Money

Is Roth IRA a scam?

Microsoft SSS!
Dec 2

Why financial advisors try to brainwash you into thinking that tax rate will go up in the future and touting the idea that you should pour money in Roth IRA now when the tax rate is low? I believe most of us don't really have a low tax rate right now. If the tax rate goes down when you retire, you paid more than you have to.

Even though tax rate goes higher when you retire, you won't work and won't have income so your marginal tax rate should be 0. So when take 401K distribution, you are taxed at a very low rate. So why pay tax now when your tax rate is high? It makes more sense to defer paying tax when you retire and don't have income, doesn't it?

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  • Citibank / Finance$$>RSU
    Yes it’s a scam. Please place your money in a high yield savings account. You know because it’s high yield and you’re saving.
    Dec 22
    • Microsoft SSS!
      OP
      Your Citibank savings is a bigger scam.
      Dec 2
    • Citibank / Finance$$>RSU
      No it’s really the best. Almost as good as windows and IE.
      Dec 2
  • Databricks Vwkanx
    Your earnings go untaxed. It's not a scam, but part of a diverse financial strategy.
    Dec 25
    • Microsoft SSS!
      OP
      But when your principal is taxed now you'll have less amount to invest, hence the earning will also be less, right?
      Dec 2
    • Microsoft Officiatin
      It's about the timespan. Look up a Roth IRA calculator, the math will prove itself.
      Dec 2
    • Microsoft / EngTier 1
      If your *marginal* tax rate now is the same as your *marginal* tax rate when you retire, the amount you get in your bank account when you retire will be the same^.

      If you are early in your career and expect your salary to grow much more, this could be a good bet. Likewise if you are living in a zero income tax state and expect to retire in a high income tax state.

      ^the only difference is as the amount you have to invest with is lower, if you burn money on transaction fees, this could have an minor effect on how much you get back.
      Dec 2
    • Stripe / EngAb4521
      The amount won’t be the same at retirement. You’re forgetting about untaxed compounding growth. That can make a huge difference.
      Dec 2
    • Microsoft / EngTier 1
      It’s the same. Do the math.
      Dec 3
  • Facebook Whateverrs
    Putting money in a Roth doesn't stop you from putting money in a 401k too.

    Unless you're close to retirement, your tax bracket probably will go up.

    What do you think you're going to live on in retirement? For your marginal rate to be zero you'd have to be pulling almost nothing out of your 401k. Life still costs money even when you're old.

    Run the actual numbers.

    If you're choosing between pre and post tax accounts, it mostly depends on your time horizon. If you have 20 years to retirement, your invested savings will probably *quadruple.* A 7.2% return for 20 years would turn 100k invested today to 400k in 20 years. Let's imagine tax rates are a constant 50% and you put 100k pretax, it goes to 400, and then you're left with 200k after tax. Or you pay tax first, invest 50k, and it goes to 200. It's basically the same benefit in this case.

    If you do neither, pay the tax, invest 50k, it goes to 200k, and then you pay 50% of the 150k investment profit, you're only left with 125k. That's the worst outcome. Maximize both your 401k and post-tax Roth Ira.
    Dec 25
    • Microsoft SSS!
      OP
      Thanks for the explanation. I still don't get why "tax bracket probably will go up" part. Trump had tax cut last year and it's also possible that future presidents will cut tax further, right?
      Dec 2
    • Cisco Infensus
      Don't get it either. My tax rate will probably go down because I'll be retiring somewhere in the Midwest. I will be withdrawing half of my current TC to cover living costs, so my federal tax bracket will be lower. What am I missing?
      Dec 2
    • Amazon BB!
      Your tax rate is assumed to go up because you tend to make more money and therefore be in a higher tax bracket at 65 than at 25.

