Roth IRA - A Really Stupid Idea

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Paul F

Veteran
It's tax time. For those of you who contribute to an IRA, you may have wondered about traditional vs Roth. Now that I am taking contributions from my IRA, I see how dumb a Roth IRA is. I always thought a Roth was a bad idea, but now I have the proof.

Back in the day I figured that I was ahead of the game by having tax free interest or capital gains re-invested for 30 or 40 years rather than pay up front. Some argue otherwise. Last year I took money out of my IRA and having filled out the federal and state tax forms, I owe nothing. Not a dime. What a waste it would have been to have paid the tax up front.

Note - never listen to anyone for financial advice, including me.
 
Peter C. said:
I don't know if you're joking, but the way I understand it all gains are taxed even if its from a tradition IRA where as the Roth they are not. When you file your annual Federal taxes (properly) that's when you'll need to pay.

https://www.investopedia.com/ask/answers/102714/how-are-ira-withdrawals-taxed.asp
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It's no joke Peter. Indeed, what you are saying is what people are telling us and what I believed would happen; I would pay taxes on my IRA distributions from a traditional IRA. Knowing that, I still considered a traditional IRA to be an advantage over a Roth for two reasons:

- Instead of paying tax up front, I would rather invest that money in the IRA. Over 30 or 40 years, that is a significant gain.
- I figured my tax rate would be much lower when I was withdrawing money. That's the key. My tax rate is lower now. So I benefit from not paying as much tax now as I would have when I was earning. It's so low, it is zero. Even if it weren't zero, it would be much lower than during the earning years, which would tax at a higher rate.

People have been writing for years about the benefits of a Roth IRA. I never bought into it and I'm glad I didn't. My IRA withdrawal is tax free baby!
 
Paul F said:
It's no joke Peter. Indeed, what you are saying is what people are telling us and what I believed would happen; I would pay taxes on my IRA distributions from a traditional IRA. Knowing that, I still considered a traditional IRA to be an advantage over a Roth for two reasons:

- Instead of paying tax up front, I would rather invest that money in the IRA. Over 30 or 40 years, that is a significant gain.
- I figured my tax rate would be much lower when I was withdrawing money. That's the key. My tax rate is lower now. So I benefit from not paying as much tax now as I would have when I was earning. It's so low, it is zero. Even if it weren't zero, it would be much lower than during the earning years, which would tax at a higher rate.

People have been writing for years about the benefits of a Roth IRA. I never bought into it and I'm glad I didn't. My IRA withdrawal is tax free baby!
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It's better to pay tax on an initial investment of $2,000 rather than on the return after it grows to $100,000. It doesn't really matter as long as save money for your retirement.
 
That's what is so misleading. The statement sounds correct, but that's not what happens. You're not paying taxes on $2000. You're paying tax on your total income and that tax rate is high due to high earnings during earning years. The tax rate is lower during retirement. I my case, it is zero.

Every Roth article agrees with you; that the Roth IRA is better. The assumption being that withdrawals are high and in a high tax bracket. It just isn't true. I planned on retiring with a big income from my IRA. It turns out I don't need near what I anticipated. Not even close. The wife and I are living very comfortably on half as much money as anticipated. If I knew what I know now, I would have retired a lot earlier.

If I had invested in a Roth for 30 years, I'd be really upset after finishing this years tax forms.

Meh, it's just one person's experience. Everyone has to make their own choice, but I'm here to tell everyone, the advice out there is often misleading and not worth the pixels it's printed on. I don't present this as advice. I'm just relaying my experience, which may be useful to others. Or it may be a pile of hot horse manure. Who knows.
 
My investment method has been put it in a checking account.

I’ve had my bank contact me with suggestion that I put it into investment accounts.

They don’t know me very well at my bank.
 
Yea, that's that guy that needs to make his commission by having you take money out of your checking account and putting it into an investment that could lose money at any time. Nice guy.
 
Luis Caffesse said:
That sounds better than my David Lee Roth IRA.
It's offshore in Panama.
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That's where Vladimir Putin keeps his too and you want to avoid any mishaps there. I mean, if you find your account suddenly $200 billion richer, you'd know that someone might be looking for it.
 
(dodges puns flying left and right)

Paul F, thank you. A financial advisor was recommending the Roth IRA to me, though so far I have been contributing to the Traditional one.

It had not occurred to me that there was a 0% tax bracket in the US. But in a way, there is --- well, at least two ways. (1) You could earn less than the Standard Deduction, which is about $25,000 for a married couple. This is a bit tight. (2) There is no tax on long-term capital gains if the couple's income was less than about $80,000, which is totally doable. https://www.fool.com/taxes/2021/02/19/the-secret-to-getting-in-the-0-tax-bracket/
 
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Paul F said:
That's what is so misleading. The statement sounds correct, but that's not what happens. You're not paying taxes on $2000. You're paying tax on your total income and that tax rate is high due to high earnings during earning years. The tax rate is lower during retirement. I my case, it is zero.

