Talk:Roth IRA/Archive 1

Traditional IRA Taxed "Effectively" after "Deductions"
There is some incorrect or misleading information in the article regarding how traditional IRAs are taxed at retirement when there are withdrawals. For example, the article says, "If that taxpayer were in the 30% tax bracket upon retirement, $1000 of traditional IRA distributions would incur $300 in taxes." This would NOT be true in most cases. It certainly wouldn't be true if this was the only income the tax payer was receiving at retirement. I'll explain below.

The article also states "Earnings in a Traditional IRA are taxed as Ordinary Income", but these earnings are taxed ONLY when withdrawn from the retirement account, at which point, the withdrawals are taxed as ordinary income on a year by year basis as they are withdrawn from the total growth of the account, typically after 59 1/2 years of age.

Every comparison I've seen of Roth IRAs vs. traditional IRAs makes the assumption that when someone withdraws from a traditional IRA that they will be paying the marginal tax rate on the entire withdrawal without factoring in deductions, exemptions, or the lower tax brackets that are paid into before even reaching the marginal tax rate. It's not just a matter of whether the "marginal" tax rate is higher at retirement than while contributing, as is often stated as the primary determining factor. It's the "effective" tax rate that really matters. When factoring these other elements into the calculations to get the "effective" tax rate, the traditional IRA is often the much better investment. This is why I stated that the article is INCORRECT OR MISLEADING to state that someone in the 30% tax bracket upon retirement receiving $1000 in traditional IRA distributions would incur $300 in taxes. Usually it would be much less than the "marginal" tax bracket.

For example, if a typical single middle class income earner is making $40,000/yr and can afford to contribute 6% of his income to a traditional IRA, he would be able to contribute only $2400/yr, which is less than the maximum allowed. If he chose a Roth IRA, after taxes, only $1800/yr would actually go into the Roth IRA due to the balance going to taxes. Assuming identical investment growth percentage, the Roth IRA growth would amount to a total which is 25% less than the traditional IRA growth. The first year of retirement, a withdrawal of $40,000 from a traditional IRA would be taxed as ordinary income. Using 2007 tax tables, the standard deduction $5350 would apply, the personal exemption of $3400 would then be subtracted, the remaining would have tax applied in the 10% and 15% tax brackets, and only the remaining taxable income in excess of $31,850 would be taxed at 25%. Factoring in the deduction, exemption, and 3 relevant tax brackets, the effective tax is 10.74% on this withdrawal. (I used this calculator to calculate the average/effective tax - http://www.dinkytown.net/java/TaxMargin.html) In this typical middle class example, this is a better option than the Roth IRA where the growth is already 25% less than the standard IRA growth. The traditional IRA would allow him to withdraw for more years due to the higher growth amount and lower "effective" tax rate. I could have used a married couple and an $80,0000/yr figure in this example showing the same "effective" tax rate of 10.74% using a traditional IRA, and making it the better choice over the Roth IRA. Financial advisers often advise going with Roth IRAs based on the marginal tax rates expected to be higher at retirement versus the contribution years, but that totally misses the reality of deductions and the tax rate structure used to calculate taxes when making withdrawals during retirement, which results in a much lower "effective" tax rate than "marginal" tax rate at retirement for the middle class. As the article is today, it is not accurate in showing the advantages/disadvantages of a Roth vs a traditional IRA. 69.44.28.121 (talk) 06:32, 23 March 2008 (UTC)Harley

Fairtax
I do not know much about investing, but won't contributors to Roth plans be screwed if the Fairtax is ever implemented? It would seem to me, if it were ever passed, that those contributing to a traditional IRA would not pay income tax at all, while those who had contributed to a Roth IRA would be income tax when they add the money, and still have to pay the new high sales tax. Am I understanding this right? If so, there should probably be an entry in the disadvantages section about this. 65.216.189.2 13:11, 13 July 2007 (UTC)
 * I think any such entry should be added to the Fairtax article rather than here. --JeremyStein 21:16, 30 November 2007 (UTC)


 * Good point. I've thought about this myself, but surely they would have an exclusion so that everyone with a Roth IRA wasn't effectively penalized by the Fairtax.  But it's certainly something to keep in mind when considering a Roth IRA, and is fair to be mentioned in this context.69.44.28.121 (talk) 05:17, 23 March 2008 (UTC)Harley

