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> "Open a traditional IRA or a Roth IRA. The traditional IRA contributes pre-tax money, the Roth IRA post-tax money. The upshot is that if you believe your marg

> "Open a traditional IRA or a Roth IRA. The traditional IRA contributes pre-tax money, the Roth IRA post-tax money. The upshot is that if you believe your marginal rate at retirement to be higher than your present rate, you should pick a Roth IRA, otherwise, you should pick a traditional IRA. If you don’t feel like forecasting that, take my word for it that 90% of you should have Roth IRAs." I simply cannot fathom why he would state that. I cannot imagine a scenario where my retirement income would (nor should) be as high or higher than my peak earning years. Typically in retirement you have a home and all sorts of hard goods (clothes, furniture, cars) paid off and thus need less money.

wyldfire 10y ago
The risk that favors Roth IRAs includes the risk that the tax code will change to include higher rates than the current tax code. Also note that any increased or decreased "need" doesn't factor in to the calculation.
- hellogoodbyeeee 10y ago
  US income taxes are at historically low levels too.
  - lettergram 10y ago
    I would disagree - prior to WWI there was no income tax. Further, not every state implanted income taxes (some still don't have any)
    - lloyd-christmas 10y ago
      undefined != 0
      - lkbm 10y ago
        Seems like in the case of tax, it does. They weren't taking a random % of income in income tax based on what was in the memory cell from the previous call stack. They were taking 0%.
    - whamlastxmas 10y ago
      Some states (Texas) don't have income tax but have very high property taxes to offset this. Or they have high sales tax.
  - opo 10y ago
    There is a difference between nominal rate and effective rate. The effective rates are fairly close to the past for high wage earners, lower for low wage earners. >...In 1958, approximately two million filers (4.4% of all taxpayers) earned the $12,000 or more for married couples needed to face marginal rates as high as 30%. These Americans paid about 35% of all income taxes. And now? In 2010, 3.9 million taxpayers (2.75% of all taxpayers) were subjected to rates that were 33% or higher. These Americans—many of whom would hardly call themselves wealthy—reported an adjusted gross income of $209,000 or higher, and they paid 49.7% of all income taxes. >In contrast, the share of taxes paid by the bottom two-thirds of taxpayers has fallen dramatically over the same period. In 1958, these Americans accounted for 41.3% of adjusted gross income and paid 29% of all federal taxes. By 2010, their share of adjusted gross income had fallen to 22.5%. But their share of taxes paid fell far more dramatically—to 6.7%. The 77% decline represents the single biggest difference in the way the tax burden is shared in this country since the late 1950s. http://www.wsj.com/articles/SB10001424127887324705104578151601554982808 http://www.wsj.com/articles/SB100014241278873247051045781516...
- maerF0x0 10y ago
  This is an interesting point, but not something we can solidly plan on. Vs we can absolutely say what the best way to play the game is based on todays rules.
  - angersock 10y ago
    It's a pretty safe bet that the next 30-40 years is going to explode in entitlements spending and infrastructure costs. If the government folks don't pay them, then it's going to basically be Mad Max and your IRA (whatever the type) won't really help you much. If the government folks do pay them, then the money for that has to come from somewhere. It's very unlikely to come from businesses, because the little ones don't make enough and the big ones pay very bright lawyers and accountants to keep the .gov away (cough Apple cough). So, it's probably going to come from income tax. Get a Roth.
    - tcoppi 10y ago
      If you consider the risk of massive tax rate increases over 30-40 years significant, due to the need to pay for massive entitlement and infrastructure spending, also consider the risk that they will tax Roth capital gain withdrawls to pay for it as well.
      - Jtsummers 10y ago
        In which case you've lost nothing since that money wouldve been in a conventional account and taxed to hell anyways. Put it in the IRA and if things don't go to shit, your money is fine. Don't put it in the IRA and of things go to shit, lose the tax advantage. Do either and things go to shit, it doesn't matter which you did.
        tcoppi 10y ago
