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(Bloomberg)   All those articles and advertisements telling you how important it is to convert your 401K to an IRA as soon as you leave the company? Yeah, about that   (bloomberg.com) divider line 68
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2423 clicks; posted to Business » on 17 Jun 2014 at 2:32 PM (10 weeks ago)   |  Favorite    |   share:  Share on Twitter share via Email Share on Facebook   more»



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2014-06-17 08:41:52 AM
You should roll your 401k over. What these guys did wrong was, they bought what a broker was selling. Don't ever buy what a broker is selling. That's the rule people should follow.
 
2014-06-17 08:44:46 AM
Those fish were going to get caught anyway.
 
2014-06-17 12:03:55 PM
Once again, the conservative sandwich-heavy portfolio pays off for the hungry investor.
 
2014-06-17 12:20:32 PM
This article is written to take advantage of the financially ignorant.

whether it be a 401K or IRA, all that means is the tax-deferred status of the financial account.  The tax-deferred status of an account is wholly separate from the type of investment the account makes.  And in fact, 401K's and IRA have substantially similar tax-deferred statuses (assuming neither is a Roth).  You can't lose 70% of the value of an account just because you switched it from a 401K to an IRA.  Now if these financial managers were telling people to turn their retirement accounts into non-tax deferred accounts before they hit their retirement age, making them pay penalties, then that would be an issue.

What probably happened is that these financial managers convinced people to switch from investments in lower risk mutual funds to individual high risk stocks.  and it doesn't matter if your tax treatment is ira, roth ira, taxable or whatever, switching from a low risk diversified portfolio to a high risk non diversified portfolio is always, well, much more risky.
 
2014-06-17 01:00:04 PM
Chances are, you'll change jobs several times over the course of your career. In fact, the average US employee switches jobs 11 times before retiring. That means employees may participate in 11 different 401(k)s or other retirement savings plans during a career.

Fortunately, 401(k) plans are portable. If you switch jobs before retirement, you usually can choose among several things to do with your 401(k):
leave the money in your former employer's plan;
roll over the money to your new employer's plan, if the plan accepts transfers;
roll over the money into an IRA; or
take the cash value of your account.

With the first three alternatives, you won't lose the contributions you've made, your employer's contributions if you're vested, or earnings you've accumulated in your old 401(k). And, your money will maintain its tax-deferred status until you withdraw it.
 
2014-06-17 02:39:23 PM

serial_crusher: Once again, the conservative sandwich-heavy portfolio pays off for the hungry investor.


Once again, someone with limited knowledge of tax-deferred investment vehicles imagines there's a political point to be scored.
 
2014-06-17 02:43:47 PM
I'd say a Roth IRA is pretty worthless for most workers, because their taxable income will be a lower when they are retired, so they wind up paying higher income taxes now than they would during retirement. Also, when you add in inflation and the opportunity cost of not having the money saved on current taxes available to invest or pay off debts, you get screwed even more because the money save now is worth more than money you will save 40 years from now.

Sure the Roth IRA gives you a little more money to play with in your golden years if you are bad about saving, but unless you for some reason expect to be making more income during retirement than you are now, the math really doesn't add up for the 99%.
 
2014-06-17 02:45:35 PM

rumpelstiltskin: You should roll your 401k over. What these guys did wrong was, they bought what a broker was selling. Don't ever buy what a broker is selling. That's the rule people should follow.


Exactly. IIRC, you can roll over your 401k to an IRA and park it in a MMA making diddly squat until you decide what to do with it. Or, you can do what these people did and roll it into an IRA and invest in risky products that reward the broker.
 
2014-06-17 02:46:22 PM

GoldSpider: serial_crusher: Once again, the conservative sandwich-heavy portfolio pays off for the hungry investor.

Once again, someone with limited knowledge of tax-deferred investment vehicles imagines there's a political point to be scored.


It's a Futurama quote.
 
2014-06-17 02:52:32 PM

Mitch Taylor's Bro: It's a Futurama quote.


My post was bad then, and I should feel bad  :(
 
2014-06-17 03:00:43 PM
I'm gathering this reinforces the 'Don't trust anyone' rule of finances.
 
2014-06-17 03:02:08 PM

Mad_Radhu: I'd say a Roth IRA is pretty worthless for most workers, because their taxable income will be a lower when they are retired, so they wind up paying higher income taxes now than they would during retirement. Also, when you add in inflation and the opportunity cost of not having the money saved on current taxes available to invest or pay off debts, you get screwed even more because the money save now is worth more than money you will save 40 years from now.

