Author Topic: Why do folks still worship Roth IRA's?  (Read 3937 times)

rocketman48097

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Why do folks still worship Roth IRA's?
« on: March 06, 2015, 02:06:46 PM »
I have been investing in a tIRA since I was 18, which was 1994, just out of high school and prior to starting college.  As soon as the Roth became available, I converted my funds to a Roth, stopped contributing, and only contributed to a Roth after that.

In 2012, I realized my bank was getting too big, and eventually I would need to prepare for early retirement.  My wife and I cut off all funding of our Roth IRA's to invest in taxable accounts.  With the 0% cap gains and dividend rates for those in the 15% federal bracket, I see no reason why a Roth, with all of it's restrictions, same penalties and taxes as a tIRA IF withdrawn early, would be preferable to a 0% taxable account, with the ability to harvest tax losses and tax gains. 

Since I am saving up for years 1-5 of early retirement (enough time to create a sizeable Roth ladder), I don't understand why so much emphasis is placed on Roth IRA's still.  I see value in them, only in the following situations:

1.  Do not qualify for traditional IRA deduction AND first five years of early retirement is fully funded in taxable accounts. 
2.  Nearing age 59.5, the age of penalty free withdrawal status. 

Instead, we both withdrew our Roth Principle this year, (65k total) in order to beef up our early retirement accounts.  Sure, we could have kept the principle in the Roth and used that for early retirement, but our retirement is near full funding for the entire length of it.  Therefore, our goal here is to expedite the early part.  We did not need the principle for our "old age" retirement funding as we have hundreds of thousands in 401k's as well as 80k in a tIRA. 

In summary, I believe the only time you should put money in a Roth is when all other tax shelters are accounted for.  I would like to hear others opinions. 

Iron Mike Sharpe

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Re: Why do folks still worship Roth IRA's?
« Reply #1 on: March 06, 2015, 02:21:08 PM »
Once your salary/wages + dividends + capital gains escalate out of the 15% bracket, you will have to start paying taxes on that money that is over the 15% limit. 

My questions to you: are you going to stop investing in your taxable account?  and do you not believe your investments will grow over time? 

With the Roth,you will never pay any tax on any of it (barring an act of Congress)

rocketman48097

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Re: Why do folks still worship Roth IRA's?
« Reply #2 on: March 06, 2015, 02:27:12 PM »
My questions to you: are you going to stop investing in your taxable account?  and do you not believe your investments will grow over time? 

1.  Yes, I am going to stop investing in my taxable account once I have years 1-5 of early retirement expenses fully funded.

With the Roth,you will never pay any tax on any of it (barring an act of Congress)

2.  I agree, but barring an act of congress, I will also pay 0% on the sale of my investments, as I will be retired and not earning a large income, like I am currently.  I do have to account for dividends, however, I contribute extra to pre tax accounts to cover that for now (401k has room in it).  I also have a 409a def comp plan, which I could also contribute up to 90% of my income too, IF I had to.  I currently only put in 2% into this, since I have no intention of working here until I am 55 and will get this as a lump sum when I retire early. 

frugaliknowit

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Re: Why do folks still worship Roth IRA's?
« Reply #3 on: March 06, 2015, 02:30:24 PM »
My wife and I cut off all funding of our Roth IRA's to invest in taxable accounts.  With the 0% cap gains and dividend rates for those in the 15% federal bracket

Answer:  Well, yes, that's NOW.  Next year, it could be something else.  There's no guarantee.

I see no reason why a Roth, with all of it's restrictions, same penalties

Answer:  There's no penalty to withdraw principle from a Roth.  It's only earnings, but check with your accountant.

Since I am saving up for years 1-5 of early retirement (enough time to create a sizeable Roth ladder), I don't understand why so much emphasis is placed on Roth IRA's still.  I see value in them, only in the following situations:

1.  Do not qualify for traditional IRA deduction AND first five years of early retirement is fully funded in taxable accounts. 
2.  Nearing age 59.5, the age of penalty free withdrawal status. 

Answer:  How about the taxes are DONE and paid at a guaranteed rate.  With a traditional Roth, you do not know what tax you will pay.  Also, RMD's can corrupt SS income such that you end up paying taxes on SS.  Further, if you plan to work in retirement, your SS taxation is further complicated.