        No, that money would have been in a 401k, so you would lose out on the initial benefit of not having paid taxes when you contributed if they raid Roths. But, if you've already maxed out your other tax-advantaged space, and you have more money to contribute, there is no reason not to put it in a Roth instead of a regular taxable account, assuming you are eligible, because then you can have tax-free growth at least(worth less than tax-free contributions, but still worth a lot).
- tcoppi 10y ago
  The rates would need to go up enough so that your overall tax rate in retirement is greater than the marginal rate you pay taxes at today. That would be quite the taxation increase, probably above the historical norm at any point in the US, unless you're well above the 33% bracket, in which case the probability of your rates increasing is a lot higher.
  - cbhl 10y ago
    If you live in Silicon Valley, a new grad would probably be in the 28% or 33% bracket just to be able to afford renting a studio apartment on their own.
    - loeg 10y ago
      GP is talking about Federal brackets. 33% starts at $190,150 AGI (after deductions) which is well above what a new grad could expect (from their employer) or require to pay rent, even in the valley.
- misnamed 10y ago
  It's also worth noting that by historical standards tax rates are actually low. So if we assume the possibility of mean reversion they could well be higher. I see the Roth/Regular as a bet-hedging opportunity - ideally, put some in each type and then you are ensured against either scenario.
jonmb 10y ago
I think it's incorrect to compare marginal rates as well. It makes more sense to compare your Effective Rate in retirement versus your Marginal Rate of today. This article explains the math: http://www.gocurrycracker.com/roth-sucks/ http://www.gocurrycracker.com/roth-sucks/ Your effective tax rate is likely to be much less than your marginal rate. Also, for anyone interested in financial independence and simple investing with your 401k and IRAs, I'd like to recommend the Stock Series here: http://jlcollinsnh.com/stock-series/ http://jlcollinsnh.com/stock-series/
- connoredel 10y ago
  This is a really good point. Now I'm pissed that I contributed to a Roth earlier in my career. Another one that no one has mentioned: state income tax. I live in CA but would put a >50% chance that I will live in a lower tax state when I retire. Thus, Traditional > Roth.
  - tcoppi 10y ago
    If you are going to contribute to a Roth, it is better to do it earlier than not, while your earnings are lower, so at least you have that going for you. It can also make it easier if you ever decide to do a backdoor Roth in the future(for you know, when you have tons of money kicking around after you are contributing the max to your 401k and have your mortgage(s) paid off), since it could be hard to open a Roth account after you are over the income limit.
arielweisberg 10y ago
Also neglects to mention you can have a 401k and a Roth IRA and that if you have a spouse with income they can open up a Roth as well. For financial advice I think it's really important not to miss details like that. Also an HSA can be used to shelter a bit more income. If you don't consume much health care a HDHP may be the way to go. There is also the backdoor Roth, but I never wrapped my head around it.
- pilom 10y ago
  The gist of the backdoor Roth is that you make a traditional contribution and then roll it over into a Roth before tax season. There is no income limit on roll-overs and you aren't taking the benefit of a traditional IRA at tax time so the IRS doesn't care that you set it up in the first place.
MaulingMonkey 10y ago
> and thus need less money. Medical bills.
- ceejayoz 10y ago
  Medicare.
tvanantwerp 10y ago
Income early in one's career is typically lower than incomes later in one's career. So even if retirement income is lower than final career income, there's still a good chance it's greater than entry-level income and would be taxed at a higher rate. You've also got to keep in mind that taxes may eventually rise. America's top rate today is much, much lower than the top rate historically--no reason to believe it couldn't swing back the other way.
- maerF0x0 10y ago
  oh i see the pattern like someone making $50k a year to start, but rises to $150k by end of career and whom is planning for a retirement income of the average (100k)... Then a Roth is a good deal when making $50k (at the beginning) and regular is better when making $150k (at the end)... Tricky.
  - dennisgorelik 10y ago
    If you are making $50K/year - it does NOT make sense to save in order to push retirement income up to $100K/year. On the other hand, saving when you have $150K/year income in order to push your retirement up to $100K/year could make sense. (All numbers in this example are inflation adjusted to each other)
