Author Topic: Disadvantages Of The ROTH IRA  (Read 12347 times)

blackjack

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« Last Edit: February 15, 2016, 10:08:26 AM by blackjack »

seattlecyclone

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Re: Disadvantages Of The ROTH IRA
« Reply #1 on: February 15, 2016, 11:23:08 AM »
When you have a choice between pre-tax contributions and Roth contributions, Roth only wins out mathematically if you expect your tax bracket to be at least as high in retirement as it is now. The interesting paradox here is that the more money you already have in Roth accounts, the lower your taxable income during retirement will be (since Roth withdrawals won't count as income), which makes it less likely that further Roth contributions will be a good idea!

If you're a grad student or something with a very low income already, and you expect to earn much more later in your career and have an income higher during retirement than you have now, go ahead and fund a Roth IRA. If you've already maxed out all available pre-tax retirement accounts (including your HSA) and you have to choose between Roth or taxable for your next contributions, go ahead and contribute to a Roth IRA. Otherwise, why pay tax at a high bracket now just to avoid paying tax at a low bracket later? It doesn't make sense.

mulescent

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Re: Disadvantages Of The ROTH IRA
« Reply #2 on: February 15, 2016, 11:53:04 AM »
My Roth keeps me from having to have fully taxable emergency/kids college/etc funds.  The chances I'll need the money are low, so I'll likely enjoy the tax advantage in retirement.  But, it's nice knowing I can get the principal out without a penalty if I need it.  That's not true of 401/403/457 accounts.  However, I agree that as a vehicle for retirement saving, it doesn't make sense for a Mustachian.

blackjack

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Re: Disadvantages Of The ROTH IRA
« Reply #3 on: February 15, 2016, 12:01:08 PM »
I gross between 75-100k a year, wife makes 60k a year.. were early 30s but probably really won't make much more than that except for lil raises along the way... I have a Tradition 401k and a ROTH IRA; wife has a ROTH 403b; This stuff gets a little confusing for me still

Gin1984

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Re: Disadvantages Of The ROTH IRA
« Reply #4 on: February 15, 2016, 12:07:20 PM »
He missed a reason.  You have used your 401k and HSA to put yourself down to the point that you would not save another cent by contributing to your 401k (but are not maxed), and still have money left.  I am pay no federal taxes (low income and saver's credit), a bit to state, getting a pretty large return because of EITC/child tax credit and still have a small amount to save.  I'd rather put it in my Roth and get the free gains.

NoStacheOhio

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Re: Disadvantages Of The ROTH IRA
« Reply #5 on: February 15, 2016, 12:12:37 PM »
I gross between 75-100k a year, wife makes 60k a year.. were early 30s but probably really won't make much more than that except for lil raises along the way... I have a Tradition 401k and a ROTH IRA; wife has a ROTH 403b; This stuff gets a little confusing for me still

Your AGI and tax bracket are going to determine your best choice for account type. If your taxes are already low/zero, then contributing to a Roth won't be leaving money on the table. If you would benefit from reduced taxable income, then traditional is the better option.

frugalnacho

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Re: Disadvantages Of The ROTH IRA
« Reply #6 on: February 15, 2016, 12:32:58 PM »
He missed a reason.  You have used your 401k and HSA to put yourself down to the point that you would not save another cent by contributing to your 401k (but are not maxed), and still have money left.  I am pay no federal taxes (low income and saver's credit), a bit to state, getting a pretty large return because of EITC/child tax credit and still have a small amount to save.  I'd rather put it in my Roth and get the free gains.

Yes this.  Once we lower our taxes to $0 we don't have any incentive to utilize tIRA over ROTH. 

teen persuasion

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Re: Disadvantages Of The ROTH IRA
« Reply #7 on: February 15, 2016, 12:57:36 PM »
He missed a reason.  You have used your 401k and HSA to put yourself down to the point that you would not save another cent by contributing to your 401k (but are not maxed), and still have money left.  I am pay no federal taxes (low income and saver's credit), a bit to state, getting a pretty large return because of EITC/child tax credit and still have a small amount to save.  I'd rather put it in my Roth and get the free gains.

Yes this.  Once we lower our taxes to $0 we don't have any incentive to utilize tIRA over ROTH.

Us, too.  I use those refundable credits to fund our Roth IRAs, actually.

MDM

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Re: Disadvantages Of The ROTH IRA
« Reply #8 on: February 15, 2016, 01:20:48 PM »
He missed a reason.  You have used your 401k and HSA to put yourself down to the point that you would not save another cent by contributing to your 401k (but are not maxed), and still have money left.  I am pay no federal taxes (low income and saver's credit), a bit to state, getting a pretty large return because of EITC/child tax credit and still have a small amount to save.  I'd rather put it in my Roth and get the free gains.

