Roth IRAs – Bad Advice is Abundant

 

I am constantly amazed at how main stream financial “Experts” miss the value of a Roth IRA or 401k.

Here is an example. A quote from CNNmoney.com about a Roth IRA compared to a traditional IRA:

“Mathematically, there’s no difference between getting a tax break at the beginning or end. All else being equal, you end up in the same place whether you pay taxes at the outset or in retirement.”

Mathematically there is no difference???? This is the kind of garbage advice that has cost taxpayers untold Billions of dollars they could have otherwise put in their pockets.

We’ll take a look at a hypothetical example, and compare the Roth to a traditional IRA.

In our example let’s say that Bob puts $40,000 in a Roth 401k, and then deposits $40,000 in a traditional 401k account the following year.

Over the years Bob earns $260,000 on each account. At retirement (age 59 1/2) each account now has $300,000 in it.

With the traditional IRA, Bob got to deduct $40,000 from his taxes the year he first opened it up. Let’s say Bob was in the 30% tax bracket, so he saved about $12,000 on taxes that year (disregarding any other tax strategies he may have been using at the time – which surely he would be if he was in that tax bracket).

With the Roth, Bob got no deduction the year he opened the account (although there is a small tax savings you may qualify for with your Roth – we’ll just ignore it in this example).

Now, say that Bob needs to raise $200,000 quickly for some reason at retirement age. He decides to pull $100,000 from each account. Assume that Bob’s business is still running (although with a lot less Bob these days) so that he is still in the 25% tax bracket.

On the 100 grand he pulls out of the Roth, there are no taxes to pay, not one dime! On the other hand, Bob will need to pay uncle Sam $25,000 in taxes on the traditional $100,000.

What if over the years taxes are raised (even though we know Washington would never do that to us) and Bob is now in the 50% tax bracket? Bob would gladly write a check to the IRS for $50,000 and be so happy that he got the $12,000 tax break years ago right?

Give me a break! No mathematical difference? You do the math and ignore what some of these so called “experts” are saying about the Roth.

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