Every Roth article agrees with you; that the Roth IRA is better. The assumption being that withdrawals are high and in a high tax bracket. It just isn't true. I planned on retiring with a big income from my IRA. It turns out I don't need near what I anticipated. Not even close. The wife and I are living very comfortably on half as much money as anticipated. If I knew what I know now, I would have retired a lot earlier.

If I had invested in a Roth for 30 years, I'd be really upset after finishing this years tax forms.

Meh, it's just one person's experience. Everyone has to make their own choice, but I'm here to tell everyone, the advice out there is often misleading and not worth the pixels it's printed on. I don't present this as advice. I'm just relaying my experience, which may be useful to others. Or it may be a pile of hot horse manure. Who knows.
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Everyone's situation is different that's why there are financial planners to tailor the best approach for YOU. What you're are saying still doesn't make much sense because most people are going to fall between 40-165k and there is only a 2% difference in the tax rate in that range. There are also yearly contribution limits. I don't have much sympathy if you're crying foul that you made 6 figure income but can't afford the higher tax rate.
10% $0 to $9,875
12% $9,876 to $40,125
22% $40,126 to $85,525
24% $85,526 to $163,300

The one fact that is undeniably true is the government at any time can change the tax rules. So I don't think its productive second guessing your prior retirement contribution decisions. Both Roth and traditional IRAs are useful.
 
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combatentropy said:
(dodges puns flying left and right)

Paul F, thank you. A financial advisor was recommending the Roth IRA to me, though so far I have been contributing to the Traditional one.

It had not occurred to me that there was a 0% tax bracket in the US. But in a way, there is --- well, at least two ways. (1) You could earn less than the Standard Deduction, which is about $25,000 for a married couple. This is a bit tight. (2) There is no tax on long-term capital gains if the couple's income was less than about $80,000, which is totally doable. https://www.fool.com/taxes/2021/02/19/the-secret-to-getting-in-the-0-tax-bracket/
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In the first case I think you're right - but in the second case I'm not so sure.
While what you're saying might be true, it doesn't mention income tax (only capital gains).

Traditional IRA distributions would still be subject to income tax, while Roth IRA distributions would not.

(unless I'm completely misunderstanding something, which is possible)
 
groveChuck said:
I have the Philip Roth IRA, known for Portnoy's Complaint to the SEC...
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It could have been worse. You could have bought an Uli Roth IRA and been shredded.

(my tax accounting professor would not have been amused at this joke either)
 
Paul F said:
Every Roth article agrees with you; that the Roth IRA is better. The assumption being that withdrawals are high and in a high tax bracket. It just isn't true. I planned on retiring with a big income from my IRA. It turns out I don't need near what I anticipated. Not even close. The wife and I are living very comfortably on half as much money as anticipated. If I knew what I know now, I would have retired a lot earlier.
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Thanks for sharing your experience, really interesting insights. Thanks!

Also, sorry you didn't retire sooner, but that's great news to have more than you need. Maybe update your home theatre, buy a sports car, build a PC with full flight controls and VR for Flight Sim 2020, learn to scuba dive, take some fun vacations... eh?
 
combatentropy said:
... I guess then I'm still uncertain what happened with Paul. ...
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Imagine your over 65, on Medicare, not making car payments, mortgage is paid, all debts are paid, are not paying social security nor disability nor any other payroll tax, not making contributions to your retirement fund, collecting social security. Fill out a 1040 form on that basis. Magic happens. You can have several tens of thousands of income over $25,000 and not pay a dime of tax and live well because your expenses are so low.
 
I think it is all relative. What about when RMDs appear? Will that push you to withdraw more than you want to each year? Causing more taxes to appear? It also depends upon how much you have in your IRA. If you have a lot, you are going to pay some taxes because the amount to be taken out will be pushing your bracket upward. Your are going to pay some kind of tax in the end. I am almost of the mind that any IRA is not that special compared to just saving/investing out of a vehicle. IRAs & 401Ks are useful due to the tax breaks they offer along the way. But for pure saving money, the government will always want you to pay taxes. The house always wins to some extent.

From a pure numbers point of view, if you are going to draw down an IRA to zero, paying tax on the small up front amount with a Roth is better than paying tax on the swollen amount later with a Traditional IRA. But, that also depends upon how much it grows. If you are getting 1% a year then id does not matter to even have an IRA. If you are buying Amazon stock when it goes public and holding forever, the Roth winds by a country mile if you do not need the tax breaks along the way.

IRAs are tax investment vehicles, not retirement vehicles. Traditional is tax deferred meaning, you still will owe the tax on gains where the Roth is tax free after the initial payment.
 
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