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Thread: Roth IRA versus conventional / SEP IRA versus no IRA

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    Default Roth IRA versus conventional / SEP IRA versus no IRA

    This IRA related content was split from another thread ...

    Scroll way down for the remaining posts ... it's hopefully worth it !
    Last edited by Melonie; 10-03-2010 at 04:44 AM.

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    Default Re: What do YOU save your money for?

    for those who want to understand where the gov't sanctioned retirement account 'fear factor' comes from, here's a new tidbit ...

    (snip)"40l(k)/IRA Nationalization Quietly Moves Forward

    The U.S. Treasury and Labor Departments will ask for public comment as soon as next week on ways to promote the conversion of 401(k) savings and Individual Retirement Accounts into annuities or other steady payment streams, according to Assistant Labor Secretary Phyllis C. Borzi and Deputy Assistant Treasury Secretary Mark Iwry, who are spearheading the effort.

    They want to "get people to invest their 401k's and IRA's into annuities, or likely into U.S. T-Bonds, which are in the biggest overvalued bubble the world has ever seen.

    They are doing this because they will have $2 Trillion Dollars in bonds to sell this year, and foreign buying is drying up. China doesn't want them.... Do you?


    Who's behind it? The White House and a powerful network of Congressional activists, and the highly-influential Ford and Rockefeller Foundations.

    They are engineering a new regulatory and tax-incentive. The purpose is to herd and ultimately force Americans to convert their 40l(k)s and IRAs into government-directed retirement accounts.

    The 40l(k)/IRA de-privatization plan is the brain-child of Teresa Ghilarducci of the Schwartz Center for Economic Policy Analysis " "SCEPA", who is funded by the Rockefeller Foundation.

    The extreme tactics used to ram Nationalized Health care down the country's throat are a blueprint for what could be the biggest asset grab in history.

    This is exactly what took place in Argentina. Yes, Argentina was once a powerful nation; the 3rd wealthiest nation until the 20th Century. Another reason as to why our government needs to nationalize retirement accounts...

    Is reported by the New York Times, "This year, the system will pay out more in benefits than it receives in payroll taxes, this important threshold was not expected to cross until at least 2016, according to the Congressional Budget Office." The trickle of red ink will soon become a flood under the pressure of 78 million retiring Baby Boomers....

    Less money going into the system! Who will you need to Trust in the Handling of your money?

    The March 9 edition of Business Week notes that new federal regulations designed to "promote the conversion of 401(k) savings and Individual Retirement Accounts into annuities or other steady payment streams" would help drive cash into government-controlled entities such as American International Group (AIG), which was bailed out to the tune of $182.3 billion.

    You Do Trust AIG.. right? The Real Question Is.. Is there a safe haven for retirement accounts?

    from


    Before anybody goes off the deep end, the source for this tidbit is admittedly 'far from objective'. However, that does not subtract from the factuality of their excerpts. There have already been 'discussions' about creating (dis)incentives that would pressure IRA / 401k account holders to shift their retirement assets into US Treasury bonds and/or other gov't approved annuities. The new round of 'public comment' simply attempts to resurrect the issue.

    The premise behind these 'discussions' is that 'Joe Sixpack' isn't smart enough to avoid experiencing major IRA / 401k market value losses during market downturns ... supposedly increasing the 'burden' placed on the Social Security system. Thus the premise goes that 'Joe Sixpack' must be protected from his own greed / bad judgement in regard to his retirement savings by the gov't 'forcing' Joe's retirement assets to be placed in 'secure' investment vehicles ... like US Treasury bonds and/or guaranteed payout annuity contracts through AIG. Of course, both of these pay extremely low rates of interest, arguably resulting in IRA / 401k account holders involuntarily subsidizing US gov't debt !

    And this latest resurrection of the US Treasury bond / guaranteed annuity contract issue is just one aspect of a much larger principle ... that when you choose to put money into an IRA / 401k account you begin playing a 'game'. Much like 'Jumanji' it's a 'game' where you are effectively locked in until the bitter end i.e. you reach official retirement age ( enforced via early withdrawl penalties / high lump sum distribution taxes etc. ) whereas the gov't is free to change the rules of the 'game' in its own favor at any time !!!

