Disadvantages Of The ROTH IRA: Not All Is What It Seems

Passed Out Drunk Vomit Oozing From Mouth

If you contribute to a Roth IRA

For years I’ve been an opponent of the ROTH IRA after the government came out with its tricky dick way to let us all do a “one-time” conversion from our traditional IRAs. The government was so successful in getting people to pay huge sums of taxes on their IRAs during the financial crisis that I just shook my head in disbelief.

As a personal finance blogger who wants to help you achieve financial freedom sooner, rather than later, it’s my duty to write this post to help you see the error in contributing or converting to a ROTH IRA if you have not maxed out your 401(k).

Of course if the choice is between NOT SAVING and saving via a ROTH IRA for your future, then the answer is that one should open up a ROTH IRA rather than piss their money away on stupid stuff that depreciates in value. However, do know that you are still pissing money away by giving some of your money to the government. And if the choice is between choosing a traditional IRA over a ROTH IRA, choosing the traditional IRA is hands down the way to go.

Please read the reasons why a ROTH IRA is not a good idea for the large majority of you. I really hope this article will wake you up to the tremendous government brainwashing that is being conducted to get you to part more with your hard earned money. If you’re still in favor, at least you know the other side of the story and Uncle Sam thanks you!


* The government is inefficient. I’m all for patriotism, but if you think the government is efficient with your money, then you are simply not paying attention to the enormous budget deficits on a state-wide and country level. By participating in a ROTH IRA, you are paying your taxes up front, thereby giving the government more of your money to waste! Would you give an alcoholic a beer? Would you give a drug addict some meth? Would you eat a double cheeseburger in front of an obese person who is trying to lose weight? No, no, no! There is a reason why there are $2,000 staplers and $10 staples in the government bureaucracy! Why do you think the Social Security system is so underfunded? The government wastes your money, so don’t give it more.

* The government is smarter than you. The government realizes people are bad with their money, which is why they set up a withholding tax system to make sure people pay throughout the year. If it was up to everybody to pay their year-end taxes at the end of the year, all hell would break loose because people are not disciplined to put money away to meet their obligations!  The country would go into instant default. As a result, the government has pushed propaganda on the masses to get them to pay MORE TAXES UPFRONT, hence the introduction of the ROTH IRA. They will spend millions on marketing to highlight why converting to a ROTH and participating in a ROTH IRA is a great idea. Yes, it’s a great idea for them, not for you!

* You allow asymmetric reward or punishment between equals.  Not everybody can participate in a ROTH IRA. Only those fortunate enough to make less than $105,000 a year/$165,000 for married couples (it’s always changing). After making more than $122,000 a year for singles, you are shit out of luck!  No soup for you. Sorry, but the government doesn’t believe you have the right to save in this way. Discrimination is not OK, just because you aren’t being discriminated against. We need to fight for equality for everybody!  The income cap for contribution is too low. The irony is, the government is actually saving people who make more than $105,000-$122,000 a year from paying more taxes and getting tricked into entering the Borg. Unfortunately, there are income limits for contribution on an IRA as well, which are even more egregious at around $66,000 for single filers.

* The math is the same whether you pay now or later. Whether you pay taxes now and let your investment grow tax free, or you let your pre-tax investments grow, and then tax it upon retirement results is more or less the same! Don’t believe me? Do a calculation yourself. Here’s an equation: Y = A * B.  Re-arrange to A = Y / B.  Or Y = A * B is equal to Y = B * A.  But just so you know, the math also depends on the future performance of your investments. Let’s say you pay $2,000 in taxes to contribute $5,000 to a Roth IRA, and that $5,000 miraculously grows to $1 billion dollars. Your total tax bill will be around $500 million dollars! Trust me, I was a rock math star in the 2nd grade!

Sam, I can appreciate your distaste for the USG, but your math is all wrong. You convert $50k from an IRA to a Roth IRA, and pay your taxes. Ten years later, at say 7% annual growth rate, that $50k is now over $98,357. I pay no taxes on that $48,357 increase. In a regular IRA, I would owe taxes on that gain.
Sure the USG wastes our taxes, but with a Roth they have less to waste!

* What will $5,500 do for your retirement? A max contribution of $5,000 a year isn’t going to get you to the promised land. If you are already maxing out your 401K (pre-tax contribution up to $18,000 for 2015), and you are eligible for a ROTH IRA maximum contribution for a single filer ($105,000 income or less), you probably will get more out of spending your $5,500 on life now. I am a big proponent of aggressive savings, however, if you are only earning up to $88,000 a year in gross income after maxing out the 401K, I’d rather you not tie up that $5,000 in a government savings vehicle until 59.5. Spend it, save it in your own investment account, or keep it liquid.

* You may never reap the fake rewards. Let’s say the math wasn’t the same, and you continue to contribute to your ROTH IRA because you believe in the tax benefits. Unfortunately, you die at age 59. You’re screwed! All those taxes you paid upfront to the cunning government, and you’ll never once get to utilize the returns on your ROTH IRA. What a shame. Guess what? Over those 37 years, the government has happily spent your tens of thousands of dollars on themselves. That makes me sick, and it should make you sick as well. But maybe not, since you are a patriot.

