IRA's Vs. Mutual Funds

ambassador orange wrote:

One interesting feature of the tradtional to roth conversion (and quite possibly the reason the conversion is allowed) is that it increases government revenues right now when you pay income taxes on the conversion in 2010 and the lost government revenue (from taxable withdrawals no longer being taxable from the converted roth) doesn't occur until way off in the future when the loss in revenues will be someone else's problem.

mr. ambassador, i concur. this is a very interesting thing, and it's something that properly critical journalists should pick up on.

even though, as my simplistic example a few pages ago showed, the individual is no better or worse off under traditional or roth style accounts, the net amount of tax received by the government is substantially lower with a roth (assuming that your long-term investment returns beat inflation and tax rates don't drop significantly; and of course).

i don't think i've seen a single article in the news in the past few years mentioning this relatively obvious and meaningful fact. meanwhile, congress is cannibalizing future revenue and essentially creating more debt for future taxpayers to repay by rapidly expanding roth-style programs. just think about how much more money will be invested in roth-style accounts now that wealthier people can contribute to roth 401(k)'s.

maybe it's only a blip on the overall federal budget. but it still seems to me that, as you point out, it's congress putting off budget problems. and it seems to me that the press has a responsibility to inform voters about this side effect of the expansion of roth-style programs.

No, the mistake you made was in saying that there would be a 10% penalty when there would not be.

Nobody ever advised anyone to take money out of an IRA ahead of time. Nobody. How many times do you need that repeated to you before it sinks in? For whom is this silly diatribe intended? Can't be Kaitenen - he never told anybody to do that. Can't be malmo, he never said anything like it. It sure as hell isn't me. So who are you "correcting" by posting this crap?

Answer: No one. It's a straw man. We all know it's a bad idea to take money out of a retirement account too soon. We knew it long before you ever weighed in. That's investing 101.

I DID decide for myself you buffoon. That's why my very first statement in my post said the question WAS NOT FOR YOU. Remember that? But as you cannot stop yourself from weighing in on subjects you know nothing about, on you go.

1) There IS a 10% penalty on Roth IRAs the VAST MAJORITY of the time. kaitainen gave a scenario when you would NOT have a penalty which is when someone takes money out that they've CONTRIBUTED. If you're doing that, then you will never gain wealth. Why give that as a possibility if you're not planning to do it? You keep saying I'm wrong about there being a 10% penalty on taking distributions from a ROTH IRA, and that is NOT true. There is in the VAST majrority of the cases -- only NOT when you take just the contributions, but again for the millionth time, if you take that advice, your money will NEVER grow.

2) So, you believe that kaitainen and his "girlfriend" will have saved (invested) over $800,000 in just two years (2006 and 2007? Ok then brother. I've got some swamp land to sell you. Bottom line here is that he tried to make a statement to put me in my place, but he made the mistake of also telling me that he'd have $10 million when he turns 60. Since I have a calculator and a spreadsheet and know how to use them both, I know that due to that grandiose prediction, he'd have to have $800,000 saved in the two years he mentioned. No way. Shows he doesn't know how to figure out how much money he will have. Since he's involving the money of his "girlfriend" too, then he's really pushing it. I once dated a girl who was super rich. Guess what, I didn't count any money from her, and I wouldn't have until I was married to her.

3) Sorry brother, but investing is something I know a TON about, so I will weigh in everytime someone brings this subject up. The real thing here is that I provided some very basic info (all correct by the way except that I said the IRA contribution limit for 2007 was $4,500 when it is $4,000 -- I ALWAYS admit when I'm wrong) and kaintainen wanted to appear as a know-it-all by making observations about my post that were not necessary for the original poster. Like I said before, you can't give ALL the details about IRAs in one short post, and I didn't pretend to give ALL the situations. He decides to pick a situation that is RARE (as another poster also mentioned) and then tell me I'm wrong because of that. BS.

