what is the outcome of Roth IRA?

Hi there,
I am considering to have a Roth IRA plan. I am 28 and lets say I start
at the age of 30. If I put $3000.00 per year for five years,
roughly how much can i get when I am at age of 60? If i keep puting
$3000.00 per year till I reach 60, how much can i get then? Is there
any risk for purchasing a Roth IRA plan? what is the worst situation?
Can I buy it from any where? like Bank of America? I am a total layman
about any kind of retirement plan...Never have any in my life yet..:):)
Thanks
*L* any kind of help will be highly appreciated.

Have a great holiday ahead!

-Selina Peterson

Re: what is the outcome of Roth IRA?

selina wrote:
> any risk for purchasing a Roth IRA plan? what is the worst situation?

The Roth IRA is a special account that you use to purchase other
investments such as stocks, bonds, mutual funds, CDs. It is not an
investment in itself. The benefit is that all earnings will not be
taxed. The risk will depend what you decide to invest in. If you invest
in stocks, the worst case is you can lose everything. If you invest in
CDs, then very little risk.

> Can I buy it from any where? like Bank of America?

Most banks offer Roth IRA accounts, but it's usually a better idea to
open them with a brokerage firm like Fidelity or Vanguard. Banks
usually have higher fees and less choices.

> I am considering to have a Roth IRA plan. I am 28 and lets say I start
> at the age of 30. If I put $3000.00 per year for five years,
> roughly how much can i get when I am at age of 60? If i keep puting
> $3000.00 per year till I reach 60, how much can i get then?

The answer will vary widely depending on your assumption of what return
rate you expect. Here is a basic calculator, just plug in the numbers.


It takes a long time to learn about the financial world, here's a place
to start:

Re: what is the outcome of Roth IRA?

Roth ira's are the best thing the gov't has ever done for the individual
investor....... max it out each year, invest conservatively, and never pay
taxes on that money again...... anyone who is eligible for a Roth, can
afford it, and doesn't have one.... is nuts..

Arne

"Bucky" <> wrote in message
news:
> selina wrote:
>> any risk for purchasing a Roth IRA plan? what is the worst situation?
>
> The Roth IRA is a special account that you use to purchase other
> investments such as stocks, bonds, mutual funds, CDs. It is not an
> investment in itself. The benefit is that all earnings will not be
> taxed. The risk will depend what you decide to invest in. If you invest
> in stocks, the worst case is you can lose everything. If you invest in
> CDs, then very little risk.
>
>> Can I buy it from any where? like Bank of America?
>
> Most banks offer Roth IRA accounts, but it's usually a better idea to
> open them with a brokerage firm like Fidelity or Vanguard. Banks
> usually have higher fees and less choices.
>
>> I am considering to have a Roth IRA plan. I am 28 and lets say I start
>> at the age of 30. If I put $3000.00 per year for five years,
>> roughly how much can i get when I am at age of 60? If i keep puting
>> $3000.00 per year till I reach 60, how much can i get then?
>
> The answer will vary widely depending on your assumption of what return
> rate you expect. Here is a basic calculator, just plug in the numbers.
>
>
> It takes a long time to learn about the financial world, here's a place
> to start:
>

Re: what is the outcome of Roth IRA?

I should have added, I did this with my 401k, which is why I retired 10
years before any of my peers...

Arne

Re: what is the outcome of Roth IRA?

In article <>,
selina <> wrote:
>Hi there,
>I am considering to have a Roth IRA plan. I am 28 and lets say I start
>at the age of 30. If I put $3000.00 per year for five years,
>roughly how much can i get when I am at age of 60? If i keep puting
>$3000.00 per year till I reach 60, how much can i get then? Is there
>any risk for purchasing a Roth IRA plan? what is the worst situation?
>Can I buy it from any where? like Bank of America? I am a total layman
>about any kind of retirement plan...Never have any in my life yet..:):)
>Thanks
>*L* any kind of help will be highly appreciated.
>
>Have a great holiday ahead!
>
>-Selina Peterson
>

The Roth IRA is more of an administrative label. I opened a Roth IRA
savings account with my bank some years ago (Indiana University Credit
Union, I probably got better terms and interest than you would from a
commercial bank). Lately I've been transferring some of that money to a
CD and to mutual funds, all of them designated as Roth IRA.