Sure the Roth IRA gives you a little more money to play with in your golden years if you are bad about saving, but unless you for some reason expect to be making more income during retirement than you are now, the math really doesn't add up for the 99%.


The other argument for a Roth IRA is that you expect tax rates to go up in the future, rather than down. Looking at the state of this country, I'd say that's a pretty good bet.
 
2014-06-17 03:12:41 PM

the_vicious_fez: Mad_Radhu: I'd say a Roth IRA is pretty worthless for most workers, because their taxable income will be a lower when they are retired, so they wind up paying higher income taxes now than they would during retirement. Also, when you add in inflation and the opportunity cost of not having the money saved on current taxes available to invest or pay off debts, you get screwed even more because the money save now is worth more than money you will save 40 years from now.

Sure the Roth IRA gives you a little more money to play with in your golden years if you are bad about saving, but unless you for some reason expect to be making more income during retirement than you are now, the math really doesn't add up for the 99%.

The other argument for a Roth IRA is that you expect tax rates to go up in the future, rather than down. Looking at the state of this country, I'd say that's a pretty good bet.


I have considered that as well, but I make six figures now, putting me in one of the higher brackets. I am pretty sure I will be in one of the lowest brackets in retirement. I not a mathamagician but I am pretty sure I will benefit more from dropping pre-tax dollars in the account and getting taxed later.
 
2014-06-17 03:15:03 PM

Mad_Radhu: I'd say a Roth IRA is pretty worthless for most workers, because their taxable income will be a lower when they are retired, so they wind up paying higher income taxes now than they would during retirement. Also, when you add in inflation and the opportunity cost of not having the money saved on current taxes available to invest or pay off debts, you get screwed even more because the money save now is worth more than money you will save 40 years from now.

Sure the Roth IRA gives you a little more money to play with in your golden years if you are bad about saving, but unless you for some reason expect to be making more income during retirement than you are now, the math really doesn't add up for the 99%.


Another benefit of 401k is that you don't pay taxes on what you contribute, so it's double good. Then again, if your mutual fund selections suck, then Roth may be better (after you go up to the match amount). Obviously both are best
 
2014-06-17 03:21:12 PM
"I am a minister's daughter and granddaughter.

I've learned over the years that the kind of person who makes this statement is the kind of person you need to look out for.

Before you accuse me of oppressing you, it's not about her being a Christian.
 
2014-06-17 03:24:05 PM

machoprogrammer: Mad_Radhu: I'd say a Roth IRA is pretty worthless for most workers, because their taxable income will be a lower when they are retired, so they wind up paying higher income taxes now than they would during retirement. Also, when you add in inflation and the opportunity cost of not having the money saved on current taxes available to invest or pay off debts, you get screwed even more because the money save now is worth more than money you will save 40 years from now.

Sure the Roth IRA gives you a little more money to play with in your golden years if you are bad about saving, but unless you for some reason expect to be making more income during retirement than you are now, the math really doesn't add up for the 99%.

Another benefit of 401k is that you don't pay taxes on what you contribute, so it's double good. Then again, if your mutual fund selections suck, then Roth may be better (after you go up to the match amount). Obviously both are best


You do pay taxes on what you contribute to 401k. You just pay them at withdrawal. I'm sure you already knew that but thought I'd mention it anyway.
 
2014-06-17 03:32:21 PM

jst3p: the_vicious_fez: Mad_Radhu: I'd say a Roth IRA is pretty worthless for most workers, because their taxable income will be a lower when they are retired, so they wind up paying higher income taxes now than they would during retirement. Also, when you add in inflation and the opportunity cost of not having the money saved on current taxes available to invest or pay off debts, you get screwed even more because the money save now is worth more than money you will save 40 years from now.

Sure the Roth IRA gives you a little more money to play with in your golden years if you are bad about saving, but unless you for some reason expect to be making more income during retirement than you are now, the math really doesn't add up for the 99%.

The other argument for a Roth IRA is that you expect tax rates to go up in the future, rather than down. Looking at the state of this country, I'd say that's a pretty good bet.

I have considered that as well, but I make six figures now, putting me in one of the higher brackets. I am pretty sure I will be in one of the lowest brackets in retirement. I not a mathamagician but I am pretty sure I will benefit more from dropping pre-tax dollars in the account and getting taxed later.


I'm financially right now in the same boat as you.  The state of the country has told me that taxes have needed to go up for 10 years, but they haven't and based on past performance I'm not certain they will just because they "have" to.  My retirement income will be at most 80% of my working income so I'm tax-deferring now and paying later.  I could get by on 40% of my working income depending on where I decide to live, but right now I'm aiming for something good.
 