In the grand scheme of things, I should let you follow his advice. Makes no difference to me. Go ahead and open a Roth IRA for the sole fact that you can take money out of it without penalty as long as you JUST take the money you put in it. You'll be poor that way. The original poster wanted advice about how to invest. MY way of thinking about it is the right way. Put money into and IRA (Roth or Traditional) and leave it alone. You should also max out your 401K if possible. If you're doing both of those things, then you should have a liquid fund (separate mutual fund or money market account) that you keep 3-6 months of expenses in only -- use THAT for emergencies and leave that retirement money alone. Once you've done all that, then it's time to pay the house off. Become wealthy by having NO debt and having money in investment vehicles that will actually grow.

Go read this --

Note that it says this - "Unless an exception applies, most distributions from a Roth IRA before the owner reaches age 59 1/2 will be subject to an "early withdrawal penalty" of 10% on the amount of the distribution." JUST AS I'VE SAID ALL ALONG. To put money into one and think of it as a holding place for your money is ridiculous.

Sorry brother, but I've been right all along.

1. You made a blanket statement that withdrawals from Roth IRAs are subject to a 10% penalty. Not "in some cases". Not "unless an exception applies". You were wrong. Period.

2. I neither know nor care how much money Kaitenen has or will have. I asked him for facts about the accounts and what I may legally do with them, not advice on how to use them. You surreal inability to understand this distinction after it has been repeatedly explained to you defies all logic.

I specifically asked him or malmo, and specifically not you.

Next.

Desperate for attention? Jeez....

Flagpole Willy wrote:

Note that it says this - "Unless an exception applies, most distributions from a Roth IRA before the owner reaches age 59 1/2 will be subject to an "early withdrawal penalty" of 10% on the amount of the distribution." JUST AS I'VE SAID ALL ALONG. To put money into one and think of it as a holding place for your money is ridiculous.

Sorry brother, but I've been right all along.

No you haven't. I think it's time to take some tax-and-penalty free money out of your Roth IRA and buy some new reading glasses. I would also help if you posting the entire paragraph when making a point. By not doing so, one would think you were deliberately hiding exculpatory material.

You conveniently left out the paragraph heading titled "Penalties on Earnings from Contributions" Read slowly "penalties on earnings" You can withdraw contributions without penalty. It's is explained in the link labeled "Part III" in the paragraph you just cited and also in the very next paragraph.

(very next paragraph omitted by Flagpole)

"Example #1: Jim, age 30, made a Roth IRA contribution of $2,000 in 1998. In 2005, Jim's Roth IRA has a balance of $3,500. Jim decides to close his Roth IRA in a non-qualified distribution that year. Since the distribution is non-qualified, Jim will owe taxes on his Roth earnings of $1,500, and will pay tax on this amount at his marginal tax rate. In addition, since the distribution took place before Jim reached age 59 1/2, and since Jim did not meet any of the exceptions, Jim will also be assessed a 10% early withdrawal penalty on the earnings. If we assume that Jim is in the 28% marginal tax bracket, he will pay $420 in tax on the earnings, and will pay a penalty in the amount of $150 on the early distribution. This is a very steep price to pay."

Clearly Jim's $2000 contributions are tax and penalty free, his $1500 earnings are.

Part III

Remember that, under the Roth IRA rules and unlike the rules for a regular IRA, you can first remove your contributions without tax or penalty. So, in Example #1 above, if Bill decided to take a withdrawal of only $2,000, it would be treated as a distribution of his original contributions, and would not be subject to taxes or penalties. That only makes sense since Bill didn't get to deduct that contribution from his taxable income when it was originally made (so, he's already paid income tax on the money).