    ~

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    Senior Member Lillionaire's Avatar
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    Default Re: What do YOU save your money for?

    -down payment for a house
    -eventually, mortgage payments and the rest of it, too
    -remainder of student loans, which should not be more than $20,000 total
    -early retirement? nervous about the whole IRA-uncertainty thing. I want to max out my Roth deposits this year but I don't even know WHEN I will find out whether or not the coast is clear

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    Banned Melonie's Avatar
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    Default Re: What do YOU save your money for?

    ^^^ Roth IRA accounts, while still potentially subject to future gov't rule changes, would appear to be far less at risk for 'surprises' than SEP IRA's, 401k's, conventional IRA's etc. The reason of course is that the money contributed to a Roth IRA will already be taxed in the year it is contributed ... such that only the dividend / interest / cap gain earnings on money contributed to Roth IRA accounts receives gov't sanctioned tax preferred treatment. Thus from a logical standpoint, the gov'ts 'right' to dictate conditions on Roth account moneys should be limited to the dividend / interest / cap gain earnings portion. This is a different story than SEP, 401k, conventional IRA etc. moneys where both the contributed money and the dividend / interest / cap gain money have received gov't santioned tax preferred treatment.


    Also, in regard to your desire to save up for and purchase a home, there are similar gov't 'rule changes' on the horizon as well. From

    (snip)"Abolishing the mortgage-interest deduction, enjoyed by some 75 million homeowners, is a way to “end the subsidization of too much debt,” which was at the crux of the financial meltdown, a Cato Institute official told CNBC Friday. (snip)

    (snip)"Congress is considering eliminating the deduction as a way to raise revenue and close the budget gap. This move would add an estimated $120 billion to the Treasury coffers.

    “I’m not in favor of it to raise taxes,” added Calabria. “You need it to get rid of it in a budget-neutral way. You could use it to offset marginal taxes on income.”

    Calabria conceded the deduction could be kept in place for those who have, for instance, at least 30 percent of equity in their homes, but not those who have less."(snip)

    Thus, much like entering into a 30+ year 'game' with gov't sanctioned retirement accounts, these days buying a home also constitutes entering into a 30 year 'game' where the gov't could also change the 'rules' after the 'game' has already started. In this case, for middle class earnings level home buyers, abolishment of the home mortgage interest tax deduction could effectively make monthly mortgage payments far more expensive in net dollar terms ... and especially so during the early years of the mortgage where interest payments exceed principal repayments. Put another way, the gov't abolishing the home mortgage interest tax deduction would not directly increase your monthly mortgage payment, but it would directly decrease the amount of after-tax dollars you have remaining to make the mortgage payment with !!! The gov't abolishing the home mortgage interest tax deduction would also result in more potential home buyers failing to qualify for new mortgages, and as a result fewer homes being sold, and as a second result even lower real estate market prices / valuations.

    ~

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    Default Re: What do YOU save your money for?

    Only thing left is student loans - walking into that dealership and smacking down cash demanding my car was pretty damn awesome lol

    I want to start investing (but not high risk stocks) ..I"m guessing with the economy that doing an IRA isn't a good idea? Thanks for your help

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    Default Re: What do YOU save your money for?

    ^ Get a Roth IRA!

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    Default Re: What do YOU save your money for?

    Agreed that a Roth IRA, where the contributed money has already been taxed and as such shouldn't be subject to future tax rate / retirement account rule changes, is the safest of the available options.

    However, in theory, a Roth IRA could be subject to certain rule changes nonetheless ... such as the potential forced conversion of ( some percentage of ) the Roth IRA's assets into US Treasury Bonds ( which could pay near zero interest while the US dollars they are denominated in drop in value ), such as huge new penalties for early withdrawl of Roth IRA assets before some newly set retirement age ( 70 ? 72 ? 75 ? ).

    As far as my purely personal opinion goes, right now there are too many 'unknowns' in the US economic / tax / potential rule change equation to consider 'locking up' US dollars in any kind of gov't sanctioned retirement account for the next 30-40-50 years. As with buying real estate with a 30 year mortgage ( and potentially having the future deductibility of mortgage interest disallowed as a tax deduction ), IMHO there are simply too many risks that some basic 'rule of the game' will be changed that could fundamentally alter the game in the 'house's' favor.