* Withdrawal penalty. The are no withdrawal penalties for the after tax money you contribute to your ROTH IRA. However, if you decide to withdraw money that has been earned from your after tax contributions, then will be penalized by 10% + your normal tax rate. For example, if you contribute $10,000 to your ROTH IRA and it grows to $15,000. There is a 10% penalty on the $5,000 + your normal tax rate.  Just don’t be naive to put it past the government to one day tax your after-tax ROTH IRA contributions again upon exit. Look at Social Security, for example. They raised the base case age for full retirement from 62 to 67 for those born after 1960!  That’s five long years more one has to wait to receive full SS benefits.

* You chop off your legs and fingers. America is a free country where we can relocate at will. If you live in one of the 43 States where there are State income taxes, then it behooves you not to pay more State income taxes. In California, our state income tax is 8-10.4% and we’ve got a huge budget deficit!  There’s no way I’m giving 10% of my hard-earned retirement income to the politicians up in Sacramento to waste. Instead, once I retire, I plan to move to one of the 7 no income-tax states (Nevada, Washington, Wyoming, Florida sound reasonable), and avoid paying 10% state taxes altogether. You have the power to save on taxes just by moving.


If you are a recent college graduate who is at the beginning of their earnings power, then choosing to participate in a ROTH IRA is less egregious than someone who is older and makes more money (up to ~$122,000). It is a good assumption you will make more money in your 30’s, 40’s, and 50’s than in your 20’s and therefore pay more taxes as a result. However, even though you are in the lower tax bracket and assume to make more, go with a traditional IRA and never give more money to the government than you need to.

Do the math. Let’s say you make $50,000 a year and contribute to a ROTH IRA. At $50,000, single, with no deductions, your Federal Tax bill is estimated at around $6,250, equaling an effective tax rate of 12.5%.  However, you are squarely in the 25% Federal Tax bracket.  Let’s say you are hot stuff now and make $100,000, the very income edge of where you can still contribute to a ROTH IRA. Your Federal Tax bill is now around $18,900, or an effective tax rate of 18.9%. You are in the marginal tax bracket of 28% now.  What’s your saving?

Your savings really is nothing, because it’s not about moving up and down the Federal Tax Brackets. It’s about what you think future tax rates will be at for income levels below $105,000, since any more and you get phased out and can’t contribute completely after $122,000! The $122,000 and below income level for single filers is the protected middle class where no politician dare assaults. The middle class is what puts politicians in office and therefore, taxes will unlikely ever go up for this income group!

To humor you, let’s do the math anyway. $5,000 X (18.9%-12.5%) = $320 “savings” or $5,000 X (28% – 25%) = $150 “savings” per year. If these savings were real, they would be somewhat meaningful, but not really.  This math is absolutely wrong and therefore, the “savings” is irrelevant.

Final Important Point: If you are a middle income person who generates $122,000 a year or less for your entire life, and is therefore able to contribute to a ROTH IRA, do you really think when you retire, your income will now be more than $122,000 a year, putting you in a higher income tax bracket during withdrawal ceteris paribus? Be realistic. At today’s 10-year risk free rate of ~2% (as of 2Q2015), you need $6.1 million dollars to generate $122,000 a year in income!

You will likely NOT make more in retirement than during your working years. Stop being delusional!


2014 Income Tax Bracket

You never want to give the government more money than you need to. We are all idealists in college and just out of college.  However, once you start paying attention to what’s going on up in the various State capitols and in Washington DC, you will realize how manipulative our politicians are. If allowed, the government will take you for all you’re worth.  Power is addicting and you must help fight Capitol Hill’s addiction by holding on to your own money.

You know what’s best for yourself. You have the power to make a good living. Don’t be fooled by the government and administrators who want to make money off of you. Fight on and open your mind!

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Updated for 2H2015 and beyond


Sam started Financial Samurai in 2009 during the depths of the financial crisis as a way to make sense of chaos. After 13 years working on Wall Street, Sam decided to retire in 2012 to utilize everything he learned in business school to focus on online entrepreneurship. Sam focuses on helping readers build more income in real estate, investing, entrepreneurship, and alternative investments in order to achieve financial independence sooner, rather than later.

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  1. Jeremy says

    Unless you are making less than $59,000 MAGI a year, Traditional IRAs are, to put it bluntly, absolutely terrible. You wind up paying taxes on the front and back end.

    You also are insistent on maxing out a 401(k), when that makes absolutely no sense prior to maxing out an IRA. There are many IRA accounts available with no fees, where you will likely be paying 1%/year on a 401(k).

    Also, if you are trying to maximize your tax savings, you can have a much larger effective tax advantaged Roth IRA than you can a Traditional IRA ($5,500 after tax money is worth more than $5,500 before tax).