  - taurath 10y ago
    Keep in mind Roth is no longer an option after 120k.
tcoppi 10y ago
The only situations I can think of where Roth might make sense are 1) early stages of your career, before you hit the 28% marginal rate and 2) if you are still eligible for a Roth, but already maximized your other tax-advantaged space in 401(k)s and IRAs.
- sparky_z 10y ago
  > if you are still eligible for a Roth, but already maximized your other tax-advantaged space in 401(k)s and IRAs. Under what conditions could this occur?
  - Willson50 10y ago
    When you make under $132,000 but were still able to contribute $18,000 to your 401k.
  - loeg 10y ago
    If you make more than ~$62k (single earner) and have an employer 401(k) program, you're not eligible to deduct traditional IRA contributions. (Non-deductible traditional IRA contributions get a worse tax treatment than a taxable brokerage account.) At very roughly $120k-$130k (single earner; I forget the exact figure) you're no longer eligible for Roth IRA contributions. However, you can make non-deductible Traditional IRA contributions and then do a Traditional-to-Roth conversion (not "recharacterization"). This is known as a "Backdoor Roth IRA contribution" and is legal and explained in nauseating detail on the internet. So: > Under what conditions could this occur? If you make more than ~$62k, have an employer 401(k), and contribute the maximum to it, funding a Roth IRA is a good idea. (Unless you have an existing traditional IRA balance which would make backdoor Roth funding counter-productive due to the pro rata …. blah blah. If you don't have an existing Traditional IRA balance it's not a problem.)
  - deleted 10y ago
    [deleted]
  - graton 10y ago
    When you want to do a back-door Roth IRA for one. http://www.rothira.com/what-is-a-backdoor-roth-ira http://www.rothira.com/what-is-a-backdoor-roth-ira
kimsk112 10y ago
Even if you can guarantee that your retirement income wouldn't be higher, you can't guarantee that your tax would be lower either. So I'd have both traditional and Roth IRA (e.g., 50/50)
- tcoppi 10y ago
  A 50/50 traditional/roth allocation suggests you see it as even odds that your overall tax rate will be higher in retirement than your marginal rate today. That would require quite the rise in taxation rates, depending on exactly what your marginal rate is today. It is very easy currently to be married and make > $150k with a marginal rate of 25% and effective rate of < 15%. So, if you decided to draw exactly $150k each year in retirement, much more than you would be likely to need in any case, your effective rate would have to go up by over 10% to make it worth it to contribute to a Roth today. If you are drawing less than $150k, your effective rate on less income would have to go up 10%. This seems incredibly unlikely in our political environment, more like 80/20 or 90/10 odds.
  - zeveb 10y ago
    > That would require quite the rise in taxation rates Take a look at any of the Millenials working in any large-city downtown: they spend every single penny they earn, they have no savings; when they get older, either the State will let them starve to death, or taxes will be raised in order to take care of them. I don't think the former is politically possible, so taxes will have to go up. Meanwhile, the same spendthrifts are by-and-large refusing to have children early, which means that there will be fewer workers to pay those taxes. That means that there will be tremendous political pressure to raid 401(k) plans and IRAs. I actually believe it's even odds whether Roths will end up taxed one way or another (perhaps with 'withdrawal fees' or some form of Social Security clawback or something): it'll be too much money for the State to leave alone.
    - tcoppi 10y ago
      I agree that the risk of Roths being raided is quite high if we get to the point of taxes being raised that significantly to cause them to be valuable, so I don't really see a benefit personally of making significant contributions to one. I think raiding of 401ks is much less likely, as a lot more people have them and would be affected, and even if they do, you are still going to be better off than having contributed to a Roth unless they outright confiscate your balance, since you will have at least have avoided paying taxes in the past. Or we could just continue doing what we are currently, and just keep piling up the debt :) No tax increase or Roth/401k raids needed.
g52oevr0in 10y ago