Growth mutual funds are a good plan for someone with 30 years before
retirement. They'll go up and down, but in the long term tend to gain
more than safer investements would. Going down is actually a good thing
because the share price drops and you can buy more shares. Then it will
go up. In the last decade start transferring some of that to safer
investments, sell high.

Mutual funds are not FDIC insured. The worst that can happen is you lose
everything.
--
"Will we be suturing the anus?"

Re: what is the outcome of Roth IRA?

> selina <> wrote:
>>Hi there,
>>I am considering to have a Roth IRA plan. I am 28 and lets say I start
>>at the age of 30. If I put $3000.00 per year for five years,
>>roughly how much can i get when I am at age of 60? If i keep puting
>>$3000.00 per year till I reach 60, how much can i get then?

How much you get will depend on how your investments do over time.

Is there
>>any risk for purchasing a Roth IRA plan?

You don't purchase an IRA, you start one by opening an account. There is no
risk.
The risk comes with the investments you select for your IRA.

>> what is the worst situation?

The worst case is that you will not reach your goal. The best case is that
you will exceed your expectations.

>>Can I buy it from any where? like Bank of America? I am a total layman
>>about any kind of retirement plan...Never have any in my life yet..:):)
>>Thanks

You can start an IRA at most banks, yes. Many people prefer to use mutual
fund sellers like Fidelity, T. Rowe Price, Vanguard, or others. These
companies will offer you no-load mutual funds and banks usually don't. Banks
usually offer loaded funds, loaded just means that you will pay a sales
charge to purchase shares, no-load means that there is no sales charge.

Re: what is the outcome of Roth IRA?

"selina" <> wrote in message
news:
>
> If i keep puting
> $3000.00 per year till I reach 60, how much can i get then?
>
Well, I wouldn't worry about how much. You have two choices with money.
You can either spend it now, or save it for future. If you decide to save,
Roth IRA is just about the best thing since you are earning returns
tax-free, unless you have an employe-matched 401k plan. The only downside
is that you don't have access to that money till you retire. (Actually,
make that 3rd best thing after HSA).

Re: what is the outcome of Roth IRA?

I thought you can invest up to $4,000 this year in a Roth IRA, correct?

What is the critieria for eligibility? I heard there is a $150K cutoff for
married filing joint? What if I file married filing separate?

"Arne" <> wrote in message
news:cBEle.35613$
> Roth ira's are the best thing the gov't has ever done for the individual
> investor....... max it out each year, invest conservatively, and never pay
> taxes on that money again...... anyone who is eligible for a Roth, can
> afford it, and doesn't have one.... is nuts..
>
> Arne
>
> "Bucky" <> wrote in message
> news:
>> selina wrote:
>>> any risk for purchasing a Roth IRA plan? what is the worst situation?
>>
>> The Roth IRA is a special account that you use to purchase other
>> investments such as stocks, bonds, mutual funds, CDs. It is not an
>> investment in itself. The benefit is that all earnings will not be
>> taxed. The risk will depend what you decide to invest in. If you invest
>> in stocks, the worst case is you can lose everything. If you invest in
>> CDs, then very little risk.
>>
>>> Can I buy it from any where? like Bank of America?
>>
>> Most banks offer Roth IRA accounts, but it's usually a better idea to
>> open them with a brokerage firm like Fidelity or Vanguard. Banks
>> usually have higher fees and less choices.
>>
>>> I am considering to have a Roth IRA plan. I am 28 and lets say I start
>>> at the age of 30. If I put $3000.00 per year for five years,
>>> roughly how much can i get when I am at age of 60? If i keep puting
>>> $3000.00 per year till I reach 60, how much can i get then?
>>
>> The answer will vary widely depending on your assumption of what return
>> rate you expect. Here is a basic calculator, just plug in the numbers.
>>
>>
>> It takes a long time to learn about the financial world, here's a place
>> to start:
>>
>
>

Re: what is the outcome of Roth IRA?

