<BreadWithSpam[at]fractious.net> wrote in message
news:yobslfqlzby.fsf[at]panix3.panix.com...
- quote -

Interesting thought, but not quite analogous. In the situation above, one
is not forced to choose between the Roth IRA or a deductible IRA (for the
sake of argument, assume one is not an active participant in a retirement
plan). Rather, contributing the maximum ($0) to the Roth does not diminish
the amount one can contribute to the traditional IRA.

In order for something to be labeled "inferior", it must be inferior to
something else. No choice is required here, one can contribute to both
IRAs, so there is only one sane alternative (contribute to both), and thus
neither a superior nor inferior option. (Admittedly, contributing $0 sounds
absurd.)

To get rid of the $0 nonsense, consider a traditional 401(k) vs. a Roth IRA.
Here, the limits on both are non-zero, so we eliminate the $0 distraction.
They still have unequal limits, which was your key condition. Which is
better - the 401(k) or the Roth IRA? That question reflects a false
dichotomy, for it is not an either-or situation. The superior choice is
"both", as you opine below.

In contrast, with $5K in pre-tax dollars (25% bracket), one is forced to
choose between a Roth IRA and a traditional IRA + $750 in a taxable account.
Those are the actual choices; one merely abbreviates them as Roth vs.
traditional. The former gives you more after-tax dollars at the end of the
line (end of story?).

- quote -

Yes, yes, yes!

- quote -

One doesn't necessarily need a big conversion to get bumped up. For
example, in NYS, the first $20K of pension distributions (including IRAs)
are excluded from state (and city) taxes. With your example, say around age
80, the MRD would be somewhere in the $10 range, leaving only $10K for
conversion without hitting a sizeable bump in local income taxes. People
tend to forget about local taxes when they run the numbers.

- quote -

Some of this depends on how close to the borderline one is. Simply making
tax-free inter vivos gifts ($12K/recipient/year) may suffice. Or the estate
may be shrinking over time, as the owner pays for medical expenses in late
retirement.

Now consider 2011. Do you want to try to reduce the estate to $1M, or grow
it with the hope that Congress will make the $3.5M exemption from 2009
permanent?

Don't you just love December tax planning?

Mark Freeland
BnetOnewsX[at]sbcglobal.net

- quote -

Thanks for your newer perspective on the home loan. So it makes perfect
sense to try finish off the other loans through ESPP, bonds etc.

"Mark Freeland" <BnetOnewsX[at]sbcglobal.net> writes:
- quote -

That's semantic nit-picking. The assumption is that the same amount
of money is available to invest - which means, apples-to-apples, that
one needs to start with pre-tax money. "amount invested" vs. "amount
available to invest". I thought I made it pretty clear that it in
this context, I was defining the former as the latter.

- quote -

That's not an issue of investment performance - but rather one of
investment availability. The effective pre-tax limit on a Roth IRA
is higher than the effective pre-tax limit on a regular IRA because
the limit is applied after-tax on the Roth. But, again, assuming
the same quantity of money is available to invest in both cases
*and* that the quantity will be below the limits, the performance
is otherwise identical.

- quote -

If "superior" means "has a higher limit". To someone who earns above
the income which lets one invest in a Roth, then, I suppose you'd say
the Roth is "inferior" rather than simply "unavailable". Okay by me.
Of course, if "has a higher limit" alone is the criteria, then VAs,
well, let's not go down the VA road...

- quote -

That would have been, um, me.

Nits aside, the bottom line is, generally, to all folks who
qualify (ie. have income and it's below the threshold), putting
money into a Roth is a good thing. Having a 401k is a good thing.
Max out both if you can. If income doesn't permit it, then chances
are that income's low enough to do the Roth - as Elle points out
all the time, then, do the 401k up to the match, as much Roth as
one can, then, if there's still funds available, 401k as much as
possible.

The question's a little trickier for folks who can't put
money into a Roth at all (usually due to too much income) - in
which case, if they have a 401k, they should probably max it
out unless it absolutely stinks. But the tricky part is whether
or not it makes sense for that person to put non-deductible
contributions into a traditional IRA, to get a low-cost VA,
to just buy some tax-efficient index fund and put it away.
FWIW, I lean towards loading up the IRA anyway (possibly with
the chance to do a Roth conversion later on), and then manage
taxable investments with an eye towards tax efficiency (ie. by
harvesting losses sometimes, etc).