    The order you should be going in is as follows:
    Maximize Employer Match
    Max out Roth IRA
    Remainder to 401(k)

    For illustration, we’ll do an example. Somebody makes $50,000 per year (we won’t bother figuring in raises). Lets say we determine $10,000 of that is available for retirement. Assuming your employer does a 50% match up to 6%, according to you, you should simply just put all $10,000. You will wind up with $11,500 invested each year. Knowing the stock market averages about 10.5%, you should make about 9.5% per year after fees. You will wind up with $40,000 taxable income per year (~$36,000 after tax and investment dollars), and a $4.445 million nest egg with taxable distributions (assuming 40 years).

    Instead, lets say you just max the employer match, then max the Roth IRA, then further pump money into the 401(k). To get the same ~$36,000 after tax and investment dollars, you can put $3,525 into 401(k) (+$1,500 match), and $5,500 into a Roth IRA. The $5,025 will grow at 9.5%, and the $5,500 will grow at 10.5% (no fees, remember). You will wind up with a $1.942 million taxable nest egg, and a $2.790 million nontaxable nest egg.

    So what is the difference?
    100% 401(k)=$4.445 million taxable distributions
    401(k) max match + max roth IRA + remainder 401(k)=$4.732 million, only $1.942 million of which is taxable.

    So Mr. Financial Samurai, even if the tax rate is only 15%, you just lost these poor investors $662,000 (after tax). Wow.

    Now, regarding Traditional IRAs. If you instead put $5,500 into a traditional IRA, you are left with $4,500 (+$1,500) for the 401(k). You will wind up with $2.790 million from the IRA, and $1.739 million from the 401(k), for a total of $4.529 million of taxable distributions (still higher than the 401(k) option, but still worse than maxing out a Roth IRA by a LONG shot).

    • Kurt says

      Did you include the benefit from the 401(k)-Trad. scenario with maxing the 401(k) you avoid Med/SS taxes (taken as a payroll deduction), where you still pay these with Trad. IRA contributions?

      • Chris says

        This is incorrect. Traditional 401(k) contributions only reduce your taxable income for federal income tax purposes. It has no impact at all on medicare and social security taxes.

    • Magus says

      The only problem with this solution is the 401k or traditional IRA (up to a certain income level) also is pre-tax so to contribute 5,500 only costs most people around 3,740 bucks (1 – Fed tax of 25% – state tax of 7%) while the Roth costs a full 5,500. That’s $1760/year in savings that you can reinvest or spend to live a good life that you aren’t counting in the equation.

  2. JC says

    Sam….many arguments here are saying the ROTH is better because your distributions are tax free and the traditional is taxed at income bracket. Well, what about the retiree who has most of her assets in tax free muni bonds? They will have a very small tax bill and hence low tax bracket. Therefore shouldn’t worry about traditional IRA distributions being taxed at say 10% vs. today’s income bracket of I’m certain much more.

    • Kurt says

      The argument would be that with today’s incredibly low tax rates, the minimum rate in the future may be say 20% instead of 10%.

        • Kurt says

          Very few indeed. I doubt anyone would run on that platform, but that doesn’t mean it can’t happen happen while in office. I think it’s fairly obvious what politicians run on to get elected can be far from how they behave in office.

          We’ve [U.S.] gone from a minimum rate of 0% all the way to 23% and now we’re at 10%.

          I am less confident to say with certainty that taxes won’t be raised in the future. Taxes have been raised in the past, so it wouldn’t be unprecedented if it happened again. As recently as 2013 the top marginal tax rate was raised 4.6%.

          Depending on the size of one’s Traditional IRA, RMDs can easily push one from the lowest tax bracket.

          With all that said, I hope you’re right about taxes!

  3. Justin Winters says

    I am no expert, but the government is GOING to get there taxes one way or the other. Correct me if I am wrong, but you are going to be paying taxes on a a traditional IRA or 401k when it is withdrawn and also can only roll your 401k to a traditional IRA to begin with but can be converted to a Roth IRA by adding the money into your income the year you convert it and will pay ordinary income tax on the amount rolled over. But would you want to pay taxes on that lesser amount vs in the future when you could possibly be in a higher tax bracket and with more money being taxed if you kept it in the traditional or 401?

  4. Ryan says

    I’m late to the party, but wanted to comment on such a strange post from you, FS. Certainly you make some good points in there that I agree with wholeheartedly (like the futility of converting Traditional to Roth). But other points just don’t seem to hold water. Here’s a few I would challenge you to reconsider:

    #3) Asymmetric Reward/Punishment – You seem to be suggesting that since not everyone can participate in Roth IRA’s we should boycott them and instead participate in Traditional IRA’s. But Traditional IRA’s are limited to an even smaller subset of the population, so, uh, … what was the argument again? I must have missed it.

    #4) The Math Is The Same Before and After – Well its only the same if your income stays the same and the tax code stays the same. I agree with you that our incomes will likely be lower in retirement but I fully expect the tax rates to be higher. Who can predict the net result? Not me.

    #5) What Difference Will $5000/Year Make? – The question you ask is easily answered. Compared to just filling the 401k, an extra $5k/year would increase your savings by over 28% and hence it would increase your nest egg by 28% if done over your investing lifetime. Not insignificant at all. And really this underestimates the impact since the 401k money gets taxed as it comes out while the Roth money does not.

