Planning for retirement

[winneythepooh7]

OK, this is kind of a spin-off from my earlier post. Some background:

I really like my job, however, I don't have a pension/401B or anything like that, which I am realizing now is very important.

Is there something I can get on my own that would be an equivalent? I mean, I know I can have a savings account and not touch it (ha, ha) and watch it grow..........or an IRA? (Yes, I am clueless with the terms LOL).

I'd prefer probably to NOT leave my job unless I absolutely have to...............With all the financial and job threads as of late, it's just got me really thinking. Keep in mind as well that I don't make a lot of money either, so I need tips on how to go about saving just a little bit so it will add up years from now.............

[redav]

A traditional IRA is equivalent to a 401(k) / 403(b). The money that is put into it is deducted from your taxable income, so you pay fewer taxes today. The maximum per year is $4000 for those under 50, while the maximum for a 401(k) is $15,000/year. The investment grows tax-free until you start withdrawing it.

If you do not make much money now, and thus don't pay much tax, but you expect to make more money (pay more taxes) in the future, esp. at/during retirement, then a Roth IRA would probably be better. With the Roth, you pay taxes on the money today; it grows tax-free, and you pay no taxes at all when you withdraw the funds. Also, since you have already paid taxes on the money that you pay into it, the rules about pulling the principle are more lenient, as are the withdrawal rules at retirement. For most young workers, the Roth is a fantastic vehicle. (On a side note--It is likely that in the future, we will have some sort of universal healthcare and other services, which will raise tax rates from the historically low rates we have today. That is another factor that makes the Roth appealing for young workers.)

For both types of IRAs, contributions can be made up to Apr of the following year. For example, if you set up and put $3000 an IRA in Feb 2007, you can designate it for 2006, and then the $3k doesn't affect how much you can contribute in 2007. For the Roth, it does not change your filing for taxes. A traditional IRA does, since it reduces your taxable income.

You can set up IRAs just about anywhere, including banks and credit unions. Investment companies (Vanguard, Fidelity, Charles Schwab, etc) make investing in IRAs easy, they are very helpful and will do most of the work for you. However, to have an account with them, there is typically a minimum starting balance ($1k-$3k, or higher), and they will also charge low-balance fees. The larger the balance you have in your accounts with them, typically the lower the costs will be.

To save money, it needs to be automatic. I have my paycheck direct deposited into various bank accounts, so I don't have to make the decision to save. Christmas accounts are similar--they are like a CD (put money in for a fixed time, and you can't take it out without penalty), but mature in Dec each year. They also typically have slightly higher interest rates than regular savings accounts.

Another way to save money is to simplify/reduce expenditures. Conserving electricity, driving less (and less aggressively), etc will help. Shop around for insurance--this can be big. I saved $400/yr on auto and $300/yr on home by finding the best deal. Deleting unnecessary services is also a good way to go, deleting extra features from your phone. Last year I splurged and got satellite TV, but I found I didn't like paying as much as they wanted. This year I cancelled, and don't miss it that much. Getting rid of services can be hard since a luxury enjoyed twice becomes a necessity.

[wordsmith]

The above is really helpful, speaking as somebody who also doesn't have a (worthwhile) 401k/403b option.

I'm really good at not having/cancelling unnecessary luxuries and cutting back in personal expenditures, better than most people I know. But the lack of having a savings other than my regular old passbook savings account stresses me, esp. having grown up in a family who run a business and have jack shit for retirement.

[SpaceMonkey]

redav provided a lot of good information. One other thing to keep in mind is that a Traditional IRA and a Roth IRA are both just wrappers of sorts for tax purposes. There are a myriad of different investment options that you will need to choose from to determine what your money will actually do once it is deposited into the account: different stock and bond mutual funds, money market accounts, real estate investment trusts (REITs), etc.

Most people split their money between stock funds (more short-term risk, more potential for higher long-term return) and bond funds (less short-term risk, less potential for higher long-term return). However, if you are just starting out, you won't have enough money in the account to meet the minimum balance requirements of more than one fund. Therefore, most people start out with a "fund of funds" that automatically maintains a certain percentage of your money in different subfunds of domestic stocks, international stocks, and bonds. Examples would be Vanguard's LifeStrategy (https://flagship.vanguard.com/VGApp/hnw/content/Funds/FundsVanguardFundsLifeStrategyJSP.jsp) line, Fidelity's Four-in-One Index Fund (http://personal.fidelity.com/products/funds/mfl_frame.shtml?31634R109) , and also the popular "life cycle" type of fund that automatically rebalances itself over the years to put more money into less risky bond funds (ex: Vanguard Target Retirement Funds (https://flagship.vanguard.com/VGApp/hnw/content/Funds/FundsVanguardFundsTargetOverviewJSP.jsp), Fidelity Freedom Funds (http://personal.fidelity.com/products/funds/content/freedomfunds.shtml.cvsr?refpr=ipmf8), T. Rowe Price "Retirement (Year)" Funds (http://www.troweprice.com/common/index3/0,3011,lnp%253D10094%2526cg%253D910%2526pgid%253D7 128,00.html) This is probably a good thing, especially for someone just starting out. It really forces you to narrow your ultimate choices to only a handful of potential funds, and thus limits the "indecision paralysis" that causes some people to put off retirement planning in the first place.

I wanted to go into this only because I know that for me, setting up the account was the easy part. Deciding what I would actually invest in was the more confusing step.


Keep in mind as well that I don't make a lot of money either, so I need tips on how to go about saving just a little bit so it will add up years from now.............