Should also be interesting as Roth 401k plans start to be
more widespread.

One other thing I was just thinking about recently with respect
to estate taxes - a Roth conversion may also help lower the
value of an estate - by prepaying the taxes on the distributions
from the IRA. If someone has an estate big enough that at the
margin, it's going to get hit with estate taxes (up to 45%),
then every dollar used to pay taxes on a Roth conversion before
death is a dollar less to be taxed as estate taxes - and as
we've discussed above (assuming same rates of return and of
taxation) that has no after-(income)-tax impact on the spendable
amount resulting from the IRA investment.

Contrived example - 25% marginal tax rate (on both owner and his
heirs) and an estate consisting
of (a) a bunch of other stuff (enough to put the estate
up into the realm of estate taxation, say $2million now,
and the 2007 marginal estate tax rate of 45%)
(b) say, $150,000 of cash/investments in a taxable account
and (c) $100,000 in a Regular IRA.

The person dies and the estate pays 0.45 * $250,000 = $112,500
out of the cash to cover estate taxes owed on the IRA and the cash.
That leaves (b) and (c) at $37,500 and $100,000 respectively.
Now, suppose the heir wants to spend all he got in (b) and (c) -
he pays income taxes of $25,000 on the IRA distribution, leaving,
out of the original $250,000, only $112,500 spendable.

Now, suppose that the $100,000 got converted to a Roth - and
the taxes on the conversion, $25,000 were taken out of the cash
in (b). The estate now looks like this:
(a) (stuff)
(b) $125,000 in cash/taxable
(c) $100,000 in Roth IRA
Now the person dies and the estate taxes due on the combination
of (b) and (c) is 0.45 * $225,000 = 101250, leaving the (b) and
(c) looking like this: $23,750 and $100,000 respectively. If
he wants to spend all of it, there are no more income taxes due,
so the whole $123,750 is spendable - ie. since the income taxes
were paid with pre-estate-tax money, he's ended up with $11,250
more to spend. Note that that $11,250 is precisely the estate
tax rate times the income taxes due on that conversion, and
relative to the amounts of money involved here, a huge difference.

Of course, much of that example is contrived - assumption of
the tax rate, for example - a big Roth conversion could bump
into tax brackets - assumption that the heirs cash it all out
and spend it at once - assumption that the heirs have the
same tax rate as the original owner - etc. etc. Nevertheless,
it looks like Roth converions - help with estate tax issues,
even without considering distribution rules.

Ugh. As if this stuff weren't messy enough *before* considering
estate taxation issues.


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In article <1165599926.386482.162180[at]73g2000cwn.googlegroups.com> ,
gayathrikarth[at]gmail.com wrote:

- quote -

The size of the loan has no bearing on taxes.

Home equity loans are generally a bad kind of debt. That is where
you buy a pizza using a credit card, then roll the credit card
debt onto a H/E loan, and you end up paying for the pizza over
20 years. That is not a good wealth building strategy. So pay
off the H/E loan.

I don't mind you having a H/E line of credit that has a zero
balance to be used in case of emergency. Just don't use it to
buy toys or pizzas.

A 30 year fixed mortgage under 6% is a pretty good loan. In
fact, you have great terms. After taxes, that is only about
4%. I wouldn't pay that off a minute early. The reason is
that you can do better than 4% in a no-brainer investment like
a CD, or go for a real good ride if that were in the market
over this past year. Consider also the business cycle. In
the past 30 years, we have seen money market paying 14% and
15% at one point. That could happen again. You will be real
happy having money invested that way while your loan stays
fixed at 4% (after taxes).

-john-

--
================================================== ====================
John A. Weeks III 952-432-2708 john[at]johnweeks.com
Newave Communications http://www.johnweeks.com
================================================== ====================

<BreadWithSpam[at]fractious.net> wrote in message
news:yobwt52mcak.fsf[at]panix3.panix.com...
- quote -

news:yoblkltvurv.fsf[at]panix1.panix.com or
http://groups.google.com/group/misc....66b19183823c84

One of your assumptions was different from this. You assumed the same
amount of money, pre-tax, to invest. The amount actually invested in the
Roth IRA was less, because some of that pre-tax money was used to pay taxes.