    But you go so far as to recommend, for singles making $66k to $105k, that they should blow the money before putting into a Roth IRA??? (“you probably will get more out of spending your $5,000 on life now.”) Then you imply that the same is not true for the single making less than $66k because to them you say “CHOOSE THE TRADITIONAL IRA OVER THE ROTH IRA WHILE MAXING OUT THE 401K”.

    So in the first case, if I’m making more money and maxing the 401k that’s fine, stop there, after saving 17% – 26%. But in the second case I’m making less money and saving 27% isn’t enough, I should be saving 34% or more (($17.5k+$5k) out of $66k). Doesn’t make sense.

    You could had said “go ahead and invest the extra $5k, but do it in a taxable account”, which would have been a tough pill to swallow since it would mean giving up the ability to pull the gains tax free. Yet I can buy into the idea of having some money that’s accessible rather than tying it all up for decades. But the idea that I’d be better off blowing $5k than saving $5k goes against other posts you made which recommend an ultimate savings rate goal of 50%.

    For individuals in the $66k to $105k range who want to save more than $17.5k for retirement, the 401k + Roth IRA combo is universally accepted as the best option out there for the typical American. As a bonus, it provides you with two separate pools of money that are taxed differently. So when you retire you can decide where you want to pull from first to get the best tax efficiency. You’ve added tax diversification to your portfolio instead of trying to predict what Uncle Sam will be up to decades from now.

    When choosing between Roth vs. Tradition, I can agree that Traditional wins. But if its Roth vs. nothing then Roth wins every time. You are showing an unreasonable bias against the Roth.

    • Magus says

      You aren’t actually getting 28% more with a ROTH though. The roth costs you $5500 out of pocket (8088 pre-tax) while the 401k only costs you around $3740 (5500 pre-tax income) out of pocket due to federal income and state income tax reduction. You have to account for a) the 1740/year extra you save (+- depending on your state, marginal fed tax bracket) + the fact most people have a lower tax rate in retirement + the fact that the government can change the tax code on Roth’s at any time and make them taxable + the fact that you may die early and not get any of the benefit. The Roth IRA only makes sense for people in the 10%-15% marginal income bracket who expect to make a lot more some day (so in other words people in their early 20s who didn’t go college and least likely to put money into an IRA/401k Period)

  5. dasmb says

    Some good points. My feeling on the Roth has always been that if it’s really effective, we’ll see an increase in the sales tax.

    I think an argument might be made about effective tax rates on the young being far lower than effective tax rates for the old (due to mortgage and student load deductions as well as child tax credits), but that’s not too helpful in this case — I may have an effective tax rate of 18% because i’m so busy building a family, but if I make an extra $1000 I’m only going to keep about $600. Shifting savings from the 401k to the Roth is going to be taxed at that top dollar rate.

  6. Grace says


    I have a question for you all, I am a 44yo single mom of 3. I’ve been divorced now for a few years & to be very honest was left with pretty much nothing after everything was said & done. I am a waitress as a profession, I do ok but definitely dont make boat loads of money. My kids are also teenagers & really dont ask for much so I do have a little at the end of the month.
    My question is what would be the smartest way to invest that extra money & for how long?
    Would a Roth IRA still be a good choice for me even though I have no other savings?
    If so what should I invest monthly to yield the greatest return by retirement age?

    Thank you for your time : )

  7. Douglas says

    I didn’t follow all of this, but it seems like you’re leaving out the value of compounded tax savings over the years. In my case, I converted a traditional IRA of about $11,000 in 1998 and paid about $2,200 in taxes over a couple years. I eventually withdrew all of the original contribution to cover life expenses, but my investments did quite well and the account now worth $463,000 as of today. I would hate to have to look forward to paying taxes on all that when I retire.

  8. says


    I respectfully disagree. First of all, taxes are currently at historical lows. It’s much more likely to go up than down in the future for various budgetary and demographic reasons. When you are young and earning less (thereby benefiting less from tax deductions), it makes infinitely more sense to favor Roth IRA over 401(k) or traditional IRA; although, I advocate always contributing enough to 401(k) to get the employer match. With a long investment horizon and low starting salary, it makes sense to favor Roth IRAs. You can always ramp up your 401(k) contributions as your salary increases, at which point, the tax benefits becoming more desirable.

    Second of all, the reason that the government set an income cut-off to Roth IRA eligibility and also set a low annual contribution limit is because the Roth IRA is intended to help regular people build wealth, rather than allow high-income people to stash away tons of money and avoid taxes. However, where there is a will there is a way (anyone ever wonder how Mitt Romney managed to put so much in his IRA? Albeit probably not Roth). There is the “backdoor Roth IRA” for high-income people. Furthermore, if you are high-income and your company offers a Roth 401(k), you can actually contribute after-tax money up to 401(k) limit and then simply roll the Roth 401(k) into your Roth IRA upon retirement, all entirely tax-free. This will also allow the person to avoid required minimum distributions.

