Roth Retirement account annual contributions now $500 more

[Still_Small_Voice]

This is great news for those of us who are putting money into Roth retirement accounts.  Roth Individual Retirement Account annual contribution limits will go up by $500 from $5,500 in 2018 to $6,000 in the year 2019 if your annual income is not too high.  Internal Revenue Service raised the contribution limits.  The after age 50 catch up limit is now $7,000.  Contributions for Individual Retirement Accounts also went up $500 per year but I do not care because I do not like the I.R.A.  I prefer to take my retirement tax free from a Roth account after age 59.5.  Read more about it here:

https://thefinancebuff.com/401k-403b-ira-contribution-limits.html

[NeuroTypical]

Remind me - Roth IRA's are where you pay taxes up front, and then make the withdrawls tax free after retirement?     As opposed to a regular IRA where you contribute tax free, and then pay taxes when you withdraw?

 

[Guest]

15 minutes ago, NeuroTypical said:

Remind me - Roth IRA's are where you pay taxes up front, and then make the withdrawls tax free after retirement?     As opposed to a regular IRA where you contribute tax free, and then pay taxes when you withdraw?

 

Yes, that is correct 

[Guest]

36 minutes ago, Still_Small_Voice said:

I do not like the I.R.A.  I prefer to take my retirement tax free from a Roth account after age 59.5.

That may be wise for you currently.  But it may not always be so.  People in different tax brackets may find a better return (via tax structure) with the traditional IRA.

[anatess2]

My dad's philosophy is to skip the retirement accounts altogether and use the money to buy a piece of property anywhere.  Currently, you can buy a 5-acre property near the San Luis Valley in Colorado for not much more than $6K.

Edited December 27, 2018 by anatess2

[Still_Small_Voice]

The Standard and Poors 500 Stock Index has historically outperformed almost every investment out there so that is where I am at for likely the next ninteen years.

The Roth retirement account works for me.  My Federal income taxes are nothing presently with raising four kids.  Many regular retirement accounts will be taxed at around 24% with the current tax brackets when people go to start making withdrawals in retirement.  Twenty-four percent is too painful.  I'd rather take the 0% after tax from the Roth retirement accounts after age 59.5.

Edited December 27, 2018 by Still_Small_Voice

[NeuroTypical]

It's hard to know which is the winner.

Case 1 - Earn $10,000 to save for retirement.

Roth IRA
Pay 25% taxes, invest the remaining $7,500.
It grows until you retire.  Let's say it doubles in value to $15,000. 
Withdraw tax free and spend. Yay! 

Traditional IRA
Don't pay taxes, invest $10,000.
It grows until you retire.  Let's say it doubles in value to $20,000.  Yay! 
Withdraw, pay taxes of say 25%, or $2,500, and spend the other $17,500.  Yay +$2,500!

Case 2 would be that stuff doesn't double, it only grows maybe 50% or so.  There's a line somewhere, where the Roth makes sense on one side, and the traditional makes sense on the other side.  You gotta predict the future in two ways - how much will it grow, and what will your tax rate be?

 

I think the general wisdom is Roth's make sense if you're in your early earning years paying a lower tax rate.  Pay low taxes now, and a smaller amount of money grows and you can withdraw a higher-tax-rate-amount and skip taxes. 

Edited December 27, 2018 by NeuroTypical

[NeuroTypical]

In other news, here's something to consider as we reflect on the recent stock market scary correction thing.

[anatess2]

50 minutes ago, NeuroTypical said:

In other news, here's something to consider as we reflect on the recent stock market scary correction thing.

The Democrats won the House..............................................................................................................................^here^

So maybe that's why they went scared.

[mdfxdb]

I don't like the ROTH but it stems from my general mistrust of government in general to look out for our well being, remember these are the same guys who said social security would never be taxed.

