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Thread: Roth IRA

  1. #1
    Senior Member xGeminix's Avatar
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    Default Roth IRA

    I have little idea about the Roth IRA, and I was wondering what your thoughts about it were?

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    Banned Melonie's Avatar
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    Default Re: Roth IRA

    Truthfully, I have growing negative impressions about ANY gov't sponsored tax favored retirement program. The reason, of course, is that once you put money into any of these gov't sponsored retirement programs your money is subject to whatever future changes US lawmakers may choose to enact over the course of the next 30-40 years. Granted that a Roth IRA, where the 'principal' contributed to the program has already been taxed, is less vulnerable to future rule changes than conventional IRA's where neither the principal nor the dividends / interest earnings have been taxed, but the Roth interest / dividend earnings aren't 'immune'.

    The following have already been discussed in Washington as proposed changes to gov't sponsored retirement programs ...

    - reduction / elimination of Social Security checks at retirement age if sufficient money exists in a gov't sponsored retirement program to allow the person to 'pay their own bills'

    - enacting higher tax rates on the pre-tax contributions and untaxed dividend / interest earnings in gov't sponsored retirement programs at the time they are withdrawn

    - subjecting money in gov't sponsored retirement programs to the estate tax upon the contributor's death


    Again personal opinion, but, the past attractiveness of all of the gov't sponsored retirement programs was the ability to defer today's ( presumably higher ) income, interest and dividend tax rates from current year income ... in exchange for paying ( presumably lower ) income taxes at the time the funds are withdrawn. IMHO with the just enacted new income tax rates on the 'rich', and given the fact that these gov't sponsored retirement programs essentially convert interest and dividend income into ordinary income for tax purposes at time of withdrawl, that past attractiveness is already being marginalized.

    To elaborate, suppose you had the option of buying stock in a particular company directly or inside a gov't sponsored retirement program, and that company just paid a $1000 special dividend. With direct purchase of the stock, that $1000 would be subject to a ~15% tax rate ( assuming you earn less than $400k this year ). But inside the gov't sponsored retirement program, that $1000 would eventually be subject to whatever ordinary income tax rate prevails at the time of withdrawl some 30-40 years from now, which could be 28% or 33% or who knows ??? Ultimately, this boils down to a compounding equation with a ton of unknown variables.

    IMHO at least, the vulnerability of gov't sponsored retirement programs to future law changes now outweighs the value of the tax deferral they provide. So the decision to contribute to a gov't sponsored retirement program essentially boils down to a belief that future tax rates will be lower 30-40 years from now than they are today, a belief that the existance of a pile of money in a gov't sponsored retirement account will NOT adversely affect the amount of future gov't transfer payments ( i.e. Social Security checks, national health insurance premium subsidies, who knows ? ) that the person might otherwise receive, etc.

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    Senior Member xGeminix's Avatar
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    Default Re: Roth IRA

    Wow, thank you so much for your response.

    I am so grateful for it.

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    Banned Melonie's Avatar
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    Default Re: Roth IRA

    I'll also point out that, if legal tax avoidance is a primary concern ... which it certainly is these days in high tax rate states like CA, NY, IL etc. ... it's possible to directly purchase tax free municipal bonds. These municipal bonds provide up to say 6% in tax free interest earnings, with no 'strings attached' a la the gov't sponsored retirement programs. While the direct purchase price for a municipal bond is in the $50k range, some brokers do sell 'fractionals' with a purchase price in the $5k range. Also, many mutual fund companies make state specific tax free muni bond fund shares available at much lower prices. These provide the same legal tax avoidance advantages, but typically charge a 1% management fee that 'shaves' the actual rate of return versus direct bond purchase. And of course the tax free muni bond mutual fund shares can be easily bought and sold just like stock shares through any brokerage account.

    With either a directly purchased muni bond, or with shares of a mutual fund consisting of muni bonds, despite the tax-free interest earnings while you own them there are no 'strings attached' in regard to selling these assets at any time ... no age limits, no 'early withdrawl' penalty charges, no surprise increase in income taxes due on the proceeds of the sale, etc. Obviously, the daily 'cash value' of these muni bonds and muni bond based mutual funds does go up and down with market forces, so losses of principal are possible if sold prior to maturity. However, with many states leveeing higher state income tax rates, increased demand for these tax free instruments has kept their 'cash values' rising.
    Last edited by Melonie; 02-02-2013 at 11:30 PM.

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    Banned Melonie's Avatar
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    Default Re: Roth IRA

    and speak of the devil ..... from


    (snip)"It’s Coming: The Government Wants to “Help Manage” Retirement Accounts

    Posted on February 2, 2013

    Many people, including myself, have discussed this threat over the past several years. The obvious concept is that when the government runs out of money, or they face a drying up in interest for its debt, they will come for the $19.4 trillion in American’s retirement accounts. It seems that day may be finally drawing near.

    I stopped contributing to my 401k back when I worked at Bernstein, and I will probably now have to give more serious consideration whether I want to take the penalty and move the funds out of my retirement account entirely. I haven’t made any decisions, but will be watching closely.

    I’m sure the government is just trying to protect your retirement account from terrorists.

    From Bloomberg:

    The U.S. Consumer Financial Protection Bureau is weighing whether it should take on a role in helping Americans manage the $19.4 trillion they have put into retirement savings, a move that would be the agency’s first foray into consumer investments.

    “That’s one of the things we’ve been exploring and are interested in in terms of whether and what authority we have,” bureau director Richard Cordray said in an interview. He didn’t provide additional details.

    The bureau’s core concern is that many Americans, notably those from the retiring Baby Boom generation, may fall prey to financial scams, according to three people briefed on the CFPB’s deliberations who asked not to be named because the matter is still under discussion.

    The Securities and Exchange Commission and the Department of Labor are the main regulators of U.S. retirement savings vehicles and funds. However, the consumer bureau — established by the 2010 Dodd-Frank Act — sees itself as a potential catalyst for promoting a coherent policy across the government, the people said.
    "(snip)


    The unspoken 'truth' behind this latest proposal is that, thanks to chronic money printing by the FED, US treasury bonds carrying near zero interest rates are becoming harder and harder to sell to anyone besides the FED. And, of course, the US gov't needs to keep printing and selling new Treasury Bonds at near zero interest rates in order to keep funding it's trillion dollar a year deficit spending spree. This proposal, under the guise of trying to 'prevent losses' on investments already inside gov't sanctioned retirement accounts, would mandate that X percent of that investment money MUST be allocated toward the purchase of ( supposedly 100% safe ) US Treasury Bonds !!!

    This proposal, if actually enacted, would FORCE millions of Americans to reallocate X percent of the money they have already contributed to IRA's, 401k's, Roth's etc., to buy US Treasury Bonds providing near zero return on investment ... in order to preserve a viable market for newly printed Treasury Bonds without the necessity of raising the interest rates paid to the point where private / institutional / foreign investors would willingly buy them ( because increasing interest rates would also devastate US gov't cash flows due to huge amounts of tax revenues having to be used to pay much higher interest payments on current / future Treasury Bonds ).

    However, this proposal, if actually enacted, would also virtually eliminate all compound interest earnings within those IRA's, 401k's, Roth's etc. ( i.e. the interest rate on a 5 year US Treasury bond is currently only 0.88% ). And, obviously, since Treasury Bond interest earnings are already exempt from federal income tax, this mandate would 'wipe out' the majority of the only real financial advantage that the IRA's, 401k's, Roth's etc. have had going for them in the past ... i.e. tax deferral.
    Last edited by Melonie; 02-03-2013 at 01:05 AM.

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