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    Default Re: What do YOU save your money for?

    ^Ehm..what's the difference between Roth and regular IRA again? I know I researched it somewhere but it's all confusing to me You can't touch any of the money you put in, right? It just earns interest?

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    Default Re: What do YOU save your money for?

    Oops sorry Melonie just saw your post lol- thanks- so, consensus is that roth ira is the best way? I read the book "rich dad poor dad" and he's totally right- you have to get your money working for you- so ultimately have your monthly bills paid by residual/or investments, and whatever your salary is, save for retirement/reinvest etc.

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    Default Re: What do YOU save your money for?

    While this is a bit off topic for this thread, it is important info so here's the bare basics of gov't sanctioned IRA's UNDER PRESENT LAW !!!!

    Conventional / SEP IRA's allow a portion of the money you earn this year to avoid immediate taxation by being contributed to an IRA account. This contributed IRA money can be used to invest in stocks / bonds / gold or just about anything else, with the earned interest / dividends / cap gains also not being taxed in the current year. Once you reach legal retirement age you can liquidate assets / withdraw funds without penalty ... however the withdrawn funds count as ordinary income in the future year that they are withdrawn. That makes the withdrawn funds subject to future taxation, and also subject to future means testing of other gov't benefits ( which could potentially reduce / eliminate future Social Security benefits if you have IRA money available ). The 'good' side is the deferral of current year income taxes, but the 'bad' side is a plate full of unknown variables when you reach retirement age and start making withdrawls. Also, with certain special exceptions, withdrawing funds from an IRA before you reach legal retirement age is subject to a heavy penalty as well as heavy income taxation.

    A Roth IRA is not tax deferred in the current year ... thus any money that you contribute to a Roth IRA will already have been subject to income tax. However, interest / dividend / cap gains earnings from Roth IRA investments are allowed to accumulate tax free. Since the contributed money has already been taxed once, it is possible to withdraw a portion of that contributed money before reaching legal retirement age without heavy penalties. At the moment, future withdrawls once you reach retirement age are not considered to be income and not subject to tax. However, it is still possible that a rule change could count future Roth IRA withdrawls against means tested Social Security benefits. The 'good' side is that the already taxed contributed money should remain somewhat free from future gov't rule changes. The 'bad' side is that the contributed money will have already been taxed ... thus contributing to a Roth IRA offers no current year tax advantage over investing in stocks / bonds / gold etc. outside of an official gov't sanctioned retirement account framework ( but where THAT money will remain relatively free of potential future gov't tentacles / restrictions ).

    My personal concerns with both conventional IRA's and Roth IRA's is that, as gov't sanctioned retirement accounts, the gov't maintains 'jurisdiction' over your money. This means that the gov't knows exactly how much money you have, that the gov't could issue future directives as to how this money must be invested ( i.e. 50% in US Treasury Bonds has already been discussed in Washington ), that the gov't could issue other future directives as to when, and how much, of your own money you can withdraw per year without penalty, that the gov't could issue another future directive that withdrawn IRA money could not be sent outside the USA etc. While none of these possibilities sounds too ominous in light of the past 10 years of US economic / retirement situation, for a fact the US and the world could be a very different place 20-30-40 years from now when you reach the then legal retirement age !

    From that viewpoint, my personal opinion is that there are just too many future risk factors and too many variables on the table in Washington to prudently commit available savings to either type of gov't sanctioned retirement accounts right now. This is the same sort of personal opinion I hold against purchasing a home with a 30 year mortgage loan not knowing for sure whether or not the home mortgage interest payments will remain tax deductible over the 30 year life of the mortgage ( something which is also the topic of recent discussions in Washington ). In other words, I tend to shy away from making high stakes long term bets when the 'rules of the game' can be changed by the gov't after the game has already started !!! But again that's just my own personal opinion.

    However, I will say that a Roth IRA is the lesser of the two evils. Along those lines, if anybody out there has a conventional IRA, a SEP IRA, or an 'old' 401k, it is now possible to convert those accounts to a Roth IRA without penalty ( however the conversion will result in taxation of the IRA assets ) ... something that IMHO should be seriously considered !!! see

    ~

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    Default Re: What do YOU save your money for?