Constant Tax Rate
OK, IANAA but I'm pretty sure that I was correct in adding the clarifying statement "and a constant tax rate" to the section contrasting traditional and Roth IRAs. Let me know if I'm wrong here. Also, there should probably be something mentioned about Roth IRAs kind of acting as a bet that taxes will rise. Anyone else have input? Maybe somebody w/ real accounting expertise. Bugg 19:59, Nov 19, 2004 (UTC)

Maybe a silly question.
If your income is already taxed then why would you have to pay a tax when you deposit the income that's leftover into an individual retirement arrangement?
 * Because the US government knows most people don't actually track their finances well enough to notice how much is being constantly taxed away.
 * I think you misunderstand. Without an IRA you pay taxes on your income when you receive it, and you pay taxes on any interest, dividends or capital gains resulting from the investment of that income. These are separate things; there is no double-taxation. With a Roth IRA, you only pay taxes on the original income. With a traditional IRA you pay taxes on the whole, but taxation is delayed until you actually cash out, allowing your investment to compound longer. -- Scott ei&#960;  09:55, 3 April 2006 (UTC)

um
"With the assumption that one is in a 30% tax bracket and then contributes $1000 to a traditional IRA, the individual would pay $300 less in taxes, and hence the investment would only cost the investor $700." <-- the math doesn't seem to add up here.


 * Lets say your total income was $1000 at a 30% tax rate, normally you would earn only $700 after tax. However if you invested the entire $1000 in a traditional IRA you would get a $300 tax discount and pay $0 in tax, so the $1000 that you have invested really only cost you the $700 that you would normally earn. 210.235.203.106 (talk) 05:22, 30 November 2007 (UTC)

Everyone should remember that the 401(k) and IRA are not retirement plans, they are saving plans. They guarantee nothing at retirement, what you get is based on how successfully you invest. For example if you had invested in the stock market during 2000 to 2004 you could easily have lost half your money.


 * You can put your IRA into a FDIC insured bank account if you like. Steve Dufour 07:16, 9 February 2007 (UTC)

Re: um
What doesn't add up about the math? It seems right. Let me walk through. Let's say (hypothetically) a person earns $10,000 and is in a 30% tax bracket (not the case in the US, but we'll assume it for the sake of simple calculations). Assume he makes no traditional IRA contributions. Then he has $10,000 taxable income at a 30% tax rate, and thus pays $3000 taxes, leaving $7000 in the end (and $0 in his IRA). Now assume he makes a $1000 traditional IRA contribution. This contribution is tax deductable, and thus he only has $9000 in taxable income. Hence he pays .3*$9000=$2700 in taxes, and his post-tax income is then $10,000-$2,700=$7300. He put $1000 in his IRA, so he only has $6300.

So therefore, if he contributed nothing, he has $7000 at the end of the year. If he contributes $1000, he has $6300 at the end of the year. Thus his investment only cost $700.

What's wrong with that?

I see
I was confused by "pay $300 less in taxes." I thought that meant that he would pay $300 less towards the IRA, due to taxes, or that he'd pay $1000, be taxed $300, and $700 would land in the account, so the cost to the investor would be the full $1000.

Conversions?
Shouldn't we mention the provision for convertinga Traditional into a Roth?

Agreed. Somewhere this article should mention the convertability between one into the other. Does anyone have a solid background in IRA investment? I know people often shift their accounts from traditional into Roths. Also, there is somewhere inside the conversion that specifically deals with realized capital gains during the current year that confuses many people.

Contribution Limits with both Traditional and Roth IRAs
The IRS's Publication 590 "Individual Retirement Arangements (IRAs)" says, "If contributions are made to both Roth IRAs and traditional IRAs established for your benefit, your contribution limit for Roth IRAs generally is the same as your limit would be if contributions were made only to Roth IRAs, but then reduced by all contributions (other than employer contributions under a SEP or SIMPLE IRA plan) for the year to all IRAs other than Roth IRAs." All IRAs other than Roth IRAs and SEP or SIMPLE IRAs seems only be the Traditional IRA. Am I correct? I added that comment to the Roth IRA wikipedia article.

Are Yearly Contribution Limits Net or Gross?
Are yearly contribution limits to a Roth IRA net or gross?