As redav mentioned, IRAs through investment companies like Fidelity, Vanguard, and T. Rowe Price tend to have relatively high minimum initial deposits. Vanguard's is $3,000, Fidelity's is $2,500. I'm not sure about T. Rowe Price. Fidelity does have the option, however, of its "SimpleStart" IRA, where you initially deposit as little as $200, with no low balance fee, as long as you continue to contribute at least $200 monthly, or $600 quarterly. If you can't afford to contribute $200 per month, you're probably better off trying to save up the initial $3,000 in a high interest savings account like ING or Emigrant Direct, and then opening an IRA.

[winneythepooh7]

I have an ING savings account which I am going to make more of an effort to save in. I think what was happening before, was I was saving an unrealistic amount and then I had to withdraw some of that money for expenses. I have decided to put only $50.00 per paycheck automatically in there, that way, if I do have extra funds for whatever reason, I can choose to sock some of that away.

Can a joint IRA be opened? I am thinking that if me and my fiance are both contributing to it, it will be easier to come up with more money. I also think he and I need to sit down and have a meeting to figure all of this out. We do have a little bit of time though, but I just want to make sure we get some of this stuff set up a couple months before our wedding in October.

I also am waiting to hear back from my mom. I know her and my dad took out this life insurance policy for me, and I think one of the "perks" about it is that I can take $$$ from it when I'm "old". I'm not positive though and don't know how exactly it works.

[WorkInProgress]

I also am waiting to hear back from my mom. I know her and my dad took out this life insurance policy for me, and I think one of the "perks" about it is that I can take $$$ from it when I'm "old". I'm not positive though and don't know how exactly it works.

It's a good idea to know what sort of life inusurance there is for you. Your parents own that policy, though, right? (My parents took some insurance out on me when I was little--basically enough so that they could afford to bury me--but they own that policy, I don't.) I have since purchased my own policy, but it's totally unconnected to theirs. A financial planner will be able to help you with this kind of thing too.

[winneythepooh7]

It's totally in my name. I just thought of it because my mother had sent me an email reminding me that the yearly payment should be due sometime in January.

[jrwilheim]

Can a joint IRA be opened? I am thinking that if me and my fiance are both contributing to it, it will be easier to come up with more money. I also think he and I need to sit down and have a meeting to figure all of this out. We do have a little bit of time though, but I just want to make sure we get some of this stuff set up a couple months before our wedding in October.

I also am waiting to hear back from my mom. I know her and my dad took out this life insurance policy for me, and I think one of the "perks" about it is that I can take $$$ from it when I'm "old". I'm not positive though and don't know how exactly it works.

I'll have to check as to whether married couples can have a joint traditional or Roth IRA. My gut says no--I've never heard this referred to anywhere, but I could be wrong. I know my parents each have a traditional IRA in their own names. One thing I can tell you--not that this is immediately relevant to your situation, but it might be at some point down the road--is that a non-working spouse can contribute to an IRA in his or her own name.

Regarding the insurance policy: what your family set up for you is what's known as a permanent/cash-value policy. This may also be known as a whole, universal, or variable universal policy (the names reflect differences in when premiums are paid that aren't really relevant to your situation). Basically, there are two types of life insurance: term and permanent/cash-value.

Term is the simpler kind of insurance. With term insurance, you pay a premium each month (or each year), and you receive a specified amount of coverage coverage for a specified term (i.e., 10 years, or 20 years). If you die during that term, your beneficiary collects. If not, that's the end of it. With most term policies, your premium increases each year, basically because your chances of dying increase as you get older, though there are also what are known as level-term policies, where your premium remains the same.

Cont'd....

[jrwilheim]

Permanent/cash-value is a different kettle of fish. With a permanent/cash-value policy, a portion of your premium goes into some kind of savings/investment account. The idea is that eventually, this will build up to a point where you don't have to pay premiums any more, and can have the policy permanently (hence the name). Many people are sold permanent/cash-value policies with the idea that the cash-value you get in the savings/investment account is really an "investment", not just a means of paying the premiums when you get older.

Permanent/cash-value policies are, IMO, a bad deal for most people. They're generally about 4 times as expensive as a term policy with an equal amount of coverage. As a way of saving money, they're also not so great, since you end up paying a lot of mortality charges and insurance costs that eat into your returns--you'd really do better just saving and investing outside the policy, if your goal is just to build up savings.

The other reason they're a bad deal is that life insurance isn't really something you need all of your life. You need life insurance for only a very particular period of your life--when you are married and/or have a significant other and/or have children who would be financially effected by your death, and don't have assets. When you're old and gray, you (hopefully) have sufficient assets that your death would not cause your relatives financial hardship, in IRAs, 401(ks), home equity, etc., etc.

What I would recommend is this: surrender your policy (insurance lingo for cashing out a permanent/cash-value policy), and invest the proceeds elsewhere, whether by investing in the stock market, putting it aside as an emergency fund, or using it to help fund the down payment on a home. Any of these investments would get you better returns than the cash-value in a permanent/cash-value policy. You'll get stuck with some kind of tax bill on whatever the "gains" in the cash value have been (whatever amount there is above and beyond what your family paid in premiums). But I still think it's better to have this in some other kind of investment.

[jrwilheim]

OK, this is kind of a spin-off from my earlier post. Some background:

I really like my job, however, I don't have a pension/401B or anything like that, which I am realizing now is very important.

Is there something I can get on my own that would be an equivalent? I mean, I know I can have a savings account and not touch it (ha, ha) and watch it grow..........or an IRA? (Yes, I am clueless with the terms LOL).

I'd prefer probably to NOT leave my job unless I absolutely have to...............With all the financial and job threads as of late, it's just got me really thinking. Keep in mind as well that I don't make a lot of money either, so I need tips on how to go about saving just a little bit so it will add up years from now.............