2014-06-17 03:37:11 PM

JohnBigBootay: machoprogrammer: Mad_Radhu: I'd say a Roth IRA is pretty worthless for most workers, because their taxable income will be a lower when they are retired, so they wind up paying higher income taxes now than they would during retirement. Also, when you add in inflation and the opportunity cost of not having the money saved on current taxes available to invest or pay off debts, you get screwed even more because the money save now is worth more than money you will save 40 years from now.

Sure the Roth IRA gives you a little more money to play with in your golden years if you are bad about saving, but unless you for some reason expect to be making more income during retirement than you are now, the math really doesn't add up for the 99%.

Another benefit of 401k is that you don't pay taxes on what you contribute, so it's double good. Then again, if your mutual fund selections suck, then Roth may be better (after you go up to the match amount). Obviously both are best

You do pay taxes on what you contribute to 401k. You just pay them at withdrawal. I'm sure you already knew that but thought I'd mention it anyway.


Yep but since you didn't pay it now, if you are in a lower bracket later, it's better because you can lower your tax bracket now, too.
 
2014-06-17 03:38:54 PM
"It's scary," said Maria Lew, a former AT&T administrative assistant and Tarr client whose account balance has fallen to $100,000 from $390,000. She fears she will lose her home, and her kitchen ceiling has a gaping hole because of a leak that will strain her budget to fix. "There are days when I go to sleep and I can't stop thinking about it."

I feel real bad for a person who only has $100,000 but won't fix their roof. I bet she pays Comcast $187 a month or more.
 
2014-06-17 03:39:20 PM
So basically, "All those articles and advertisements telling you how important it is to wear a seat belt? Yeah, about that."

Then in TFA it explains that wrapping it around your throat several times might cause you some trouble.
 
2014-06-17 03:45:20 PM

machoprogrammer: JohnBigBootay: machoprogrammer: Mad_Radhu: I'd say a Roth IRA is pretty worthless for most workers, because their taxable income will be a lower when they are retired, so they wind up paying higher income taxes now than they would during retirement. Also, when you add in inflation and the opportunity cost of not having the money saved on current taxes available to invest or pay off debts, you get screwed even more because the money save now is worth more than money you will save 40 years from now.

Sure the Roth IRA gives you a little more money to play with in your golden years if you are bad about saving, but unless you for some reason expect to be making more income during retirement than you are now, the math really doesn't add up for the 99%.

Another benefit of 401k is that you don't pay taxes on what you contribute, so it's double good. Then again, if your mutual fund selections suck, then Roth may be better (after you go up to the match amount). Obviously both are best

You do pay taxes on what you contribute to 401k. You just pay them at withdrawal. I'm sure you already knew that but thought I'd mention it anyway.

Yep but since you didn't pay it now, if you are in a lower bracket later, it's better because you can lower your tax bracket now, too.


I rolled my 401K into an IRA several years ago, at which point my CPA and financial planner both recommended a Roth IRA.  My game plan was to cash flow the conversion, whereby I rolled a limited amount from the traditional to the Roth each year and pay the taxes owed at filing rather than having the taxes withheld.  I just recently reviewed everything and decided to stop doing that, as I could have had my house paid off by next year if I had not rolled anything over into the Roth.
 
2014-06-17 03:53:04 PM
TFA: You're going into the wild, wild west when you take your money out of a 401(k) and put it into an IRA," said Karen Friedman, executive vice president and policy director of the Pension Rights Center, a Washington-based group representing retirees

Aaw, geez, not her again!

Look, when you leave a company, you can either (a) leave it in the company's 401(k) and be stuck with whatever miniscule selection of funds your plan administrator had availble to you, (b) roll it over into an IRA, or (c) take it out and pay full taxes on it, plus a 10% penalty if you're under the age limit. Option (c) is almost always an act of financial suicide, so let's just cross that off the list right away.

That leaves you with the options of keeping the funds in the 401(k) or rolling it over into an IRA. If you like the funds you had in your old 401(k), you can still roll it over into an IRA and continue to hold them. If, as Ms. Friedman herself suggested the other day, the selection of funds in a 401(k) is characterized by high fees, then I argue that rolling the 401(k) into an IRA is the most effective way to escape those fees. Schwab, E*Trade, Fidelity, the whole discount brokerage ecosystem, wil be more than happy to let you buy anything you want, including index funds or ETFs that are characterized by minimal management fees.