Yes this.  Once we lower our taxes to $0 we don't have any incentive to utilize tIRA over ROTH.

That might be (perhaps even likely is) true, but not necessarily.  See http://forum.mrmoneymustache.com/investor-alley/sell-taxable-to-keep-maxing-tax-advantaged/msg945982/#msg945982 for a recent example in which the traditional account is arguably better than the Roth (even at $0 owed) due to the high marginal savings and credits.

mrpercentage

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Re: Disadvantages Of The ROTH IRA
« Reply #9 on: February 15, 2016, 06:02:35 PM »
I'm curious. If I was planning to take a huge lump sum from a Roth 457 at retirement to buy an RV sell my house and go nomad would you still think a Roth is stupid?

And does anyone else have a one year old boy climbing all over them while they type?
« Last Edit: February 15, 2016, 06:05:29 PM by mrpercentage »

ender

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Re: Disadvantages Of The ROTH IRA
« Reply #10 on: February 15, 2016, 06:08:04 PM »
I gross between 75-100k a year, wife makes 60k a year.. were early 30s but probably really won't make much more than that except for lil raises along the way... I have a Tradition 401k and a ROTH IRA; wife has a ROTH 403b; This stuff gets a little confusing for me still

Your AGI and tax bracket are going to determine your best choice for account type. If your taxes are already low/zero, then contributing to a Roth won't be leaving money on the table. If you would benefit from reduced taxable income, then traditional is the better option.

Don't forget that there is a region where the deductibility of an IRA phases out - but you are still eligible for a Roth IRA. If your income is in this zone and you want to do retirement money (have maxed HSA/401k/etc) then a Roth IRA is the next best choice.

I'm curious. If I was planning to take a huge lump sum from a Roth 457 at retirement to buy an RV sell my house and go nomad would you still think a Roth is stupid?

And does anyone else have a one year old boy climbing all over them while they type?

Depends, are you on this forum? Or a normal "retire at 65" person?

And more importantly, will your house not cover the majority of the RV?

mrpercentage

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Re: Disadvantages Of The ROTH IRA
« Reply #11 on: February 15, 2016, 06:12:23 PM »
I'm more like a retire or semi retire at 52 guy, 15-16 years from now. My house will be paid off if we don't jump houses.

I might have to hang around a couple of years for my son to finish high school. It's that or buying a Cessna and getting certified all the way up. Either way spending a lot in one year
« Last Edit: February 15, 2016, 06:19:03 PM by mrpercentage »

MustacheAndaHalf

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Re: Disadvantages Of The ROTH IRA
« Reply #12 on: February 16, 2016, 01:22:30 AM »
http://www.financialsamurai.com/disadvantages-of-the-roth-ira-not-all-is-what-it-seems/
...
Just want to know if this information seems to be on point...
This blogger does not seem to be an authority on Roth IRAs.  He quotes a basic fact, then goes on a rant about how he feels about that fact.  Why focus on the government when you can't do anything about it?  And why would government waste make you switch retirement vehicles?  To me it seems like trolling for a response - trying to grab attention without doing much research.

The article should have started with comments about high taxes, not what government does with them.  Living in a high tax state, and paying a high Federal tax could be reasons to prefer a Traditional IRA over a Roth IRA.  But the author couldn't recognize the importance of that point, so I wouldn't give the article much weight.

WildJager

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Re: Disadvantages Of The ROTH IRA
« Reply #13 on: February 16, 2016, 08:47:12 AM »
For early retirees a traditional can make more sense.  If you're not going to be making a large income at retirement age, then your tax bracket will be low, defeating the purpose of the Roth.

Additionally, if you defer taxes now with a traditional, and then roll that money into a Roth over the years post retirement, you can avoid paying taxes on your savings all together.

To a degree, I almost see the Roth as a scam.  "Pay taxes now, because you'll still be working at 60 and you sure as hell don't want to pay taxes then at such a high tax bracket!". Scam is a strong word... Maybe asenine is more appropriate.

dandarc

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Re: Disadvantages Of The ROTH IRA
« Reply #14 on: February 16, 2016, 08:58:35 AM »
For early retirees a traditional can make more sense.  If you're not going to be making a large income at retirement age, then your tax bracket will be low, defeating the purpose of the Roth.

Additionally, if you defer taxes now with a traditional, and then roll that money into a Roth over the years post retirement, you can avoid paying taxes on your savings all together.