To answer your original question, you can get the same benefits as you would from a 401(k) or 403(b) plan from a Traditional IRA. With a Traditional IRA, you get a tax break now on your investments, the money grows tax-free until your retire, and you don't pay tax until you take the money out in retirement.

I agree with a previous poster, however, that you would probably do better with a Roth IRA. In a Roth, you don't get the tax break now, but the money still grows tax-free, and you don't pay any taxes when you take the money out in retirement. The Roth is definitely a better deal if you expect to be in a higher tax bracket in retirement. Another benefit of a Roth is that there's no age at which you are forced to begin taking withdrawals, whereas with a Traditional IRA, you have to begin taking withdrawals at 70 1/2, whether you need the money or not.

The main advantage of a 401(k) or 403(b) (you have a 403(b) rather than a 401(k) if your employer is a non-profit or government entity, but they're essentially identical) is that your employer may provide a match and/or discretionary contributions. For instance, the employer might match you 50% up to 4% of your salary. If you end up some place where you get that, I would recommend putting in at least enough to get the full match, because you're essentially getting a 50% or 100% return on your investment, regardless of how the underlying funds you choose perform. If you have money beyond that that you can put aside for retirement, I would then fund a Roth IRA.

[SmilesSoSweet]

I have a Roth IRA that I opened right after I graduated from college. I have $200/month go in to that account.

My last job had a 401k plan and I had to roll it over into another type of retirement account. Right now it's in a Traditional IRA. I may roll it over into my current work's 401k plan, but I want to see how this 401k plan is doing before I roll my last one over.

I think I have about $17k in my Traditional IRA and about $10k in my Roth IRA. My 401k since I just started it has about $1000 in it.

[pisces2473]

Winney, I don't have any retirement accounts either. Well, I have a Roth IRA, but I haven't contributed to that in ages, cuz I have no money TO put in there! When I worked at Yale, I could have put money into one of their things, but I wasn't thinking clearly back then. The last job and the current job = no retirement stuff.

So yeah, I don't know what I'm gonna do...I don't think I can squeeze out anything from my current salary. BUT, now that C and I are living together, I do have a little more discretionary money, so I might be able to put some of that into the Roth. It just feel so lame, writing a check for like $50.

[redav]

I want to second what SpaceMonkey said--there is very good advice there, esp. about all-in-one funds.

Next time you are at a bank (or you could call one of the investment companies), ask someone for help with questions about setting up an IRA. I think they will be very willing to sit with you and go through all your options. Of course, they won't tell you about what other companies can do for you, so you might have to talk to a few people to cover all the bases.

Good Luck!

[CityGal]

A traditional IRA is equivalent to a 401(k) / 403(b). The money that is put into it is deducted from your taxable income, so you pay fewer taxes today. The maximum per year is $4000 for those under 50, while the maximum for a 401(k) is $15,000/year. The investment grows tax-free until you start withdrawing it.

If you do not make much money now, and thus don't pay much tax, but you expect to make more money (pay more taxes) in the future, esp. at/during retirement, then a Roth IRA would probably be better. With the Roth, you pay taxes on the money today; it grows tax-free, and you pay no taxes at all when you withdraw the funds. Also, since you have already paid taxes on the money that you pay into it, the rules about pulling the principle are more lenient, as are the withdrawal rules at retirement. For most young workers, the Roth is a fantastic vehicle. (On a side note--It is likely that in the future, we will have some sort of universal healthcare and other services, which will raise tax rates from the historically low rates we have today. That is another factor that makes the Roth appealing for young workers.)

For both types of IRAs, contributions can be made up to Apr of the following year. For example, if you set up and put $3000 an IRA in Feb 2007, you can designate it for 2006, and then the $3k doesn't affect how much you can contribute in 2007. For the Roth, it does not change your filing for taxes. A traditional IRA does, since it reduces your taxable income.

You can set up IRAs just about anywhere, including banks and credit unions. Investment companies (Vanguard, Fidelity, Charles Schwab, etc) make investing in IRAs easy, they are very helpful and will do most of the work for you. However, to have an account with them, there is typically a minimum starting balance ($1k-$3k, or higher), and they will also charge low-balance fees. The larger the balance you have in your accounts with them, typically the lower the costs will be.

To save money, it needs to be automatic. I have my paycheck direct deposited into various bank accounts, so I don't have to make the decision to save. Christmas accounts are similar--they are like a CD (put money in for a fixed time, and you can't take it out without penalty), but mature in Dec each year. They also typically have slightly higher interest rates than regular savings accounts.

Another way to save money is to simplify/reduce expenditures. Conserving electricity, driving less (and less aggressively), etc will help. Shop around for insurance--this can be big. I saved $400/yr on auto and $300/yr on home by finding the best deal. Deleting unnecessary services is also a good way to go, deleting extra features from your phone. Last year I splurged and got satellite TV, but I found I didn't like paying as much as they wanted. This year I cancelled, and don't miss it that much. Getting rid of services can be hard since a luxury enjoyed twice becomes a necessity.

Thank you so much. You seem to know all the good and confusing stuff. This has truly been helpful.

[analogman]

I'll have to check as to whether married couples can have a joint traditional or Roth IRA. My gut says no--I've never heard this referred to anywhere, but I could be wrong. I know my parents each have a traditional IRA in their own names. One thing I can tell you--not that this is immediately relevant to your situation, but it might be at some point down the road--is that a non-working spouse can contribute to an IRA in his or her own name.