Flagpole. These are the links you provided.

this has gotten beyond silly.

many thanks to those who have defended me.

for anyone not involved in the spat still reading, let me try to clarify why this matters without forcing anyone to reply with another inflammatory post. i'll have to let FW's childish taunts slide without reply in order to stick with my pledge. if i don't, this will go on forever.

anyway, for those who read this thread to gain knowledge rather than to watch or participate in the spat, here is the issue:

if you are someone in your early 20s with minimal funds to either save or invest, you commonly hear advice to set up an emergency fund first, and only after that savings is in place should you invest for your retirement. the OP seemed to be in this situation due to his lack of knowledge of IRAs and mutual funds.

the question of whether or not you can withdraw contributions from a Roth IRA penalty-free is extraordinarily relevant to my hypothetical fledgling investor. if you cannot withdraw penalty-free, then you should not risk your short-term financial well-being by tying up all of your savings in retirement accounts.

however, if you can withdraw contributions penalty-free, then you can take advantage of tax-preferenced retirement savings while having the peace of mind that the money is available to you penalty-free in an emergency. in other words, you can have your cake and eat it too. my hypothetical early 20s individual should definitely open a Roth IRA. hopefully no emergency ever arises and s/he will be able to leave that money in the Roth IRA until retirement. but the fact that s/he can withdraw that money penalty-free (the contribution(s)) means that s/he does not need to first build up emergency savings.

this is a substantial benefit that should not be understated. i didn't know this in my early 20s. if i had, i would have created a Roth IRA much earlier. and that's why i think this point is far more than a minor one. all of you out there in your early 20s with meager savings accounts, this knowledge should allow you to open a Roth IRA with little fear. and if the choice is between not opening a Roth IRA or opening one knowing that you might take some of the contributions back in the future out of necessity, the latter is clearly better.

of course you never want to withdraw money from retirement accounts, with penalty or without, unless there is a very good reason. and if you follow my advice and invest in a Roth IRA without first having some emergency savings, please make sure that you invest in low-risk vehicles (e.g. money market funds) until you do have some emergency savings somewhere else.

kaitainen wrote:

meanwhile, congress is cannibalizing future revenue and essentially creating more debt for future taxpayers to repay by rapidly expanding roth-style programs.

...under the guise of doing something about the problem that people don't save enough for retirement. These new laws are just providing ways for people who are already saving huge amounts for retirement to save even more at a tax advantage. It does nothing to solve the problem.

Sorry brother malmo, but I HAVE been right all along. I gave info initially that said that with IRA's that you would be subject to a 10% penalty for early withdrawal, and for Traditional IRA that is ALWAYS true, and for a Roth IRA that is true MOST of the time. When kaitaninen brought that up later, I agreed that with a Roth IRA that you can take your CONTRIBUTIONS out without penalty. Holy crap, this is such basic stuff. I NEVER thought you couldn't.

As I said earlier, the ONLY mistake I made was in assuming that someone might actually leave their money in a Roth IRA long enough for it to gain enough money so that if they took it out that they'd likely pay a 10% penalty on most of it. I don't know WHY anyone would open a Roth IRA just because they can take their little contributions out without penalty. I know how these IRAs work malmo. Sorry that I didn't provide every little possibility, but the fact remains that for MOST people, taking money out of their ROTH IRA ahead of time will result in a penalty of 10%.

I'm right.

kaitainen wrote:

however, if you can withdraw contributions penalty-free, then you can take advantage of tax-preferenced retirement savings while having the peace of mind that the money is available to you penalty-free in an emergency. in other words, you can have your cake and eat it too.

That is NOT having your cake and eating it too. That is simply eating the cake and leaving none for retirement. Horrible advice. Wrong mindset to retirement planning. You'd better be able to save $800,000 (like YOU said you could) with your "girlfriend" every two years and then hope she agrees to marry you and you two don't divorce, because that's the only way you will be able build up any wealth with that kind of investing attitude.

Have your cake and eat it too? Not hardly.

Flagpole Willy wrote:

I gave info initially that said that with IRA's that you would be subject to a 10% penalty for early withdrawal, and for Traditional IRA that is ALWAYS true, and for a Roth IRA that is true MOST of the time.

you can only be pushed so far by this guy before you allow yourself to be bothered and you find yourself responding.

