Chris Huber

Roth IRA

Hey guys, I just found out that Roth IRA max contributions went up to 4000 and going up to 5000 in 2008. Both my wife and I have one right now with an ok amount of money in mine and she just started hers 2 years back.

We'd always like to put the full amount in each year, because the compounding later on would be better. However, 10k a year is a bit of a stretch. Would it be better to have 1 account and be able to always contribute the max, or is it better to keep both accounts and maybe be able to only stick 3-4k in each year?

Do you guys have Roths? What do you do?

Andy_Bu

Re: Roth IRA

1) Do you have a 401k at work and if you do, does the company perform any matching?

If the company matches, make sure you invest in the 401k first (at least up to the amount the company matches) before you invest in the Roth

2) As for the Roth, there is no real benefit to maxing one out vs having two smaller ones outside of perhaps less paperwork.

Simply put as much in them as you can. If you can afford more than $4k a year, simply split the amount between the two.

As a side note, the IRA contributions went up to $4000 last year. If for some reason you have the money to max that out and did not, you have until early April to add to last years(2006) IRA.

Andy

My DVD Collection

Johnny Angell

Re: Roth IRA

One question and a comment. Is there such a thing as Roth 401K?

And I would think that keeping separate accounts would be better. I know this is not something people like to plan for, but what if there were a divorce in your future? Keeping separate accounts might be handy then.

Johnny
www.teamfurr.org
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Andy_Bu

Re: Roth IRA

yes there is. It came into existance on Jan 1, 2006.

Two main benefits to the Roth 401K are

1) No income limitation. No matter how much you make, you can use a Roth 401K, where as a normal roth is income(AGI) limited to $95k for individuals and $150k for married filing jointly.

2) As of today, you can only invest $4K into a Roth but you can invest up to $15k in a Roth 401k

Andy

My DVD Collection

John Alvarez

Re: Roth IRA

What are the advantages of a Roth 401k? My employer matches up to 6% but I put 10% in my 401. Should I be taking that additional 4% and investing it in a Roth 401? I don't qualify for a Roth because of the income.

PhillJones

Re: Roth IRA

If I understand the question correctly, you seem to think that putting the money in a single account give a better return due to compound interest. This isn't true.

Let's say you put $100 in an account that earns 5% and leave it there for 10 years. You end up with:

100*1.05^(10)=$162.89

Now lets say instead of doing that you put 2 lots of $50 in two separate accounts earing 5%

2*(50*10.5^(10))=2*($81.44)=$162.89

So you see putting it all in one pot is the same as putting it in two different pots with the same interest rate. So just putting all the money in the same account doesn't increase the amount of compound interest.

Getting two accounts however lets you spread the risk more so is wise from that perspective.

My wife and I have two Roths with different risk profiles. We have maxed them out until now but with having a child, we'll see for next year.

If you understand this perfectly well then please accept my apologies.

Andy_Bu

Re: Roth IRA

I listed the two main benefits of Roth IRA in the post above yours.

As to whether it is more benefitial to invest after tax dollars in a tax free environment(Roth 401K) vs investing before tax dollars in a tax deferred environment (401K), you would need to run the numbers yourself.

And also remember that even when you run the numbers you still will never have the correct answer because none of us can predict what the tax rate will be 20-30 years from now.

Here is one of many calculators online to help you run the numbers

http://www.americantrust.com/Retirem...kalculator.htm


Andy

My DVD Collection

Andy_Bu

Re: Roth IRA

This is not necc. true.

Having two accounts does not reduce or add risk to your investments. It is all based on what you invest in, not how many accounts you have.

For example

1) Single Roth account
Invests in 12 funds, well diversified across growth, value, large to small cap

2) Two Roth accounts
Account1: Invests in Large Cap growth
Account2: Invests in Small Cap value

The single roth account, in this example, is more diversified (and as such less risk) than the two Roth account example.

As such, don't be concerned with how many accounts you have, but be concerned about your diversification within each account.

Andy

My DVD Collection

PhillJones

Re: Roth IRA

Doesn't it pretty much come down to whether you'll be in a higher tax bracket when you retire than now? Since my present salary falls under the sod all tax bracket, I went the Roth route.

Wouldn't you be paying tax on a higher amount with the trad. IRA/401k than with the Roth? Surely this would make it difficult for the trad. to be better than the Roth?

I once had one of those free personal finance meeting with Amex. I asked them to explain the difference between Roth and trad. then and I'm not entirely sure I get it.