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metaphoric
Mr. Bater



Registered: 05/18/15
Posts: 730
Last seen: 2 years, 2 months
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Please Sticky This. Roth IRAs are for you!
#21963925 - 07/19/15 09:17 AM (8 years, 6 months ago) |
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Hey guys and gals! I wanted to re-itterate a basic financial concept to you called a "Roth IRA". A Roth Ira itself isn't a specific thing, it's just a term for how you want your money to be taxed. You can put money into any account or investment and call it a 'roth IRA' at set-up to apply these tax laws to that money.
The big concern with Roth IRAs people always seem to have is: "but what if I need to take my money back out?" YOU CAN!! "Yeah but there's a penalty if I take any back before I'm 55 years old…" NOPE!
When AFOAF and I were saving money for my lil kiosk business we saved it in a Roth IRA. In total, we put about $3,000 in it over four months. When the time came for me to buy my stuff and pay my kiosk rent, my friend and I took the entire $3,000 back out of our Roth IRA (penalty free) and bam we had our money… just like if it was in a savings or checking account waiting for us.
The key difference though (and this is huge) is that while it was in there for four months it grew by approximately $350!
This $350 interest that we did not personally put in out of our own money must remain in a Roth IRA fund permanently linked to me until I turn 55 years old. This means that every second of every day of every week of every month of every year for the next 30ish years that $350 continues compounding interest and growing exponentially. (I'm sure I don't have to tell you about the value of compound interest and exponential growth)
Another FOAF is a professional financial planner and he is the one that made this clear to me. There are tons of loopholes and tax shelters and little things he could go into crazy detail explaining to maximize your money but this one simple thing is not only easier then all of that to understand and open up, it's the single greatest tax break the government makes available to you. It's so good in fact our gov won't let us put more then $5,500 into it every year. That's why every time this friend of mine takes on a new client, the first thing he does is make sure $5,500 is going directly into a Roth IRA automatically every year.
All of your growth is completely tax free and your growth is the only thing you have to keep in your fund.
To reiterate here's a recap in bullet points.
- If you put a dollar in, you can take a dollar out. Anytime.
- If your dollar earns a dime, you leave the dime take the dollar.
- Your dime compounds it's interest.
- Your growth is tax free.
- Basic compound math formulas show us you'll make a lot more money by investing a small amount early in life, compared to a large amount later in life.
- So basically based on the above point, invest any small amount you are able to now, as early as you can in life. Even if you grow up rich and successful you'll still be glad to harvest all that tax free income at 55.
- If you ever have a crisis in life a Roth IRA is a great safety cushion because you can take out as much as you need.
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 BEHOLD 
        
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Ahab McBathsalts
OTD Windmill Administrator




Registered: 11/25/02
Posts: 35,107
Loc: Wind Turbine, AB
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Re: Please Sticky This. Roth IRAs are for you! [Re: metaphoric]
#21966576 - 07/19/15 06:38 PM (8 years, 6 months ago) |
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Roth IRAs and their Canadian counterpart the TFSA are excellent tools.
Using tax advantaged accounts and buying stocks, bonds, or etfs is one of the best things you can do for retirement or future financial planning. Ideally when its automated and started early in your working career.
I read an article on bloomberg I believe a while ago that was describing how some individuals, including Mitt Romney, have used Roth IRAs to accumulated millions of dollars in their tax free accounts using some pretty greasy restructuring of public companies. Its a very small portion of the population, but it is a very wise technique and the rich are taking advantage, so should you.
One thing I would caution is that a very small group of people put a lot of money into 401Ks (RRSPs) and if you can actually end up with too much money get stuck with Required Minimum distributions and need to take out more money than you actually need. Or alternatively, you figure out you have your $1.8Million stuck in a 401K but you worked very hard so you can't get at the money with penalty before age 60. Obviously it would be a much smaller problem to be in this situation. It is a million times better to have made 1.8 Million dollars and have to pay 800,000 to the government, than to make $8,500 and owe the government nothing...
I have a buddy at work. He is about the same age as me, early 30s. I tell him once every couple months, "You get on the company RRSP (401K) plan yet?" As a fairly typical plan, the company matches the first 5%. He always ho's and hums, and figures he can't afford to loose that extra $250 a paycheque, but the longer you wait, the worse it gets. Plus the company is giving you free money. Saving early and often is the only way to financial independence. Working until you die really isn't an option. 66% of people retire sooner than they wanted too, because of illness, layoffs, or other situations. You're body will fail, you mind will wither and you will need to rely on your early life planning for the future of you.
Even all my stock trading and options are in tax advantaged accounts. Not paying tax is a good way to keep that extra 15-45% depending on investment and region, but you do lose out on the loses deductions, so tread carefully, or swing for the fences tax free, but whatever your strategy is, be comfortable in it and stick with it and know the risks.
-------------------- "Nobody exists on purpose. Nobody belongs anywhere. Everybody's going to die."
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Ahab McBathsalts
OTD Windmill Administrator