I don't think there are joint traditional or Roth IRAs. I also seem to recall that non-working spouse can't always contribute to an IRA in his/her own name. I think there needs to be earned income in order to contribute to a retirement account (there might be an age waiver for this). This was an issue for us because my wife was in grad school and her stipend didn't count as earned income.

Winnie, the big thing you would be missing out by staying in your current job is the amount of tax deferred saving you can do. IRAs have an annual limit of 4000 while a 401k (and I would guess the 403b) has a limit of 15000 (and up to a certain limit still give one ability to contribute to an IRA).

If you stay in your current job, then saving in taxable accounts would be a wise idea. For those who care for some math/projections, highlight to read the next paragraph.

If one puts in 4000 a year for the next 30 years and earns 12% a year (this is somewhat optimistic), the account would be worth roughly $965K. Don't get excited yet though, at 2% annual inflation (perhaps slightly optimistic as well), that is only about $533K in today's dollars. Using a 4% withdrawal rate (considered conservative), that gives an annual income of about $21k in today's dollars. If we tweak the assumptions a little to 10% return a year (this can be realistic over 30 years) and 3% inflation (I think this is a more reasonable number) the account value drops to $271K and annual income drops to $11K, both in today's dollars. It is also better to err on the side of caution when planning for retirement.

[pisces2473]

Winnie, the big thing you would be missing out by staying in your current job is the amount of tax deferred saving you can do. IRAs have an annual limit of 4000 while a 401k (and I would guess the 403b) has a limit of 15000 (and up to a certain limit still give one ability to contribute to an IRA).
Yeah, but how many employers are still offering 401Ks?

[winneythepooh7]

Yeah, but how many employers are still offering 401Ks?


In my field, it's a 403B. And you are right Jen. Most employers are slashing benefits. Hell, a lot of places in my field are getting rid of healthcare because they just can't afford it. I am very ambivalent right now about what I should do. I don't want to leave a job that I enjoy if I can save $$$ on the side in a plan myself, to end up in a situation like my last place of employment (even though they offered a 403B, pension, dental, etc.).

[jrwilheim]

Winney, I don't have any retirement accounts either. Well, I have a Roth IRA, but I haven't contributed to that in ages, cuz I have no money TO put in there! When I worked at Yale, I could have put money into one of their things, but I wasn't thinking clearly back then. The last job and the current job = no retirement stuff.

So yeah, I don't know what I'm gonna do...I don't think I can squeeze out anything from my current salary. BUT, now that C and I are living together, I do have a little more discretionary money, so I might be able to put some of that into the Roth. It just feel so lame, writing a check for like $50.

Some mutual fund companies will let you start a Traditional or Roth IRA with as little as $50 if you agree to automatic monthly contributions. I know T. Rowe Price will do this. Not sure about other companies. Look around.

[EmberMae]

If one puts in 4000 a year for the next 30 years and earns 12% a year (this is somewhat optimistic), the account would be worth roughly $965K. Don't get excited yet though, at 2% annual inflation (perhaps slightly optimistic as well), that is only about $533K in today's dollars. Using a 4% withdrawal rate (considered conservative), that gives an annual income of about $21k in today's dollars. If we tweak the assumptions a little to 10% return a year (this can be realistic over 30 years) and 3% inflation (I think this is a more reasonable number) the account value drops to $271K and annual income drops to $11K, both in today's dollars. It is also better to err on the side of caution when planning for retirement.
This is really freaking depressing. 4k is a HUGE amount of money for us to invest, and obviously that's not even going to be close to good enough. How is ANYONE going to be able to retire?

[pisces2473]

Some mutual fund companies will let you start a Traditional or Roth IRA with as little as $50 if you agree to automatic monthly contributions. I know T. Rowe Price will do this. Not sure about other companies. Look around.
Oh yeah, I have one--through my auto ins. company.

[WorkInProgress]

Yeah, but how many employers are still offering 401Ks?

I was under the impression that more and more employers were offering 401(k)s (rather than fewer and fewer). I don't actually know any figures about it, though. And, in the end, if the employer in questions is not matching or doing profit-sharing, I'm not sure why they need to bother with a 401(k).

[SpaceMonkey]

This is really freaking depressing. 4k is a HUGE amount of money for us to invest, and obviously that's not even going to be close to good enough. How is ANYONE going to be able to retire?

I think the realistic answer is that most of us, if we are healthy, will be working past the age of 65, at least part-time, until maybe the age of 70 or so. Health is the scary factor, though.

[winneythepooh7]

I think the realistic answer is that most of us, if we are healthy, will be working past the age of 65, at least part-time, until maybe the age of 70 or so. Health is the scary factor, though.


I don't want to go too much off topic, but I tried hiring an older, retired lady. It didn't work out though and I had to let her go. She started dictating to me and the client the hours she "was gonna work" because "she was retired". (And it was only TEN HOURS, divided up either between 2 or 3 days a week, however she wanted to schedule it).

I've also interviewed some "older" people and they have a lot of unrealistic demands.

[SpaceMonkey]

I don't want to go too much off topic, but I tried hiring an older, retired lady. It didn't work out though and I had to let her go. She started dictating to me and the client the hours she "was gonna work" because "she was retired". (And it was only TEN HOURS, divided up either between 2 or 3 days a week, however she wanted to schedule it).

I've also interviewed some "older" people and they have a lot of unrealistic demands.

True, there may be an "entitlement complex" (although I cringe whenever I bring up that phrase here on the QLC boards). I think those kinds of attitudes among older workers will start to go away though, if it becomes more commonplace for middle-class workers to continue working until the age of 70. If more people are doing it, it will become more "normal," and older workers will be less likely to see themselves as special.

