Capital Gains tax vs IRA
I was thinking about the current 15% LT Cap gains tax and how it is a pretty good deal for those investing in mutual funds and possibly Private Equity/Hedge Funds. The government has the standard IRA which is suppossed to be this gift to society to encourage retirement savings. But I never realized until yesterday that distributions from a standard IRA are taxed as "regular income". So while you get the deduction up front, many of us will be in a 35% tax bracket even in retirement and will be paying a lot of taxes on those IRA's. Compare it with the idea of simpy buying into an investment and holding and therefore only paying 15% tax on the gains and there is very little advantage to the IRA. Obviously the ROTH is great but I never realized how piss poor the regular IRA is. Of course, who knows what the Cap Gains tax of the future with the socialist movement in the US!
IRA's are meant to encourage saving in the general population. The people who "will be in a 35% tax bracket even in retirement and will be paying a lot of taxes on those IRA's" aren't the target audience for IRAs.
if you re-invest the tax saving you get from the traditional ira in the current period - your net gain will out pace your loss of increased taxes on the back end. additionally, when you are in the retirement period of your life you tax burnden will probably be very low and you won't be in a 35% tax bracket.
1) Traditional IRA income limits are low, so you won't be able to use one anyway. 2) LT Cap Gains rates are due to sunset and most speculate they won't be made permanent. (See Obama's proposals for where this is possibly headed in the future.) 3) All dividends/interest earned in a regular account will be taxed in the current period rather than deferred until retirement, a problem which is intensified by.... 4) The power of compounding returns on tax savings (both now and in future periods) will most likely outweigh the differential in tax rates.
Anyway, use the Roth while you can, and dump the rest you can afford into 401(k) (unless there is matching, in which case the 401(k) will most likely be preferential to the Roth, but definitely use both.)
the roth iras have the low limit; i dont think traditional iras have limits
I believe you are referring to income limits in which the Roth does indeed have a max salary of $115,000 for a single person before you are no longer eligible for contributions, whereas the Traditional does not have a salary cap. However, both the Roth and the Traditional are capped at a maximum contribution of $5500 a year (periodically adjusted upwards for inflation).
Also, compounding will always make the tax deferred investment more lucrative (all else being equal).
Simply put, contribute to a Roth if you think your tax bracket at retirement will be higher than your current one, contribute to a traditional if you think your tax bracket now will be higher than your retirement bracket (this will be the case for the bulk of your career), but always max out IRA and 401(k) contributions.
A traditional IRA is beneficial to the extent that it provides tax diversification for the majority...
Obama is so awesome...raising taxes is exactly what you want to do to drive growth in an ailing economy
Sapiente et distinctio qui dolores id. Rerum delectus incidunt dolor. Nisi deserunt quia pariatur in rem qui dignissimos quam.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...