Registered: 11/25/02
Posts: 35,107
Loc: Wind Turbine, AB
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It is a bit misleading to place so much emphasis on your $350/ 3000 = 11.6% return in 4 months. That would not be a typical return, but tax advantaged accounts are much better. You get to keep that full $350 instead of it being taxed 28% or whatever your marginal tax rate is.
-------------------- "Nobody exists on purpose. Nobody belongs anywhere. Everybody's going to die."
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TravelerOfSorts
sober pro


Registered: 06/29/11
Posts: 492
Last seen: 2 years, 4 months
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as a canadian how can I get in on this do I have to have it where I work? cause the pension plan is OMERS and I should be able to pay into their thing"? dono sorry, I can look this up in the economics book maybe.
-------------------- a soul of solitude but a master of ecstacy in waiting for my rebirth cycle i have hopes that when mushrooms find me it will occur then and i can go about the world as a medicine man walking staff in one hand spaceship in the other a journeyman of nature soon to be stepping up to novice hopefully i will have time to become an expert, and i believe only in death will i become a master
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Ahab McBathsalts
OTD Windmill Administrator




Registered: 11/25/02
Posts: 35,107
Loc: Wind Turbine, AB
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Re: Please Sticky This. Roth IRAs are for you! [Re: TravelerOfSorts]
#21981907 - 07/22/15 08:29 PM (8 years, 6 months ago) |
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I got a feeling you are receiving a survivor benefit and its not a company RRSP. Talk to you HR department about RRSP matching or their pension or whatever. It should have been in your employee handbook when you got hired.
-------------------- "Nobody exists on purpose. Nobody belongs anywhere. Everybody's going to die."
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mndfreeze 
Shroomery Secret Service




Registered: 04/22/02
Posts: 20,529
Loc: PuppetMasterFlash
Last seen: 19 hours, 19 minutes
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I dont see the special benefit of a Roth when used in a company 401k plan?
I was reading up on it because my 401k offers the abilitty to put in (and company match up to 6%) of either a traditional pre-tax, or a Roth. While reading the info they broke down the differnces between the Roth and traditional and basically I still pay taxes, its just WHEN I pay those taxes. If I switch over to the Roth then taxes are taken out right away, but then there is no taxes paid on withdrawal. The traditional is pre-tax, so I dont pay up front but then do pay the income tax at withdrawal. Its a bit confusing the way it was stated.
-------------------- Nothing says love like grannies prolapsed anus! quote]Urb said: I know... Its fucked up... Ill fix it minyana..[/quote]
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mndfreeze 
Shroomery Secret Service