[analogman]

Yeah, but how many employers are still offering 401Ks?

I think 401ks are replacing pensions, which means they should be somewhat prevalent. It doesn't cost an employer all that much to offer a retirement account (certainly a very small fraction compared to health insurance).

[analogman]

This is really freaking depressing. 4k is a HUGE amount of money for us to invest, and obviously that's not even going to be close to good enough. How is ANYONE going to be able to retire?

I figured the math was a bit gloomy for a Monday morning so I put it in a different color.

As incomes rise, it becomes easier to save since the extra money can all theoretically be saved (one was able to live on the smaller income after all). The reality for most is different though. One starts thinking "I got a raise, time for a nicer car/home/TV/whatever."

[vxmike]

Thoughts on the Roth IRA:

I'm not as big on the Roth as most people for a couple reasons. First of all since the Roth contribution is taxed now for many people than can mean they can only afford a smaller contribution, so they're starting off behind the Traditional IRA person person who might be able to contribute a higher amount. Starting off with 20% more to invest is a huge advantage.

As for taxes - I don't know too many people who are going to be in a higher tax bracket when they retire compared to the working years especially those with lower incomes now, so paying the taxes when the money is withdrawn may not be a bad thing. Not to be a conspiracy theorist, but who's to say Roth distributions will still be tax free in 40 years? Canada just changed a major tax law that NAILED energy income trusts...this was not expected and there's nothing to say the IRS won't want to tax those Roth's in the future....laws change and governments are unpredictable. All I'm saying is don't count on what's true today to be the same in 40 years.

http://ca.news.yahoo.com/s/capress/061102/business/trusts_oilpatch

Personally I now contribute to a standard IRA, since my tax bracket is very high right now and I'm very unlikely to have a higher one when I retire.

[vxmike]

This is really freaking depressing. 4k is a HUGE amount of money for us to invest, and obviously that's not even going to be close to good enough. How is ANYONE going to be able to retire?

Most people aren't...sad but true answer. For those without pensions (almost all of us) it's going to take saving a substantial amount of $$ on our own to finance retirement. I figure it will take roughly a minimum of 10k per year saved for 40 years for the average person to retire. Inflation is the major difficulty...it is very difficult to beat inflation consistently after taxes.

[analogman]

Thoughts on the Roth IRA:

I'm not as big on the Roth as most people for a couple reasons. First of all since the Roth contribution is taxed now for many people than can mean they can only afford a smaller contribution, so they're starting off behind the Traditional IRA person person who might be able to contribute a higher amount. Starting off with 20% more to invest is a huge advantage.

As for taxes - I don't know too many people who are going to be in a higher tax bracket when they retire compared to the working years especially those with lower incomes now, so paying the taxes when the money is withdrawn may not be a bad thing. Not to be a conspiracy theorist, but who's to say Roth distributions will still be tax free in 40 years? Canada just changed a major tax law that NAILED energy income trusts...this was not expected and there's nothing to say the IRS won't want to tax those Roth's in the future....laws change and governments are unpredictable. All I'm saying is don't count on what's true today to be the same in 40 years.

http://ca.news.yahoo.com/s/capress/061102/business/trusts_oilpatch

Personally I now contribute to a standard IRA, since my tax bracket is very high right now and I'm very unlikely to have a higher one when I retire.

I agree with you that the tax benefits of Roth IRAs might not always be around (that would be one sucky day for all who have them). I am however, not sure I agree with you on the future tax brackets. Incomes typically rise so the tax brackets go up. It’s not hard to imagine having more income from 401k/social security etc in retirement than when on first starts working. Also, with the aging population and entitlement programs running deficits, it’s much more likely for taxes to go up (to cover those costs) than down in the future.

[arrow]

On a related note...

I just signed up for my company 401K! Yay! (I couldn't sign up before... it only kicks in the January or July after you've been at the company for 6 months, and I started in March).

I chose one of those easy Fidelity Freedom Funds (where they invest your money in various stocks, bonds, etc., starting riskier and then changing to more conservative over time).

I'm only planning to invest 4% of my biweekly paycheck pretax. I know it's well below their 10-15% recommendation, but I do like to have some of my money on hand, just in case. My HSBC online account gets 5% interest, which is practically like a CD.

I'm just glad that's done. Now for the IRA...

[vxmike]

I agree with you that the tax benefits of Roth IRAs might not always be around (that would be one sucky day for all who have them). I am however, not sure I agree with you on the future tax brackets. Incomes typically rise so the tax brackets go up. It’s not hard to imagine having more income from 401k/social security etc in retirement than when on first starts working. Also, with the aging population and entitlement programs running deficits, it’s much more likely for taxes to go up (to cover those costs) than down in the future.

I can't disagree - the bottom line is that we just don't know what will happen. Another factor to consider is state and local taxes I suppose. By contributing to a Standard IRA now I avoid those taxes (which are high where I'm at), and when I retire I will move to a locale with no state/local tax and avoid those taxes completely.

[analogman]

I can't disagree - the bottom line is that we just don't know what will happen. Another factor to consider is state and local taxes I suppose. By contributing to a Standard IRA now I avoid those taxes (which are high where I'm at), and when I retire I will move to a locale with no state/local tax and avoid those taxes completely.