Looking at the way the typical 401(k) is managed at a smaller business, it's handled by some RandomEmployeeBenefitsRetirementPlans.com with a rinky-dink website that's merely a wrapper to assign the various portions of the 401(k) pool (employee contributions, employer match, vesting, etc...) that are assigned to each worker. I've had much better customer service calling a real broker than some 10-person employee benefits organization in East Bumfarkistan, Missouri. That's fine, because these organizations exist for the convenience of the HR department and the maze of compliance issues that surround 401(k)s, but although they provide an invaluable service to benefits administrator, they're not designed to serve the needs of investors.

When you leave a job, why keep the middleman unless you really like making extra paperwork for your old company's HR department? Just roll it into a IRA at a suitably large investment house. You're no more and no less on-your-own with an account Schwab or Fidelity or E*Trade as you were in the 401(k). Yes, the paradox of choice can seem daunting at first, but it beats the alternative of being stuck with a limited set of funds chosen by your company's HR department.

The problem with retirement security in North America isn't the fees or the investments, it's the low level of financial literacy amongst the general populace. It should start in primary school and be continued as a requirement through high school, and I don't have a very good solution for delivering ongoing financial education during one's career years. Having the company provide resources to the employees would be helpful start, but it's not a full solution. Having someone show up in a suit to talk about money in order to shield the company from liability tends to lead to the level of employee engagement associated with annual sexual harassment training. Companies should strive to do better than that, but if they don't, the only fallback is to teach financial literacy to everyone, long before they enter the workforce.
 
2014-06-17 03:54:54 PM

Gary-L: machoprogrammer: JohnBigBootay: machoprogrammer: Mad_Radhu: I'd say a Roth IRA is pretty worthless for most workers, because their taxable income will be a lower when they are retired, so they wind up paying higher income taxes now than they would during retirement. Also, when you add in inflation and the opportunity cost of not having the money saved on current taxes available to invest or pay off debts, you get screwed even more because the money save now is worth more than money you will save 40 years from now.

Sure the Roth IRA gives you a little more money to play with in your golden years if you are bad about saving, but unless you for some reason expect to be making more income during retirement than you are now, the math really doesn't add up for the 99%.

Another benefit of 401k is that you don't pay taxes on what you contribute, so it's double good. Then again, if your mutual fund selections suck, then Roth may be better (after you go up to the match amount). Obviously both are best

You do pay taxes on what you contribute to 401k. You just pay them at withdrawal. I'm sure you already knew that but thought I'd mention it anyway.

Yep but since you didn't pay it now, if you are in a lower bracket later, it's better because you can lower your tax bracket now, too.

I rolled my 401K into an IRA several years ago, at which point my CPA and financial planner both recommended a Roth IRA.  My game plan was to cash flow the conversion, whereby I rolled a limited amount from the traditional to the Roth each year and pay the taxes owed at filing rather than having the taxes withheld.  I just recently reviewed everything and decided to stop doing that, as I could have had my house paid off by next year if I had not rolled anything over into the Roth.


It is one of the things I disagree with Dave Ramsey about.

http://www.bankrate.com/calculators/retirement/401-k-or-roth-ira-cal cu lator.aspx

That calculator shows that, in my situation, the traditional is always better for me than the Roth.

Then again I could be missing something.
 
2014-06-17 03:57:33 PM

Twilight Farkle: TFA: You're going into the wild, wild west when you take your money out of a 401(k) and put it into an IRA," said Karen Friedman, executive vice president and policy director of the Pension Rights Center, a Washington-based group representing retirees

Aaw, geez, not her again!

Look, when you leave a company, you can either (a) leave it in the company's 401(k) and be stuck with whatever miniscule selection of funds your plan administrator had availble to you, (b) roll it over into an IRA, or (c) take it out and pay full taxes on it, plus a 10% penalty if you're under the age limit. Option (c) is almost always an act of financial suicide, so let's just cross that off the list right away.

That leaves you with the options of keeping the funds in the 401(k) or rolling it over into an IRA. If you like the funds you had in your old 401(k), you can still roll it over into an IRA and continue to hold them. If, as Ms. Friedman herself suggested the other day, the selection of funds in a 401(k) is characterized by high fees, then I argue that rolling the 401(k) into an IRA is the most effective way to escape those fees. Schwab, E*Trade, Fidelity, the whole discount brokerage ecosystem, wil be more than happy to let you buy anything you want, including index funds or ETFs that are characterized by minimal management fees.

Looking at the way the typical 401(k) is managed at a smaller business, it's handled by some RandomEmployeeBenefitsRetirementPlans.com with a rinky-dink website that's merely a wrapper to assign the various portions of the 401(k) pool (employee contributions, employer match, vesting, etc...) that are assigned to each worker. I've had much better customer service calling a real broker than some 10-person employee benefits organization in East Bumfarkistan, Missouri. That's fine, because these organizations exist for the convenience of the HR department and the maze of compliance issues that surround 401(k)s, but although they provide an invaluable service t ...