:: IRA:
:: Pay no taxes now. Invest $100K
...
:: Roth IRA:
:: Pay taxes now on the $100K, invest $75K

- quote -

Precision is important, because you had another unstated assumption - that
one didn't have enough pre-tax money to max out the Roth. If one did, as I
showed in a followup, the Roth was superior (with all other assumptions as
stated above).

news:kZ5ch.189$qO4.90[at]newssvr13.news.prodigy.net or
http://groups.google.com/group/misc....e4e24ceaa01039

Nevertheless, I absolutely agree that if one is cash limited (as opposed to
limited by legal maximums on contributions), then a Roth
contribution(whether IRA or 401(k)) is no better or worse than a pre-tax
contribution (whether IRA or 401(k)), in terms of dollar/net tax results.

There are, of course, other factors. Many large 401(k) plans offer cheaper
institutional shares of funds than one can get at the retail level (on the
other hand, many small 401(k) plans are wrapped in annuities that cost more
than a retail IRA).

As someone pointed out in another thread, a (traditional, not Roth) 401(k)
will reduce your adjusted gross income(AGI), which can have all sorts of
good effects like making you eligible for a Roth conversion. (Contributing
to a Roth won't reduce your AGI).

Mark Freeland
BnetOnewsX[at]sbcglobal.net

Thanks a lot for all those who have been replying to this thread.

- quote -

Todd - I am 30, married, no kids (yet). The assets I mention are
combined one.

- quote -

Okay. I plan to do this as well (atleast partially, if not fully).

- quote -

One important thing I forgot to mention was that I do have a mortgage
loan for 240K with 5.375%, 30 year fixed loan. One of the 40K was
infact a home equity loan with 6.75% fixed interest. I think I need to
figure out if it's better to payoff the main mortgage (i.e 240K and
reduce it to 200K) or simply pay off the 40K loan. I am into my first
year of home buying, so I do get the tax deduction benefits decently.

Thanks!

Thanks a bunch for all those (Todd/Elle/Andy/John, others if any) who
have replied.

Todd - My understanding is the same as Elle (i.e Roth IRA is better
than unmatched 401k. While in 401k you reduce tax for the calendar year
and save $s, when you pull it out at retirement age you may pay lot of
taxes on the amount accrued. Roth IRA is already taxed, but ofcourse no
savings in tax in the current calendar year). I also read that by 2010
traditional IRA's can be converted to RothIRA's. My age is 30,
married, no kids (yet). What I have is combined assets.

I forgot to mention one important thing, rather didn't clarify. I have
~250K mortgage at 5.375% at 30yr fixed (1 year has just passed), and
the 40K was the home equity loan was at ~6.75%, 10 year fixed. My
understanding is that it is better to pay off the smaller loan first
than the first one due to tax benefits (i.e instead of reduced 250K to
210K, finish off the 40K first).

I will certainly consider approaching a tax advisor, but I am just
trying to get some clarity on the possible questions I may have.


Thanks again!

t[at]toddh.net (Todd H.) writes:
- quote -

[401k vs. Roth IRA]
- quote -

While the deductibility of contributions does differ, the net
judgement (that one is better than the other) is 100% wrong.
They are different, and can have some differences as far as
ultimate spendable returns (depending mainly on changes in
one's marginal tax rate), it's mainly a wash with respect
to the deductibility. 401k contributions, while earning one
a tax deduction now, lose out later on when one pays income
taxes on both the gains and on the original contributions
when they are distributed to the investor.

See a recent thread here where I compared the net results of
investing in a regular IRA (or 401k), a Roth IRA and investing
after-tax in highly tax-efficient vehicles - assuming the
same tax rates, the same amount invested, the same return
on the investments themselves - and the net results from
those investments. The 401k and Roth are identical given
those assumptions, in the end.

- quote -

This part is true enough. But do take care to look at the
costs in your 401k. The 401k, especially with an employer
match, is one of the best deals going for most workers. But
it's not without its issues, and there are some 401ks with
miserable investment choices, very high fees and other problems.
The 401k *can* be amazing, especially with an employer who
does the right thing. But it can also be a real stinker.