"TK Sung" <> wrote
> "selina" <> wrote
> > If i keep puting
> > $3000.00 per year till I reach 60, how much can i get then?
> >
> Well, I wouldn't worry about how much. You have two choices with money.
> You can either spend it now, or save it for future. If you decide to
save,
> Roth IRA is just about the best thing since you are earning returns
> tax-free, unless you have an employe-matched 401k plan. The only downside
> is that you don't have access to that money till you retire.

Not so for a Roth IRA. Contributions (but not earnings) may be withdrawn
from a Roth IRA at _any time_.

Historical stock market returns have been about 10% a year over the last
century. Figure it's only 7%, as the market may be a bit bloated now, and
figure you max out your Roth IRA contribution each year.

Google for {"Roth IRA"} to find out more information. Like others here, I
recommend opening your Roth IRA account with a large, well known mutual fund
company like Vanguard or Fidelity. They have among the best rates, if not
thee best rates, available.

As to what mutual funds, stocks, and bonds you should put into you Roth IRA,
and the allocation among these choices, and why such an allocation is good,
just ask here and also at misc.invest.financial-plan . The expertise is
similar but hearing responses from as many diverse sources as possible is
usually advantageous.

Re: what is the outcome of Roth IRA?

In article <M38me.2761$>,
Elle <> wrote:
>"TK Sung" <> wrote
>> "selina" <> wrote
>> > If i keep puting
>> > $3000.00 per year till I reach 60, how much can i get then?
>> >
>> Well, I wouldn't worry about how much. You have two choices with money.
>> You can either spend it now, or save it for future. If you decide to
>save,
>> Roth IRA is just about the best thing since you are earning returns
>> tax-free, unless you have an employe-matched 401k plan. The only downside
>> is that you don't have access to that money till you retire.
>
>Not so for a Roth IRA. Contributions (but not earnings) may be withdrawn
>from a Roth IRA at _any time_.

But you'll pay for it at tax time.
--
"Awareness means not just a vague, comfortable, fuzzy feeling. It means
explicit knowledge of current conditions." -- NBSR Radiation Safety
Training

Re: what is the outcome of Roth IRA?

"Gregory L. Hansen" <> wrote
E wrote
> >Not so for a Roth IRA. Contributions (but not earnings) may be withdrawn
> >from a Roth IRA at _any time_.
>
> But you'll pay for it at tax time.

You're confusing a Roth IRA with a Traditional IRA.

Contributions to a Roth IRA are taxed prior to their being contributed.

Contributions to a Traditional IRA that are subsequently withdrawn
pre-retirement and without meeting certain criteria (e.g. medical expenses)
are taxable and also penalized 10%. This is because no taxes were paid on
the contributions prior to contributing.

Re: what is the outcome of Roth IRA?

> >Not so for a Roth IRA. Contributions (but not earnings) may be withdrawn
> >from a Roth IRA at _any time_.

Gregory L. Hansen wrote:
> But you'll pay for it at tax time.

Nope. Many people don't realize that with the Roth IRA, you can
withdraw your contributions at any time without paying any taxes or
penalties whatsoever. I myself had been contributing to a Roth IRA for
a few years before learning about this, and I didn't believe it at
first either.

what is the outcome of Roth IRA?

In a traditional ira, your profits come out first and your contributions
come out last. The Roth is the reverse of this. As I recently stated, anyone
who can afford to have a Roth and does not is nuts..

After a person retires, all contributions and gains are non-taxable.... a
person (like me) can conceivably live income-tax free for the rest of their
lives (I do pay taxes on my pension and social security).

