Why a Roth IRA? (pensions, federal, states, retired)

[judd2401]

If Pennsylvania doesn't tax retirement income, why get a Roth IRA in which you pay taxes up front, compared to a traditional IRA where you pay taxes drawing it out, if you're in PA, would you pay taxes drawing down a traditional IRA?

[mathjak107]

it is more about your federal tax . unless you see having a higher income in retirement with no pay checks I wouldn't get a roth.

most folks with no pensions and no pay checks are not going to be in a higher bracket later on.

they just have to look at whether they will trip taxing their ss or not as the final deciding factor.

[deckdoc]

Didn't see your age on your post~ reason to go with Roth~ highly possible through compounding that amount of money in IRA that is untaxable gain is higher than amount you put into the IRA. Say you put $5000 in tax paid. 20 years later you had an account worth $20,000. and it was all taxfree when you drew it out. Or you could have put in before tax money of $5000. Now the amount in your account of $20,000 dollars is all subject to taxes. The tax I paid on the $5000 is a lot less than the tax I now owe on $20,000.

PS. I'm now have the highest income I've ever had and many farmers I know are in the same boat.

[mathjak107]

You are not comparing equal amounts. 5000 in a roth takes about 7k in pretax income. You would really have to compare it to 5k in a regular ira and 2k in an etf that spins off little in taxable income yearly.

Equal amounts with the same gains will always equal the same bottom line.

It is easier to compare a roth to a 401k since you can contribute equal PRETAX AMOUNTS and follow it through.

You have to remember you are starting with more pretax income with a roth.

Another way you can figure is this.

Since you are prepaying the tax on a roth with money outside the roth then figure paying the tax on the regular ira from money outside the ira as well for taxes..
even if taxes stayed the same the roth would not do as well since tax brackets allow more and more income through at lower tax rates every year.

Throw in the extra exemption at 65 and tax wise a roth which has prepayment of taxes at possibly your highest tax rate and it may be very hard to come out ahead.

[BayAreaHillbilly]

These generally only make sense early in a career.

In the high tech space I play in it would be ill advised.

Almost no one I know will have anywhere near the income they have now once they retire.

[StealthRabbit]

Your ideas / needs may vary (and should) I reside and keep Domicile and investments in income tax free states (WA, TX, SD, NV, NH, TN for me, others available + US Protectorates.)

I convert to ROTHs on the yrs I have little / no income. (sooner in age the better bang for buck)

I am in the rare minority that consider income taxes are likely to increase and threshholds decrease. (yes, even for the retired).

I keep ample options open (several income streams and buckets for distributions).

I Love my ROTH's for their many benefits of access to contributions (after 5 yrs) as well as sheltered gains for the High roller stuff.

I am buying some high potential equity gain real estate in my ROTHs.

Everyone will have their OWN personal investment / holdings / vehicles formula based on their risk factor and investment capabilities.

For 'qualified' accts, I have the bundle... 401K's, Roth 401k's, Traditional Ira's, ROTH Ira's - they all have their purpose and timing.

[oldsoldier1976]

Originally Posted by StealthRabbit

Your ideas / needs may vary (and should) I reside and keep Domicile and investments in income tax free states (WA, TX, SD, NV, NH, TN for me, others available + US Protectorates.)

I convert to ROTHs on the yrs I have little / no income. (sooner in age the better bang for buck)

I am in the rare minority that consider income taxes are likely to increase and threshholds decrease. (yes, even for the retired).

I keep ample options open (several income streams and buckets for distributions).

I Love my ROTH's for their many benefits of access to contributions (after 5 yrs) as well as sheltered gains for the High roller stuff.

I am buying some high potential equity gain real estate in my ROTHs.

Everyone will have their OWN personal investment / holdings / vehicles formula based on their risk factor and investment capabilities.

For 'qualified' accts, I have the bundle... 401K's, Roth 401k's, Traditional Ira's, ROTH Ira's - they all have their purpose and timing.

Stealth don't get this wrong but that is way too much for a lot of people to consider. It makes perfect sense and some people will benefit from it as will people benefit from mathjak's points as well. BLUF is that save, save, save for that income, income, income. Even for those of us with pensions coming saving is important. It could mean the difference between a first class cruise and one on a tug boat or the dingy towed by the tug.

[judd2401]

Thanks very much for the response, I'm 59, will have a lot less income when I retire, most likely a quarter of what I'm making now, I have been maxing out my 401K with match, and IRA's for 25 years, got a little bit of a late start because of government pay-back service and having no retirement plan except for IRA's which at that time was $2000/yr. I have never seen the point in converting my IRA's to Roth for the reasons already stated in this blog, and if it's true that PA [aside from federal] taxes no retirement income, pensions, IRA's, etc., Roth vs Traditional IRA will be a moot point unless I'm missing something.

[mathjak107]

Federal tax is the biggie. it has no bearing on whether your state taxes retirement money or not.

[oldsoldier1976]

Originally Posted by mathjak107

Federal tax is the biggie. it has no bearing on whether your state taxes retirement money or not.

Bingo! Point on!