The one thing I don't like, or maybe I don't understand, is the Roth IRA.
The Roth IRA, from what I understand, is you pay the taxes now so you don't have to pay them later. The thing is, you're probably in a higher tax bracket now (while working) than when you're retired. So I always thought the Roth IRA wasn't a good idea. I could be wrong tho... I'm no expert.

by the time an investor retires. My independent financial advisor strongly recommends using one to grow money tax free before and during retirement.

Go w/ the Roth now.. imo

By the time I understood it, I could have rolled over, I think.. what I do know is.. if ya have the option, get all the info n go w/ the Roth. I just went along w/ the program at the time. Thankfully, my employer offered it n I’m benefiting now

https://en.m.wikipedia.org/wiki/Roth_IRA

By that I mean money that is your take-home pay from work, if you work under a W-4. So you are right, in that those accounts are funded with money that has already been taxed.

(The same applies if you work under a 1099 or are self employed, as long as your required filings and estimated taxes are up to date)

Fund the account, choose asset classes and securities, your investments grow and it all comes out tax free, with some minor exceptions.

They have several advantages over traditional IRA’s and 401(k)’s (both of those have similar RMD requirements) in that there is no age limit to contribute to them and no mandatory age to begin taking distributions. They also have other advantages when used to pass assets on to heirs.

A thorough reading of IRS Publication 590-A and Publication 590-B can help understand them more completely.

(Sorry in advance for being stupid about this)
When you put $100 in a Roth IRA, and let’s say it grows to $200, when you take that $200 out you aren’t taxed. But if it was a tradition IRA, you’d have to pay income tax on $200 (so the IRA saved you the tax on the accumulated extra $100). Is that right?

Last edited Fri May 13, 2022, 04:27 AM - Edit history (1)

In my example, I chose investing $100 and it gaining $200, so that its easier to keep track of which is what as far as initial investment and gain. And over a 20 year period, a tripling is not a wild pie-in-the-sky amount, a 5.65% average annual return will do that.


ROTH IRA:
Let's say you write a check for $100 to deposit in a Roth IRA account, and over say 20 years it gains $200 tax free, for a total balance of $300 (a tripling)

When you withdraw the $300, it is tax free

TRADITIONAL IRA (TIRA):
Let's say you write a check for $100 for deposit in a Traditional IRA account. You get a tax break of say 25% if your federal + state tax bracket is 25%. Meaning you get a $25 tax break. That can be invested in a regular taxable account. Which is taxed every year, so after taxes it won't triple to $75, but rather grows to $57.36 [1]. This is what's known as the "side account" in Roth vs. Traditional IRA parlance. Many media finance writers and even supposed "experts" shamefully ignore the side account, or don't count its gains.

The Traditional IRA account itself begins with $100 in it, and over the years it gains $200 with no taxation in the meantime, for a total balance of $300.

On withdrawal, if you're still in the 25% tax bracket, you'd pay 25% tax and keep 75% of it: 75%*$300 = $225

Total after tax value : Side account + former TIRA account = $57.36 + $225 = $282.36

==========================================

Anyway, this is one illustration of how a Roth can beat an Traditional IRA (a little bit: $300 vs. $282.36, a 5.9% difference ), even though one's tax bracket is the same throughout the entire period.

If one expects their retirement tax bracket to be lower in retirement, than the Traditional IRA may come out better.

In my case, I've been happily converting small amounts of my Traditional IRA almost every year beginning in 1998, and I'm glad I did, because otherwise the required minimum distributions on my traditional IRA would eventually grow to large amounts, pushing me up a tax bracket or more. That could cause me to also pay higher Medicare premiums and does cause me to pay higher taxes on Social Security income -- two forms of "stealth taxes" that are additional to what one's tax marginal tax rate is according to the tax tables. It also pushes up the amount of my capital gains that are taxed, yet another "stealth tax".

Footnote [1] - A 5.65%/year average annual return triples an untaxed account over 20 years. Unfortunately, the side account, being a regular taxable account, is taxed every year on its gains. Say the marginal tax rate is 25% and thus the after-tax rate of return is 5.65% * (100%-25%) = 4.24%. A dollar that grows at a 4.24% after-tax rate reaches 1.0424^20 = 2.294 (well short of a tripling) over 20 years. $25 in the side account grows to $25*2.294 = $57.36

Disclosure: I'm not a financial or tax professional. I've read a lot, consulted with tax and financial advisers a lot on these darn IRAs, studied conversion calculators and done a lot of analysis, and as an engineer I know math and spreadsheets, but at the end of the day I'm just another message board rando

Edited to make clearer when there is and when there isn't taxation.

I had to read it twice, lol, and will forward it to my husband.

BTW, I had a feeling you were an engineer (I know the type - I have an BEE).

My sister began working regularly in 1973 (born in 1948, got BA and Masters in Education) and when offered a 401k, began contributing a small amount out of every paycheck automatically, maybe $25 each pay period. It went in, she didn't think about, she kind of forgot about the account.