For example:

John Doe has 10,000 dollars in his Roth IRA in 2006 (8,000 from contributions in the previous two years and 2,000 dollars in earnings). Dutifully, John maxs out his contributions in 2006 by depositing another 4,000 dollars. Six months later, however, John has a non-qualified emergency and withdraws 5,000 dollars from his Roth account. Since, he had 12,000 in contributions, the withdrawal is tax-free. Several weeks later, John's situation improves and he wants to contribute again to his Roth account for the 2006 tax year. How much is he able to recontribute? 5,000 thousand, so as to have a net contribution of 4,000 for tax year 2006? 4,000, since he can't make up for withdrawals that tapped into contributions prior to 2006? Or, is he unable to recontribute any portion of his withdrawal since his gross contribution for 2004 was already maxed out by his first contribution in 2006.

New Tax Law for income limits on conversions from IRA to Roth IRA
The recently signed tax law (signed May 2006) lifts income limits on conversions.

Hurray...tax free growth (after paying up front)!

Here is a question; can I roll over my 401k into my IRA, and then convert the whole amount into a Roth IRA?

Yes, but you would have to pay taxes on the total amount in the IRA. Also, note that you will have to pay the taxes when you roll it over. If you don't have spare cash to pay the taxes, it will be deducted from the rollover amount and you will pay a penalty for early withdrawal. Apart from that, everything is fine. You're not the only one waiting for the new laws for take effect in order to roll Trad IRAs into Roth IRA


 * The discussion on "Conversion limit" refers to traditional IRA contributions as being "rolled over" into a Roth IRA. In the traditional IRA article, the Transfers vs. Rollovers section indicates that differences exist.  To my non-expert eye, the procedural difference seems to be based on who "initiates" the movement of funds.  If an institution initiates the movement, it is a transfer; if the participant initiates the movement, it is a rollover?  The pragmatic impact appears to be whether the movement is reportable to the IRS and restrictions on multiple transfers during a 12 month period.  Is my understanding correct?  Does this distinction between transfer and rollover exist for Roth IRA the same as for traditional IRA?  If so, perhaps the conversion limit section should be modified accordingly?--Rpclod (talk) 19:45, 29 August 2010 (UTC)

Age restrictions?
At one point in the article, it says "Provided that a taxpayer has earned income (and is within the modified AGI limits), contributions can be made to a Roth IRA at any age." Later the article says "You must be 18 years of age or older earning less than $110,000 (single) or $160,000 (married, filing jointly)". Which is it? Can someone under the age of 18 contribute to a Roth IRA? --dm (talk) 00:31, 12 December 2006 (UTC)

Under 18
A ROTH can be established for a minor provided that minor has a taxable income equal to or greater than the amount given the ROTH (but less income than the limit of $95,000. for a single person.)

Awkward?
"If one is not able to max out one's IRA contributions, and ends up in a lower income tax bracket at retirement, then one will wind up with less usable cash by choosing a Roth IRA over a Traditional IRA." This should be changed to improve readability. If one so wishes.

Where does the term Roth come from?
Is Roth someone's name? An acronym? What's the history behind this name and the retirement account program? What legislation allowed this? —The preceding unsigned comment was added by 67.169.91.53(talk) 20:55, 17 March 2007 (UTC).
 * Read the article - your answers are there. --ZimZalaBim (talk) 20:57, 17 March 2007 (UTC)

Can someone just please put this in either the Traditional or Roth IRA page?
Seems that those that understand this stuff get lost in all kinds of money speak.

Please just speak english and add this somewhere. This is all anyone really needs to know.

'''The difference between a Roth and a Traditional IRA

Roth: Contributions, taxed. Withdrawls, not taxed.

Traditional: Contributions, not taxed. Withdrawls, taxed.

- or -

Roth: Taxed on the front end. Back end tax free.

Traditional: Tax free on the front end. Taxed on the back end.'''

Its now up to you to play the gambling game and figure out when you are going to die and what your tax bracket is now compared to when you are 65.

Feel free to chastise me if you think this is too simple, but once some just said these very basic facts to me, all the rest fell into place.

Baronvonmike 16:59, 22 May 2007 (UTC) Mike

Which year's MAGI is used when computing one's contribution limit?
If I want to compute my contribution limit for 2007, do I use my MAGI from 2006 or from 2007?