--
Plain Bread alone for e-mail, thanks. The rest gets trashed.
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"Todd H." <t[at]toddh.net> wrote
- quote -

I suggest you read up on the pros and cons of the unmatched
401(k) vs. the Roth IRA. From my reading, it is not at all
"typical" for the unmatched 401(k) to be the superior
vehicle.

"really_novice_investor" <really_noviceinvestor[at]yahoo.com> writes:

- quote -

Absolutely.

401k is typically the superior vehicle because contributions to it are
done with pre-tax dollars, not your take home post-tax pay. That is,
401k contributions reduce your taxable income amount on your tax
return while roth IRA contributions do not.

Also, the limits are much higher with 401k in terms of how much you
can save. Up to 18% of salary I believe up to whatever limit, while
roth is capped at something much lower (4k i believe).

Just because your employer doesn't match contributions doesn't mean it
isn't something you should focus on more. Look into the benefits of
401k investing more, and when you change employers, don't forget to
roll that stuff directly over into a rollover ira. Don't let it sit
and get hit with maintenance fees and such. :-)

Best Regards,
--
Todd H.
http://www.toddh.net/

"really_novice_investor" <really_noviceinvestor[at]yahoo.comwrote
- quote -

Then I recommend sticking with funds for awhile and
continuing your exploration of this subject via (1) lurking
here and at other financial fora; (2) asking questions
whenever something does not make sense to you; (3) skimming
some of the books at http://www.joetaxpayer.com/book.html .
Maybe start with the first (the Tobias book), skim the
chapter titles and read/skim what looks interesting, then
move onto the second. Plan on returning to some of the books
as your interest allows.

For starters, you could even start a thread with the subject
"How to Pick Mutual Funds."

- quote -

Because there is no matching, and before you consider adding
another dollar to your 401(k), you should look further into
the minutiae of its offerings. I think joetaxpayer's site
http://www.joetaxpayer.com/401rip.html is a good overview of
some of the pitfalls of a non-matched 401(k). The biggest
concerns are (1) high mutual fund expenses which can easily
offset the tax advantage; and (2) lack of diverse choices.
Joe says this site of his is a draft at this point, but it
still reads pretty well right now.

- quote -

Absolutely. Many consumer sites exist to help you with the
details on Roth IRAs and 401(k). Googling for {Roth IRA
limits} for example turns up a bunch.

You are asking excellent questions. I trust you are aware
that this is a first step to becoming a master of the
financial universe and so your destiny.

"really_novice_investor" <really_noviceinvestor[at]yahoo.com> writes:
- quote -

You might also consider employing a flat fee financial advisor for
their thoughts.

You forgot to mention your age, responsibilities, and risk profile.

- quote -

Gut feel...that's a lot of money tied up in one security. i had built
up a lot in my employers stock that i have been liquidating to reduce
my exposure if they go in the toilet.

- quote -

Seems low to my tastes given how much you have in your ESPP.


- quote -

9% is a pretty ugly rate. 6.75 isn't bad, but you can do a lot better
now that mortgage rates are in the 5's again.

- quote -

Paying off the 9% somehow sounds like an excellent move. Liquidating
some of the ESPP to do it sounds good too. The only thing to consider
though is the tax impact and if there are strategies to minimize
that.

If your investments are positioned to do better than 6% and you can
tolerate the risk, refinancing your mortgage and paying off all other
loans with it may be one thought. The benefit of mortgage interest is
its ability to be deducted from your taxes, assuming you have enough
of it.

Is the ING in terms of whole life insurance?

These are just random thoughts based on what I'm seeing. You have
enough questions where it may be worth paying an independent financial
advisor (who isn't paid by commissions on products they have to sell)
would be excellent for you.

--
Todd H.
http://www.toddh.net/

Elle,

Thanks for your response. I guess you are asking the right questions
that I need to think about.

1. Mutual funds - The returns I quoted are for the past 1 year (never
had any mutual funds open before
2. Stocks - Confidence level w.r.t stocks is not all that high . Your
guess was correct regarding 2001 as I wasn't in US at that time (infact
the savings are from the past ~5 years of my stay in US. I am 30 for
reference)
3. Another reason why I never touched the bank a/c to pay for the loan
was that I wanted to keep the $s for emergency. But it looks like I can
afford to pay off the loan a little bit
4. No matching 401K from the employer. So I have minimal in 401k (~2K).
The 8K is actually Roth IRA. Can one contribute to both Roth IRA and
401K same time ?

