"Shyster1040" <Shyster1040[at]nospamhotmail.com> writes:

- quote -

Huh? Once someone has had any Roth IRA open for at least
five years *and* is over age 59.5 (or is under but meets
some exceptions), withdrawals from a Roth IRA *are*
completely tax-free.

I didn't see anything in the original poster's email that
indicated a plan to withdraw funds prior to age 59.5.

--
Rich Carreiro rlcarr[at]animato.arlington.ma.us

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- quote -

Ooops!

_All_ _Qualified Distributions_ from a Roth IRA are
tax-free, under current law.

I realize that while there is a certainty about the very
existence of *death and taxes* ... there can be no equal
certainty that the Congress will not (in its infinite
"wisdom") change tax laws in the future, and retract the
tax-free distinction currently available under the Roth IRA
rules ... however, there is no doubt that you have
mis-stated the current law.

I believe you were thinking of distributions taken either
during the first five years after establishment of a Roth
IRA, or before the age of 59 1/2 -- since both of these
actions would limit the "tax-free" withdrawal to the amount
of original contributions.

But Pub 590 leaves no doubt that if the distribution is
_Qualified_ -- that is, taken after age 59 1/2 and more than
five years after inception for the Roth IRA in question --
then said distribution is "qualified" and is not subject to
tax or penalty.

[See Figure 2-1, under the heading "Are Distributions
Taxable" in the section on Roth IRAs.]

Bill

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"Shyster1040" <Shyster1040[at]nospamhotmail.com> wrote:

- quote -

This is wrong. Qualified distributions from Roths are
totally tax-free. See IRS Publication 590.

--
Phil Marti
Clarksburg, MD

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"Shyster1040" <Shyster1040[at]nospamhotmail.com> wrote:

- quote -

Not true. Qualified withdrawals are also tax-free.
Withdrawals are qualified as long as you're 59.5 years old
or disabled, and the account has been open at least 5 years.

--
Barry Margolin, barmar[at]alum.mit.edu
Arlington, MA
*** PLEASE don't copy me on replies, I'll read them in the group ***

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Shyster1040 wrote:

- quote -

Huh? Really? That's completely counter to my understanding
of the Roth IRA! If that were the case, there'd be little
point to converting a conventional IRA to a Roth IRA.

My understanding was that qualified withdrawals from a Roth
IRA are completely tax free.

The Motley Fool website
(http://www.fool.com/money/allaboutir...boutiras06.htm)
seems to agree with my understanding:

"Any qualified distribution from a Roth IRA is NOT included
in gross income for individual tax purposes. Simple as that.
In effect, a qualified distribution from a Roth IRA is
tax-free... no taxes due on the principal... no taxes due on
the earnings... no taxes due, period."

So, uh, who's right?

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- quote -

Are you sure about this? The IRS states that qualified
distributions of INCOME from a Roth IRA are tax free.
Qualified distributions include normal distributions after
the tax payer reaches 59 1/2 years of age.

--
Vic Roberts
Replace xxx with vdr in e-mail address.

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Victor Roberts <x...[at]lighting-research.com> wrote:

- quote -

Your math is correct, but your analysis only applies if all
of the money that you have to invest is going into an IRA.
If you are keeping money outside of an IRA (and if those
funds are available to pay the taxes on the amount invested
in the Roth IRA), then the Roth IRA comes out ahead. Let's
modify your example a little and say that you have $5,000
that you are going to invest and that the maximum IRA
contribution is $3,000. I'll use the same 20% tax bracket
and 5% growth rate (compunded monthly) that you did.

With a regular IRA, you put $3,000 into the IRA (free of
tax) and the other $2,000 goes into an outside investment.
The $2,000 is subject to $400 of tax, leaving $1,600 to be
invested. The $3,000 in the IRA grows to $13,403.23, as you
indicated, but you have to pay tax on the withdrawal of
$2,680.65, leaving $10,722.59. The $1,600 in the taxable
account grows by 5% compounded monthly each year, and each
year that growth is taxed at 20%. Over 30 years this
account will grow to $5,330.40. The total amount, after
taxes, at the end of the 30 years is therefore $16,052.99.

Now, if we use a Roth IRA instead of a traditional IRA, you
put $3,000 into the IRA, and the other $2,000 goes into an
outside investment. The entire $5,000 is subject to $1,000
of tax, leaving $1,000 to be invested. The $3,000 in the
Roth IRA grows to $13,403.23, which can all be withdrawn
free of tax. The $1,000 in the taxable account grows by 5%
compounded monthly each year, and each year that growth is
taxed at 20%. Over 30 years this account will grow to
$3,331.50. The total amount, after taxes, at the end of the
30 years is therefore $16,734.73.

Investing in the Roth in this case yielded an extra $681.74.
That is the same as investing the traditional IRA and
getting a 5.149% yield (compounded monthly) rather than a 5%
yield.

As long as you have excess outside money to pay the taxes
with, the Roth IRA will beat out the traditional IRA,
assuming that the performance of the investments is
identical and that the tax rates stay the same. If there
are no outside investments, then the Roth IRA and the
traditional IRA will have the same performance. The
traditional IRA will never beat the Roth IRA. (Of course
this is making a big assumption: that tax rates are not
lower when the IRA withdrawals are made).