      Also those tax cuts are set expire before you retire- 2025

      https://amp.cnn.com/money/2017/12/20/pf/taxes/tax-cuts-temporary/index.html
      Dec 2
    • Microsoft / EngHarmar
      Trump's tax cut isn't sustainable. It's running up a massive deficit which will have to be repaid eventually, so we either make huge cuts to the military or the tax rate will have to go up in the future.
      Dec 2
    • Facebook Whateverrs
      Sss! I wouldn't focus too much on the tax bracket going up part. I mean, it will, in the sense that funding a post-tax ira later in your career will be more expensive than it is right now, but the main point is to maximize contributions and you can contribute more in total by doing both.

      Rates will also likely go up because as others pointed out, our current rates are unsustainably low. There's no amount of expenses we could realistically cut that would balance our budget against such deep cuts we have so far, tax revenue will need to be raised somehow.

      You probably will be in a lower bracket when actually retired vs now, but your taxes will still be real and significant, the tax-free distributions may lower the tax bracket at which your 401k distributions are taxed, and it'll be more expensive to contribute post-tax dollars to an ira later in your career when you earn more.
      Dec 2
  • Facebook ScubaDiver
    It’s either taxed now or taxed later, upon withdrawal. Effectively you have the option of when to pay. Assuming a fixed tax rate they are roughly equivalent (actually Roth is slightly better from a taxation perspective due to dividend distributions). For most people though, they expect their tax rate to go up, so it makes sense to pay taxes now at a lower rate.

    Your income/tax rate isn’t 0 in retirement either.
    Dec 20
  • Facebook public2
    The best tax loophole available is a "scam" eh? Haha. Also yes tax rates are historically low right now and the gov is in massive debt, rates will have to rise and loopholes (like the backdoor roth) will have to be closed at some point. Milk the Roth while you can, tax free money is the best!
    Dec 22
    • Amazon Jеff Bezоs
      You’re assuming that only income taxes will go up while property, sales, and excise taxes won’t. If the opposite happens, Roth may not be so great...
      Dec 2
    • Facebook public2
      Pretty safe assumption but sure let's say income drops and sales tax triples. How does that make decades of tax free investment growth any less attractive or is even related to sales tax?
      Dec 2
  • Microsoft / EngHarmar
    It's situation-dependent, of course. If your current and retired marginal rates are the same, Roth and Traditional are equivalent.

    There are many factors that can cause your future tax rate to be higher, though -
    • Early in career
    • Significant inheritance
    • Political climate (current rates historically low)
    • Current lack of state income tax (Washington)

    Additionally, the Roth backdoor allows you to save more sheltered dollars than just the front door, and Roth is better than unsheltered.

    Even if you expect it to be close and not necessarily higher in the future, making a mixture of contributions hedges your bets.
    Dec 21
    • Microsoft / EngHarmar
      If you're able to save and have enough foresight, saving Roth when you're still a student locks in near-zero tax rates and give maximum time for compound interest. I tell interns to take advantage of that as much as they can.

      Once you're a full time engineer, you're generally in an upper bracket, so the potential benefit is much narrower.
      Dec 2
  • Amazon Flynn
    Yeah okay dude I don’t need to sell a Roth IRA to you. If you think it’s bullshit, then don’t use it.

    Meanwhile I’ll add $5600 each year with the comfort of tax-free earnings growth, while at the same time contributing the max to my 401(k). Then at retirement I’ll find the right mix of taxable / non-taxable accounts to draw from so that I can spend as little on tax as I can.
    Dec 20
  • Citibank / Finance$$>RSU
    Reading this thread makes me feel ever better about my long term prospects in IB. You guys are financially illiterate. Better get some decent advice before the next recession hits. Oh wait, good advice starts at $1million aum. Lol.
    Dec 26
    • Cruise Automation mocca
      Sounds like a total dick. in finance. makes sense lol.

      Seriously, why not help people instead making snide comments?

      Edit: saw that you at least tried to help on the 22yo investing thread =) it's helpful for the people that needs help. Making people feel bad about asking questions can cause people to stop asking questions (think about kids in school that gets told they asked a stupid question by their teacher and classmates).
      Dec 2
    • Citibank / Finance$$>RSU
      Ive posted plenty of great investment advice. Problem is most of you are too busy smelling your own farts and believing this collective nonsense to listen. History repeats itself in the markets. Not hypothetically but empirically.

