Roth IRA questions

[kgraeme]

<< My cc debt is only at 3.9%. >>



I knew when I wrote 17-19% that I was in a thread with the RossMAN and that if anyone has low interest it would be you.

Sorry to harp on the CC debt thing, and I'm not talking about your debt specifically. I just personally don't believe in carrying a balance on anything. I have no debts. We're buying a house and intend to have it interest free after six years and paid off in 15-17.

 

[ggavinmoss]

<<

<< My cc debt is only at 3.9%. >>



...

We're buying a house and intend to have it interest free after six years and paid off in 15-17. >>



kgraeme - how are you going to swing the no interest after six years? Finish paying it all off or what? Just curious.

-geoff

 

[Cerebus451]

<< I agree that the market is a good long-term investment. But a Roth isn't used for the long-term. It's really great for the short-term for something like buying a house, say about 5-10 years. A Roth is going to get you about 8% interest, whereas a CC is usually around 17-19%. So compare a $5000 starting point and 5 years: >>


Ummm... since when did Individual Retirement Accounts become short-term investements? I did not open my Roth IRA as a short-term shelter for my money. If I wanted that, I would invest in a mutual fund, not open a IRA. You invest in a Roth IRA the same as a regular IRA - you are putting the money away for retirement. A Roth IRA just has different rules about disbursement which is why I chose Roth over regular (not required minimum disbursements, no taxes on withdrawals after 59.5, ability to take out money invested (minus any gains accrued) at any time). Maybe I'm missing something here, but all my IRA/401k accounts are for when I retire and I don't plan on touching any of that money until then.

 

[mithrandir2001]

<<

<< You pay tax on the $3000 now, but it's not taxed when you take it out >>


That's correct but many people going the Roth route are planning/hoping to be in a much higher tax bracket when they retire thus making it a good deal to pay the lower tax rate now. >>


Ain't gonna happen. This is why I am somewhat cool to Roth IRAs.

I am currently in the 30.5% tax bracket. I see little chance that I will be in a similar bracket during retirement since I doubt I'll be "making" over $65K a year then. Between a Roth and a NON-deductible IRA, the Roth is the clear choice, but between a Roth and a 401(k) - which is deductible - it's a different story. Contribute to a 401(k) and I get a 30.5% tax deduction now and perhaps pay 25% in retirement when I withdrawl. Contribute to a Roth and I, in essence, am paying that 30.5% tax up front. Roths are great if you are in the 15% tax bracket now, but not so much if you are in a much higher bracket.

Of course, Roth IRAs have some very nice features: you can withdrawl your contributions at any time tax-free. So if you put $3000 in a Roth today and see it grow to $5000 in 5 years, you can withdrawl the $3000 tax-free (even if you are less than 59.5) and leave the $2000 in the account (which you may not touch without paying penalties).

Roths also have much more lenient withdrawl requirements. With a traditional IRA/401(k) you MUST start making withdrawls by age 70.5 and you must withdrawl so much each year (so that you liquidate the account and pay all those taxes by the time of your expected death). I think you can leave a Roth account intact during retirement and even transfer it fully to your heirs tax-free (with some limitations).

So I would recommend (generically), in order:

Pay off revolving consumer debt (credit cards, high interest rate loans, but NOT mortgages/home equity loans)
Contribute as much into your 401(k) as your employer match goes
Max out a Roth IRA
Max out your 401(k)
If you still have money left over at this point, you suck

 

[RossMAN]

In a way my Roth IRA would be a short term investment (assuming I tap it for first time home buyer's down payment).

Otherwise I have every intention of using it as a long term investment.

 

[SCSIfreek]

Roth IRA's <---You can not deduct from your tax return? I opened up a IRA account 3 weeks ago and its a traditional IRA account which I plan on using after my retirement. <----my income would be much lower or none at that point.


--Scsi

 

[kgraeme]

<< kgraeme - how are you going to swing the no interest after six years? Finish paying it all off or what? Just curious. >>



By paying down the loan to the point where the interest diminishes to below the principle. Check out this great graphing mortgage calculator.

A lot of it depends on the terms and length of the loan. A 15 year is obviously going to cost more per-month, but will be paying th principle faster. A 30 year loan oviously takes longer, but costs less. What I'm looking at doing is getting the 30 year loan, but paying it back at the 150year schedule. That means I'll be paying in a few hundred extra a month, but in the end I'll save over 100K but I'll still have the fallback buffer of the lower payment in case money gets tight like at the holidays.

 

[kgraeme]

<<

<< I agree that the market is a good long-term investment. But a Roth isn't used for the long-term. It's really great for the short-term for something like buying a house, say about 5-10 years. A Roth is going to get you about 8% interest, whereas a CC is usually around 17-19%. So compare a $5000 starting point and 5 years: >>


Ummm... since when did Individual Retirement Accounts become short-term investements? I did not open my Roth IRA as a short-term shelter for my money. If I wanted that, I would invest in a mutual fund, not open a IRA. You invest in a Roth IRA the same as a regular IRA - you are putting the money away for retirement. A Roth IRA just has different rules about disbursement which is why I chose Roth over regular (not required minimum disbursements, no taxes on withdrawals after 59.5, ability to take out money invested (minus any gains accrued) at any time). Maybe I'm missing something here, but all my IRA/401k accounts are for when I retire and I don't plan on touching any of that money until then. >>



I'm not really arguing against retirement investment. I do have my own and I firmly believe that every penny squirrled away is worth it. IMHO, because of the benefits for first-time homebuyers, the Roth is a better short to mid-term investment than other options like a CD. I'm going to backpeddle a little and say that it can also obviously be a long-term investment, but there are other great options for that as well but they don't have the no-penalty for buying a home.