You can take your contributions (the principal, not the growth) out of a Roth account before you reach retirement age. The exact rules are complicated, but that's the big core benefit that has me putting money in a Roth. I can use it to retire at 40, or cash out some of it to make a down payment on a house.
- tcoppi 10y ago
  If you decide to retire early you can always set up a Roth conversion ladder by rolling over IRAs and 401ks to Roth IRAs. It takes 5 years for those contributions to "season" so that you can take them out before 59.5, but you can take out capital gains that way as well. No need to contribute to a Roth today if that doesn't make sense otherwise.
  - tedmiston 10y ago
    Can you elaborate on this? I've been managing a post-tax account somewhat like a Roth IRA, though it is not an IRA because I plan to retire far before 59 1/2. I'm hoping for something in the middle of the two approaches with flexibility to withdraw early without penalty.
    - tcoppi 10y ago
      This is the most concise summary I've seen, but you can find some more discussion googling around for "Roth Conversion Ladder" - http://retireby40.org/roth-ira-conversion-ladder-minimize-taxes/ http://retireby40.org/roth-ira-conversion-ladder-minimize-ta...
- pilom 10y ago
  You can also take your principal (and earnings) out of a traditional IRA penalty free if you work through the loopholes. http://www.madfientist.com/how-to-access-retirement-funds-early/ http://www.madfientist.com/how-to-access-retirement-funds-ea...
  - g52oevr0in 10y ago
idunno246 10y ago
not mentioned is the income limits. Almost every engineer I work with is over the limit for Roth, and definitely over the limit for deductible tira. Non deductible has very little benefit, so might as well go with Roth, or back door into a Roth. I look at it as diversifying against tax law going crazy though, siNce so much of my retirement income is in 401k and pretax. Also the limits are a third of 401k, so it's only a quarter of retirement savings, and principal can be pulled out if needed.
- tcoppi 10y ago
  If you aren't contributing the max to your 401k and IRA I would do that before considering Roth contributions, unless you really believe tax rates will explode such that your overall rate in retirement is higher than your marginal rate today. If that is the case you should also consider the risk that the law will be changed to tax Roth on withdrawal of capital gains, which I believe has been floated in the past.
  - idunno246 10y ago
    And the risk that the tax laws on 401k will change too. Also, I missed that's in the self employed section so I don't know much about that. But if you have and can afford to max out a 401k, you probably can't get a deductible tira so it's really a question of taxable account vs Roth.
    - tcoppi 10y ago
      How would 401k laws change, you are already taxed when you withdraw from a 401k normally? The risk with Roth laws changing is you get double-taxed because the government needs money, with a 401k you have gotten the benefit the moment you contribute money to it, after that all they can do is literally confiscate money from it, or change it to a regular taxable account, but you've still already come out ahead of contributing to a Roth in either case.
      - zeveb 10y ago
infinite8s 10y ago
One issue with the Roth is the amount you can contribute phases out with increasing income, to the point that you can't contribute if you file single and your income exceeds $132k (or $194k for joint filings).
- loeg 10y ago
  "Backdoor Roth."
- tunesmith 10y ago
  FWIW, Fidelity makes it very easy to make a "back door" Roth contribution, but only if you don't have a Traditional/Rollover IRA. You make a taxable contribution to a zero-balance Traditional, and then transfer it to the Roth. There aren't income limits on Roth transfers.
- ryandrake 10y ago
  That must be a nice problem to have. Realistically this probably doesn't hit many people, and the ones it does hit already afford accountants who conjure up ways to minimize their taxes. Yea, I know, this is HN, where everyone knows that buddy who's cousin's roommate makes $400K at Google. The average geek doesn't have to worry about this.
  - tcoppi 10y ago
    The Roth phaseout starts at $117k for single earners. That is a lot of money, more than most people in the US, let alone the world, make, but it is not a princely sum for most technologists, especially not ones on HN.
loeg 10y ago
> I simply cannot fathom why he would state that. Me either, unless he assumes: 1) His audience is all tech workers, and 2) all tech workers are making better than $62k (single earner) or whatever the higher married-jointly exclusion is. That's not so unreasonable.