Registered: 04/22/02
Posts: 20,529
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Last seen: 19 hours, 19 minutes
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Re: Please Sticky This. Roth IRAs are for you! [Re: mndfreeze]
#21982685 - 07/23/15 12:09 AM (8 years, 6 months ago) |
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Here is what my employee handbook for the 401k says. This is normally a table but I cannot get it to paste correctly so im cutting it up to make it readable for you guys.
Taxes:
Before-tax contributions (standard 401k) *You don’t pay income taxes on before-tax contributions at the *time they are deducted from your certified compensation, but *the before-tax contributions are taxable upon distribution.
Roth contributions *You pay income taxes on Roth contributions at the time they *are deducted from your certified compensation but you don’t *pay taxes on Roth contributions when you withdraw them from *your 401(k) Plan account.
Earnings on the money you contribute:
Before-tax contributions (standard 401k) *Earnings are taxed when withdrawn.
Roth contributions *Earnings are not taxed if the first contribution date is at least five *years old and at least one of the following conditions is met: *attainment of age 59½, disability, or death
---- The other sections in the table were the same and specific to employer matching and contribution limits, so I omitted those.
So, I see where if I was building my own Roth account it would be beneficial, but in the case of a Roth retirement account it doesn't seem as much so? Maybe I'm missing something or not understanding and someone can explain.
-------------------- Nothing says love like grannies prolapsed anus! quote]Urb said: I know... Its fucked up... Ill fix it minyana..[/quote]
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Ahab McBathsalts
OTD Windmill Administrator




Registered: 11/25/02
Posts: 35,107
Loc: Wind Turbine, AB
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Re: Please Sticky This. Roth IRAs are for you! [Re: mndfreeze]
#21982687 - 07/23/15 12:09 AM (8 years, 6 months ago) |
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I did the calculations one time on Roth vs 401K, but don't have them with me.
Basically the trade off is that you should likely be in a higher tax bracket now than when you retire.
If you are at a say 40% combined federal and state tax bracket now, you only save money if you are in a lower tax bracket when you withdrawal the money in the future at say 35%. The matching usually puts it over the top for most plans, but that's the saving differential. You are taking the income off your highest marginal tax rate and hopefully withdrawling it at a lower rate in the future.
If you have lump sum payment or inhertance, a 401K won't have any benefit, because it will have the opposite effect. You will be in a low tax bracket and then when you take the money out you will receive large yearly withdrawals and pay lots of tax on those amounts.
I can only say that I did them for BC Canada and our tax related programs, and I believe the magic number was in the 55k range for income. If you made less that number it was our version of the Roth you should be throwing your money in, and anything more it was the 401K. Canada and USA tax retirement programs are set up fairly similar and I would imagine the numbers would be in the same ball park. Matching programs that come off your cheque are always worth while and change the calculation, but saving for the future is always a good idea even if you end up paying a few extra dollars in deferred tax. Thats a problem for you in 30 years and the money will be there to pay the tax.
Paying a $30,000 a year in tax is easy when your able to withdrawl 90,000 a year for the rest of your life because you saved the money.
-------------------- "Nobody exists on purpose. Nobody belongs anywhere. Everybody's going to die."
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Ahab McBathsalts
OTD Windmill Administrator




Registered: 11/25/02
Posts: 35,107
Loc: Wind Turbine, AB
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If they are matching both roth and 401k there should be an online calculator to tell you which to pick depending on your annual income, assuming that tax rates stay the same. It should be in the 46-56k range though. Less than that Roth, More 401K.
-------------------- "Nobody exists on purpose. Nobody belongs anywhere. Everybody's going to die."
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mndfreeze 
Shroomery Secret Service




