Roth IRA in Ankeny area

[JY07]

Just to set the record straight. Generally with an IRA, you have MORE investment options. "Better" is subjective and doesn't ensure a person will select the "right" investments anyway.

Nothing is "free". Either and IRA or 401(k). These aren't provided by charities after all. Some 401(k)'s can actually be less expensive if you're with a large enough employer and thus they are able to offer lower large institutional fees on the investment. This isn't he norm, but it is out there so don't assume an IRA will always be cheaper.

I have a SEP-IRA through Schwab which has no costs outside of their standard brokerage fees (i.e. purchasing a stock through it would cost $8 or whatever). They have a pool of ETFs that cost nothing to trade, and all have a very low expense ratio: if you solely invest in these ETFs you wouldn't end up with any fees (outside of the ETF expenses).

It works similarly for their regular IRA/Roth products, and I know a lot of the other larger brokerages work the same way, incentivizing using their funds for no cost.

There's no way a 401k is going to compete with that

 

[Bobber]

Everything I have read suggests you should max out your 401 k first and then contribute to a Roth. Reasoning is the benefit of tax deferred gains over time outweigh the taxes you pay when taking out.

My wife and I did roll some money from an old job she had into a Roth. Had to pay a lot of taxes that year.....our reasoning that tax rates are only going to go up would be false today.

 

[ricochet]

You are correct. With a Roth, you are only paying taxes on contributions, not on growth. Over a 20-30 year timeframe, that's a HUGE difference. With a Traditional, you may pay a lower tax rate when you withdraw at retirement than you have now, but you're paying taxes on everything - contributions and growth. For a young person, a Roth (either IRA or 401(k)) is absolutely the way to go (after getting the maximum match of course).

No, he isn't correct. Say you invest $10,000 of your salary and to make things simple you have a tax rate of 20%. For a Roth IRA you pay $2000 in tax right away and have $8,000 to invest. For the 401k you invest the whole $10,000. When it comes time to withdraw the investment has doubled in value. The Roth IRA has $16,000 and it is all tax free. The 401k has $20,000 but you have to pay 20% in taxes which leaves you with $16,000. If the tax rates are the same it ends up the same, that is just how math works.

 

[clonebb]

With a Roth you still pay management investment fees per fund plus the fee to trade. I use ameritrade for my IRAs and general investing. I can buy stock and mutual funds as IRA investment options.

 

[crash_zone]

No, he isn't correct. Say you invest $10,000 of your salary and to make things simple you have a tax rate of 20%. For a Roth IRA you pay $2000 in tax right away and have $8,000 to invest. For the 401k you invest the whole $10,000. When it comes time to withdraw the investment has doubled in value. The Roth IRA has $16,000 and it is all tax free. The 401k has $20,000 but you have to pay 20% in taxes which leaves you with $16,000. If the tax rates are the same it ends up the same, that is just how math works.

Unless you pay tax outside of the investment. Then you have $20,000 and no taxes. Your statement only works if you limit inputs based on the combined total.

 

[capitalcityguy]

I have a SEP-IRA through Schwab which has no costs outside of their standard brokerage fees (i.e. purchasing a stock through it would cost $8 or whatever). They have a pool of ETFs that cost nothing to trade, and all have a very low expense ratio: if you solely invest in these ETFs you wouldn't end up with any fees (outside of the ETF expenses).

It works similarly for their regular IRA/Roth products, and I know a lot of the other larger brokerages work the same way, incentivizing using their funds for no cost.

There's no way a 401k is going to compete with that

As I said, generally IRAs can be less expensive. That said, I don't recommend you provide advice to someone based on anecdotal evidence.

This is based on a Government Accountability Office (GAO) report a couple years ago.

GAO: Workers hurt when rolling over 401(k) plans to IRAs

 

[ricochet]

Unless you pay tax outside of the investment. Then you have $20,000 and no taxes. Your statement only works if you limit inputs based on the combined total.

My statement works because math is math. Paying taxes "outside of the investment" doesn't make any difference. If the choice was IRA versus Roth IRA it could because they have the same maximum. $5,500 dollars in a Roth is equivalent to $6,875 in a traditional IRA (using my 20% tax example), but you can't contribute $6,875 to a traditional IRA in one year.

The point I'm trying to make though, is that your original statement of "having all the growth being tax free more than makes up for paying more taxes up front" is not correct. Many people believe it, but it simply isn't true. If the tax rate is the same the net money is the same.

 

[vacyclone]

My statement works because math is math. Paying taxes "outside of the investment" doesn't make any difference. If the choice was IRA versus Roth IRA it could because they have the same maximum. $5,500 dollars in a Roth is equivalent to $6,875 in a traditional IRA (using my 20% tax example), but you can't contribute $6,875 to a traditional IRA in one year.

The point I'm trying to make though, is that your original statement of "having all the growth being tax free more than makes up for paying more taxes up front" is not correct. Many people believe it, but it simply isn't true. If the tax rate is the same the net money is the same.

You make a good point. My experience is based on being able to max out an IRA, which makes what I said correct. As you said, paying taxes on $5500 now is much better than paying taxes later on the full amount. However, if you aren't able to invest to the full limit, I agree with what you're saying, and honestly, I hadn't thought of it that way before. Thanks.