Roth vs. Brokerage

[chad]

Suppose I'm expecting to be in either the 10 or 15 percent tax bracket in retirement, and suppose that I plan to hold all my stock market investments for more than a year. Then doesn't that mean that, if all these stocks are held in a brokerage account, I won't pay any taxes on the gains when I sell them? And, if that's true, then why should I hold the investments in a Roth rather than an Brokerage account? Sorry if this is a dumb question.

[Nothlit]

Will you be in a higher tax bracket between now and retirement? If so, you will likely have to pay taxes on dividends earned in a taxable brokerage account between now and then, vs. no tax on dividends in a tax-sheltered account like a traditional or Roth IRA.

[seattlecyclone]

Suppose I'm expecting to be in either the 10 or 15 percent tax bracket in retirement, and suppose that I plan to hold all my stock market investments for more than a year. Then doesn't that mean that, if all these stocks are held in a brokerage account, I won't pay any taxes on the gains when I sell them? And, if that's true, then why should I hold the investments in a Roth rather than an Brokerage account? Sorry if this is a dumb question.

You won't pay any federal taxes on the gains if you stay in a low tax bracket and Congress doesn't change the tax laws. Those are some pretty big ifs, and ignore state taxes entirely. For reference, the 0% capital gains rate has only been around since 2008. It's hardly a long-running tradition of our tax code. Also remember that if you retire using the 4% rule, chances are high that your investments will grow much larger than what you need, which makes the odds of ending up in a higher tax bracket decidedly higher than zero.

Another thing is that if you're in a higher than 15% bracket while you're working, you'll be paying taxes on the dividends each year until you retire to the lower bracket. That's not so with the Roth account.

[VoteCthulu]

1) So you can hold non-qualified stock funds like international, REIT, etc. without taxes.

2) In case tax laws change for capital gains.

Otherwise, there's not much reason.

[Quidnon?]

I have a big reason to favor a roth ira over a brokerage account; especially if you are young and still single.  Asset protection.

One of the features of just about any retirement account is that they are legally protected savings vehicles, from civil lawsuits (including bankruptcy, I think) but not from the IRS itself.  This might not seem like a big deal, but keep in mind that asset protection and favorable tax treatment are the two main reasons that small businesses become corporations; both of which ira's do for an individual.  Additionally, the ira is intended to be for an individual only; so if you are single and contribute to an ira before getting married, then stop contributing to that one and open a new one while married, the old one can probably be declared a pre-marital asset if there is a divorce.  The second one cannot be, because there were contributions during the marriage; which is why you get a new one.  But another slick trick with the roth ira is that you, individually, can choose to withdraw the contributions for any reason you like, and the IRS considers all your roth ira accounts as a collective whole.  So if you were to contribute $20,000 before marriage to roth #1 and then $30,000 to roth #2, then you ran into a financial crisis and needed $50,000 (for example, Tiny Tim needed that surgery), you could pull the full $50,000 out of roth #2 as long as you have had enough gains in it to cover the full amount.  Thus still leaving your original roth #1 with untouched funds, should the divorce occur later.

[mathjak107]

very good reason for a roth over a brokerage account .

when you spend down the tax rate is separate from your income level .  all the things you get hammered on in retirement like getting your social security taxed , getting an aca subsidy , rmd's , what you pay as a medicare premium are all income driven . all that stuff at zero capital gains tax still counts as magi calculated income .

[chad]

Thanks for all the answers. It looks very likely to me that I'll never face any federal taxes on my investment income given my level of income (and, once I pay off my house, my expenses will go down further, which makes it even easier to get by on less income). And I have enough money already in my IRAs already that I can hold any tax disadvantageous investments in them that I want. So the main benefits to me, assuming I'm right that my income stays at 15% bracket or lower, are that

I avoid state taxes (in my case 3.4%) on the gains,
I get some asset protection,
I have protection against possible future tax increases.

I also thought of one other benefit: the savers credit, which was worth $400 to me last year. I guess when I add all that up it seems worth it, but it isn't obvious that it's worth it!