I am not sure if there is a precedent for this already, but your old state could conceivably come after you for income taxes anyway. I know one high level executive moved to a state with no income tax after living in California for a long time. He exercised some stock options (and made a bunch of money) and CA's Franchise Tax Board went after him for taxes. Their argument was that he earned those stock options while working in CA so they were entitled to tax him. I can see a similar argument being made for retirement account money. He paid the taxes (the FTB is tougher than the IRS I heard). Just thought I'd put that out there :eek:

[meatwad]

I have a Roth IRA, but haven't contributed much to it since I bought my house. But I also have a 401K that has 5% of my income (not much admittedly) going into it with 4% being matched for a total of 9%. Here's hoping I do well with my poker playing side job. :D

[meatwad]

I am not sure if there is a precedent for this already, but your old state could conceivably come after you for income taxes anyway. I know one high level executive moved to a state with no income tax after living in California for a long time. He exercised some stock options (and made a bunch of money) and CA's Franchise Tax Board went after him for taxes. Their argument was that he earned those stock options while working in CA so they were entitled to tax him. I can see a similar argument being made for retirement account money. He paid the taxes (the FTB is tougher than the IRS I heard). Just thought I'd put that out there :eek:

In my state they really nail you on taxes. Let's say there's a couple that lives in a state with no income tax. The wife works in her home state and the husband has a government job in my state that has income tax. My state taxes both their incomes if they file jointly, even though she doesn't work here.

[WorkInProgress]

In my state they really nail you on taxes. Let's say there's a couple that lives in a state with no income tax. The wife works in her home state and the husband has a government job in my state that has income tax. My state taxes both their incomes if they file jointly, even though she doesn't work here.

One of my uncles works in Mass and lives in RI, and is taxed in both states. :eek: So they're moving a few doors down to be officially in Mass, even though it's the same neighborhood.

[SpaceMonkey]

Not to be a conspiracy theorist, but who's to say Roth distributions will still be tax free in 40 years? Canada just changed a major tax law that NAILED energy income trusts...this was not expected and there's nothing to say the IRS won't want to tax those Roth's in the future....

One could say exactly the same thing about Traditional IRAs, so I'm not sure what the point is to worry about it.

[meatwad]

One of my uncles works in Mass and lives in RI, and is taxed in both states. :eek: So they're moving a few doors down to be officially in Mass, even though it's the same neighborhood.

My state was voted the worst taxed state in the country by some group based on the percentages people pay in, cost of living, and what you actually get in return for your tax money.

[WorkInProgress]

My state was voted the worst taxed state in the country by some group based on the percentages people pay in, cost of living, and what you actually get in return for your tax money.

:eek: I would never have guessed.

[pisces2473]

But Meat, it's VACATIONLAND!

[meatwad]

But Meat, it's VACATIONLAND!

Oh dear God. Please, please, please...we are very happy to have all American and English speaking Canadians come to our state and enjoy our parks, campgrounds and beaches. But we may have to institute a moritorium on the import of middle aged, French speaking Quebecois men in disturbingly skimpy speedos.

[WorkInProgress]

Oh dear God. Please, please, please...we are very happy to have all American and English speaking Canadians come to our state and enjoy our parks, campgrounds and beaches. But we may have to institute a moritorium on the import of middle aged, French speaking Quebecois men in disturbingly skimpy speedos.

I almost ruined my computer by spitting diet coke at it.

[pisces2473]

Oh dear God. Please, please, please...we are very happy to have all American and English speaking Canadians come to our state and enjoy our parks, campgrounds and beaches. But we may have to institute a moritorium on the import of middle aged, French speaking Quebecois men in disturbingly skimpy speedos.
Sacre bleu!

[meatwad]

I almost ruined my computer by spitting diet coke at it.

You don't know what it's like! They migrate down here in the summer and take over our white, sandy beaches! And talk about lousy tippers! My cousin was a cleaning lady at a hotel one summer and she said she probably got and average of $1.00 per weekend in tips.

[WorkInProgress]

Sacre bleu!

Ok, so even though I studied French for years and learned any number of fun expletives, every.single.time I hear this, I think of the chef from the little mermaid.

(Damn, I am very unfocused today.)

[pisces2473]

You don't know what it's like! They migrate down here in the summer and take over our white, sandy beaches! And talk about lousy tippers! My cousin was a cleaning lady at a hotel one summer and she said she probably got and average of $1.00 per weekend in tips.
But zey are zee best people in zee world! Yah!!!

[meatwad]

But zey are zee best people in zee world! Yah!!!

You air zee Ricky Bobby?

[pisces2473]

You air zee Ricky Bobby?
No! I am Celine Dion, zee best singer een zee warld!

[meatwad]

No! I am Celine Dion, zee best singer een zee warld!

Behole my giante fore-ed, ancient usband, and magnifique jump-suit wit outlined camel toe.

[WorkInProgress]

No! I am Celine Dion, zee best singer een zee warld!

Hey. I actually like her French Album. She is an odd woman, though.

[analogman]

One could say exactly the same thing about Traditional IRAs, so I'm not sure what the point is to worry about it.

Withdrawals from Traditional IRAs are already taxed as income. Roth is not, that is why Roth is advantageous, assuming the tax laws don't change.

[SpaceMonkey]

Withdrawals from Traditional IRAs are already taxed as income. Roth is not, that is why Roth is advantageous, assuming the tax laws don't change.

Yes. But I meant more generally that the government could arbitrarily change any of the rules surrounding Traditional IRAs, or Roth IRAs, for 401(k)s, for that matter, at any time. So I'm not sure why vxmike is specifically concerned about the Roth.

[analogman]

Yes. But I meant more generally that the government could arbitrarily change any of the rules surrounding Traditional IRAs, or Roth IRAs, for 401(k)s, for that matter, at any time. So I'm not sure why vxmike is specifically concerned about the Roth.

Roth is currently better than Traditional IRA. It is much more likely for Roth to become taxed than for Traditional or 401k/403b to become tax-free. That's why it makes sense to worry about Roth changes.