Last December, she got a deposit to her account for $93,000 - she didn't know where it had come from. After calling her credit union, it turned out it was her first mandatory distribution from that 401k. The account she had pretty much forgotten has over two million dollars in it! Now she has a big payment coming every year, more than she ever made working in the school system.

Even without employer matching, it is well worth putting that contribution into a retirement account starting as early as possible in your working career.

each pay period. Even if she only took the standard deduction during those years -- the contributions to tradtitional 401ks and traditional IRAs aren't subject to that. Generally, every dollar contributed to traditional 401ks and traditional IRA is deducted from income. (Well, there are some limits on the IRA contributions, I don't recall the 401k ones, but I know I ended up some years with non-deductible IRA contributions and also I ended up with some after-tax stuff in my 401k stuff that I don't remember how that occurred. )

That's vastly better than my story of a forgotten account that was worth about $300.00 some twenty years later. This was in the early 90's, and that sum financed a trip to a quilt show, so I am not complaining.

The zero coupons reach par at maturity, so there's an inexorable upward pressure on them.

Keep laddering them and you'll keep pace with rising rates.

If zeros become scarce, then 0.125% will be the next best choice to mimic the same behavior.

Once it is in there the gains are tax-free. For that reason, I assume it is the last place I will take money from. Hence, I tend to be more aggressive in my Roth.

I am not licensed to give financial advice.

My financial advisor has pounded that in to me.

My investments with him are in several different places. Two annuities, that I'm collecting from. One Roth IRA, another IRA, and a trust account that I currently take money from. If that last actually gets depleted, I then have the other two IRAs to take from.

Oh, and to help you make some decisions, look at this: https://www.calcxml.com/do/how-long-will-my-money-last

I find it incredibly helpful. Their default assumption is that before tax earnings will be 8%. I always change that to 6%, even though in reality over the long term earnings are close to 10%. But I'd rather underestimate. Looking at that, even in recent market downturns, I'm okay.

I live modestly. I live alone, and even with recent inflation, my expenses are very low. This has a lot to do with being 73, retired, one child and no grandchildren. Yes, I do have a mortgage on my home, but the payment is very affordable.

I have one son, who is my heir. He is actually very well off financially thanks to gifts from grandparents and an inheritance from an uncle. I'm thinking of changing some of my beneficiaries on various accounts to others, nieces and nephews, who could honestly use the money more.

I always used to joke that my son would die a rich man, because his wants and needs are so very modest. That is still true. Which means, I need to think a lot about passing what I have on to others, besides him. I've already put my sister on an insurance policy, which is a start.

Now That I'm retired, those payments are nice and help me a Lot.

If you are young, reinvest em and get that compounded growth.

Einstein called Compound Interest the most powerful force in the universe.

Last edited Mon Sep 26, 2022, 03:05 AM - Edit history (1)

Here’s my take;

Yes, you absolutely can. Some firms even offer a Roth 401(k), so it may behoove you to ask if their custodial firm offers one that you can participate in. It’s not common to have both available from what I understand, but it’s possible.




It most definitely is free money!




You may want to consider placing the bulk of that $200 in the 401(K), primarily because you have a higher contribution limit in that account than you do in the Roth - in your case because of your age, you can put up to $30,000 per year in the 401(k). The IRS announced new contribution limits to retirement plans (IRA’s), and those details can be found here.




Bonds are typically a conservative (as opposed to aggressive) asset class, and US Treasury Securities are about as conservative as you can get. The Ten Year is considered the benchmark, risk-free security worldwide and is currently offering a Coupon of 1.88% and the current quote on Bloomberg is showing the yield at 2.92%, which means the bonds are selling for a discount to Par at 91 1/32, which means they cost ninety one and one thirty second percent of par, or $1000. So a $1000 face value bond will cost you just over $910 and after ten years (provided you bought one recently issued) it will be redeemed for $1000, and you will have received $18.80 per year in interest payments.

How much of an individuals overall retirement account(s) is invested in bonds and how much in equities and other asset classes depends on several factors, the primary one in my opinion is your tolerance for risk. If you absolutely can not stand the idea that your account might go DOWN as well as UP, then the amount should be higher, because well…you don’t like risk! If however, you can handle seeing your balance decrease now and then but also rise with the overall market, then more risk is appropriate. This question can only be answered by you and perhaps an advisor who has your best interest at heart. You can find numerous examples of a “Risk Tolerance Questionnaire” by simply Googling that phrase. If you’ve never taken one, I highly recommend you do. Doing so will help you calculate how your portfolio should be allocated based on your individual tolerance for risk.




I hope what I wrote was of some help.

Absolutely fund at least up to the employee match.

Defined benefit pensions can go away more quickly than people realize. Too many companies fail to fund them properly, or go bankrupt and away goes the pension. My small pension from a job I had in the 1970s is less than one third of what it ought to be. Luckily, I never expected that pension to amount to much, so it doesn't matter for me. But those who worked there 30 or more years and expected that to be the lion's share of their retirement, are now living in near poverty.

So go for it. You won't regret it.