Roth IRA

Chris Huber

Second Unit
Joined
Jan 2, 2003
Messages
416
Reaction score
0
Points
0
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

Supporting Actor
Joined
Jun 2, 2002
Messages
929
Reaction score
0
Points
0
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
 

Johnny Angell

Played With Dinosaurs Member
Joined
Dec 13, 1998
Messages
12,048
Reaction score
4,015
Points
9,110
Age
74
Location
Central Arkansas
Real Name
Johnny Angell
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.
 

Andy_Bu

Supporting Actor
Joined
Jun 2, 2002
Messages
929
Reaction score
0
Points
0

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
 

John Alvarez

Screenwriter
Joined
Sep 3, 2004
Messages
1,129
Reaction score
0
Points
0
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

Second Unit
Joined
Jan 20, 2004
Messages
472
Reaction score
0
Points
0

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

Supporting Actor
Joined
Jun 2, 2002
Messages
929
Reaction score
0
Points
0

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
 

Andy_Bu

Supporting Actor
Joined
Jun 2, 2002
Messages
929
Reaction score
0
Points
0

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
 

PhillJones

Second Unit
Joined
Jan 20, 2004
Messages
472
Reaction score
0
Points
0

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.
 

Andy_Bu

Supporting Actor
Joined
Jun 2, 2002
Messages
929
Reaction score
0
Points
0

Neither of your questions can be answered with 100% certainty since no one can predict what the tax brakets will be when you are retired and ready to start drawing on the 401k.

When you retire, if the taxes are low, then its likely to be that a 401k would be the best way to save, if the taxes are higher, then a Roth 401k would be the best way to save.

The best you can do is run the numbers in the calculator I provided and then realize that even when it gives you an answer, there is some small risk.

Andy
 

Philip Hamm

Lead Actor
Joined
Jan 23, 1999
Messages
6,874
Reaction score
2
Points
5,110
I would recommend talking to a qualified financial advisor instead of a bunch of home theater hobbyists on an internet forum.
 

Andy_Bu

Supporting Actor
Joined
Jun 2, 2002
Messages
929
Reaction score
0
Points
0

For those of us who follow personal finance more than say HT, I can tell you finding a "qualified financial advisor" is significantly harder than it sounds.

I couldn't begin to tell you some of the horror stories I have heard from friends and relatives who get horrendous advice from a "qualified financial advisor" all for the sole reason of lining said advisors pocket.

Personal finance is not rocket science no matter how much people want to believe it is. Anyone who can figure out and correctly explain OAR can figure out personal finance, IMO, assuming you have the interest.


Andy
 

PhillJones

Second Unit
Joined
Jan 20, 2004
Messages
472
Reaction score
0
Points
0

Well unless I see Satan bidding on Ice Skates on Ebay, I know where I'd put my money on whether taxes are going to be higher or lower in 30 years.

Seriously though. If the money we invest earns a bunch of interest over the years, which we all hope it does, the dollar value of the funds are going to be higher than that which was invested. So the tax that you pay would surely be a percentage of a bigger number.

So, for example, at a conservative estimate of average of 5%, and 20 years time period, your money has more than doubled. So I'd have to be paying less than half of what I pay now in tax.

I played with the calculator You posted and as I thought, I cannot contrive a situation in which the trad. is a better deal.
 

Andy_Bu

Supporting Actor
Joined
Jun 2, 2002
Messages
929
Reaction score
0
Points
0

Like you, most people would likely benefit from the Roth but I am not sure everyone would else no one would spend the time making the calculators.

Andy
 

nolesrule

Producer
Joined
Aug 6, 2001
Messages
3,084
Reaction score
1
Points
110
Location
Clearwater, FL
Real Name
Joe Kauffman
Keep in mind that many retirees have a lower relative income in there retirement years and therefore may fall into a lower tax bracket later on because of that. Lowering your taxable income now may also drop you into a lower tax bracket.

That's why you need to run the numbers. It depends on what tax bracket you are in now, whether retirement contributions could decrease your tax bracket on current income, if you have a 401k with employer matching, how much you will draw annually from your retirement savings when you retire and what tax bracket you would be in when you retire (assuming they are adjusted annually for inflation).

The last 2 are just guesses in any calculation though.
 

Andy_Bu

Supporting Actor
Joined
Jun 2, 2002
Messages
929
Reaction score
0
Points
0

I guess for financial planning junkies like myself who do not like variables, that is another point in favor of the Roth.

Assuming the government doesn't screw 3 generations of people by changing the tax free growth/withdrawal of a Roth, at least one can plan on that money coming out tax free during retirement years.

Where, as you speculated, trying to plan your tax braket when you retire leaves you guessing.

If my company ever does offer a Roth 401K, I will likely hedge my bet by putting some money into the 401K up to the company match and the rest into the Roth 401k (assuming that is even allowed).

Andy
 

Chris Lockwood

Producer
Joined
Apr 21, 1999
Messages
3,215
Reaction score
1
Points
0
> 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.

Since the "I" in IRA means "individual", I don't think an IRA is for a couple but for one person, so you and your spouse would have separate IRAs, and it wouldn't matter for IRA purposes whether you divorced.

If that's wrong, someone can correct it. But it would be dumb to design these accounts assuming a couple will still be together 30-50 years later.

BTW, if you are 50+, the IRA limit is 5000 for tax year 2006. The limits for 401Ks are also higher.
 

Andy_Bu

Supporting Actor
Joined
Jun 2, 2002
Messages
929
Reaction score
0
Points
0

You are correct but thats not really what he was asking I think.

He was asking, "I have $4k. Is it better to open two Roths or just one"

In terms of pure investment return it doesn't matter if you have one or two.

In terms of fairness, in case a divorce ever occurs, it would be better to put $2k into "his" Roth and $2K into "her" Roth.

Andy
 

mylan

Screenwriter
Joined
Jan 6, 2005
Messages
1,692
Reaction score
1
Points
110
If you were to divorce, depending on the length of your marriage and other factors, your wife would be entitled to some of the proceeds from any retirement funds, including 401K's anyway.

Edit: Andy beat me to it.
 

Chris Lockwood

Producer
Joined
Apr 21, 1999
Messages
3,215
Reaction score
1
Points
0
Uh, since he said "but what if there were a divorce in your future?" I think that IS what he was asking.

Whether a single person should have one account or multiple accounts is a different question.

> it would be better to put $2k into "his" Roth and $2K into "her" Roth.

Why not put $4000 into each Roth?
 

Forum Sponsors

Staff online

Forum statistics

Threads
343,722
Messages
4,688,092
Members
141,018
Latest member
John_Weber