Help with understanding Roth IRA's

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0cean23
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Help with understanding Roth IRA's

Post by 0cean23 »

Hi,

I understand that Roth IRA's are pretax and you benefit in the future when you withdrawal at a higher tax bracket. But what if you withdrawal the money when your retire? Won't you be in a small tax bracket since you're not making any income? Would a traditional IRA be better for a retirement portfolio?
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gnosis
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Post by gnosis »

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PaddyMac
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Post by PaddyMac »

Roth contributions are made AFTER tax.
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archbish99
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Post by archbish99 »

You're right -- if everything is in the Roth IRA, you'll probably be in a lower tax bracket, and wish you'd done Traditional to get the tax benefit when you were in a higher tax bracket. You also can't take advantage of any tax benefits, such as charitable giving deductions, if that's part of your lifestyle.

On the other hand, if you do that, then your distributions will push you into a higher tax bracket, and you'll wish you'd done a Roth to reduce your tax liability in retirement. :) High taxable income from your IRAs also increases your tax liability for Social Security income.

I'm of the mind that you probably want some of each -- ideally just enough in Traditional to cover everything that's deductible. Under current law, I'm assuming that means twice the percentage I expect to give away each year (since there's a 50% on charitable contributions). The same logic applies if you expect to have deductible health care expenses, etc.

The other major advantage of a Roth IRA is the lack of Required Minimum Distributions. A Traditional IRA or 401k requires you to take a certain fraction out each year beginning when you're 70 1/2, targeting to force you to withdraw everything by the end of your life. If that's more than you need, too bad -- you can withdraw it and put it in a taxable account, but it lost tax-advantaged status.

If you expect to use up your money during your life, that's no big deal. If you expect to leave some for heirs, a Roth lets you leave it in there under tax shelter until they withdraw it.
staythecourse
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Post by staythecourse »

As mentioned there are a few adv. to Roth's.

1. No RMD in your lifetime
2. No income taxation on heirs

These are both HUGE advantages for people of wealth as well.

Good luck.
"The stock market [fluctuation], therefore, is noise. A giant distraction from the business of investing.” | -Jack Bogle
Default User BR
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Re: Help with understanding Roth IRA's

Post by Default User BR »

0cean23 wrote:I understand that Roth IRA's are pretax and you benefit in the future when you withdrawal at a higher tax bracket. But what if you withdrawal the money when your retire? Won't you be in a small tax bracket since you're not making any income? Would a traditional IRA be better for a retirement portfolio?
Traditional IRA is potentially better ONLY when the contributions would be tax-deductible. If not, then a TIRA makes no sense. For people with a company plan, the phase-out for deductibility is pretty low.




Brian
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grabiner
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Re: Help with understanding Roth IRA's

Post by grabiner »

0cean23 wrote:I understand that Roth IRA's are pretax and you benefit in the future when you withdrawal at a higher tax bracket. But what if you withdrawal the money when your retire? Won't you be in a small tax bracket since you're not making any income? Would a traditional IRA be better for a retirement portfolio?
You won't be drawing a salary when you retire, but you will usually have taxable income, from a 401(k), pension, and Social Security (which is partly taxable if you exceed certain income limits).

Therefore, you don't want to go all-Roth; you want enough taxable income to use up the lower tax brackets. But if you are in a 15% tax bracket now and retire in a 15% tax bracket, then you can put $850 in a Roth IRA or $1000 in a Traditional IRA for the same after-tax value.
Wiki David Grabiner
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