In 2003, my effective tax rate was 1.23%, last year it jumped to 5.22%, but
will go no higher.

so, folks, plan for tomorrow, live for today, as the saying goes.

Arne

"Bucky" <> wrote in message
>
>
>

Re: what is the outcome of Roth IRA?

In article <J5ime.35950$>
wrote:

> In a traditional ira, your profits come out first and your contributions
> come out last. The Roth is the reverse of this. As I recently stated, anyone
> who can afford to have a Roth and does not is nuts..

I agree completely. I do have one concern - isn't it possible that at
some point Congress will decide to not extend the tax exempt status of
Roth gains?

--
---
Chris Smolinski
Black Cat Systems

Re: what is the outcome of Roth IRA?

"Chris Smolinski" <> wrote in message
news:
> In article <J5ime.35950$>
> wrote:
>
>> In a traditional ira, your profits come out first and your contributions
>> come out last. The Roth is the reverse of this. As I recently stated,
>> anyone
>> who can afford to have a Roth and does not is nuts..
>
> I agree completely. I do have one concern - isn't it possible that at
> some point Congress will decide to not extend the tax exempt status of
> Roth gains?
>

Retroactive?
Congress - Indian givers? Naaaaaaaa

> --
> ---
> Chris Smolinski
> Black Cat Systems
>

Re: what is the outcome of Roth IRA?

While anything is possible. I can't see how they could tax money twice in
such a blatant way.... also, there are a lot of roths out there, and the no
politician is going to want to hit roths too hard.... so I suspect they
would end roth contributions, but leave the roth as it is, similar to what
they did with simple ira contributions for a while.... before they brought
it back.

Arne

"Chris Smolinski" <> wrote in message news:cps->
> I agree completely. I do have one concern - isn't it possible that at
> some point Congress will decide to not extend the tax exempt status of
> Roth gains?
>
> --
> ---
> Chris Smolinski
> Black Cat Systems
>

Re: what is the outcome of Roth IRA?

"Chris Smolinski" <> wrote

> I agree completely. I do have one concern - isn't it possible that at
> some point Congress will decide to not extend the tax exempt status of
> Roth gains?

I doubt they would fool with it and if they did it could only apply to gains
and not contributions.
Yes, I realize that most of the money in the account could be gains.

Re: what is the outcome of Roth IRA?

I'd be surprised it the retroactively made gains taxable.... they would tend
to make future gains taxable.... but again I don't see them monkeying around
with it too much. And I'm not sure how they could make future gains taxable
without a double taxation problem.....

bottom line, we are overthinking this..... the other bottom line is the
gov't might try to wiggle out in 20-30 years when a lot of people retire and
stop paying a lot of taxes..... If it were me, I'd still bulk up my Roth ira
until they change the law.

Arne

"Ed" <> wrote in message
news:
>
> "Chris Smolinski" <> wrote
>
>> I agree completely. I do have one concern - isn't it possible that at
>> some point Congress will decide to not extend the tax exempt status of
>> Roth gains?
>
> I doubt they would fool with it and if they did it could only apply to
> gains and not contributions.
> Yes, I realize that most of the money in the account could be gains.
>
>

Re: what is the outcome of Roth IRA?

In article <UJmme.35973$> wrote:
>I'd be surprised it the retroactively made gains taxable.... they would tend
>to make future gains taxable.... but again I don't see them monkeying around
>with it too much. And I'm not sure how they could make future gains taxable
>without a double taxation problem.....
>
>bottom line, we are overthinking this..... the other bottom line is the
>gov't might try to wiggle out in 20-30 years when a lot of people retire and
>stop paying a lot of taxes..... If it were me, I'd still bulk up my Roth ira
>until they change the law.

The other side is, with Social Security going the way it is, people will
likely depend more on their IRAs than they have in the past. I don't
think the Roth is going away any time soon when the maximum yearly
contribution has just been increased.


