Retirement

Originally Posted by shahanshah

Click to expand...

i thought the only difference was that roth is taxed pre-contributions and standard contributions come out of your income so are taxed only when you withdraw from the account ? the banker himself didn't seem to know what he was talking about

That is a major difference though. You get taxed at your current tax rate (which is low both because you are in a low bracket and because taxes are historically low) and then you get to grow your money as much as you want and not pay taxes on withdrawals. If you put in 5k a year from 24-30...with reasonable return you get to around $40k. of this, you paid full taxes on just 5k a year. If you then stop contributing (say you hit the AGI limit)...this will become almost 600k by retirement. You won't pay taxes on that amount. If you did this with a traditional IRA...sure, your 5K payments are more like 3K in take home income...but you now owe taxes on 600k which is a hell of a lot more than the few grand in taxes you saved in your 20s. EDIT: also a kind of nifty thing to think about...you can pull the principle from one without penalty. This is not something to go and do willy nilly but I know some people have valid strategies that incorporate this. Think something along the lines of paying more than you can really afford into the account with the intent of withdrawing it for a down payment on a house or something (you might do this instead of using a savings account so that you can take the principle out but keep the earnings tax free).

Originally Posted by otc

Click to expand...

That is a major difference though.

You get taxed at your current tax rate (which is low both because you are in a low bracket and because taxes are historically low) and then you get to grow your money as much as you want and not pay taxes on withdrawals.

If you put in 5k a year from 24-30...with reasonable return you get to around $40k. of this, you paid full taxes on just 5k a year. If you then stop contributing (say you hit the AGI limit)...this will become almost 600k by retirement. You won't pay taxes on that amount.

If you did this with a traditional IRA...sure, your 5K payments are more like 3K in take home income...but you now owe taxes on 600k which is a hell of a lot more than the few grand in taxes you saved in your 20s.

EDIT: also a kind of nifty thing to think about...you can pull the principle from one without penalty. This is not something to go and do willy nilly but I know some people have valid strategies that incorporate this. Think something along the lines of paying more than you can really afford into the account with the intent of withdrawing it for a down payment on a house or something (you might do this instead of using a savings account so that you can take the principle out but keep the earnings tax free).

roth it is ! right now the account is not substantial by any means but i retrofitted the last contribution into 2010 (i knew this window of opportunity was useful for something!) so i am free for 2011. not sure if i will reach the agi limit but i guess there's a while to go yet
thanks to sf i'm well on my way to some form of conservative fiscal responsibility--only to splurge it all on looking good

Btw, Roth conversion...I'd shy away from that if you're in the 33% or > bracket. Why? I'm not sure I'm willing to bet a 33% or more bill right now in hopes the legislation will not be changed in the next 20 years until I'm 60. I think taxes going up is a fair bet but I also think we will see some retro-grabs on things like Roths.

Originally Posted by otc

Click to expand...

That is a major difference though.

You get taxed at your current tax rate (which is low both because you are in a low bracket and because taxes are historically low) and then you get to grow your money as much as you want and not pay taxes on withdrawals.

If you put in 5k a year from 24-30...with reasonable return you get to around $40k. of this, you paid full taxes on just 5k a year. If you then stop contributing (say you hit the AGI limit)...this will become almost 600k by retirement. You won't pay taxes on that amount.

If you did this with a traditional IRA...sure, your 5K payments are more like 3K in take home income...but you now owe taxes on 600k which is a hell of a lot more than the few grand in taxes you saved in your 20s.

EDIT: also a kind of nifty thing to think about...you can pull the principle from one without penalty. This is not something to go and do willy nilly but I know some people have valid strategies that incorporate this. Think something along the lines of paying more than you can really afford into the account with the intent of withdrawing it for a down payment on a house or something (you might do this instead of using a savings account so that you can take the principle out but keep the earnings tax free).

I like this strategy.

Originally Posted by SkinnyGoomba

Click to expand...

I like this strategy.

That may be a bad example since I think they have a provision for withdrawal for a first home purchase (401ks too) but the idea still stands. You can funnel money into it that would otherwise be going into some sort of long term savings and take it out later and keep the earnings tax free.

This of course only applies if you are at a point where you are unable to meet all of your financial goals while fully funding the roth. If you can fully fund your Roth and put down payment money into another account...that is better than putting some into the IRA.

That's why I originally liked the roth, so I'll stick with the Roth. My only worry is that the rules will change before I get to collect on them and I'll end up paying taxes on it.

Originally Posted by Piobaire

Click to expand...