[Still_Small_Voice]

I used to be too afraid to put my money in a good mutual fund that invested in the stock markets.  After thinking it through I decided that I could hold on to my fear of investing and only go with sure, safe investments and end up guaranteed poor in my later stages in life.  But, if I took reasonable risks with my savings in decent stock mutual funds I could end up with some accumulation of assets in about 25 years for retirement.  Thus far I took the plunge and my wife and I are trying to maximize our Roth retirement accounts every year in a good mutual fund.  Here is hoping the blessings of God are upon our assets as I will need them in later years when I do not want to be a full time servant to an employer or I cannot work anymore.

[ephedra]

ROTH IRAs are great if you expect to be in a tax bracket higher in retirement than what you are in when you are working - generally. If the person is in the 15% bracket it usually doesn't make sense to use anything but a ROTH with the exception of the 401K (403B, 457B, TSP) at work. 401Ks are found in both the Traditional and ROTH forms. Many employers offer both. 

Using the traditional IRA and 401K where contributions can be written off of income are better (IMHO) as it allows higher contributions and a reduction in taxable income. This, combined with the other available deductions such as medical, dependents and charitable contributions make it so eligible contributors can save much more and do it earlier. Taking full advantage of the 401K and possible employer matching contributions is a tremendous wealth builder. I have many clients who pay an effective rate of about 10% on their income even though they are six-figure earners. 

For those who do not make six figures, often the combination of deductions brings them into eligibility for the "Savers tax credit." I ensure every person I meet with who has a sub-six figure income is aware of this IRS rule as they may be eligible to take advantage of it.

https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-savings-contributions-savers-credit

The ROTH is also a great tool to use to split up funds as we do not know what tax rates will be. ROTHs are also not subject to RMDs as opposed to traditional plans. Withdrawals in retirement can be made from both ROTH and Traditional sources in order to produce desired income and avoid moving up to a higher tax bracket.  

Many will cite the fact ROTHs are not taxable as the primary reason for having one. Tax laws change all the time so the ROTH can be impacted with that at some point. In most instances, people do not retire at a higher income than their final peak earnings years so it is very likely their contributions will be taxed at a much higher rate if diverted to a ROTH than they would be on withdrawal in retirement from a Traditional plan.

The primary reason people have a difficult time making ends meet in retirement is not because of taxes, but because they failed to save early and often. The power of compounding works much more to your advantage when it is growing the money you deposited 30-40 years ago as opposed to five years ago with the age 50 catch-up provision. I find this to be an issue with many LDS clients who didn't save much or at all (for a variety of reasons) and then in their peak earning years they are financing their children's missions in addition to tithing. Although those expenses are pretty much non-negotiable for a faithful member, they definitely have a significant impact on their financial future. Now this is not such a big deal for the DRs. Lawyers and Dentists out there, but let us be honest. The vast majority of our Brothers and Sisters do not make a six figure income, much less one which will allow them to max out their 401K and/or even an IRA at any time in their lives. This is why I place heavy emphasis on them saving all they can as soon as they can. All other variables aside, Tithing and missions do make this much harder on an average income LDS family, but it can be done and I regularly am able to help many identify fund leakage they can divert to investing for their future.

Does this issue also impact non-LDS families? Yes- just for different reasons, but I do find that many of them do save more money as they have more available. The college tuition thing also affects both LDS and Non-LDS alike.

In order to save enough to retire, one must have a good idea of how much they will need in retirement. Let us say that in addition to Social Security, a family needs $20K annually in order to cover all expenses. If this is the case, they would need about $500K in a diversified portfolio in order to withdraw $20K annually in perpetuity. $40K per year? $1Million.

We suggest a maximum withdrawal rate of 4% per year in order to accomplish this. I tend to lean to the conservative side and advise clients to go with 3 or 3.5% max!

Don't put off saving your money. Keep in mind with historical inflation rates, $100,000 will only have about 50% of it's purchasing power in about 24 years. 

Here is a link which illustrates the benefit of saving early and often:

https://investor.vanguard.com/retirement/savings/when-to-start