    ^Thanks so much melonie! That was very helpful, so pretty much- there's obviously no 'sure safe way' to do that..really, i'm just looking to earn interest/SOME sort of income from my money..because if not, banks are going to be sorry to hear that people are doing the "safe in the mattress" deal!

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    Default Re: What do YOU save your money for?

    ^ My question is off topic, but that was really interesting. I had no idea there was a difference between an IRA and a Roth IRA - I thought the two terms could be used interchangeably. I am a bit confused though - if Roth IRA's are taxed immediately, and regular IRA's are taxed later....what's the difference? I mean, why bother with the SEP IRA and try and avoid the inevitable? Why not just pay the taxes right away and then you know exactly how much you have saved? Do you get a tax break with one over the other?

    This should probably be a different thread....



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    Default Re: What do YOU save your money for?

    ^^^ well, and again under CURRENT law, the conventional IRA offers current year tax savings where the Roth IRA does not. For someone earning say $100k a year, contributing say $10k to a conventional IRA would reduce their current year's taxable income to $90k and in the process reduce their income taxes by $3-4k. The kicker of course is that, 30-40 years from now when the money starts to be withdrawn, that contributed $10k will count as earnings upon withdrawl and will become subject to whatever income tax rates ( and other income based means tests for gov't benefits ) are in effect at that time.

    In contrast, with the same $100k earnings and $10k contribution situation to a Roth IRA, the contributed money does not subtract from current year earnings thus an extra $3-4k in income taxes will have to be paid this year. However, 30-40 years from now when the money starts to be withdrawn, the contributed $10k will NOT count as earnings and will NOT be subject to whatever income tax rates will then apply.

    In essence, the conventional IRA is a 'leveraged bet' that present income tax rates are higher than income tax rates that will be in effect 30 years from now, and that present year's earnings levels are higher than they will be 30 years from now. If you are a serious professional dancer with a present income in the $200k plus range, that assumption is pretty safe. If you are a full time dancer with a present income in the $100k range that assumption is less safe. And if you are a part time dancer with a present income in the $50k or less range, that assumption is probably NOT safe.

    And again all of the assumptions are subject to whatever the gov't may decide to change in the way of income tax rates and / or official gov't retirement account rules over the course of the next 30 years ! For example, if the US gov't remains broke, 30 years from now the future year 'income' provided by withdrawing funds from a conventional IRA may directly reduce the size of your Social Security check, whereas withdrawing money from a Roth IRA would not count as future year income thus leaving your Social Security check unaffected ! Or on the other hand, the gov't could change rules such that having a lot of money in either a conventional IRA account or a Roth IRA account could cut off / reduce Social Security checks 30 years from now.

    This is the 'risk factor' I was talking about earlier where the 'rules of the game' can be changed by the gov't long after you start playing ! And as I mentioned earlier, the same sort of risk now more or less exists when buying a house with a 30 year mortgage. As with the mortgage ( with tax deductible mortgage interest payments), with a conventional IRA you are 'giving up control of your money' for the next 30 years in exchange for current year tax savings based on certain present day tax rules and financial assumptions. However, like the mortgage, there is no guarantee that the present day rules and assumptions ( i.e. that the value of real estate always goes up, that mortgage interest will always be tax deductible ) will remain true over the course of the next 30 years !

    And also just like the 30 year mortgage, if the rules and assumptions change for the worse it may be impossible to 'get out from under' your 30 year financial commitment to an IRA without experiencing heavy losses / penalties in the process. Personally speaking, I am increasingly disturbed by Washington discussions which would potentially force future IRA money ( or some percentage of IRA money ) to be removed from standard private sector stock / bond / commodity investments and instead forced into the purchase of US Treasury bonds / guaranteed income annuities / whatever other specific areas of investment that the gov't may deem necessary etc. Such future gov't mandates could VASTLY reduce the effective rate of return on IRA retirement investments, could MORE than cancel out any tax advantages of IRA's etc.

    ~

    ~
    Last edited by Melonie; 10-03-2010 at 04:52 AM.

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