wyldfire 10y ago

The risk that favors Roth IRAs includes the risk that the tax code will change to include higher rates than the current tax code. Also note that any increased or decreased "need" doesn't factor in to the calculation.

hellogoodbyeeee 10y ago
US income taxes are at historically low levels too.
- lettergram 10y ago
  I would disagree - prior to WWI there was no income tax. Further, not every state implanted income taxes (some still don't have any)
  - lloyd-christmas 10y ago
    undefined != 0
    - lkbm 10y ago
      Seems like in the case of tax, it does. They weren't taking a random % of income in income tax based on what was in the memory cell from the previous call stack. They were taking 0%.
  - whamlastxmas 10y ago
    Some states (Texas) don't have income tax but have very high property taxes to offset this. Or they have high sales tax.
- opo 10y ago
  There is a difference between nominal rate and effective rate. The effective rates are fairly close to the past for high wage earners, lower for low wage earners. >...In 1958, approximately two million filers (4.4% of all taxpayers) earned the $12,000 or more for married couples needed to face marginal rates as high as 30%. These Americans paid about 35% of all income taxes. And now? In 2010, 3.9 million taxpayers (2.75% of all taxpayers) were subjected to rates that were 33% or higher. These Americans—many of whom would hardly call themselves wealthy—reported an adjusted gross income of $209,000 or higher, and they paid 49.7% of all income taxes. >In contrast, the share of taxes paid by the bottom two-thirds of taxpayers has fallen dramatically over the same period. In 1958, these Americans accounted for 41.3% of adjusted gross income and paid 29% of all federal taxes. By 2010, their share of adjusted gross income had fallen to 22.5%. But their share of taxes paid fell far more dramatically—to 6.7%. The 77% decline represents the single biggest difference in the way the tax burden is shared in this country since the late 1950s. http://www.wsj.com/articles/SB10001424127887324705104578151601554982808 http://www.wsj.com/articles/SB100014241278873247051045781516...
maerF0x0 10y ago
This is an interesting point, but not something we can solidly plan on. Vs we can absolutely say what the best way to play the game is based on todays rules.
- angersock 10y ago
  It's a pretty safe bet that the next 30-40 years is going to explode in entitlements spending and infrastructure costs. If the government folks don't pay them, then it's going to basically be Mad Max and your IRA (whatever the type) won't really help you much. If the government folks do pay them, then the money for that has to come from somewhere. It's very unlikely to come from businesses, because the little ones don't make enough and the big ones pay very bright lawyers and accountants to keep the .gov away (cough Apple cough). So, it's probably going to come from income tax. Get a Roth.
  - tcoppi 10y ago
    If you consider the risk of massive tax rate increases over 30-40 years significant, due to the need to pay for massive entitlement and infrastructure spending, also consider the risk that they will tax Roth capital gain withdrawls to pay for it as well.
    - Jtsummers 10y ago
      In which case you've lost nothing since that money wouldve been in a conventional account and taxed to hell anyways. Put it in the IRA and if things don't go to shit, your money is fine. Don't put it in the IRA and of things go to shit, lose the tax advantage. Do either and things go to shit, it doesn't matter which you did.
      - tcoppi 10y ago
        No, that money would have been in a 401k, so you would lose out on the initial benefit of not having paid taxes when you contributed if they raid Roths. But, if you've already maxed out your other tax-advantaged space, and you have more money to contribute, there is no reason not to put it in a Roth instead of a regular taxable account, assuming you are eligible, because then you can have tax-free growth at least(worth less than tax-free contributions, but still worth a lot).
tcoppi 10y ago
The rates would need to go up enough so that your overall tax rate in retirement is greater than the marginal rate you pay taxes at today. That would be quite the taxation increase, probably above the historical norm at any point in the US, unless you're well above the 33% bracket, in which case the probability of your rates increasing is a lot higher.
- cbhl 10y ago
  If you live in Silicon Valley, a new grad would probably be in the 28% or 33% bracket just to be able to afford renting a studio apartment on their own.
  - loeg 10y ago
    GP is talking about Federal brackets. 33% starts at $190,150 AGI (after deductions) which is well above what a new grad could expect (from their employer) or require to pay rent, even in the valley.
misnamed 10y ago
It's also worth noting that by historical standards tax rates are actually low. So if we assume the possibility of mean reversion they could well be higher. I see the Roth/Regular as a bet-hedging opportunity - ideally, put some in each type and then you are ensured against either scenario.