    Third of all, yes, anyone can theoretically die at any time without ever enjoying the benefits of tax-free distribution. But how would a dead person benefit from a 401(k) either? In reality, the overall life expectancy in this country is increasing for both men and women. In fact, a child born today can expect to live longer than ever in U.S. history. The chance that a person is going to need the retirement fund to last longer than expected is high for someone of good health, which makes Roth IRA’s lack of RMD desirable, especially if you have other available sources of income. There are hoards of actuaries banking on life expectancy increases–one of the many reasons as to why insurance companies are always trying to sell whole-life insurances, especially to people with excellent health and habits.

  9. Grace says

    Hello. I posted this question a month ago but never received a reply. So im re-posting with hopes of receiving one.

    I am a 44yo single mom of 3. I’ve been divorced now for a few years & to be very honest was left with pretty much nothing after everything was said & done. I am a waitress as a profession, I do ok but definitely dont make boat loads of money. My kids are also teenagers & really dont ask for much so I do have a little at the end of the month.
    My question is what would be the smartest way to invest that extra money & for how long?
    Would a Roth IRA still be a good choice for me even though I have no other savings?
    If so what should I invest monthly to yield the greatest return by retirement age?

    Thank You for your time!! :)

    • AmericanFool says

      I’d call Vanguard (I have some of their funds through my 401K, so I don’t use them directly myself) and set up an IRA with them, put the cash in there (Fidelity is another pretty good company to work with, but I think Vanguard has lower minimums, meaning you can get started with a smaller initial investment). The two biggest money mistakes are raiding the account, and rapid buying and selling of investments. Because the math should work out roughly the same, Roth or not, I’d go with a normal IRA, and invest in a 2035 fund (or whatever date you expect to retire, just know that they use 5 year gaps, so your alternate choice is 2030 or 2040. All three of those choices will yield similar results, so don’t freak out about which one… just give it your best guess and move on. Choosing any of those three will eliminate the more difficult choices of stocks vs bonds vs flavors of stocks and bonds…) – Vanguard will manage the fund with low fees, shifting the investments to become more conservative the closer you get to retirement. I will tell you this: deciding to put the money to work for you is far more important than the Roth or Not decision. Don’t let it hold you up, and don’t worry that one is slightly better than the other. Both will get you started on a good path, and that’s the key thing. How much you save at the front end will be the biggest driver of how much you’ll have waiting for you on the back end (when you retire). 20 years is enough time to build a decent size fund to supplement your Social Security. It is addictive to watch it grow.

  10. Denjen says

    Your math is correct but not for this situation. My understanding is that with an employer Roth 401K even highly compensated employees can contribute the maximum to the Roth that they can to a Traditional 401k. If that is the case, the math depending on the tax rate and estimated earnings the Roth can be a great advantage even if you are in a lower tax bracket at retirement. As it turns out most people are not in a lower tax bracket upon retirement because they generally lose the necessary deductions to itemize. This year I start taking out the mandatory withdrawals from the IRA – losing 25% is pretty hard. Do a spread sheet with a expected growth rate on the IRA and the amount saved each year from the tax savings and compare it to the Roth – do it with 30 years and then 25 to 30 years in retirement and it may surprise you using different tax rates and purpose growth rates on the savings account. The statement the Roth is only good if you are going to be in lower tax rate is exactly true and with the Roth you have do mandatory withdrawals.

  11. Anthony says

    I have a question. I’m 39 going on 40 in march I lost everything including my 401 k in the 2008 collapse. After the past 3 years struggling to get back on my feet financially. I landed a union job with a pension. My work offers a 401 k with no match. I’m currently looking at ira options to start to get my retirement plan going again. Can anyone help lead me in the right direction. I’m making 60 k a year easily. What should I do

    • Zachary Taylor says

      1. Open a traditional IRA for tax year 2014 at a discount broker such as Scottrade,
      2. Fund it with the max $5500,
      3. Invest in a ETF with a 60% equity/40% bond mux and a low nanagement fee (less than 0.4%).
      4. When/if more money is available fund your 2015 IRA as well any time after Jan. 1st.
      – Zack

    • AmericanFool says

      Since your 401K is yours no matter what happens to your company, I assume you withdrew the entire amount (and paid penalties as a result). The reason I mention this is that otherwise, your 401K is still yours, that is one huge benefit of a 401K over a pension – if you fund it and don’t withdraw, nobody can take it from you, it’s yours legally (pensions are kind of a mixed bag as far as that goes.)

  12. Anthony says

    Also thought I’d be ok with social security and a pension but in having second thoughts now that our pensions could possibly be reduced.

  13. Fish Jones says

    Is my Roth IRA supposed to be losing money? :( So far, I’ve only put in $300 and it’s eaten $9.00. I know it’s just 9.00, but >.<

    • Ryan says

      And the next day it will go up $20. Don’t swear the fluctuations. If youre well diversified in Index funds at the right allocation, you’ll make money in the long run. Worrying about the short term gains and losses is a losing recipe since youre then emotionally tied to it. Maintain consistent contributions over the long term for dollar-cost averaging and don’t get scared in market swings. If i may recommend a site called Betterment, they do a great job at managing your portfolio, keeping you balanced in low cost index ETFs and minimizing your tax liabilities. Thats who I have my Roth IRA through and will more than likely open a taxable account there eventually. They are very cheap since they use technology and Vanguard funds.

