxes on gains.

This is wrong.  You can withdraw contributions at anytime, whether it's been open 5 years or not.
But it can be taxable then.  Sorry I was not clear: What Are Qualified Distributions?

A qualified distribution is any payment or distribution from your Roth IRA that meets the following requirements.

It is made after the 5-year period beginning with the first taxable year for which a contribution was made to a Roth IRA set up for your benefit, and

The payment or distribution is:

Made on or after the date you reach age 59½,

Made because you are disabled (defined earlier),

Made to a beneficiary or to your estate after your death, or

One that meets the requirements listed under First home under Exceptions in chapter 1 (up to a $10,000 lifetime limit).

MDM

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Re: Roth IRA vs. Standard Mutual Fund
« Reply #13 on: October 27, 2015, 02:58:14 PM »
I'd go with a Roth over taxable, anytime.  First, you can access the money you deposit in the Roth as long as it has been open for five years. Second, you don't pay taxes on gains.

This is wrong.  You can withdraw contributions at anytime, whether it's been open 5 years or not.
But it can be taxable then.  Sorry I was not clear: What Are Qualified Distributions?

A Qualified Distribution is sufficient for the withdrawal to be non-taxable, but it is not necessary.  See https://www.irs.gov/publications/p590b/ch02.html#en_US_2014_publink1000231057.  E.g.,
Quote
You do not include in your gross income qualified distributions or distributions that are a return of your regular contributions from your Roth IRA(s).

 

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