jonmb 10y ago

I think it's incorrect to compare marginal rates as well. It makes more sense to compare your Effective Rate in retirement versus your Marginal Rate of today. This article explains the math: http://www.gocurrycracker.com/roth-sucks/ http://www.gocurrycracker.com/roth-sucks/ Your effective tax rate is likely to be much less than your marginal rate. Also, for anyone interested in financial independence and simple investing with your 401k and IRAs, I'd like to recommend the Stock Series here: http://jlcollinsnh.com/stock-series/ http://jlcollinsnh.com/stock-series/

connoredel 10y ago
This is a really good point. Now I'm pissed that I contributed to a Roth earlier in my career. Another one that no one has mentioned: state income tax. I live in CA but would put a >50% chance that I will live in a lower tax state when I retire. Thus, Traditional > Roth.
- tcoppi 10y ago
  If you are going to contribute to a Roth, it is better to do it earlier than not, while your earnings are lower, so at least you have that going for you. It can also make it easier if you ever decide to do a backdoor Roth in the future(for you know, when you have tons of money kicking around after you are contributing the max to your 401k and have your mortgage(s) paid off), since it could be hard to open a Roth account after you are over the income limit.

arielweisberg 10y ago

Also neglects to mention you can have a 401k and a Roth IRA and that if you have a spouse with income they can open up a Roth as well. For financial advice I think it's really important not to miss details like that. Also an HSA can be used to shelter a bit more income. If you don't consume much health care a HDHP may be the way to go. There is also the backdoor Roth, but I never wrapped my head around it.

pilom 10y ago
The gist of the backdoor Roth is that you make a traditional contribution and then roll it over into a Roth before tax season. There is no income limit on roll-overs and you aren't taking the benefit of a traditional IRA at tax time so the IRS doesn't care that you set it up in the first place.

MaulingMonkey 10y ago

> and thus need less money. Medical bills.

ceejayoz 10y ago
Medicare.

tvanantwerp 10y ago

Income early in one's career is typically lower than incomes later in one's career. So even if retirement income is lower than final career income, there's still a good chance it's greater than entry-level income and would be taxed at a higher rate. You've also got to keep in mind that taxes may eventually rise. America's top rate today is much, much lower than the top rate historically--no reason to believe it couldn't swing back the other way.

maerF0x0 10y ago
oh i see the pattern like someone making $50k a year to start, but rises to $150k by end of career and whom is planning for a retirement income of the average (100k)... Then a Roth is a good deal when making $50k (at the beginning) and regular is better when making $150k (at the end)... Tricky.
- dennisgorelik 10y ago
  If you are making $50K/year - it does NOT make sense to save in order to push retirement income up to $100K/year. On the other hand, saving when you have $150K/year income in order to push your retirement up to $100K/year could make sense. (All numbers in this example are inflation adjusted to each other)
- taurath 10y ago
  Keep in mind Roth is no longer an option after 120k.