  14. Channon says

    You may have been a math rockstar, but you were not an economics rockstar, because the math is not the same in terms of paying taxes now or later. If you pay later, you are better off, because you are earning a return on the “loan” from the government, which compounds. This mathematical reality obviously favors a traditional IRA, assuming the same marginal tax rates now and in retirement.

    Nonetheless, a Roth is still a useful vehicle because of (a) early retirement, before age 59.5 and Roth’s ability to access those funds without a 10% penalty; (b) required minimum distributions (RMDs) of traditionals, and their interaction with (c) Social Security Income. Withdrawals from tax-deferred accounts are taxable income, and can trigger a huge hit on your Social Security Income, and finally (d) income management for ancillary benefits in retirement such as various localities’ property tax abatements for seniors of sufficiently low income. (My father-in-law’s RMD was sufficient to cause him to lose his NJ abatement. This was a very marginal amount of income that cost far more in property taxes.)

    Lesson here: know your Roth BENEFITS as well as your traditional IRA DISADVANTAGES!

    • Lynne says

      If you retire earlier than 59.5 from an employer where you have money in their 401K, you can access those funds penalty free also. But only that employer’s 401K. If you roll the funds over to an IRA, you can no longer take early distributions penalty free.

      Regular income taxes apply to all non-Roth distributions, of course.

      Also of note, the first block of your income is not taxed anyway due to personal exemption(s) and standard or itemized deductions. So if your 401K/taxable IRA is your sole source of income, a good chunk of it pulled out each year is never taxed. This is why it’s good to have tax-deferred retirement savings. Use the tax-free money to fill in income gaps when you need to avoid getting bumped up to the next income level. And Roth income doesn’t affect the calculations for how much of your Social Security is taxable.

      This is why I have 4/5 of my money in 401K/pre-tax IRA, and 1/5 in a Roth.

    • Maggie says

      Just curious: why are you stating that you can access your Roth funds before age
      59 1/2 and not pay the 10% penalty?

  15. Mike says

    “There is a reason why there are $2,000 staplers and $10 staples in the government bureaucracy!”

    The reason isn’t government inefficiency; the people who buy those staplers and staples know good and well how to buy cheaper goods.

    The reason is that private interests– who *also* know the true price of staplers and staples, mind you– get certain laws passed because they can.

    The Canadian government, or the Singaporean government, or the Hong Kong government, or, heck, even the Mississippi government, does not buy $2000 staplers.

    This isn’t about inefficiency; it’s about corruption. The answer isn’t to condemn “government”, but to take charge of a specific government (if you care to do so). “Government” knows good and well not to buy $2000 staplers.

    • AmericanFool says

      Source? The only reason I’m aware of that the gov’t buys really expensive common items is that they are modified in ways that make them resistant to damage in the event they are subjected to a dangerous (i.e. military) environment – some things become more dangerous when damaged, so the gov’t buys more expensive items that are less likely to shatter or combust.

      Don’t get me wrong, the gov’t is a human organization, has all the same faults we do. I know major weapons programs are often ordered because of who is make the decision and where the bulk of the economic activity will take place (so the Senator from Wisconson on the Appropriations committee approves the bid from the supplier with a factory in Wisconson…for example). But what you describe sounds like it’s a different flavor than the situation I just described, so I’m curious.

  16. K-man says

    @Financial Samurai, sorry but your 2nd grade math skills don’t translate into real world math skills. I’m actually kind of shocked at how many non-sensical arguments you could put into one list.

    There are many reasons why a Roth is beneficial. For instance, 1) If your tax rate is low now you’ll likely save on taxes 2) If you expect higher tax rates later you’ll likely save on taxes 3) It offers good flexibility with the ability to withdraw contributions penalty free 4) You aren’t required to take minimum distributions at any point 5) You can continue to contribute as long as you have income.

    Yes, we would all prefer to not pay taxes to the government; however, you have done nothing to show there’s a better alternative than funding a Roth.

      • K-man says

        Well, for one, you state that Y = A*B = B*A. No one is going to argue that, but this assumes that each number is the same under either scenario. It’s easy to argue your retirement account would be the same (let’s call this one A), but your tax rate is definitely unlikely to be (call this one B).

        Now, of course if you project your tax rate later in life will be much lower, then I agree, you don’t need a Roth. However, you don’t know this with certainty and for many people the converse will be true.

        Say an individual’s marginal tax rate now is 25% and it turns out to be 35% when the person retires. Also, let’s say for illustration their compounded return = 10 over the time the money is in his/her account. Finally, we’ll look at one deposit of $5,500 to make things simple.

        Traditional account: 5,500(10)(1-.35) = $35,750
        Roth account: 5,500(1-.25)(10) = $41,250

        Roth wins. Again, obviously this won’t turn out best for ALL people, but for many it will. Thus, referring to it as “pissing money away” and making claims that a “traditional IRA is hands down the way to go” is naive, at best.