>
>Arne
>
>"Ed" <> wrote in message
>news:
>>
>> "Chris Smolinski" <> wrote
>>
>>> I agree completely. I do have one concern - isn't it possible that at
>>> some point Congress will decide to not extend the tax exempt status of
>>> Roth gains?
>>
>> I doubt they would fool with it and if they did it could only apply to
>> gains and not contributions.
>> Yes, I realize that most of the money in the account could be gains.
>>
>>
>
>


--
"Things should be made as simple as possible -- but no simpler."
-- Albert Einstein

Re: what is the outcome of Roth IRA?

Good point, but it will be interesting to see what happens (many years down
the road) when the taxes that had been coming in from pensions start to dry
up a bit with the tax free roths..... I don't know how big the numbers will
be, but you can bet the gov't will be spending more and looking for all the
pennies they can get their hands on.

Arne

"Gregory L. Hansen" <> wrote in message >
> The other side is, with Social Security going the way it is, people will
> likely depend more on their IRAs than they have in the past. I don't
> think the Roth is going away any time soon when the maximum yearly
> contribution has just been increased.
>

Re: what is the outcome of Roth IRA?

Arne wrote:
>
> In a traditional ira, your profits come out first and your
> contributions come out last.

Not quite. In a traditional IRA, contributions and profits come out
simultanously on a pro-rated basis. For example, if you have
contributed $100, and your profits are $400 (total $500), then if you
take a $100 distribution, then $20 (20%) is contribution, and $80 (80%)
is profit.

The profit is taxed as ordinary income. The tax status of the
contribution depends on whether the contribution was pre-tax (deductible
contribution) or post-tax (not deducted, see form 8606).

Intuit (TurboTax) has a more complex example:

--
Mark Freeland

Re: what is the outcome of Roth IRA?

On 26 May 2005 23:19:25 -0700, "selina" <>
wrote:


>I am considering to have a Roth IRA plan. I am 28 and lets say I start
>at the age of 30. If I put $3000.00 per year for five years,
>roughly how much can i get when I am at age of 60?

Well it depends. For starters, do you want us to assume that the tax
code remains unchanged for 30 years? <grin>


-HW "Skip" Weldon
Columbia, SC

Re: what is the outcome of Roth IRA?

Hi, there.
Thanks so much for everybody's opinion. Though I still don't have a
very concrete idea about the benifit of Roth IRA, at least I know what
I am going to do. No matter what is going to happen 30 years later, I
am going to bet on my Roth IRA plan, and ready to open at least two
accounts with different companies. From what I've read, it seems the
diversity is very important to us. But here I still have some small
issues to be solved: from what I understand, We can be qualified to
open a Roth IRA account only when our total income (e.g. a couple) is
under $130K(it is just a rough number). What would happen if my income
exceeds that limit one year after I open the account? How can I keep
contributing to my Roth IRA? What about 401K? Can I always have my 401K
account no matter how much my income is? What if I changed company or
just simply quited my job after having 401k for just 6 months? Is there
any option that I can still keep it? Do I just leave it alone? Can I
roll it over to some other company in the future if I start to work
again? There is a self-directed 401k option available from my husband's
company, which doesn't have any company match. Is it better than the
troditional 401k? Should we get this one? I know I have too many
tedious nitty gritty questions :):) so please feel free to igore them
if you are tired of reading them....
Thanks for your precious time!

Re: what is the outcome of Roth IRA?

Hi, there.
Thanks so much for everybody's opinion. Though I still don't have a
very concrete idea about the benifit of Roth IRA, at least I know what
I am going to do. No matter what is going to happen 30 years later, I
am going to bet on my Roth IRA plan, and ready to open at least two
accounts with different companies. From what I've read, it seems the
diversity is very important to us. But here I still have some small
issues to be solved: from what I understand, We can be qualified to
open a Roth IRA account only when our total income (e.g. a couple) is
under $130K(it is just a rough number). What would happen if my income
exceeds that limit one year after I open the account? How can I keep
contributing to my Roth IRA? What about 401K? Can I always have my 401K

account no matter how much my income is? What if I changed company or
just simply quited my job after having 401k for just 6 months? Is there

any option that I can still keep it? Do I just leave it alone? Can I
roll it over to some other company in the future if I start to work
again? There is a self-directed 401k option available from my husband's

company, which doesn't have any company match. Is it better than the
troditional 401k? Should we get this one? I know I have too many
tedious nitty gritty questions :):) so please feel free to igore them
if you are tired of reading them....
Thanks for your precious time!