Yeah, she's a farking moran. It's no more "wild west" to put your funds in Fidelity, Vanguard, Schwab, etc... than to keep them where they are .If you choose a mutual fund and don't buy individual stocks, the only way you lose everything is if Wall Street collapses (or some other very unlikely scenario), in which case you have other things to worry about
 
2014-06-17 04:02:11 PM

Rapmaster2000: "I am a minister's daughter and granddaughter.

I've learned over the years that the kind of person who makes this statement is the kind of person you need to look out for.

Before you accuse me of oppressing you, it's not about her being a Christian.


yeah, sounds like that minister has some issues.
 
2014-06-17 04:14:39 PM
Most people spend more time planning their meals in a single day than they spend planning for their retirement in the whole year.
 
2014-06-17 04:16:55 PM

skrame: "It's scary," said Maria Lew, a former AT&T administrative assistant and Tarr client whose account balance has fallen to $100,000 from $390,000. She fears she will lose her home, and her kitchen ceiling has a gaping hole because of a leak that will strain her budget to fix. "There are days when I go to sleep and I can't stop thinking about it."

I feel real bad for a person who only has $100,000 but won't fix their roof. I bet she pays Comcast $187 a month or more.


Just curious, how much money do you think you'll need to save for retirement?
 
2014-06-17 04:17:07 PM

the_vicious_fez: Mad_Radhu:

The other argument for a Roth IRA is that you expect tax rates to go up in the future, rather than down. Looking at the state of this country, I'd say that's a pretty good bet.



The best idea is to Max out contributions to both a Roth and Traditional(IRA)\401k.
 
2014-06-17 04:17:34 PM

jst3p: the_vicious_fez: Mad_Radhu: I'd say a Roth IRA is pretty worthless for most workers, because their taxable income will be a lower when they are retired, so they wind up paying higher income taxes now than they would during retirement. Also, when you add in inflation and the opportunity cost of not having the money saved on current taxes available to invest or pay off debts, you get screwed even more because the money save now is worth more than money you will save 40 years from now.

Sure the Roth IRA gives you a little more money to play with in your golden years if you are bad about saving, but unless you for some reason expect to be making more income during retirement than you are now, the math really doesn't add up for the 99%.

The other argument for a Roth IRA is that you expect tax rates to go up in the future, rather than down. Looking at the state of this country, I'd say that's a pretty good bet.

I have considered that as well, but I make six figures now, putting me in one of the higher brackets. I am pretty sure I will be in one of the lowest brackets in retirement. I not a mathamagician but I am pretty sure I will benefit more from dropping pre-tax dollars in the account and getting taxed later.


Your age (actually the time you are going to let it collect interest) matters too. If you max out an IRA this year with $5500 and let it sit for 40 years earning an average of 7%, it will grow to be over $82k. For a Roth, you would be paying taxes on the $5500. For a traditional, you would be paying taxes on the $82k. Even if you are in a lower bracket when you retire, you would still end up paying more in taxes.
 
2014-06-17 04:20:29 PM

TheManMythLegend: the_vicious_fez: Mad_Radhu:

The other argument for a Roth IRA is that you expect tax rates to go up in the future, rather than down. Looking at the state of this country, I'd say that's a pretty good bet.


The best idea is to Max out contributions to both a Roth and Traditional(IRA)\401k.


I wonder what percentage of the population can afford to do that.
 
2014-06-17 04:27:36 PM

jst3p: TheManMythLegend: the_vicious_fez: Mad_Radhu:

The other argument for a Roth IRA is that you expect tax rates to go up in the future, rather than down. Looking at the state of this country, I'd say that's a pretty good bet.


The best idea is to Max out contributions to both a Roth and Traditional(IRA)\401k.

I wonder what percentage of the population can afford to do that.


I would bet more can afford it than actually do it,  but they probably have a nice Escalade to Tahoe with custom rims instead.
 
2014-06-17 04:39:26 PM

TheManMythLegend: jst3p: TheManMythLegend: the_vicious_fez: Mad_Radhu:

The other argument for a Roth IRA is that you expect tax rates to go up in the future, rather than down. Looking at the state of this country, I'd say that's a pretty good bet.


The best idea is to Max out contributions to both a Roth and Traditional(IRA)\401k.

I wonder what percentage of the population can afford to do that.

I would bet more can afford it than actually do it,  but they probably have a nice Escalade to Tahoe with custom rims instead.