Registered: 04/22/02
Posts: 20,529
Loc: PuppetMasterFlash
Last seen: 19 hours, 19 minutes
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Currently I just use the standard 401k pre-tax and put in at 6%, employer matches max of 6% as well. So its a no brainer of course to max out at least the free money my work is going to put in. Not to mention I lost my entire 401k at the start of the milleniium when global crossing bankrupted and pulled some enron style shit and fucked all of us. The lawsuit we all were a part of at least got me a measly few grand of it back, but nothing close to what I lost.
After that and the IT bubble bursting, followed by real estate crashing, and it costing me my 401k, Ive been ultra leary about trusting my work/companies to do another until recently since I'm full time at a world wide bank, and have a BIT more feelings of security with it. But now I'm way late to building my 401k. I'm slowly raising up my investing amount every year until I hit my goal to put me back on track for proper retirement.
It looks to me from what you're saying and how im understanding my paperwork that a Roth setup really isnt that beneficial for me. Perhaps it would be more so in the scenario OP discusses where he is just setting up a Roth account on his own, but that specific scenario doesnt fit into a Roth retirement account.
-------------------- Nothing says love like grannies prolapsed anus! quote]Urb said: I know... Its fucked up... Ill fix it minyana..[/quote]
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Ahab McBathsalts
OTD Windmill Administrator




Registered: 11/25/02
Posts: 35,107
Loc: Wind Turbine, AB
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After a certain amount of 401k contributions it doesn't make sense to hold them as much. Like again, you would need a time value calculator, but if you have 180k with 28 years to retirement, you have way too much in there already.
If you have 300k, and 10 years to retirement, you are probably ok to keep throwing some in there.
Future Value calculators are available online and with excel formulas.
Future value (FV) = Principle (P) x 1 + Interest rate (I) ^ Years (m)
I usually use an interest rate between 5.0% and 9% as a reasonable discount rate for the future.
-------------------- "Nobody exists on purpose. Nobody belongs anywhere. Everybody's going to die."
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Ahab McBathsalts
OTD Windmill Administrator




Registered: 11/25/02
Posts: 35,107
Loc: Wind Turbine, AB
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Re: Please Sticky This. Roth IRAs are for you! [Re: mndfreeze]
#21982743 - 07/23/15 12:23 AM (8 years, 6 months ago) |
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Roth vs 401K is entirely a wage and marginal tax bracket calculation vs what you expect to have as income in retirement.
As you might have a low retirement income in the future, a 401k is probably the best bet, but there should be an online calculator that can give you a better idea somewhere.
-------------------- "Nobody exists on purpose. Nobody belongs anywhere. Everybody's going to die."
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mndfreeze 
Shroomery Secret Service




Registered: 04/22/02
Posts: 20,529
Loc: PuppetMasterFlash
Last seen: 19 hours, 19 minutes
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My works 401k website has tons of tools that figure all that stuff out for you. First thing that pops up is your estimated plan and targets so you know if you are on track or need to up your contribution to catch up, etc. Since I'm many years BEHIND now, I actually need to up mine a lot more to get back on track. It goes off the basis that recommendations are 80% of income replcaement saved for retirement. I'm currently at 64% I just currently can't afford to take any more money out of my checks until I get some more stuff squared away.
-------------------- Nothing says love like grannies prolapsed anus! quote]Urb said: I know... Its fucked up... Ill fix it minyana..[/quote]
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Ahab McBathsalts
OTD Windmill Administrator




Registered: 11/25/02
Posts: 35,107
Loc: Wind Turbine, AB
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Re: Please Sticky This. Roth IRAs are for you! [Re: mndfreeze]
#21982765 - 07/23/15 12:29 AM (8 years, 6 months ago) |
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Its never too late to marry rich 
The single best financial decision you can make, and women have known for millennia longer than men.
-------------------- "Nobody exists on purpose. Nobody belongs anywhere. Everybody's going to die."
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mndfreeze 
Shroomery Secret Service




Registered: 04/22/02
Posts: 20,529
Loc: PuppetMasterFlash
Last seen: 19 hours, 19 minutes
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Is it that women have known longer... or that there just isn't a lot of rich women to marry. :P
-------------------- Nothing says love like grannies prolapsed anus! quote]Urb said: I know... Its fucked up... Ill fix it minyana..[/quote]
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