If it's 2006's MAGI, does that mean that if your 2006 MAGI is below the limit for full contributions, you can make the full contribution for 2007 even if you know that your 2007 MAGI will be well beyond the limit?

If it's 2007's MAGI and you start the year thinking your earnings will be below the limit for full contributions, so you contribute the full $4,000 but at the end of the year, you find that you have actually breached that limit, does that mean you have to somehow undo the contributions you made?

Withdrawals

 * withdrawals up to the total of contributions + conversions are tax-free

Is this true? According to, "Unless an exception applies, most distributions from a Roth IRA before the owner reaches age 59 1/2 will be subject to an "early withdrawal penalty" of 10% on the amount of the distribution."
 * Yup, that's true: Zanter 12:01, 6 August 2007 (UTC)
 * Remember that, under the Roth IRA rules and unlike the rules for a regular IRA, you can first remove your contributions without tax or penalty. So, in Example #1 above, if Bill decided to take a withdrawal of only $2,000, it would be treated as a distribution of his original contributions, and would not be subject to taxes or penalties.

For example, a 20 year old puts $4,000 in a Roth IRA. At age 23, he wants to buy a house. It has not been 5 years yet, so he cannot withdraw his earnings yet, but he can pull out the original $4,000 to put towards the down payment. Correct?
 * Not a tax-professional But I think you're still required to have the 5-year rule before you can take the money penalty free. However if it was after 5-years you could take the original 4,000 for any reason. (But if the reason is because it's for a downpayment on first-time home purchase, then you could take out earnings as well )Zanter 22:37, 6 August 2007 (UTC)
 * Hmmm... I may be wrong on the 5 year rule for the original contributions. (and that may only apply to earnings.) Anyone know?Zanter 21:16, 17 October 2007 (UTC)

Conflicting statements regarding age
"At any time, the Roth IRA owner may withdraw up to the total of his or her contributions (in nominal dollars)." and "With a Roth IRA, there are heavy penalties for early withdrawals of earnings"

Wuh? Or should I read the first statement to say "blah blah blah + though this will incur a fee"? Thanks. Jwigton 05:05, 15 August 2007 (UTC)


 * Note that the first statement refers to contributions while the second refers to earnings. These are not conflicting statements.  —Preceding unsigned comment added by 198.95.226.224 (talk) 20:27, August 27, 2007 (UTC)

Another disadvantage
Another disadvantage of the Roth IRA is that losses are not deductible.Trlucas (talk) 17:05, 23 July 2008 (UTC)

disabled macro?
Near the opening paragraphs there is a macro ' ' caught inside &lt;nowiki&gt; tags which effectively disables it. Not sure what the intent is of the nowiki tags there. I also don't know what the 'what' macro does so I'm not sure how to fix it. Somebody know better? - El Visitoro

Talk Page Table of Contents
The article has a TOC but the Talk page does not. Why is this? --Virgil H. Soule (talk) 18:05, 14 November 2009 (UTC)

Government Double Dipping?
Why do you have to pay tax AND penalty on early withdrawal? I'm asking this in the context of an IRA account that has had little to no trading (i.e., no realized gains until the withdrawal) —Preceding unsignedcomment added by 67.61.204.43 (talk) 16:16, 12 February 2010 (UTC)

Terminology: Plan, IRA, Account, Annuity
Publication 50, Chapter 2 uses "plan" to refer collectively to account or annuity. "A Roth IRA is an individual retirement plan ***. It can be either an account or an annuity." I recommend using either "IRA" or "plan" (not "account") when referring generically to accounts and annuities. I made changes to reflect this in the article. I kept at least one reference to "account" where the ramifications did not seem to apply to annuities.--Rpclod (talk) 14:57, 12 November 2010 (UTC)

Incomprehensible
The following statement appears in the main article just after the contribution limits table: "* Starting in 2009, contribution limits will be assessed for a potential increase based on inflation, though the 2009 contribution limits have remained unchanged. Nor will the funds divide." What does the last sentence mean? — Preceding unsigned comment added by 68.186.166.197 (talk) 14:16, 27 December 2011 (UTC)

Assessment comment
Substituted at 15:42, 1 May 2016 (UTC)