Well of course more could afford it than actually do it.  Some of these people may be buying a better home or choosing to life insurance, 529s, or Coverdales for their children.  There are a billion reasons people could be doing this besides the cliche'd "Escalades and new iPhones and cruises" trope.

This is about as useful as the "cut down on your coffee from Starbucks every day" tip that comes out in every recession.
 
2014-06-17 04:44:30 PM

Rapmaster2000: TheManMythLegend: jst3p: TheManMythLegend: the_vicious_fez: Mad_Radhu:

The other argument for a Roth IRA is that you expect tax rates to go up in the future, rather than down. Looking at the state of this country, I'd say that's a pretty good bet.


The best idea is to Max out contributions to both a Roth and Traditional(IRA)\401k.

I wonder what percentage of the population can afford to do that.

I would bet more can afford it than actually do it,  but they probably have a nice Escalade to Tahoe with custom rims instead.

Well of course more could afford it than actually do it.  Some of these people may be buying a better home or choosing to life insurance, 529s, or Coverdales for their children.  There are a billion reasons people could be doing this besides the cliche'd "Escalades and new iPhones and cruises" trope.

This is about as useful as the "cut down on your coffee from Starbucks every day" tip that comes out in every recession.



A 529 would be a bad idea unless one is already maxing out their IRA's and Roths,  as the money from a Roth can be prematurely withdrawn for the education of oneself or one's children's education.
 
2014-06-17 04:45:33 PM

TheManMythLegend: I would bet more can afford it than actually do it,  but they probably have a nice Escalade to Tahoe with custom rims instead.


I would also bet that there aren't very many people who can't afford it, but are doing it anyway.
 
2014-06-17 05:04:47 PM

umad: Your age (actually the time you are going to let it collect interest) matters too. If you max out an IRA this year with $5500 and let it sit for 40 years earning an average of 7%, it will grow to be over $82k. For a Roth, you would be paying taxes on the $5500. For a traditional, you would be paying taxes on the $82k. Even if you are in a lower bracket when you retire, you would still end up paying more in taxes.


I think you inverted the Roth rule.

For the traditional, you pay taxes on $82k as you take it out after retirement.

For the Roth you get your $5500 back unburdened, and pay taxes on the remaining $76.5k as you take it out after retirement.

Only if your taxes on the $5500 now are less than on the $5500 after retirement does the Roth make more money.

The advantage of the Roth is liquidity of contributions. You could take your $5500 out penalty-free before retirement to fix your car.
 
2014-06-17 05:08:22 PM
thrasherrRoth you get your $5500 back unburdened, and pay taxes on the remaining $76.5k as you take it out after retirement.

That is incorrect.
 
2014-06-17 05:14:44 PM

thrasherrr: umad: Your age (actually the time you are going to let it collect interest) matters too. If you max out an IRA this year with $5500 and let it sit for 40 years earning an average of 7%, it will grow to be over $82k. For a Roth, you would be paying taxes on the $5500. For a traditional, you would be paying taxes on the $82k. Even if you are in a lower bracket when you retire, you would still end up paying more in taxes.

I think you inverted the Roth rule.

For the traditional, you pay taxes on $82k as you take it out after retirement.

For the Roth you get your $5500 back unburdened, and pay taxes on the remaining $76.5k as you take it out after retirement.

Only if your taxes on the $5500 now are less than on the $5500 after retirement does the Roth make more money.

The advantage of the Roth is liquidity of contributions. You could take your $5500 out penalty-free before retirement to fix your car.


Nope. Roth is taxed up front with no taxes on withdrawals. Traditional is tax free up front with taxed withdrawals.
 
2014-06-17 05:22:03 PM

machoprogrammer: It's no more "wild west" to put your funds in Fidelity, Vanguard, Schwab, etc... than to keep them where they are .If you choose a mutual fund and don't buy individual stocks, the only way you lose everything is if Wall Street collapses (or some other very unlikely scenario), in which case you have other things to worry about


True.

I can see her point, though, in that when you take off the training wheels of choosing from an administrator-curated list of 10-15 funds, and get a real brokerage account, it is a bit of a wild-west experience. For every employee who picks some index funds, a bond fund or two, and/or some cash, there'll be someone who hears about the latest hot stock tip at the water cooler, and will suddenly realize they can buy that too.