Re: what is the outcome of Roth IRA?

"selina" <> wrote in message
news:

> Though I still don't have a
> very concrete idea about the benifit of Roth IRA,

Traditional IRA, Simple IRA or 401K :
Withdraws after 59.5 years old - TAXABLE

Roth IRA:
Withdraws after 59.5 years old - NOT taxable
(because you invested already taxed money)

Re: what is the outcome of Roth IRA?

On Tue, 31 May 2005, Gary C <> wrote:
>
> "selina" <> wrote in message
> news:
>
>> Though I still don't have a
>> very concrete idea about the benifit of Roth IRA,
>
> Traditional IRA, Simple IRA or 401K :
> Withdraws after 59.5 years old - TAXABLE

Forced by age 70.5 to begin withdrawl schedule based on life expectancy.


> Roth IRA:
> Withdraws after 59.5 years old - NOT taxable
> (because you invested already taxed money)

After tax contributions (but not gain) can be drawn any time (even before
59.5). No forced withdrawl at any age. So it is good for emergency fund
or when you need a wad of money at once (before or after retirement)
without taking a tax hit.

Re: what is the outcome of Roth IRA?

"David Efflandt" <> wrote

So it is good for emergency fund
> or when you need a wad of money at once (before or after retirement)
> without taking a tax hit.

You don't get to avoid the tax hit, you pay it before investing.

It can pay to do the math. A Roth IRA is not the best option for everyone.
It's true that it has benefits not available to traditional IRA investors
but these differences should be factored into the decision.

Re: what is the outcome of Roth IRA?

On Wed, 1 Jun 2005 03:12:21 -0400, Ed <> wrote:
>
> "David Efflandt" <> wrote
>
> So it is good for emergency fund
>> or when you need a wad of money at once (before or after retirement)
>> without taking a tax hit.
>
> You don't get to avoid the tax hit, you pay it before investing.
>
> It can pay to do the math. A Roth IRA is not the best option for everyone.
> It's true that it has benefits not available to traditional IRA investors
> but these differences should be factored into the decision.

What I meant was that if you draw from IRA/401K (after age 59.5), drawing
a larger amount or lump sum can increase your tax or tax rate that year.
Whereas, you can draw a lump sum from a ROTH IRA after 59.5 without it
affecting your income taxes at that time, since contributions were already
taxed and gains are not taxed.

The ever present unknown is which will come out ahead in the long run.
The best is likely a combination where investing in 401K or regular IRA
may reduce the tax rate for what you invest in a ROTH IRA (for flexible
emergency or non-emergency major expenses before or during retirement).

Re: what is the outcome of Roth IRA?

On Tue, 31 May 2005 00:04:41 UTC, "selina" <>
wrote:

> Hi, there.
> Thanks so much for everybody's opinion. Though I still don't have a
> very concrete idea about the benifit of Roth IRA,

I did some calculations on a Roth versus a Traditional IRA.

The results were remarkably simple.

If your tax rate is higher when you take the money out (than when you
put it in), you are better off with a Roth IRA.

If your tax rate is lower when you take the money out, you are better
off with a traditional IRA.

If the tax rate is the same, the result is equal either way.

These results are independent of the earnings per year of your IRA.

Note that above a certain annual income limit you are not allowed to
contribute to a Roth IRA, but if your income is too high you will
likely have a lower income when you retire and thus a Traditional IRA
would be better anyway.

Good luck,

Nate Liskov


--

Re: what is the outcome of Roth IRA?