To a degree, I almost see the Roth as a scam.  "Pay taxes now, because you'll still be working at 60 and you sure as hell don't want to pay taxes then at such a high tax bracket!". Scam is a strong word... Maybe asenine is more appropriate.
Asinine for an early retiree (save those who cannot save any taxes by contributing to a tIRA), but for the vast majority, not a bad deal.

There are many people who, whether they know it or not, will be paying a higher tax rate in retirement.  Save 10% and work till 60+ is a way above average retirement plan in this country.

Scandium

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Re: Disadvantages Of The ROTH IRA
« Reply #15 on: February 17, 2016, 07:28:46 AM »
Those points are sort of valid, in some situations. But since we can't deducts tIRA I don't see much disadvantage to putting $5.5k into a Roth, when the only option would be to add that to our taxable account contribution instead. I guess we give up some flexibility, but with only $5k a year I don't think it's a big deal. Guess my view of the Roth is ambivalent/why not. If we have to cut our investment one year I certainly would stop the Roth first though.

Richie

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Re: Disadvantages Of The ROTH IRA
« Reply #16 on: February 17, 2016, 07:46:45 AM »
My Roth IRA has been my saving grace, in regard to making MMM-style finances possible.  While I would love to have the tax deduction (and I might set up a separate Traditional IRA at some point later), the Roth gives me flexibility that I need at this point in life.  I received a major promotion in January, and I'm in a probationary period for six months.  This means they can let me go without warning, if they feel I'm not the right fit for the job.  (After six months, I become vested.)  In addition, I'm kind of just starting out in life, so there are a few major decisions I will have to make within the next five years.  For example, whether I want to rent or purchase a home.  If I decide to purchase a home, having the principle in the Roth that I can withdrawal for a down payment is a comforting option to have.  I should add that using it for this would be plan B, as I have other accounts I'm saving in for this very purpose, but the flexibility in this tumultuous period of my life gives me comfort.

Clean Shaven

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Re: Disadvantages Of The ROTH IRA
« Reply #17 on: February 17, 2016, 07:51:11 AM »
I'd be interested in hearing the anti Roth camp's view of the Roth pipeline strategy discussed on this forum.

Cromacster

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Re: Disadvantages Of The ROTH IRA
« Reply #18 on: February 17, 2016, 08:12:28 AM »
I'd be interested in hearing the anti Roth camp's view of the Roth pipeline strategy discussed on this forum.

The Roth pipeline is a strategy to get money out of an IRA without paying penalties.  It is not really related to whether it is better to invest money in a traditional vs a Roth IRA in the accumulation phase.

dandarc

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Re: Disadvantages Of The ROTH IRA
« Reply #19 on: February 17, 2016, 08:21:13 AM »
I'd be interested in hearing the anti Roth camp's view of the Roth pipeline strategy discussed on this forum.

The Roth pipeline is a strategy to get money out of an IRA without paying penalties.  It is not really related to whether it is better to invest money in a traditional vs a Roth IRA in the accumulation phase.
If anything, being aware of the strategy should be a nudge in the direction of traditional IRA while accumulating.

WildJager

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Re: Disadvantages Of The ROTH IRA
« Reply #20 on: February 22, 2016, 07:21:40 AM »
I'd be interested in hearing the anti Roth camp's view of the Roth pipeline strategy discussed on this forum.

The Roth pipeline is a strategy to get money out of an IRA without paying penalties.  It is not really related to whether it is better to invest money in a traditional vs a Roth IRA in the accumulation phase.
If anything, being aware of the strategy should be a nudge in the direction of traditional IRA while accumulating.

Yes, exactly.  If you have the ability to balance your finances for the long term, starting with traditional, retiring early, and then using a roth pipeline makes all those savings tax free from both ends.  At that point the roth makes sense.  From the get go, not really valid for this community.  The only way to prosper from a roth is if you're not making much when you're young, but then making a lot still at age 60.

trialbyFIRE

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Re: Disadvantages Of The ROTH IRA
« Reply #21 on: February 22, 2016, 12:23:02 PM »
Hi everyone!

I have been doing a lot of reading on tax advantaged investment vehicles (so I hope this is not completely off topic). I did come across one of the links referred to by the OP.

For someone who has maxed out the 18k in tax deferred and cannot take any other deductions due to income, can someone explain the advantage of doing the Roth through a backdoor? I am debating whether or not it makes sense for my fiance and I to both max out our NON-deductible $5,500 into an IRA for an eventual mega backdoor into a Roth.

Any thoughts and comments would be really appreciated!

dandarc

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Re: Disadvantages Of The ROTH IRA
« Reply #22 on: February 22, 2016, 12:42:24 PM »
TBF -

You're talking about a backdoor Roth IRA - not a Mega Backdoor Roth IRA.  Two different techniques.  The backdoor uses your empty (or mostly empty) tIRA as the starting point.  Mega Backdoor uses your 401K as the starting point.