She also raised a valuable point that there's a difference between a fiduciary (who is obliged to place the client's best interest first), and everyone else, who are held only to the lower standard of "suitable" investments. No broker is going to act a fiduciary for $10/trade as there aren't even any humans in the loop, but the old way of calling a sell-side broker on the phone and $100/trade wasn't much better. For investors who need advice, there's merit to considering fee-only advisors (who receive no commissions) over fee-based advisors (who may be compensated by a combination of fees and commissions), but once again we end up coming back to financial literacy: there are dozens of designations for advisors, planners, and each comes with its own set of regulatory standards. These people can all provide value, but prospective clients must first be at a level of financial literacy where they can make an informed decision as to what type of advisory service is best for them. Catch-22.
 
2014-06-17 05:24:23 PM

the_vicious_fez: Mad_Radhu: I'd say a Roth IRA is pretty worthless for most workers, because their taxable income will be a lower when they are retired, so they wind up paying higher income taxes now than they would during retirement. Also, when you add in inflation and the opportunity cost of not having the money saved on current taxes available to invest or pay off debts, you get screwed even more because the money save now is worth more than money you will save 40 years from now.

Sure the Roth IRA gives you a little more money to play with in your golden years if you are bad about saving, but unless you for some reason expect to be making more income during retirement than you are now, the math really doesn't add up for the 99%.

The other argument for a Roth IRA is that you expect tax rates to go up in the future, rather than down. Looking at the state of this country, I'd say that's a pretty good bet.


Your not Mitt Romney.
 
2014-06-17 05:29:08 PM
Rule #1:  Don't be a dumbass about your money.  Educate yourself.  If one of these douchebags tried to talk you out of the money in your wallet you would tell them to pound sand.  Why is a 401(k) any different?  Otherwise, start getting a taste for Tender Vittles early.

Rule #2:  There is no other rule.
 
2014-06-17 05:53:02 PM

umad: jst3p: the_vicious_fez: Mad_Radhu: I'd say a Roth IRA is pretty worthless for most workers, because their taxable income will be a lower when they are retired, so they wind up paying higher income taxes now than they would during retirement. Also, when you add in inflation and the opportunity cost of not having the money saved on current taxes available to invest or pay off debts, you get screwed even more because the money save now is worth more than money you will save 40 years from now.

Sure the Roth IRA gives you a little more money to play with in your golden years if you are bad about saving, but unless you for some reason expect to be making more income during retirement than you are now, the math really doesn't add up for the 99%.

The other argument for a Roth IRA is that you expect tax rates to go up in the future, rather than down. Looking at the state of this country, I'd say that's a pretty good bet.

I have considered that as well, but I make six figures now, putting me in one of the higher brackets. I am pretty sure I will be in one of the lowest brackets in retirement. I not a mathamagician but I am pretty sure I will benefit more from dropping pre-tax dollars in the account and getting taxed later.

Your age (actually the time you are going to let it collect interest) matters too. If you max out an IRA this year with $5500 and let it sit for 40 years earning an average of 7%, it will grow to be over $82k. For a Roth, you would be paying taxes on the $5500. For a traditional, you would be paying taxes on the $82k. Even if you are in a lower bracket when you retire, you would still end up paying more in taxes.


A big assumption would be the laws are never changed to make Roth IRAs taxable.

Remember back when Social Security income was not taxed?
 
2014-06-17 06:05:49 PM

HempHead: the_vicious_fez: Mad_Radhu: I'd say a Roth IRA is pretty worthless for most workers, because their taxable income will be a lower when they are retired, so they wind up paying higher income taxes now than they would during retirement. Also, when you add in inflation and the opportunity cost of not having the money saved on current taxes available to invest or pay off debts, you get screwed even more because the money save now is worth more than money you will save 40 years from now.

Sure the Roth IRA gives you a little more money to play with in your golden years if you are bad about saving, but unless you for some reason expect to be making more income during retirement than you are now, the math really doesn't add up for the 99%.

The other argument for a Roth IRA is that you expect tax rates to go up in the future, rather than down. Looking at the state of this country, I'd say that's a pretty good bet.

Your not Mitt Romney.


Thank god for that.
 
2014-06-17 06:23:57 PM

HempHead: A big assumption would be the laws are never changed to make Roth IRAs taxable.

Remember back when Social Security income was not taxed?


And they could raise the income tax on traditional IRA withdrawals to 90%. What is your point? Everything is an assumption when you are talking about 40 years out. Nobody knows what the income tax rates will be. Nobody knows if the IRA laws will be changed. Nobody knows if they will even be alive then.

You play by the rules you are given. If they change tomorrow, then you change your strategy tomorrow. As it is now, you can tax-advantage $5500 in an IRA and $17500 in a 401(k) per year. Everyone who qualifies should do the former, and do their best to do the latter. Roth vs. traditional doesn't matter as long as you just do it.
 