--Chris

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Victor Roberts wrote:

- quote -

Your math is accurate and I reached the same conclusion.
What is missing is what you try to hold fixed, the marginal
tax rate. That rate isn't level through one's life. The
under saver may drop from 28% to 15% at retirement and the
over saver may find they've saved their way to a higher tax
bracket. Keep in mind, the standard IRA has required
distributions which may force one right into the next
bracket. I advise an 80 year old who is about $5000 under
the 25% bracket, so for the past few years we convert the
right amount to stay right in the 15%. This slows down the
growing RMDs, and in 10 years, she'll have $100,000 that
won't be subject to the higher rate.

Advising a younger person, I'd advise them to go Roth while
in the 15% bracket, but when 28% to lean toward the tax
deductible accounts, 401(k) or IRA. Just a general comment
on that.

JOE

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Change some of your assumptive variables and then see the
differences.

1. A future marginal tax rate that is higher than current
will tip the scales towards Roth. A lower future marginal
tax rate will favor traditional IRAs.

2. We have no way of knowing what the tax schedule will be
in the distant future. As a result, many people diversify
tax scenarios as well as investment holdings.

3. The roth IRA rules have changed to allow "easier access"
to the contributions. Your sons can take out the money you
contribute on their behalf any time they like, without
penalty. This may be bad (careless spending) or good (no
penalty in an emergency situation). Earnings and conversion
dollars are a bit trickier to get their hands on.

All-in-all you are correct that unknown variables prevent
you from having a definitive answer of "which vehicle is
better." Consider using both vehicles to hedge the risk.

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"Victor Roberts" <xxx[at]lighting-research.com> wrote:

- quote -

Rather than their age, I think the "starting out" aspect
weighs in favor of Roth during the early years of their
careers. All of this requires a reliable crystal ball to
some extent, but one thing I think will hold true is that
income taxes will remain progressive. Thus a tax deduction
has less value early on that it will later in life.

An extreme example is a dependent student working part time
and earning less than the dependent's standard deduction.
There would be no tax benefit from a traditional
contribution and all those years of tax-free accumulation in
a Roth.

--
Phil Marti
Clarksburg, MD

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- quote -

Actually, the situation still favors the traditional IRA,
but only by a small amount.

The reason for this is that withdrawals from a Roth IRA are
not completely tax-free, they are tax-free up to the
amount(s) contributed, and thereafter are included in
income.

Thus, in your example, at retirement, the Roth would have a
gross value of $10,722.59, the first $2,400 could be
withdrawn tax-free, and the remaining $8,322.59 would be
subject to tax at 20% (based on your assumption), leaving a
net after-tax value to the Roth of $9,058.07.

By comparison, the traditional IRA would have a gross value
of $13,403.23, and a net after-tax value of $10,722.59.

Thus, the traditional IRA provides $1,664.52 in additional
future benefit over the Roth IRA.

The Roth IRA really only provides a benefit over the
traditional IRA if you're in one of the lowest tax brackets
at contribution, and in the highest tax bracket at the time
you withdraw the amounts at retirement. Even so, the benefit
is not great.

For example, if you had an effective tax rate of 5% at
contribution, and an effective tax rate of 35% at retirement
when you withdrew the full amount, the Roth would only
provide you with an additional $561.89 in future benefits
over the traditional IRA.

In this case, unless the contributor's current effective tax
rate is 0%, the "right" answer is a traditional IRA if that
is an available investment.

However, even though a Roth is not as good as a traditional
IRA, it is definitely better than the alternative of a fully
taxable investment, unless you can be certain that you will
hold the taxable investment until retirement without ever
realizing any of the inherent gain.

For example, assume that you had a taxable investment on the
same assumptions as for the Roth, and the investment return
is taxed currently in each year.

In that case, the taxable investment will have a value of
$7,507.38 at retirement, none of which will be taxed on
withdrawal because it has all been taxed on a current basis.
The Roth therefore provides an additional $1,550.69 in
future benefit over the taxable investment.

Of course, if the taxable investment generates only
long-term capital gains, and those gains are realized less
frequently than every year, the taxable investment provides
better future benefits, and if held to maturity at 30 years,
provides a future benefit of $10,372.66, which is better
than the Roth, but not quite as good as the traditional IRA.

It would seem then, that generally speaking, absent unusual
circumstances, the traditional IRA is the "right" answer in
almost every case.

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I've been thinking about the value of a traditional vs. Roth
IRA for my sons, who are just starting out. In the process
I came to the conclusion that one is not automatically
necessarily better than the other, even for young people. In
fact, given two simple assumptions, both types of IRAs give
EXACTLY the same results upon retirement. Under these
assumptions, the "tax-free accumulation" advantage of the
Roth is balanced by the tax-deductible feature of the
Traditional. So this is yet another decision where the
"right" answer is "it depends" and the facts necessary to
make the right decision do not exist, since they lie in the
future.

Assumptions:

1) A fixed amount of pre-tax money to fund the IRAs. Say
$3000.

2) The same marginal tax rate now and when the person
retires. Say 20% for this discussion.

If a Traditional IRA is opened with $3000 at 5% APR,
compounded monthly, it will grow to $13,403.23 after 30
years. After 20% income tax, the IRA will be worth
$10,722.59.

If the same $3000 is used for a Roth, the taxpayer first has
to use $600 of the $3000 to pay the taxes on the $3000 that
is not being deducted from his or her income, so they get to
invest $2400 in their Roth IRA. After the same 30 years at
the same 5% this grows to the same $10,722.59.

Of course, if $3000 is invested in a Roth it will be more
valuable after 30 years than $3000 invested in a
Traditional, but this is not a fair comparison since the
funds used to pay the current income tax on the $3000 are
not being accounted for.

--
Vic Roberts
Replace xxx with vdr in e-mail address.

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