[Kitty]

I talked to someone at Fidelity who helped me with my portfolio and I feel a lot better now. Now I just need to talk to someone at tiaa-cref.

[WorkInProgress]

Roth is currently better than Traditional IRA. It is much more likely for Roth to become taxed than for Traditional or 401k/403b to become tax-free. That's why it makes sense to worry about Roth changes.

If a Roth becomes taxed, wouldn't that make it pretty much just like a regular IRA?

Plus the whole point is that it's already been taxed.

[analogman]

If a Roth becomes taxed, wouldn't that make it pretty much just like a regular IRA?

Plus the whole point is that it's already been taxed.

Right, and that's why it would be one sad day if the tax advantage of Roth is taken away and what vxmike is worried about.

[WorkInProgress]

Right, and that's why it would be one sad day if the tax advantage of Roth is taken away and what vxmike is worried about.

I don't see what there is to worry about...unless it's the government taxing the Roth money again.

I'm sorry of this is very circular today. Maybe my brain is just fried for the day.

[SpaceMonkey]

Roth is currently better than Traditional IRA. It is much more likely for Roth to become taxed than for Traditional or 401k/403b to become tax-free. That's why it makes sense to worry about Roth changes.

It's "better" in that one aspect that you care about. That's my point. If the government is "unpredictable" as you say, then you can't say that they would be more likely to make changes on that one aspect of the Roth.

It's equally likely (if you can call any of these scenarios "likely") that the government would simply eliminate the tax deferred aspect of Traditional IRAs, and merge the classification of Traditional and Roth into one unified IRA classification in which contributions are not tax-exempt, withdrawals are still taxed as regular income, but account holders remain exempt from capital gains or dividend taxes on the holdings in the account. Everyone loses, and the IRA options reach parity as something worse than what they used to be, but arguably still better than a fully taxable mutual fund account.

[analogman]

It's "better" in that one aspect that you care about. That's my point. If the government is "unpredictable" as you say, then you can't say that they would be more likely to make changes on that one aspect of the Roth.

It's equally likely (if you can call any of these scenarios "likely") that the government would simply eliminate the tax deferred aspect of Traditional IRAs, and merge the classification of Traditional and Roth into one unified IRA classification in which contributions are not tax-exempt, withdrawals are still taxed as regular income, but account holders remain exempt from capital gains or dividend taxes on the holdings in the account. Everyone loses, and the IRA options reach parity as something worse than what they used to be, but arguably still better than a fully taxable mutual fund account.

"Better" in my perspective; "different" in all perspectives.

I don't think what you are saying about "one unified IRA classification in which contributions are not tax-exempt, withdrawals are still taxed as regular income, but account holders remain exempt from capital gains or dividend taxes on the holdings in the account" really makes sense. On a regular taxable account, there is dividend and capital gains tax. Those are same or better than regular income tax. Why would someone use an IRA if there is a tax penalty?

[SpaceMonkey]

Why would someone use an IRA if there is a tax penalty?

Indeed. But we weren't talking about reality anyway, were we?

[vxmike]

Ok, for fun I just ran some numbers, and I've determined that ones personal situation determines if a Roth or Traditional IRA works best. For me it's the Traditional as I already had figured. For my projected scenario (assuming the contribution limits increase linearly with my projected return):

$4,000 per year for 20 years added into a Traditional IRA yielding a 6% annual return will add up to $198,000.

For the Roth I have to figure the investment amount I'm starting with will be $4,000 less my current tax rate of 33% since I have to pay taxes on the money now, so I have less to invest. After 20 years this yields $132,500.

At retirement the Traditional IRA will generate 50% more income than the Roth due to a higher principle. The Roth will only be advantageous in this scenario if my retirement tax rate is greater than 33% - highly unlikely.

In my case the Traditional IRA wins plus I am protected in case the Roth doesn't maintain it's tax-favored status forever. It's difficult to overcome starting a long term investment with a substantially higher principal that the Traditional offers. This concurs with the investment mantra stating that one should always defer taxes into the future whenever possible b/c they are an immediate loss to the portfolio and you are unable to take advantage of the compounding effect.

[SpaceMonkey]

Ok, for fun I just ran some numbers, and I've determined that ones personal situation determines if a Roth or Traditional IRA works best. For me it's the Traditional as I already had figured. For my projected scenario (assuming the contribution limits increase linearly with my projected return):

$4,000 per year for 20 years added into a Traditional IRA yielding a 6% annual return will add up to $198,000.

For the Roth I have to figure the investment amount I'm starting with will be $4,000 less my current tax rate of 33% since I have to pay taxes on the money now, so I have less to invest. After 20 years this yields $132,500.

At retirement the Traditional IRA will generate 50% more income than the Roth due to a higher principle. The Roth will only be advantageous in this scenario if my retirement tax rate is greater than 33% - highly unlikely.

In my case the Traditional IRA wins plus I am protected in case the Roth doesn't maintain it's tax-favored status forever. It's difficult to overcome starting a long term investment with a substantially higher principal that the Traditional offers. This concurs with the investment mantra stating that one should always defer taxes into the future whenever possible b/c they are an immediate loss to the portfolio and you are unable to take advantage of the compounding effect.

The key is that "tax diversification" is something to strive for, in addition to diversification in asset allocation. Having both a 401(k) and/or Rollover/Traditional IRA, as well as a Roth IRA, means that at retirement, one can choose which to withdraw from first based on what makes sense from a tax perspective.

Of course, starting out in your mid-20s, you may not be able to afford to contribute to both a 401(k) and a Roth IRA, but it's something to shoot for as your career progresses.

