why do people love roth IRAs?

[CoryWM]

Is there any way to have a roth IRA setup, to take a percentage of your payroll, like the traditional IRA? More than anything, I think if it's not automatic, I'll end up saving less. than if it is automatic.

[meaghanchan]

Is there any way to have a roth IRA setup, to take a percentage of your payroll, like the traditional IRA? More than anything, I think if it's not automatic, I'll end up saving less. than if it is automatic.

Not through your employer, but many fund companies let you set up automatic withrawals from a checking account into a Roth or traditional IRA on a biweekly, monthly, or quarterly basis.

[cptacek]

I agree with most of the above posts. I like the Roth IRA because:
1. You can get the contributions (the money you put in) out again without paying taxes on it.
2. You never have to take the money out, so this could be a great estate planning tool...your children (or whoever you leave your money to) don't have to pay taxes on it either.
3. Tax rates are low now, and especially for younger workers that presumably will make more in the future, paying taxes now allows the investment to grow.

[jIM_Ohio]

Roth:

Pros:

Withdraws are tax free
No Required Minimum Distributions
Contributions can be withdraw anytime, penalty free

Cons:
Government is promising not to tax the qualified withdraws
Pay taxes now (which might go against "conventional wisdom"
Income limits for eligibility

Deducatable IRAs (remember not all traditional IRAs are deductable, but all deducatable IRAs are traditional).

Pros:
Tax deducation in current year

Cons
Capital gains being taxed at ordinary income levels in retirement
Required Minimum Distributions have government telling you how much to withdraw (at minimum)- this can have tax consequences.

Advantages to both:
tax free compounding
4k per year annual limit, plus catch up. 5k is limit in 2008.
allow for spousal IRAs.

[cptacek]

Also, one good thing for the regular IRA, if you qualify for it, is you can get a tax credit for contributing to one. It works like this...
People's Bank - Retirement - IRA Tax Credit

To qualify for the tax credit, the IRA holder must:
- Be 18 years old before the end of the taxable year
- Not be a full-time student or a dependent
- Be within the AGI limits.

If you are married, and only make $30,000 (AGI) you can get a 50% tax credit for up to $2000 of contribution (if you are single, only $15,000). That means, if you contribute $2000 to a regular IRA, you can deduct that contribution as well as get $1000 back as a tax credit.

The limits go up to $50,000 AGI married, $25,000 single. If your AGI is $50,000, you get a 10% tax credit. After that, no tax credit.

This would be the only reason I would contribute to an IRA instead of a Roth IRA (if you are eligible for a Roth IRA). You might say, people who make that little can't afford to invest. Well, getting 50% back is a pretty good incentive, I think...if only everybody knew about this.

[poundwise]

I don't have either right now. My wife and I are working our way out of debt (planned completion date in early 2008) and then we'll be investing through IRAs for retirement.

In nearly every way I prefer the Roth. But, the Traditional provides the tax break now, which is, of course, its appeal.

I have often thought that when we're ready to set these up, we may set up my wife's IRA as a Roth and mine as a Traditional. In this way, we get a tax break now (via the Traditional) and have options after retirement age (by having both types of accounts) so that we can minimize the tax impact on our withdrawals then. Also, more money now means additional options such as paying down the house, investing for children's education, etc. (Or even to save money on taxes to be able to fully fund retirement each year.)

It also seems that one serves as a hedge against the other. You know, a "dont' put all the eggs in one basket" sort of thing.

[buzz]

It also seems that one serves as a hedge against the other. You know, a "dont' put all the eggs in one basket" sort of thing.

My sentiments exactly.

[disneysteve]

Another difference between Roth and Traditional is how they are handled upon your death. If I'm not mistaken, your heir has to pay taxes on inherited traditional IRA assets at his highest tax rate. Roth's, however, are inherited tax free.

[MonkeyMama]

Not sure if I was clear in what I was trying to say, that you responded to -- but since our current tax liability is very low anyway, the "pre-tax" advantage of contributions to a traditional IRA is almost a moot point. We might as well contribute to a Roth instead and have the advantage of tax-free withdrawals later. Is my logic right on that?

Exactly - this is why we have all our money in ROTHS now - have been converting them at our 15% tax rate (more like 5% with child tax credit and such).

There is some 5-year-rule on ROTHS though - waiting to withdraw without penalty. But I think that is only on the gains that you are penalized on withdrawal - since you already paid tax on the contributions.

[moneybags]

Another difference between Roth and Traditional is how they are handled upon your death. If I'm not mistaken, your heir has to pay taxes on inherited traditional IRA assets at his highest tax rate. Roth's, however, are inherited tax free.

Correct, but you (sometimes) can spread the taxes out by taking distributions, either over 5 years or per minimum distribution rules. DH inherited a Roth from his mom and takes only a required minimum distribution each year. The amount is based on his age. In some cases, you have to take out all the money & pay taxes on the full amount.

Another option to create a Roth IRA if your income exceeds the phase-out range is to fund a traditional IRA every year through 2010, then in 2010, convert it to a Roth. You don't get the tax deduction for contributions, but earnings accumulate tax deferred. Upon conversion, you owe taxes on any tax-deferred earnings. I have seen this idea written up in a few papers/magazines.

[jukebox9988]

The Roth IRA allows you to contribute a fixed amount, but grow your investment as much as you please W/O paying taxes in the future.

If you're real aggressive, you can trade options, make a ton of dough, and dodge taxes on every single dollar in earnings.

I don't know where you'll find a better deal than that.

Plus, after 5 years, you can withdraw your contributions to fund educational cost or buy a home. It's really versatile, and I'm so glad Senator William Roth lobbied for its enactment.

[Diolla]

Also, one good thing for the regular IRA, if you qualify for it, is you can get a tax credit for contributing to one. It works like this...

You can get this credit with Roth or a 401(k) contributions also it is for any retirement savings not just traditional IRA's

[cptacek]

WOW!!! How did I miss that??? Thank you for pointing that out!

[kv968]

Also, one good thing for the regular IRA, if you qualify for it, is you can get a tax credit for contributing to one. It works like this...

You can get this credit with Roth or a 401(k) contributions also it is for any retirement savings not just traditional IRA's

You can get a tax credit for contributions to these if you meet the requirements. The maximum adjusted gross incomes for eligiblity are 25K-single, 50K-married and 37,500 for head of household. The credit also phases out as you go this income scale.