tcoppi 10y ago

The only situations I can think of where Roth might make sense are 1) early stages of your career, before you hit the 28% marginal rate and 2) if you are still eligible for a Roth, but already maximized your other tax-advantaged space in 401(k)s and IRAs.

sparky_z 10y ago
> if you are still eligible for a Roth, but already maximized your other tax-advantaged space in 401(k)s and IRAs. Under what conditions could this occur?
- Willson50 10y ago
  When you make under $132,000 but were still able to contribute $18,000 to your 401k.
- loeg 10y ago
  If you make more than ~$62k (single earner) and have an employer 401(k) program, you're not eligible to deduct traditional IRA contributions. (Non-deductible traditional IRA contributions get a worse tax treatment than a taxable brokerage account.) At very roughly $120k-$130k (single earner; I forget the exact figure) you're no longer eligible for Roth IRA contributions. However, you can make non-deductible Traditional IRA contributions and then do a Traditional-to-Roth conversion (not "recharacterization"). This is known as a "Backdoor Roth IRA contribution" and is legal and explained in nauseating detail on the internet. So: > Under what conditions could this occur? If you make more than ~$62k, have an employer 401(k), and contribute the maximum to it, funding a Roth IRA is a good idea. (Unless you have an existing traditional IRA balance which would make backdoor Roth funding counter-productive due to the pro rata …. blah blah. If you don't have an existing Traditional IRA balance it's not a problem.)
- deleted 10y ago
  [deleted]
- graton 10y ago
  When you want to do a back-door Roth IRA for one. http://www.rothira.com/what-is-a-backdoor-roth-ira http://www.rothira.com/what-is-a-backdoor-roth-ira

kimsk112 10y ago

Even if you can guarantee that your retirement income wouldn't be higher, you can't guarantee that your tax would be lower either. So I'd have both traditional and Roth IRA (e.g., 50/50)

tcoppi 10y ago
A 50/50 traditional/roth allocation suggests you see it as even odds that your overall tax rate will be higher in retirement than your marginal rate today. That would require quite the rise in taxation rates, depending on exactly what your marginal rate is today. It is very easy currently to be married and make > $150k with a marginal rate of 25% and effective rate of < 15%. So, if you decided to draw exactly $150k each year in retirement, much more than you would be likely to need in any case, your effective rate would have to go up by over 10% to make it worth it to contribute to a Roth today. If you are drawing less than $150k, your effective rate on less income would have to go up 10%. This seems incredibly unlikely in our political environment, more like 80/20 or 90/10 odds.
- zeveb 10y ago
  > That would require quite the rise in taxation rates Take a look at any of the Millenials working in any large-city downtown: they spend every single penny they earn, they have no savings; when they get older, either the State will let them starve to death, or taxes will be raised in order to take care of them. I don't think the former is politically possible, so taxes will have to go up. Meanwhile, the same spendthrifts are by-and-large refusing to have children early, which means that there will be fewer workers to pay those taxes. That means that there will be tremendous political pressure to raid 401(k) plans and IRAs. I actually believe it's even odds whether Roths will end up taxed one way or another (perhaps with 'withdrawal fees' or some form of Social Security clawback or something): it'll be too much money for the State to leave alone.
  - tcoppi 10y ago
    I agree that the risk of Roths being raided is quite high if we get to the point of taxes being raised that significantly to cause them to be valuable, so I don't really see a benefit personally of making significant contributions to one. I think raiding of 401ks is much less likely, as a lot more people have them and would be affected, and even if they do, you are still going to be better off than having contributed to a Roth unless they outright confiscate your balance, since you will have at least have avoided paying taxes in the past. Or we could just continue doing what we are currently, and just keep piling up the debt :) No tax increase or Roth/401k raids needed.

g52oevr0in 10y ago

You can take your contributions (the principal, not the growth) out of a Roth account before you reach retirement age. The exact rules are complicated, but that's the big core benefit that has me putting money in a Roth. I can use it to retire at 40, or cash out some of it to make a down payment on a house.