      But I suppose I could believe “it’s differ t this time” but my farts don’t smell as good as yours :)
      Dec 2
    • Cruise Automation mocca
      Yes, and people are the same. Every new generation makes the same mistakes in a different way. Repeating good advise is tiring, but it's not for those that don't listen, it's for those that do.
      Dec 2
    • Citibank / Finance$$>RSU
      I’ve gotten way more DMs from people asking for advice from my sarcastic posts that the informational ones. I guess you have to be controversial to be interesting enough to listen to these days.
      Dec 2
    • Cruise Automation mocca
      Start your own financial advisor business. You can be the Howard Stern version of Dave Ramsey.
      Dec 2
    • Citibank / Finance$$>RSU
      I do for friends and family. Can’t make money giving good personal investment advice.

      🤣🤣🤣 to the references.
      Dec 2
  • Google syeQ15
    Are you eligible for regular IRA? Also when you retire you’ll take money out of 401k and IRA which will be taxable. Also if you have non retirement investments such as stocks that’ll be taxable.
    Dec 24
    • Microsoft SSS!
      OP
      Right, all your investments will be taxed as long term capital gain rate, which is much lower than our current income tax rate. So why bother putting the money into Roth and take a cut of the tax at your current high income tax rate upfront when you can enjoy lower tax rate when you retire? Also, after paying tax on Roth, your principal will be less so the growth will also be less compared to 401K's pretax principal, right?
      Dec 2
    • Facebook SherylS
      Long term cap g can go to 90% in the future and it happened in the past too. The future is uncertain
      Dec 2
    • Microsoft SSS!
      OP
      Long term capital gain had been taxed at 90% in the past?!?! Which year was it? If people worry about government raising tax arbitrary, do they also worry that government might change rule to tax Roth IRA in the future as well?
      Dec 2
    • Amazon SorFillson
      Principle is not less with Roth. You can put a full 5500 in, the same you can do with traditional. The only difference is that you’ve already paid tax on in. So if that grows to 10k or 20k, with traditional you pay tax on the full 20k (even if the rate is lower, it’ll come out paying more because it’s 20k vs 5k). With Roth you’ve only paid tax on the 5k.
      Dec 2
  • Cruise Automation mocca
    Depends on situation, you outline a very specific one of of not earning money when retired. There are people that will have earnings from rentals and dividend, as well as other sources if they so choose.

    The other part is that it's an additional vehicle for tax sheltering, doesn't matter if it gets taxed because my regular money gets taxed anyways without the benefit of tax free growth/withdrawal.

    The choice of 401k instead of Roth 401k has a few percentage difference is returns. The madfientist does a breakdown of this if you're scheduling out 401k with no other taxable income as well as other scenarios.

    https://www.madfientist.com/traditional-ira-vs-roth-ira/
    Dec 22
    • Microsoft SSS!
      OP
      Thanks for explaination. If I ever get that rich to own multiple properties to have rental income and considerable amount of dividends, I probably won't even mind paying negligible amount of 401K tax then.
      Dec 2
    • Cruise Automation mocca
      You're on Blind and work for the most valuable company in the world. it's not if, it's when for you lol.

      It's also knowing about the audience you're speaking to. Well off techies are the ones likely to try to find and diversify tax sheltered vehicles because they have the extra income.
      Dec 2
  • New DuQvV7x
    It is absolutely a scam. Refuse to be a part of this bourgeoisie conspiracy and strike a blow for the proletariat by never saving money for retirement.

    That will show the fat cats and the 1%ers and especially the fat 1%ers!!!
    Dec 31
    • Microsoft / EngHarmar
      You can cheat the system by dying before retirement.
      Dec 3
  • Cisco / ITvzIq77
    Short $TSLA Long $ROPE
    Dec 20

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