        Other article is better, but you still ignore a lot of the other favorable aspects of the Roth (see points 3-5 in my first post, for examples).

        • says

          You can make tax rate assumptions all you want, but a bird in the hand is worth more than two in the bush.

          Most people will earn less in retirement than when they are working. To put it as clear as possible, most people will make less working than they will make when working. Sure, it’s nice to believe that you will accumulate multiple millions of dollars in retirement that will generate more income than while working, but that’s not going to happen for a large majority of people.

          I’m assuming you are not in the higher tax bracket, or have never been in the higher tax bracket, but let me tell you from someone who has been in the highest tax brackets for over a decade that there are many ways to legally not pay the highest tax bracket through deductions, deferrals, changing of incomes, establishing of corporations, etc. If you pay your taxes up front now, the government wins.

          You’re free to take my advice as someone who has been there, or not. It’s up to you. I would pay more attention to those with experience, than those whose experience is based off pontification. May I ask how old you are and what is your net worth?

          Here is another post you might like: How To Pay Little To No Taxes For The Rest Of Your Life

        • Anon E. Mouse says

          “Say an individual’s marginal tax rate now is 25% and it turns out to be 35% when the person retires.”

          Ok, what does that translate into in real terms? The max gross income for single filers in the 25% bracket is currently $90,750 annually and $151,200 for married couples. The 35% tax bracket is the rarefied air of $411,500 to $413,200 for single filers and $411,500 to $464,850. Realistically, most people will not see that kind of a jump in income, it will go down for the vast majority of Americans.

          Let’s make this more concrete. The monthly income of $90,750 for a single filer is $7562.50 a month. To make the leap to the 35% bracket, one has to assume that the distributions from investments plus social security will deliver $34,291.67 per month. Who, other than financial executives, media moguls, some actors and politicians, and defense contractors lives or has assets that will deliver a cash flow like that?

          Even if you bring this closer to the real world and say that it moves to a 28% tax bracket, which is $90,750 to $189,300 for singles or $151,200 to $230,450 for married couples, the monthly income maxes out at $15,775 a month for a single filer or $19204.16 a month. Those have to be some pretty incredible investments.

          Reality check: Most seniors end up living off of social security and maybe a modest 401k and IRA income.


          “For nearly two-thirds (65 percent) of elderly beneficiaries, Social Security provides the majority of their cash income. For more than one-third (36 percent), it provides more than 90 percent of their income. For one-quarter (24 percent) of elderly beneficiaries, Social Security is the sole source of retirement income.[21] ”

          For those people, a Roth makes no sense because they are making a lot less now than they were when they were working. That means that they paid more taxes on the contribution than was necessary. And if they have always been poor but tried to save, ending up in the same tax bracket, it is better to pay later than sooner.

          So in a nutshell, the Roth only makes sense if you are very wealthy and expect to become a hell of a lot wealthier.

          • K-man says

            “So in a nutshell, the Roth only makes sense if you are very wealthy and expect to become a hell of a lot wealthier.”

            Nonsense. The prime example of people it’s good for is people who aren’t wealthy who expect to become wealthier later on. It makes 100% sense for lots of people in their 20s, since many of them aren’t in high tax brackets now. Many of them are probably at 15%.

            Let me point out that you’ve assumed the only way your tax rate will increase is if you make more money. HELLO!!! That’s a big assumption. We don’t know that the current tax brackets will stay the same forever. If eventually we get serious about addressing our debt situation, perhaps we’ll need to raise tax rates. Having a Roth and a Traditional account is a way of hedging against tax rate uncertainty.

            I agree that not everyone stands to benefit from a Roth account. The average American probably isn’t worrying about whether to put their money in a traditional retirement account vs a Roth, because the average American is barely saving at all. They may not have either.

            In summary. The Roth probably makes a lot of sense for young people and not as much sense for older people. If you’re wealthy and expect to become very wealthy, it’s great. If you’re poor and expect to make a good salary later on, it’s great. Otherwise, it’s not that useful.

            One last comment. I will say that if I knew my current tax rate would be the same as my future tax rate, I would go Roth hands-down, contrary to some of you. So many added benefits.

            • Anon E. Mouse says

              All that matters is tax brackets at the time of tax being paid.

              If tax bracket now > tax bracket at distribution, do not put money into a Roth.
              If tax bracket now < tax bracket at distribution, put money into the Roth.

              For most people, they are told all the wonders of the Roth but the downside doesn't compute, media is tilted heavily toward a Roth but that only makes sense if you expect to be much more wealthy than you are now.

              For someone starting out, it may seem like a good idea (and in some cases may actually be a good idea) but if you think you will be in the same tax bracket as you would be when taking the distribution, why bother with the Roth? Paying the same tax now or later, keep your money now! Just the time value of money. Oh, and:


          • K-man says

            Time value of money is not an argument to pay the tax later, because you’ll be paying more in total tax dollars. That is, it already takes into account the effect of time.