Instead, we both withdrew our Roth Principle this year, (65k total) in order to beef up our early retirement accounts.  Sure, we could have kept the principle in the Roth and used that for early retirement, but our retirement is near full funding for the entire length of it.  Therefore, our goal here is to expedite the early part.  We did not need the principle for our "old age" retirement funding as we have hundreds of thousands in 401k's as well as 80k in a tIRA. 

In summary, I believe the only time you should put money in a Roth is when all other tax shelters are accounted for.  I would like to hear others opinions.
[/quote]

How about "tax diversification"?  Since you cannot be sure what your tax rate will be when you actually use the money, you have "taxable buckets" and "untaxable buckets". 

seattlecyclone

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Re: Why do folks still worship Roth IRA's?
« Reply #4 on: March 06, 2015, 02:34:05 PM »
The 0% capital gains rate has only existed since 2008. Tax rates change all the time. Why are you betting that this one won't? I think that's much more likely than a new law making Roth withdrawals taxable.

MooseOutFront

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Re: Why do folks still worship Roth IRA's?
« Reply #5 on: March 06, 2015, 02:42:39 PM »
With the relatively low maximum Roth contributions I see it as a tax diversification play.

One of my FIRE scenarios has us living off Roth principal penalty and tax free in early retirement, but another scenario has us working part time instead. 

That said for us MMM style people, our unique situation makes the Roth less worthwhile than for normal folk.

johnny847

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Re: Why do folks still worship Roth IRA's?
« Reply #6 on: March 06, 2015, 02:45:26 PM »
What others have said. And some people with a 401k simply make too much to make deductible contributions to a tIRA so their only IRA option is a Roth.

beltim

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Re: Why do folks still worship Roth IRA's?
« Reply #7 on: March 06, 2015, 02:52:56 PM »
The best reason to use a Roth is one that isn't seen very often on here: if you have a low early-career salary, but can reasonably expect higher salaries in the future.  In those cases the ideal contribution schedule may be to a Roth IRA (or 401k) in your early career, and switch to a traditional IRA (or 401k) when you have a higher salary.

beltim

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Re: Why do folks still worship Roth IRA's?
« Reply #8 on: March 06, 2015, 02:54:06 PM »
The 0% capital gains rate has only existed since 2008. Tax rates change all the time. Why are you betting that this one won't? I think that's much more likely than a new law making Roth withdrawals taxable.

This is a really good point.  Also, Roth withdrawals are not taxable by the state, whereas most states that have an income tax do not have any tax bracket with 0% capital gains or dividend taxes.

MrMoogle

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Re: Why do folks still worship Roth IRA's?
« Reply #9 on: March 06, 2015, 03:22:52 PM »
It's good to question "common sense".  There's been a couple threads recently on this topic:
http://forum.mrmoneymustache.com/investor-alley/go-curry-cracker-roth-vs-taxable/
http://forum.mrmoneymustache.com/investor-alley/potentially-all-savings-into-401kafter-tax-but-how-much-into-taxable/
I still prefer Roth's but there's not a huge benefit to them for Mustacians with the current laws. 
Of course if you can deduct using a tIRA, that's the best case.

epipenguin

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Re: Why do folks still worship Roth IRA's?
« Reply #10 on: March 06, 2015, 03:46:34 PM »
Well, I'm aiming to live for a long time. So I want to plan out retirement withdrawals up to like age 90. So you can't think just about early retirement withdrawals, you should think about late retirement withdrawals too.

There are no RMD's required for Roth IRA's, whereas there are for traditional retirement accounts. If you were stuck with a big 401k or tIRA balance after age 70.5, you could be forced to withdraw more than you want, and get pushed into a higher tax rate. Therefore I believe there is a place for Roth accounts both for early retirement withdrawals (principal only) and for late retirement withdrawals. And after 59.5 there's no tax on withdrawals so that provides added flexibility too. My initial aim would be to use taxable accounts prior to 59.5, then pull only from 401k and tIRA accounts between the ages of 59.5 and 70, leaving the Roth IRA to grow. At age 70, I switch over to SS and Roth IRA withdrawals, plus whatever RMDs I'm forced into on any remaining 401k balance. If one year prior to age 70, I wanted to withdraw enough money to take me over whatever tax threshold I didn't want to go over (15% probably), then I could take from the Roth without affecting my tax bracket. Other years I could supplement with the taxable account.