If you cannot deduct, the decision is between the Roth IRA and a taxable account.  Roth IRA has the promise of no future taxation, whereas you'll likely be taxed along the way and upon sale in a taxable account.  There are ways to mitigate taxes in the taxable account, but the Roth comes with a guarantee of paying no taxes on withdrawal, if you follow all the rules.  We make Roth IRA contributions, to the extent that we cannot deduct traditional IRA contributions.  Our income doesn't necessitate a backdoor contribution at this time. 

If you need to do a backdoor Roth IRA, be sure you have no, or a very small amount of tIRA money before you start.

trialbyFIRE

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Re: Disadvantages Of The ROTH IRA
« Reply #23 on: February 22, 2016, 12:50:25 PM »
TBF -

You're talking about a backdoor Roth IRA - not a Mega Backdoor Roth IRA.  Two different techniques.  The backdoor uses your empty (or mostly empty) tIRA as the starting point.  Mega Backdoor uses your 401K as the starting point.

If you cannot deduct, the decision is between the Roth IRA and a taxable account.  Roth IRA has the promise of no future taxation, whereas you'll likely be taxed along the way and upon sale in a taxable account.  There are ways to mitigate taxes in the taxable account, but the Roth comes with a guarantee of paying no taxes on withdrawal, if you follow all the rules.  We make Roth IRA contributions, to the extent that we cannot deduct traditional IRA contributions.  Our income doesn't necessitate a backdoor contribution at this time. 

If you need to do a backdoor Roth IRA, be sure you have no, or a very small amount of tIRA money before you start.

Thank you for clearing that up!

steevven1

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Re: Disadvantages Of The ROTH IRA
« Reply #24 on: February 22, 2016, 10:57:41 PM »
One often-missed advantage of the Roth is that you can withdraw up to all of your contributions (but not earnings) tax-free and penalty-free at ANY TIME, even before age 59.5.

PARedbeard

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Re: Disadvantages Of The ROTH IRA
« Reply #25 on: February 23, 2016, 10:58:54 AM »
I like the ROTH because as a social worker who is married to a grad student, our income is pretty low. Mix that with the fact that 18% of my income (of 27k/yr) goes to my 401k, and it means that we are in a rather low tax bracket. By combining the tax deferred 401k with the upfront ROTH tax costs will allow us to have taxable and non-taxable income once we are retired. I like that.

mizzourah2006

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Re: Disadvantages Of The ROTH IRA
« Reply #26 on: February 24, 2016, 10:53:06 AM »
I contribute to Traditional and 401k until I am in the 15% tax bracket. Once I am below 25% I contribute the remaining to a Roth. One thing he definitely over-generalized is always contributing to your 401k. There are some small businesses that use 401k companies that charge load fees. In that case I would only go 401k to match.

ender

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Re: Disadvantages Of The ROTH IRA
« Reply #27 on: February 25, 2016, 05:25:03 AM »
I contribute to Traditional and 401k until I am in the 15% tax bracket. Once I am below 25% I contribute the remaining to a Roth. One thing he definitely over-generalized is always contributing to your 401k. There are some small businesses that use 401k companies that charge load fees. In that case I would only go 401k to match.

Don't forget to include state taxes in your calculation.

Our federal marginal rate last year was only 15% but our state marginal rate was more than 8%. So our combined marginal rate was still about 23% even though the federal bracket was only 15%.

BBub

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Re: Disadvantages Of The ROTH IRA
« Reply #28 on: February 25, 2016, 06:36:32 AM »
I'm curious. If I was planning to take a huge lump sum from a Roth 457 at retirement to buy an RV sell my house and go nomad would you still think a Roth is stupid?
I'm more like a retire or semi retire at 52 guy, 15-16 years from now. My house will be paid off if we don't jump houses.

I might have to hang around a couple of years for my son to finish high school. It's that or buying a Cessna and getting certified all the way up. Either way spending a lot in one year

A roth will have some limitations, depending on how much you plan to spend.  Before 59.5 you can only take out the contributions without penalty or taxation.

Furthermore, taking a large lump sum out of the roth earlier in life could be sub-optimal since Roth funds are tax sheltered for life.  It makes sense to leave that money to grow tax free as long as possible. 

With a 15 year timeline, it would be pretty easy to save a little on the side to fund this goal.  Stick $300/mo into a total stock fund & you'll likely have close to $100k in 15yrs.  When you quit working you'll have the ability to enjoy tax free dividends & capital gains, even in your taxable account,  if you keep total AGI under $88,500 (assuming married filing jointly, under today's tax code).