I could be wrong as I don't pay attention to Roths anymore, but pretty sure Roth contribution is post-tax dollars and the incentive to do that is all conforming withdrawals, including returns, come out tax free.

Just looked it up, single and earning >122k AGI = no Roth for you.

Not necessarily true. Roth 401k has no AGI limit and you can contribute up to $16,500 or $22,000 if you're 50 or older. More and more employers are adding Roth feature to their 401k plan, check with yours.

isn't the risk higher as well though ?

Originally Posted by Piobaire

Click to expand...

Yes, there is no doubt cuffthis is living the dream and has done quite well. His WBTG program seems to be excellent as is his kitchen. I have no doubt he's earned every bit of that success though.

Using CellarTracker as an integrated inventory system updated nightly is an awesome idea, too.

Originally Posted by mussel

Click to expand...

Not necessarily true. Roth 401k has no AGI limit and you can contribute up to $16,500 or $22,000 if you're 50 or older. More and more employers are adding Roth feature to their 401k plan, check with yours.
We were speaking about Roth IRAs;you have compared apples to oranges. Further, you cannot necessarily contribute that much, if you are an HCE in a company that triggers the discrimination test. But again, we were not talking company sponsored plans but rather IRAs.

Originally Posted by edinatlanta

Click to expand...

Yes, oh dear God yes. Even the few hundred I put away in my first year will go to great lengths in helping down the line. You can't access your Roth until I think 60 so decades of growth is ******* phenomenal. Seriously, Conne, put away even 50-100 a month if you can, it'll really help out. I'm in your shoes and I still put away.

Keep in mind, you can double up with the Roth because you can deduct from your taxes. It really is amazing how much they work for you.

can you give an example of the type of growth you can see?

liek i'm wanting to open one up and contribute around ...idk lets say like $1500 a year. or $1000 a year. what kind of growth will you see doing that every year? obviously once i start my career i'd contribute more.

i know nothing of investing

Originally Posted by Piobaire

Click to expand...

I think taxes going up is a fair bet but I also think we will see some retro-grabs on things like Roths.

I may be wrong but IIRC there has never been a retrograb of accounts and I doubt that any politicians want to permanently piss off dudes who will then vote against them every time.

Originally Posted by rjakapeanut

Click to expand...

can you give an example of the type of growth you can see?

liek i'm wanting to open one up and contribute around ...idk lets say like $1500 a year. or $1000 a year. what kind of growth will you see doing that every year? obviously once i start my career i'd contribute more.

i know nothing of investing

It is compounding interest. so you put away 1k, You get 8% interest (or whatever it is) per annum (yearly). That means at year two you've know got $1080. At the end of that year it is 2080 plus 8 percent of that, so on and so on. You won't see much your first few years but just having it there continuing to grow is redonkulous.

Dave Ramsey/Clark Howard those dudes get these calls where someone inherits money and doesn't know what to do with it. Like there was one chick who got something like 150K or something from an estate. He did the math and was like if you just put that in a savings account an didn't touch, in however many years (like 35 or so, she was 20) she would have had an astronomical sum.

That's basically it. Look at interest calculators for accurate math.

Originally Posted by edinatlanta

Click to expand...

I may be wrong but IIRC there has never been a retrograb of accounts and I doubt that any politicians want to permanently piss off dudes who will then vote against them every time.

I distinctly remember some talk about screwing over Roth holders and making it taxable upon withdrawal. It's going to be very attractive for Dem politicians to staunch some red ink that way.

Originally Posted by rjakapeanut

Click to expand...

can you give an example of the type of growth you can see?

One other thing, the type of growth you'll see depends on what you're doing. The best strategy is start young, put away what you can and prepare to be amazed.

FYI: I am not a financial adviser blah blah blah but, a good rule of thumb is have 3 months living expenses in savings at all times before you invest, many dudes now saying six months, i'd say 9 given current state of affairs... but look at some tax-free ways to save too.

Originally Posted by edinatlanta

Click to expand...

One other thing, the type of growth you'll see depends on what you're doing. The best strategy is start young, put away what you can and prepare to be amazed.

FYI: I am not a financial adviser blah blah blah but, a good rule of thumb is have 3 months living expenses in savings at all times before you invest, many dudes now saying six months, i'd say 9 given current state of affairs... but look at some tax-free ways to save too.

Start young is wise but also, defer withdrawals. It's part of why I figure I'll work some in the early stages of my retirement. The compound interest thing really becomes impactful when you're dealing with seven figure numbers so I want to put off tapping it as long as possible.