"Nathan Liskov" <NATE_at_LCS_dot_MIT.EDU> wrote in message
news:
>
> If the tax rate is the same, the result is equal either way.
>

Impossible Nate. With one's tax rate remaining the same,
were talking about paying taxes ... or NOT paying taxes
with the ROTH. That result is NOT equal.

Tax free is tax free, no matter what my tax rate is.

Re: what is the outcome of Roth IRA?

In article <>,
Nathan Liskov <NATE_at_LCS_dot_MIT.EDU> wrote:
>On Tue, 31 May 2005 00:04:41 UTC, "selina" <>
>wrote:
>
>> Hi, there.
>> Thanks so much for everybody's opinion. Though I still don't have a
>> very concrete idea about the benifit of Roth IRA,
>
>I did some calculations on a Roth versus a Traditional IRA.
>
>The results were remarkably simple.
>
>If your tax rate is higher when you take the money out (than when you
>put it in), you are better off with a Roth IRA.
>
>If your tax rate is lower when you take the money out, you are better
>off with a traditional IRA.
>
>If the tax rate is the same, the result is equal either way.

I don't know. If your money is taxed before you put it in, what was taken
away as taxes could have been earning interest for decades before it's
taken away. Then you'd also pay tax on the additional interest, I
believe, but that would just be a portion of the additional interest.
--
"I fart for joy and I laugh more than if I had cast my old age, as a
serpent does its skin." -- Aristophanes, Peace, 421 BC

Re: what is the outcome of Roth IRA?

"Gregory L. Hansen" <> wrote in message
news:d8k8vn$vj6$
> In article <>,
> Nathan Liskov <NATE_at_LCS_dot_MIT.EDU> wrote:
> >I did some calculations on a Roth versus a Traditional IRA.
> >
> >The results were remarkably simple.
> >
> >If your tax rate is higher when you take the money out (than when you
> >put it in), you are better off with a Roth IRA.
> >
> >If your tax rate is lower when you take the money out, you are better
> >off with a traditional IRA.
> >
> >If the tax rate is the same, the result is equal either way.
>
> I don't know. If your money is taxed before you put it in, what was
> taken away as taxes could have been earning interest for decades
> before it's taken away. Then you'd also pay tax on the additional
> interest, I believe, but that would just be a portion of the additional
> interest.

The money that you save in taxes (by contributing to a deductible IRA) would
grow just enough to meet the taxes on the IRA itself when you withdrew it
(e.g. if your investments doubled, then the taxes you would owe on the IRA
at withdrawal would double, but then so would the investment you made with
the deferred taxes). So superficially, it looks like a wash, as Nathan
described.

But, as you noted, the growth of the tax money (i.e. the taxes deferred)
would itself be taxed, so the net amount wouldn't cover the taxes on the IRA
at withdrawal, and you would come out slighly behind with the deductible
IRA. If you look for older posts I've made on the subject, I've referred to
a "second order effect".

Here are some concrete numbers, though this could be done algebraically as
well:

Taxable income: $5,333.33, 25% tax rate. Assume investments double over
time.

Contribute $4K to traditional IRA, pay $333.33 in taxes on $1,333.33 still
outside of IRA (not tax-deferred). Leaves $1K outside of IRA.

When you withdraw from IRA, IRA is $8K, outside investment is $2K (assuming
that it was invested in something that recognized no income, such as a
tax-managed fund, a non-dividend paying stock, etc.; otherwise you'd have
less).

Tax due on IRA = $2K. Tax due on outside investment > 0
(whether it is 15%, 25%, or something else doesn't matter here; the point is
that you are left with less than $2K).

Net after taxes: ($8K - $2K) + ($2K - taxes on outside investment)
< $8K

Contribute to a Roth IRA: $4K in IRA, nothing outside (since taxes on the
$5,333.33 were $1,333.33).
IRA doubles in value. When you withdraw it, no taxes are due.

Net after taxes for Roth: $8K. Better than traditional IRA.