 

[RossMAN]

<<

<< kgraeme - how are you going to swing the no interest after six years? Finish paying it all off or what? Just curious. >>



By paying down the loan to the point where the interest diminishes to below the principle. Check out this great graphing mortgage calculator.

A lot of it depends on the terms and length of the loan. A 15 year is obviously going to cost more per-month, but will be paying th principle faster. A 30 year loan oviously takes longer, but costs less. What I'm looking at doing is getting the 30 year loan, but paying it back at the 150year schedule. That means I'll be paying in a few hundred extra a month, but in the end I'll save over 100K but I'll still have the fallback buffer of the lower payment in case money gets tight like at the holidays. >>



Great link, thanks! When we get around to buying our first home we'll probably go for a standard 30 year term but will hopefully pay it off sooner (if we can afford it). Yes it's nice to write off the taxes but if we can afford it I'd rather have it paid off within 15 years.

 

[kgraeme]

<< Great link, thanks! When we get around to buying our first home we'll probably go for a standard 30 year term but will hopefully pay it off sooner (if we can afford it). Yes it's nice to write off the taxes but if we can afford it I'd rather have it paid off within 15 years. >>



Yeah, I've never understood the argument of not paying it off so as to keep the tax writeoff. There is no way that the tax benefits will ever amount to the over 100K saved in the long run.

 

[mithrandir2001]

<<

<< Great link, thanks! When we get around to buying our first home we'll probably go for a standard 30 year term but will hopefully pay it off sooner (if we can afford it). Yes it's nice to write off the taxes but if we can afford it I'd rather have it paid off within 15 years. >>



Yeah, I've never understood the argument of not paying it off so as to keep the tax writeoff. There is no way that the tax benefits will ever amount to the over 100K saved in the long run. >>


You are forgetting that money used to pay down a mortgage could be otherwise invested. My new mortgage has an interest rate of 7.25%. Because the interest is fully deductible, the effective tax-adjusted interest rate is 5.03%. Can I make more than 5% a year after taxes on equities? Over a period of a few years, sure, that is certainly doable. You pay capital gain tax rates on equity investments instead of higher income tax rates. So if you look at the whole picture - tax rates, inflation rate, time value of money, expected investment returns, interest rate on your mortgage - paying off your mortgage early is not usually the best investment choice.

People pay off their mortgages for the "comfort" and "security" of fully owning their home, but if you are most interested in your total net worth, you are better off dragging that mortgage out over the full 30 years (at today's low mortgage rates). Also consider that your house's equity is far less liquid than an equity investment. If you pay your mortgage off early - and subsequently have little cash on hand because of the accelerated payments - getting cash may be a problem. You could get a home equity home perhaps, but selling off some of your investments (if you had them) would probably be a better solution.

It doesn't seem good to pay thousands and thousands of dollars in mortgage interest but since it is deductible and inflation will effectively whittle down that fixed payment, it's really not so bad after all.

 

[ys]

MoneyChimp
Invest FAQ



<< There are no tax benefits associated with contributions because all contributions to a Roth IRA are made with after-tax monies. In other words, unlike an ordinary IRA, the contributions are never deductible from gross income on your federal tax return. >>



Dinkytown calculators

I should consider putting more into 401k, for I get to give aditional $500 to Uncle Sam I am saving up a mortgage down payment for later this year...
that's why not putting much into retirement plan.

 

[alrocky]

quote by mithrander2001: So I would recommend (generically), in order:
Pay off revolving consumer debt (credit cards, high interest rate loans, but NOT mortgages/home equity loans)
Contribute as much into your 401(k) as your employer match goes
Max out a Roth IRA
Max out your 401(k)

The above advice is excellent. mithrander2001 gave good info. Since your CC % rate is low and you have a plan to eliminate it, suggest you invest <U>$2000 each</U> for you and the wife for your year 2001 IRA. Also invest <U>$3000 each</U> for you and the wife for your year 2002 IRA. You want to get in the habit of saving and investing money while you also pay down that debt. You can open IRAs without $30 annual fees too.

kgraeme errors in saying your "money would be better off in a regular savings account." $2k in a CD ROTH is better than $2k in a SA. Also any IRA should be considered as long term investment not a short term.

There is a downside to withdrawing your contributions from a ROTH to buy a house. If you lose the house that (ROTH) retirement money is gone too. Not a good double whammy.

 

[zephyrprime]

The contribution limit for the 2001 tax year is $2000 not $3000 dollars. The $3000 limit doesn't kick in until the 2002 tax year. However, because of how contributions can be made to 2001 even though it's already 2002, you can actually contribute $10000 right now. How you ask? $2000 contribution for both of you for the 2001 tax year. $3000 for both of you for the 2002 tax year.

 

[RossMAN]

alrocky - Thanks for the advice.

The contribution limit for the 2001 tax year is $2000 not $3000 dollars. The $3000 limit doesn't kick in until the 2002 tax year. However, because of how contributions can be made to 2001 even though it's already 2002, you can actually contribute $10000 right now. How you ask? $2000 contribution for both of you for the 2001 tax year. $3000 for both of you for the 2002 tax year.

I'm well aware that 2001's contribution limit is $2,000 and 2002 it changes to $3,000