tcoppi 10y ago
If you decide to retire early you can always set up a Roth conversion ladder by rolling over IRAs and 401ks to Roth IRAs. It takes 5 years for those contributions to "season" so that you can take them out before 59.5, but you can take out capital gains that way as well. No need to contribute to a Roth today if that doesn't make sense otherwise.
- tedmiston 10y ago
  Can you elaborate on this? I've been managing a post-tax account somewhat like a Roth IRA, though it is not an IRA because I plan to retire far before 59 1/2. I'm hoping for something in the middle of the two approaches with flexibility to withdraw early without penalty.
  - tcoppi 10y ago
    This is the most concise summary I've seen, but you can find some more discussion googling around for "Roth Conversion Ladder" - http://retireby40.org/roth-ira-conversion-ladder-minimize-taxes/ http://retireby40.org/roth-ira-conversion-ladder-minimize-ta...
pilom 10y ago
You can also take your principal (and earnings) out of a traditional IRA penalty free if you work through the loopholes. http://www.madfientist.com/how-to-access-retirement-funds-early/ http://www.madfientist.com/how-to-access-retirement-funds-ea...
- g52oevr0in 10y ago

idunno246 10y ago

not mentioned is the income limits. Almost every engineer I work with is over the limit for Roth, and definitely over the limit for deductible tira. Non deductible has very little benefit, so might as well go with Roth, or back door into a Roth. I look at it as diversifying against tax law going crazy though, siNce so much of my retirement income is in 401k and pretax. Also the limits are a third of 401k, so it's only a quarter of retirement savings, and principal can be pulled out if needed.

tcoppi 10y ago
If you aren't contributing the max to your 401k and IRA I would do that before considering Roth contributions, unless you really believe tax rates will explode such that your overall rate in retirement is higher than your marginal rate today. If that is the case you should also consider the risk that the law will be changed to tax Roth on withdrawal of capital gains, which I believe has been floated in the past.
- idunno246 10y ago
  And the risk that the tax laws on 401k will change too. Also, I missed that's in the self employed section so I don't know much about that. But if you have and can afford to max out a 401k, you probably can't get a deductible tira so it's really a question of taxable account vs Roth.
  - tcoppi 10y ago
    How would 401k laws change, you are already taxed when you withdraw from a 401k normally? The risk with Roth laws changing is you get double-taxed because the government needs money, with a 401k you have gotten the benefit the moment you contribute money to it, after that all they can do is literally confiscate money from it, or change it to a regular taxable account, but you've still already come out ahead of contributing to a Roth in either case.
    - zeveb 10y ago

infinite8s 10y ago

One issue with the Roth is the amount you can contribute phases out with increasing income, to the point that you can't contribute if you file single and your income exceeds $132k (or $194k for joint filings).

loeg 10y ago
"Backdoor Roth."
tunesmith 10y ago
FWIW, Fidelity makes it very easy to make a "back door" Roth contribution, but only if you don't have a Traditional/Rollover IRA. You make a taxable contribution to a zero-balance Traditional, and then transfer it to the Roth. There aren't income limits on Roth transfers.
ryandrake 10y ago
That must be a nice problem to have. Realistically this probably doesn't hit many people, and the ones it does hit already afford accountants who conjure up ways to minimize their taxes. Yea, I know, this is HN, where everyone knows that buddy who's cousin's roommate makes $400K at Google. The average geek doesn't have to worry about this.
- tcoppi 10y ago
  The Roth phaseout starts at $117k for single earners. That is a lot of money, more than most people in the US, let alone the world, make, but it is not a princely sum for most technologists, especially not ones on HN.

loeg 10y ago

> I simply cannot fathom why he would state that. Me either, unless he assumes: 1) His audience is all tech workers, and 2) all tech workers are making better than $62k (single earner) or whatever the higher married-jointly exclusion is. That's not so unreasonable.