            If you expect to be equally wealthy, you might as well use a Roth because it provides much more flexibility. You can withdraw contributions tax and penalty free whenever, there are no RMDs, and you’re able to contribute as long as you have income. Additionally, if you’re maxing out every year, you’re effectively able to put more into the Roth.

  17. BJ says

    I am currently in the lucky position to have enough income that I max my 401k (as much as they allow me to they cap me at 8% because I am designated “HCE”), a traditional IRA in my wife’s name and the ROTH IRA for both of us. Are you saying that I should not invest in the ROTH IRA? You don’t think it will be good for me long term?

  18. Nammix says

    Hello All,

    I greatly appreciated in advance if you guys can help . I currently self employment ( salon owner) and look for to investment for my retirement . I am 43 year old and have no retirement plans . I only have $10,000 in saving account and it not give me any return . My annual income around $55,000 . Can you please advise me what best option out there for me ?

    I thank you in advance for your helps .

  19. Trang says

    I did the math. Roth makes zero sense.

    The math is the same assuming the same tax rate now and after retirement. So it really becomes a bet that your tax rate now is lower than it will be after you retire. Is that a good bet? Depend on your situation. But I doubt it.

    Another huge risk of Roth is you are assuming the government will keep its promise and not tax you at retirement.

    Does anyone trust Congress?

    I don’t. Entitlement spending growth is unsustainable. In the 2020s Congress will face incredible political pressure to find (erm I mean appropriate) more resources to pay entitlement commitments. Don’t think for a minute they won’t grab your Roth (or 401k) in a “temporary” measure.

  20. says

    Finally someone speaking some sense about the Roth. The Roth is a terrible deal.

    I ran the numbers on it just to make sure I wasn’t missing something. Yes, assuming the same tax rate the numbers are exactly the same regardless of whether you pay tax now (i.e. Roth) or when you withdraw after years of growth (i.e. regular IRA).

    For a Roth to work out to your advantage, 2 things must happen:

    1) Your tax rate must be higher when you retire than it is now.

    2) The government must keep its promise not to tax your Roth IRA withdrawls.

    Both of these seem unlikely to me.

    Re tax rate: We all know that tax rates go higher with time. On the other hand, your post-retirement income is likely to be lower. Will your tax rate be higher? I doubt it.

    Re government keeping its promises: Ya, right!! In the 2020s and onward Congress will come under MASSIVE political pressure to keep unsustainable entitlement spending flowing. Do you really think they won’t make grab at the trillions sitting in 401ks and IRAs? I’ll bet money (and I am betting money) that they will.

    Just look at what the Obama gang tried to do by taxing college saving 529 plans. Like a Roth, capital gains in 529 plans are not taxed. Obama tried to change the rules. It failed, but it’s just a matter of time before the gubment grabs what they said they wouldn’t grab.

    I was really puzzled by all the articles about why ppl should convert to Roths. Then I realized that the gubment loves it because they get their hands on your money now. And the financial industry loves it because it generates business and fees for them.

  21. Beau says

    You make some big assumptions in saying that the Roth IRA is not a good vehicle. My 401K offers squat in employer match. My income is highly variable. In lean years, between income and a dance with the Schedule C, my effective tax rate can be almost down to the single digits. When that’s the case the Roth IRA is a godsend.

  22. Maggie says

    FS could you please clarify your paragraph on ” Withdrawal Penalties “?
    You state that there is a withdrawal penalty on money that your Roth contribution earned – a penalty of 10%, plus you are taxed on the amount you earned. So in other words, I put $10,000 in a Roth IRA, let it sit there with no further contributions, and after age 59 1/2 I have $50,000. And what you are saying is that I will pay a 10% penalty and owe taxes on $40,000? My research shows that when you take withdrawals from a Roth you are not taxed on contributions nor any earnings from it. Am I wrong?

    • says

      Hi Maggie,

      The earnings from your principal cannot normally be withdrawn prior to age 59½ without paying the 10% early withdrawal penalty. Earnings can generally be withdrawn without penalties after age 59½, provided you meet the five-year rule

      Roth IRA five-year rule: Withdrawals from your Roth IRA will only be classified as qualified distributions if it has been at least five years since you first opened and contributed to your Roth IRA, regardless of your age when you opened it. For instance, an IRA owner can make penalty free withdrawals at age 59½, but if he or she made the first contribution at age 58, the plan participant would need to wait until age 63 to withdraw any earnings made on that portion of the original contributions.

      A qualified distribution from a Roth IRA is tax-free and penalty-free, provided that the five-year aging requirement has been satisfied and one of the following conditions is met:

      Over age 59½
      Death or disability
      Qualified first-time home purchase

      A non-qualified distribution is subject to taxation of earnings and a 10% additional tax unless an exception applies. For Roth IRAs, you can always remove post-tax penalty contributions (also known as “basis”) from your Roth IRA without penalty.

      Hope this helps. Bottom line: try to wait until you are at least 59 1/2 to withdraw any government retirement vehicle like the Roth IRA, IRA, and 401k!


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