| Which is really better? Roth or Traditional |
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bong12187
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Cash: $ 24.50
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quote:
Originally posted by efflandt
What you really need to look at or crank into a spreadsheet is $1200 tax now and $4000 growing untaxed vs. non-taxable $4000 growth taxed at distribution + $1200 invested in taxable account. Also figure that a Roth IRA can be left to grow indefinitely (periodic payments not required) or can be drawn out in a lump sum as required or desired (when qualified), without taking any tax hit at that time. This is what the spreadsheet is showing. The only difference is that it was cut in half.
So for an investment of $5200/yr, the contribution would be $4000 in either case, which in the Roth would grow untaxed. The non-taxed traditional IRA would be taxed on withdrawl (not on contributions), but would also have a column for taxable growth of the $1200 tax savings. Although, a majority of people would likely spend the tax savings instead of investing it. I can't factor in the 1200 tax savings because according to the first post, this was already taken out when he received his paycheck. This means that 1200 was taken out as one of the tax deduction.
People often throw about the 15% marginal tax rate at retirement, but unless you are retiring in the near future, you may need more than your current income (inflation), which even figuring social security might put you in the same bracket you are in now (especially if still covering mortgage or rent). I totally agree with you...
If you invest long in stocks or other investments considered long term gain, in a tax deferred IRA it would be taxed at your normal tax rate at withdrawl (possibly 25% or more), in a taxable account may be taxed at 15%, or in a Roth would be untaxed. So I am currently max'ing out my 401k for regular retirement income, and building a Roth and gradually converting my traditional IRA to Roth for flexible lump sum withdrawl for fun money or emergencies. I figure better to pay 28% for every $1000 now (including state tax) rather than 28% or more of $3000 or $5000 or whatever it grows to.
But future tax rates are unknown, and if the goverment ever switches from an income tax to a VAT on everything, then the tax paid on Roth contributions will be wasted, from a personal investment standpoint.
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Fri Sep 02, 2005 4:40 am |
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mlathe
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Cash: $ 6.15
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Joined: 26 Aug 2005
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quote:
Originally posted by bong12187
Total return minus tax taken out before maxing out ROTH $382,540.64
Total return for Traditional IRA minus 30% tax bracket $282,898.45
This is kind of true... however in your scenario you are investing $600 more EVERY month. My point is that if i evened it out and invested the exact same amount for both Traditional and Roth things would turn out the same (meaning that i would invest $2600 into the Traditional, and $2000 into the ROTH but pay $600 in taxes.
Jim (aka BlankenshipFP) very true... in the real world you need to make assumptions about taxes now as compared to those in the future. Since i don't want to predict this I will assume that things will stay the same for my entire life (makes things simple  ).
Everyone... sorry i switched the size of the investment... but the concepts should be the same.
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Fri Sep 02, 2005 5:31 am |
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mlathe
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Cash: $ 6.15
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Joined: 26 Aug 2005
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the Final Word.
This is what i'm gathering from this thread. If you invest 4K into a Traditional and 4K (minus taxes (30%), which means that you invest only $2800) then in the end both are exactly the same.
Now here is a key point. If you like IRA's and have a pile of money that you like to roll around in, then a ROTH is alot better than a Traditional!!!. This is why: with both types of IRAs you can only invest $4000 for 2005, however since you have so much money, if you invest $4000 into a ROTH you are really investing the 4k plus taxes! that means you are really investing $5714.29 (4000=total*(1-0.3); 4000/0.7=total=5714.29). With Traditional you would get back the tax savings ($1714.29), but you couldn't easily invest that in any tax deferred account, so every year you would be hit with Cap Gains on any growth on those saved taxes. this WILL hurt you in the long run.
So if you won't invest in an IRA unless you get a tax break, do a Traditional. But if you are maxing out your IRA contributions, do a ROTH, and max out that ROTH!
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Fri Sep 02, 2005 5:54 am |
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bong12187
Preferred Member
Cash: $ 24.50
Posts: 120
Joined: 31 Jul 2005
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quote:
Originally posted by mlathe
quote:
Originally posted by bong12187
Total return minus tax taken out before maxing out ROTH $382,540.64
Total return for Traditional IRA minus 30% tax bracket $282,898.45
This is kind of true... however in your scenario you are investing $600 more EVERY month. My point is that if i evened it out and invested the exact same amount for both Traditional and Roth things would turn out the same (meaning that i would invest $2600 into the Traditional, and $2000 into the ROTH but pay $600 in taxes. AHHHH, that is where we are having our discrepancies... My calculation was right, it was just that I was reading it differently.... I like your little test. It keeps me on my toes...
Jim (aka BlankenshipFP) very true... in the real world you need to make assumptions about taxes now as compared to those in the future. Since i don't want to predict this I will assume that things will stay the same for my entire life (makes things simple ).
Everyone... sorry i switched the size of the investment... but the concepts should be the same.
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Fri Sep 02, 2005 5:55 am |
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