Thanks for the link. I will check them out.




Elle wrote:
- quote -


======================================= MODERATOR'S COMMENT:
Please trim the post to which you are responding. "Trim" means that except for a FEW lines to add context, the previous post is deleted.

In article <1165518756.717279.75600[at]n67g2000cwd.googlegroups.com> ,
"really_novice_investor" <really_noviceinvestor[at]yahoo.com> wrote:

- quote -

Pay the $40K 9% loan with the ING and bank money.

Pay the other $40K loan with the bonds, the stock market money,
and $1 from the bank.

Put the remaining $4K of bank money into a good money market
account for emergencies.

Cash out the company stock. You need to be diversified, so you
don't want stock in the company that writes your paycheck. Put
the money in the same funds that are doing so well for you in
the 401K (don't mix the money, create a 2nd taxable account that
holds those funds).

This leaves you debt free, with an emergency fund, some good
performing investments, and a retirement account.

-john-

--
================================================== ====================
John A. Weeks III 952-432-2708 john[at]johnweeks.com
Newave Communications http://www.johnweeks.com
================================================== ====================

"really_novice_investor" <really_noviceinvestor[at]yahoo.comwrote
Re his roughly $130k of savings:
- quote -

I agree with Andy that this is a good choice.

- quote -

For how many years have they been returning this much? This
is a very important question that will lead you to a better
understanding of market behavior.

- quote -

How confident are you that you can pick stocks that are
winners for the long run? Exactly what justification do you
have for your confidence? Have you studied the historical
behavior of stocks?

We have been in a ridiculous bull market for the last few
months. If you have not lived through a major market
correction such as that from 2000-2001, or that in 1987, you
likely have dollar signs in your eyes, now possess something
of a gambler's addiction, and need to read.

Also, you should start becomine well-versed in asset
allocation and why it's a good strategy for the long haul.
For an introduction, try some of the free online tools at
http://home.earthlink.net/~elle_navorski/id8.html .

You also need to identify your short and long term investing
goals. E.g. do you have an emergency fund? Saving for a
house? Saving for retirement? Have you a 401(k) plan with
matching? What are the matching terms? Have you started a
Roth IRA? Do you know the pros and cons of 401(k)s and IRAs?

Andy wrote:
- quote -

Okay. I was planning on using some cash on some other land investment
overseas that has a potential to increase in value - but it didn't work
out. Right now, I will pay down the loan as much as possible. Just
another question, I see lot of mutual funds doing quite well (atleast
some of the sector funds I have yielding ~10%-15%). Is it a good
strategy to use them instead of stocks ? i.e wait for it to grow and
reinvestment after some growth (Even with the penalty it may have with
premature pullout, it looks like it may work out since my stocks are
just breaking even). Any thoughts ?

really_novice_investor wrote:

- quote -

You are sitting on cash/bonds earning between 0-5% while paying
interest on loans costing 6-9%, and this odd strategy is reducing your
net worth every day you continue it. What you should be doing is using
the cash and bonds to pay down the loans.

Andy

really_novice_investor wrote:
- quote -

My immediate thinking is the first pay off both loans first.

- quote -

Hello there,

I am a novice investor trying to do the right things in managing my
portfolio. Here are the details of my savings

ING - 30K (~4.33%)
banks - 15K
bonds - 30K (yielding 5%, i think)
company stocks (ESPP, so always bought at 15% less market) over last
few years - valued at 42K. If I sell all of them now, I will be making
7K profit.
stock market - 9K (no profits really as of now and am breaking even)
IRS/401k - 8K (mutual funds yielding ~10%-15% returns)

I have mortgage and loan. I have a loan for ~40K is at 9%+10year fixed
interest rate. I also have another loan for ~40K+6.75 fixed interest,
10 year loan. I am looking for suggestions from others on what I should
be doing.

Here's what I have been thinking.
- Pay off ~20K from my bank a/c (take out 10K) + ESPP for the 9%
interest loan (sell for 10K)
- Move 10K from ING into mutual funds.

Is this the right thing to do ? Thanks for your thoughts..

Novice Investor