Protecting your Retirement 401k vs Roth

[Big Money]

It is a complicated issue because no one can tell us what the tax structure will be in 20 years with any certainty. The first recommendation is to talk to a professional to find out what is best for your situation. But I personally believe Roth IRAs are better. Get them started before your income gets too high (but they are raising the limits). I am not a tax or retirement expert but IMHO the only downside to Roths are the lower contribution limits. You pay no tax on gains or withdrawals in your IRA and don’t have to start withdrawing at a certain age. If you are willing to take full responsibility for your future, it is an excellent tool.

Remember though, you can do a lot with a Roth IRA, especially a self directed IRA. That flexibility allows you to more than make up for the lower contribution limits. Some things you can invest in include mortgage paper, options on property, rental property, Hard money lending and many others. This is not even counting the traditional investments of funds, bonds, muni, stocks, etc. Granted, most don’t have the knowledge to take advantage of these options but if you do have the knowledge, they are phenomenal tools.

The biggest problem is what will your tax rate be when you retire and start drawing your 401k? Will taxes go down, stay the same or go up (most likely). No one knows. But it is a risk you take with a 401k. Plus you have to take mandatory withdrawals once you reach certain a certain age.

But I don’t want my income to go down when I retire like many people assume. So I assume my tax rate will be higher than it is now. I also assume I will get no social security. Prepare based on your goals. Talk to a pro and find out your situation and what makes the most sense for you. A Roth is just another tool. Use it and whatever else you need to reach your goals. There are no cut and dry answers.

Good luck

TM

 

[pt199]

Quote from Big Money


But I don’t want my income to go down when I retire like many people assume. So I assume my tax rate will be higher than it is now. I also assume I will get no social security. Prepare based on your goals. Talk to a pro and find out your situation and what makes the most sense for you. A Roth is just another tool. Use it and whatever else you need to reach your goals. There are no cut and dry answers.



Why do you assume you will not get Social Sec.?

If we all adopt that attitude that wish may come true!

 

[Neodude]

Quote from vhehn:

the withdrawal issue is a big point. with a traditional ira you must set up a schedule to withdraw all of the money and pay ordinary income taxes on it before you die.
with a roth you can choose to withdraw the money tax free as you need it or pass it on in your estate if you choose to.
if your traditional ira is down because of the market this might be an oppertunity to switch it to a roth and pay tax on a depreciated balance. then if it recovers some day you will come out ahead.

You brought up a very important point, which I didnt consider. I'm starting to think that a combination of the two might also be good idea, but I don't know if there is a prohibition against having both types of accounts at the same time.

Thanks,
-Neo

 

[Neodude]

Quote from stinkyfelix:

It is a very complex issue and may become more complex here in California.

There are rumblings in Sacramento, CA that some of the politicians want to tax 401k contributions when you put the money in, instead of when you take it out.

Many folks build up sizable 401k balances working here in CA and then retire in NV. Under the current set-up, the $ escape CA taxation all together.

To help cover the CA budget shortfall, the worker contributions going into the 401k would get taxed up front. That way, if the worker escapes to NV for retirement, CA state government got some of the tax it feels is due.:eek:

If the worker stays put and retires in CA, then only the gains would be taxed.

Example: CA worker contributes $100k over 20 years and the 401k grows to $400k. At retirement, the worker escapes to NV. The state of CA gets $0 tax revenue.

With the change in law, in the above example, CA would get 9.3% or $9300 up front when the contributions were made before the worker escapes to NV.

If the workers stays in CA and retires, CA would tax the gains in the account of $300k as the $ are taken out.

A very complex situation...

This is bad news indeed, if Cali manages to pass this then other states will copy them.

This is also what worries me about Roth IRAs; what is stopping the government from turning around and saying that they will tax me on the funds in the future anyway. Maybe we should all buy gold and bury it the backyard...

-Neo

 

[Free Thinker]

Quote from Neodude:

You brought up a very important point, which I didnt consider. I'm starting to think that a combination of the two might also be good idea, but I don't know if there is a prohibition against having both types of accounts at the same time.

Thanks,
-Neo

you can have both iras at the same time but your contributions are still limited as one.

 

[stinkyfelix]

Quote from Neodude:

This is bad news indeed, if Cali manages to pass this then other states will copy them.

Actually, I believe CA wants to copy PA law. From what I understand, PA taxes contributions that go into a 401k and only taxes the gains when $ are withdrawn during retirement. (Like CA, where folks escape to NV at retirement, PA folks escape to FL at retirement.) This way, PA gets some tax money before it leaves the state. CA wants to copy PA. Anyone from PA can confirm this???

Quote from Neodude:
This is also what worries me about Roth IRAs; what is stopping the government from turning around and saying that they will tax me on the funds in the future anyway. Maybe we should all buy gold and bury it the backyard...

-Neo [/B]

I agree. I think over the long-term, with the have nots taking more and the haves paying more, they will phase in the taxing of Roth IRAs. Maybe they will start at taxing 25% of the gains at regular tax rates and eventually tax 100% of the gains....