Cool Info About the Roth

Posted By Paul

I read an article that made a point about the Roth that I thought was interesting.

For those of you not familiar with the Roth IRA you can read up on some earlier posts on this topic:

Roth IRA: A tax shelter for your golden years
-and-
The Roth as a College Savings Vehicle

I put money in a Roth with the basic idea that the more money I can save towards retirement the better. The article made the additional point that any money you put into a tax-deferred retirement account (like a 401k or IRA where you pay taxes when you take it out, presumably during retirement) has the added wrinkle that you really have no idea what the tax laws will be like when you retire.

The changes in the tax rates for a particular income bracket can have a dramatic effect on your retirement situation. Let's say theoretically that when you retire the tax rates are much lower...well then your retirement money will go that much farther and the opposite situation if tax rates end up being much higher.

When talking about a retirement that is probably decades away, it's VERY hard (perhaps impossible) to predict and plan for this.

However, the Roth sidesteps all this. You pay the taxes now so you don't have to worry about what the tax laws will be in the future.

Not to say you should dump your IRA or 401k, but I thought it was a cool little point about the Roth that hadn't occurred to me.

Here is the full article:

New Ways to shelter your retirement

Roth IRA reversal

Posted by Matt

Paul and I have both posted several times about the advantages of using the Roth IRA to save for retirement, and I still believe in it for all the same reasons. BUT, after much consideration, I've decided that I'm not going to open one (for 2007, at least). How's that for a ringing endorsement?

I do want to increase my retirement saving rate, however, and I've elected to increase my 401k contribution rate from 12% to 15%. That still won't put me at the maximum contribution, but every little bit helps. Here's why I went this way:

1. I like the fact that the 401k withdrawal is totally automatic and almost invisible to me. Yes, I see the money come out each paycheck, but I don't really feel it. It's just another line item on the pay stub. The money that I really think about and budget with is the amount that actually gets deposited in my checking account.


2. Yes, I could have set up automatic withdrawals for the Roth, but I don't like to have any more accounts than is necessary. It's probably just a personality thing. In my dream world, I would have a single bank account that somehow encompassed all of my finances. I remember one point when my wife and I were still figuring out how to handle our joint finances and we had about nine different checking and saving accounts. It just didn't feel right.


3. Finally, the Roth's benefits aren't that compelling FOR ME. Yes, it is nice that the principal is available for emergency withdrawal, but that is what I have an emergency fund for. Yes, it would be nice if some of my income was tax-free in retirement, assuming that I'm in a higher tax bracket then, but who knows if I will be?

I'm always trying to figure out what is the BEST possible financial action I can take, and usually that means trying to put money into instruments that will yield the maximum return, but I'm also learning that it is next to impossible to predict that. I tried to set up a spreadsheet that would predict my financial outcomes in retirement, but there are FAR too many variables.

What will my salary be each year?
What tax bracket will I be in during retirement?
What will happen to the tax laws?

The list goes on and on. Remember the computer in the movie "War Games" that ran through every possible nuclear war simulation and determined that the only way to ensure a positive outcome was to not engage in war at all? Well, I've gone through lots of scenarios and the only thing I was able to determine for certain is that I should definitely save for retirement. Shocking.

So, I'm just trying to do the best I can. I don't think anyone would argue that I shouldn't put more money into my 401k account. They might make a compelling argument that it's not the BEST place for it, but who can say for sure?