If you are not maxing out your IRA, then the two IRAs do come out equal.
For example, suppose you have $4K in taxable income (not $5,333.33).

Traditional IRA: contribute $4K
doubles in value to $8K
taxes due at withdrawal = $2K
net at withdrawal = $6K

Roth IRA: pay $1K on taxes (25% of $4K)
contribute $3K to Roth
double in value to $6K
net at withdrawal = $6K (no taxes due)

This is the calculation that Nathan did. Or more algebraically:

Let $P = principal amount, pre-tax
Let M = multiple of investment growth (in example above, M = 2)
Let T1 = tax rate now
Let T2 = tax rate at withdrawal

Same calculations as above, symbolically:
Traditional IRA: $P * M * (1- T2)
Roth IRA : [$P * (1 - T1)] * M * 1

(First term is amount contributed after applicable taxes, second is growth,
third is percentage remaining after applicable taxes after withdrawal.)

As you can see, if T1 = T2, then this is a wash, if T1 < T2, then the
Traditional is better, and if T2 > T1, the Roth is better.


--
Mark Freeland

Re: what is the outcome of Roth IRA?

In article <0vjre.486$>,
Mark Freeland <> wrote:
>"Gregory L. Hansen" <> wrote in message
>news:d8k8vn$vj6$
>> In article <>,
>> Nathan Liskov <NATE_at_LCS_dot_MIT.EDU> wrote:
>> >I did some calculations on a Roth versus a Traditional IRA.
>> >
>> >The results were remarkably simple.
>> >
>> >If your tax rate is higher when you take the money out (than when you
>> >put it in), you are better off with a Roth IRA.
>> >
>> >If your tax rate is lower when you take the money out, you are better
>> >off with a traditional IRA.
>> >
>> >If the tax rate is the same, the result is equal either way.
>>
>> I don't know. If your money is taxed before you put it in, what was
>> taken away as taxes could have been earning interest for decades
>> before it's taken away. Then you'd also pay tax on the additional
>> interest, I believe, but that would just be a portion of the additional
>> interest.
>
>The money that you save in taxes (by contributing to a deductible IRA) would
>grow just enough to meet the taxes on the IRA itself when you withdrew it
>(e.g. if your investments doubled, then the taxes you would owe on the IRA
>at withdrawal would double, but then so would the investment you made with
>the deferred taxes). So superficially, it looks like a wash, as Nathan
>described.
>
>But, as you noted, the growth of the tax money (i.e. the taxes deferred)
>would itself be taxed, so the net amount wouldn't cover the taxes on the IRA
>at withdrawal, and you would come out slighly behind with the deductible
>IRA. If you look for older posts I've made on the subject, I've referred to
>a "second order effect".
>
>Here are some concrete numbers, though this could be done algebraically as
>well:

I've just analyzed it in my own way.

Roth:

P0, principle before taxes
P = k*P0, principle after taxes
Interest P*exp(rt)
Amount after so many years: A = k*P0(1 + exp(rt))

Traditional:

P0, pre-tax principle invested
Pre-tax amount, A0 = P0(1 + exp(rt))
After-tax amount, A = k*A0 = k*P0(1 + exp(rt))

Same thing, assuming tax rate doesn't change. I didn't expect it to be
the same thing since the pre-tax portion would be earning interest, but
it's the same thing. How about that.

--
"The result of this experiment was inconclusive, so we had to use
statistics." (Overheard at international physics conference)

Re: what is the outcome of Roth IRA?

Gregory L. Hansen wrote:
> Same thing, assuming tax rate doesn't change. I didn't expect it to be
> the same thing since the pre-tax portion would be earning interest, but
> it's the same thing. How about that.

Good work. Most people don't realize that taxing before investing and
taxing at withdrawal is identical if the tax rates are the same for
both cases. It seems surprising at first, but if you break down why,
it's not so surprising:

a x b x c = a x c x b

where a = amount invested
b = tax
c = investment gain