[redav]

I doubt that gov't will change the Roth/Traditional IRA rules too much. Here's why:

If you stay in the same tax bracket and assume equal returns, then a Roth and Trad. IRAs produce identical after-final-tax amounts. The theory is this:

F = P * (1+i)^n

F = final amount
P = principle amount
i = annual interest rate
n = number of years invested

If you deduct taxes (we'll say 'x' is the tax rate), then for the Roth, you multiply P by (1-x), which yields (1-x)*F. For the Trad. IRA, you start with (1-0)*P, and you end up with F--but it's taxed, so it becomes (1-x)*F, which is the same.

The gov't will not change the rules to make one IRA theoretically more lucrative than the other--that would be political suicide. Likewise, the gov't desperately needs people to save for retirement; otherwise, they have to pay for it. Making it harder for you to save means that they will have to pay for your retirement, which means if you are poor, it becomes their fault. (Look at the complaints about how bad it is living off of SS.) On the other hand, if you don't save enough and are poor in retirement, then it's your fault, and the gov't can wipe their hands clean.

Additionally, we are currently in the midst of the lowest taxes since WWII. I expect these tax rates to expire in 2010. Also, I expect the US will move toward more social services being provided by the gov't, which will require higher taxes. Combine those things, and I don't expect to see tax rates this low (regardless of my income) ever again.

[vxmike]

The key is that "tax diversification" is something to strive for, in addition to diversification in asset allocation. Having both a 401(k) and/or Rollover/Traditional IRA, as well as a Roth IRA, means that at retirement, one can choose which to withdraw from first based on what makes sense from a tax perspective.

Of course, starting out in your mid-20s, you may not be able to afford to contribute to both a 401(k) and a Roth IRA, but it's something to shoot for as your career progresses.

That is an excellent point. I have both IRAs and contribute to whichever one makes sense for the given tax year. Years in which I haven't made much money I've contributed to the Roth but now it's wiser to contribute to the Traditional since I'm paying 33% at the top end of my income. I imagine I'll cut down to part time when I ease into retirement and at that point it might make sense to contribute to the Roth again.

I also max out 403b's at two employers in addition to my IRAs and 401K, so I will have a lot of taxable retirement money, but I figure I can take out almost 40k per year before exceeding the 15% tax bracket (just using today's brackets). I also save a lot outside 403b/IRA/401K so I'll have plenty of options when it comes to contributing/withdrawing money depending on the tax situation for any given year.

[slimjim]

Another factor to consider is state and local taxes I suppose. By contributing to a Standard IRA now I avoid those taxes (which are high where I'm at), and when I retire I will move to a locale with no state/local tax and avoid those taxes completely.

You also state in another post that your tax rate is 33% today so you don't feel that you will see any advantage later.

My issue with your discussion points:
If you are in the 33% tax bracket, there is no possible way you are taking the deduction for a standard IRA. You would far exceed the income threshold. If you are taking the deduction on your federal return, you might want to consider filing an amended return because you are not eligible for the credit on your taxes. If you are in this bracket and not contributing to a roth, my guess is that your only option would be a non-deductible IRA.

Also, if you are in the 33% tax bracket, you probably are not even eligible for a Roth due to the AGI imcome cap. Maybe you are getting hit with the AMT, but you make no mention of this.

[vxmike]

You also state in another post that your tax rate is 33% today so you don't feel that you will see any advantage later.

My issue with your discussion points:
If you are in the 33% tax bracket, there is no possible way you are taking the deduction for a standard IRA. You would far exceed the income threshold. If you are taking the deduction on your federal return, you might want to consider filing an amended return because you are not eligible for the credit on your taxes. If you are in this bracket and not contributing to a roth, my guess is that your only option would be a non-deductible IRA.

Also, if you are in the 33% tax bracket, you probably are not even eligible for a Roth due to the AGI imcome cap. Maybe you are getting hit with the AMT, but you make no mention of this.

33% is with my state and city taxes in addition to the federal rate. The top end of my income falls within the 28% federal bracket. I make about 100-115k annually.

[slimjim]

33% is with my state and city taxes in addition to the federal rate. The top end of my income falls within the 28% federal bracket. I make about 100-115k annually.

Your reasoning is not correct as you are not in the 33% tax bracket. Yes, the top end of your income falls within the 28% bracket, but at $110-$115K, if you itemize and have decent deductions, you should be in the 13-17% effective tax bracket. You are really only in the 28% bracket if you are hit with the AMT which applies a true flat 28 or 32% tax on your income.

Let's leave the state taxes out of this as you may or may not end up in a state that has an income tax when you retire (ie, florida).

[winneythepooh7]

Dude, chill!

[SpaceMonkey]

Dude, chill!

:lol: Right on.

[vxmike]

Your reasoning is not correct as you are not in the 33% tax bracket. Yes, the top end of your income falls within the 28% bracket, but at $110-$115K, if you itemize and have decent deductions, you should be in the 13-17% effective tax bracket. You are really only in the 28% bracket if you are hit with the AMT which applies a true flat 28 or 32% tax on your income.

Let's leave the state taxes out of this as you may or may not end up in a state that has an income tax when you retire (ie, florida).

Any taxable income that I reduce with IRA contributions is for all practical purposes in an effective 33% bracket. Yes I understand my total income is not taxed at this rate obviously, but any taxable income over 72k is and even after all deductions my taxable income will still be over this amount.

I don't itemize as I have no deductions to take. I'm a single non-homeowner with no kids. I also guarantee I will not live in a state with state/city taxes when I retire...I will specifically move my homebase to such a location.