2014-06-17 06:46:37 PM
One reason not to convert is if your 401K has a "guaranteed income" fund. It is a bond fund that the provided has insured so that the share price never falls but always grows, so you always gain income and the principle never falls. I don't think you can find those outside of 401Ks, especially with low fees.
 
2014-06-17 07:14:14 PM

jst3p: I have considered that as well, but I make six figures now, putting me in one of the higher brackets. I am pretty sure I will be in one of the lowest brackets in retirement. I not a mathamagician but I am pretty sure I will benefit more from dropping pre-tax dollars in the account and getting taxed later.


Probably.  Very probably.

There are conceivable situations where you'd actually want Roth money, even if you think your bracket will be lower.  Consider the subsidy model under Obamacare.  Your health premiums have a fixed cap (i.e., rest is subsidized) if your '1040 income' is below 400% of the poverty line.

Withdrawals from a Roth IRA aren't, by that measure anyway, income.  If you're considering retiring before 65 (before Medicare eligibility, but while your insurance premiums are high) it would behoove you to try and manipulate your household income to 399% of the poverty line.  Being able to tap Roth money can help you make those kinds of strategic moves.

Basically, I look at it like asset classes.  Diversification is good.  So is some diversification between pre-tax and after-tax retirement savings.
 
2014-06-17 08:05:39 PM

umad: HempHead: A big assumption would be the laws are never changed to make Roth IRAs taxable.

Remember back when Social Security income was not taxed?

And they could raise the income tax on traditional IRA withdrawals to 90%. What is your point? Everything is an assumption when you are talking about 40 years out. Nobody knows what the income tax rates will be. Nobody knows if the IRA laws will be changed. Nobody knows if they will even be alive then.

You play by the rules you are given. If they change tomorrow, then you change your strategy tomorrow. As it is now, you can tax-advantage $5500 in an IRA and $17500 in a 401(k) per year. Everyone who qualifies should do the former, and do their best to do the latter. Roth vs. traditional doesn't matter as long as you just do it.




Of course, most people using Roth's are assuming that there will be higher tax rates in the future.
 
2014-06-17 08:21:33 PM

TedCruz'sCrazyDad: Of course, most people using Roth's are assuming that there will be higher tax rates in the future.


I see a good reason to go Roth for the first few years of your career just because of the time it will be collecting interest, regardless of what happens with the tax rates. It should have enough time to grow to make up for the extra initial cost of the taxes. Still, I would advise against doing Roth unless you are already putting in the federal limit. Otherwise, those dollars you are spending on taxes up front could be put toward that limit in a traditional.
 
2014-06-17 08:21:40 PM

umad: thrasherrr: umad: Your age (actually the time you are going to let it collect interest) matters too. If you max out an IRA this year with $5500 and let it sit for 40 years earning an average of 7%, it will grow to be over $82k. For a Roth, you would be paying taxes on the $5500. For a traditional, you would be paying taxes on the $82k. Even if you are in a lower bracket when you retire, you would still end up paying more in taxes.

I think you inverted the Roth rule.

For the traditional, you pay taxes on $82k as you take it out after retirement.

For the Roth you get your $5500 back unburdened, and pay taxes on the remaining $76.5k as you take it out after retirement.

Only if your taxes on the $5500 now are less than on the $5500 after retirement does the Roth make more money.

The advantage of the Roth is liquidity of contributions. You could take your $5500 out penalty-free before retirement to fix your car.

Nope. Roth is taxed up front with no taxes on withdrawals. Traditional is tax free up front with taxed withdrawals.


I stand corrected, after now having time to read IRS.gov.  Sadly, I checked three 'finance for stupids' type sources before replying before, and they all wrongly say that Roth growth is taxed.

/No wonder people are confused.
//Off to send complaints to some webmasters
 
2014-06-17 08:22:15 PM
TedCruz'sCrazyDad:
Of course, most people using Roth's are assuming that there will be higher tax rates in the future.

Or just hedging their bets.  I put about a third in a Roth and the rest in a traditional 401k.  Most likely my retirement tax rate will be lower but even so I won't have lost much.  If we go full socialism I'll be a little better off.  If I get sold off for soylent green hopefully someone will use the money for a kegger.
 
2014-06-17 08:42:00 PM
Step 1: Roll your 401(k) into an IRA at a well known discount broker (Vanguard, Schwab, Etrade, etc.).

Step 2: Invest in an S&P500 mutual fund.

Step 3: Step back and just let your money grow until retirement.

It's not that hard. I don't see how some people try so hard to lose so much money.
 
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