FW, here is the first thing you posted on this thread:

"Let's be clear about some things here:

1) With an IRA, (traditional or Roth) you can't take the money out until you are 59 1/2 years old without paying a 10% penalty."

it's on the first page. these are literally the first words in your post. no where in that post do you indicate there are exceptions and that contributions can be withdrawn from a Roth IRA penalty-free. that's why i responded to your post in the first place. it's relevant information for a new investor.

Flagpole Willy wrote:

That is NOT having your cake and eating it too. That is simply eating the cake and leaving none for retirement. Horrible advice. Wrong mindset to retirement planning. You'd better be able to save $800,000 (like YOU said you could) with your "girlfriend" every two years and then hope she agrees to marry you and you two don't divorce, because that's the only way you will be able build up any wealth with that kind of investing attitude.

Have your cake and eat it too? Not hardly.

are you just trying to be annoyiing now?

what don't you get? if i'm 22 years old and i have $2,000 in my savings account and it's April 14th. should i open a Roth IRA or should i leave that money in a savings account (assuming that's all the savings i have in the world).

as Jizzmo wrote on the first page of this thread, the conventional wisdom is to have emergency savings first, because if you go the retirement account route first, you'll be killed with penalties if an emergency forces you to access those funds. the fact that you can withdraw contributions from a Roth penalty-free eliminates this concern. so instead, my 22 year old self can open a Roth IRA with the $2,000. i have both started retirement savings at an early age and also protected myself in the event of an emergency. cake - eaten.

this is so simple that your failure to agree with it can't be anything other than spite.

get over it.

Flagpole Willy wrote:

Let's be clear about some things here:

1) With an IRA, (traditional or Roth) you can't take the money out until you are 59 1/2 years old without paying a 10% penalty. Also, the money you put into an IRA has to be in there for 5 years before you take it out without penalty, but in no case can you take it out BEFORE 59 1/2 without penalty. For example, if you open an IRA at age 57, you have to wait until you are 62 before you can take the money out with no penalty.

As others have said, this is plain wrong.

However, I do agree with you on the thrust of your argument that retirement accounts should not be used as rainy days funds. An optimal investor starting out will follow kaitainens's advice and use the roth as his rainy day fund because he cannot get those years back and needs to get this tax advantage for every year he can (and when he has more money will switch the money market in a roth to a more aggressive investment in the roth). But can most investors do this? I don't know, my guess is most people just put stock mutual funds in their retirement accounts and then if things go bad in the stock when you have an emergency you're in trouble (as kaitainen pointed out). An investor not disciplined enough to put safe investments in the roth to start out might want to have a separate account in a money market that psychologically he considers a rainy day fund and then just growth assets in the roth and keep the rainy day fund and the retirement accounts totally separate because they serve different ends.

Flagpole Willy wrote:

You'd better be able to save $800,000 (like YOU said you could) with your "girlfriend" every two years and then hope she agrees to marry you and you two don't divorce.

i only brought up my personal finances because you constantly brag on this website about how smart you are with investing. my point is that i make so much more money than you, while living a similar or even more frugal lifestyle (why own a car at all?), that i've probably saved as much in a 2-year period as you have in 15 years (comparing apples to apples - savings, not savings + gains).

i never said $800,000.

thank you. a well-written, concise summary of what i've been trying to say.

Flagpole Willy wrote:

Sorry brother malmo, but I HAVE been right all along. I gave info initially that said that with IRA's that you would be subject to a 10% penalty for early withdrawal, and for Traditional IRA that is ALWAYS true, and for a Roth IRA that is true MOST of the time. When kaitaninen brought that up later, I agreed that with a Roth IRA that you can take your CONTRIBUTIONS out without penalty. Holy crap, this is such basic stuff. I NEVER thought you couldn't.

I'm right.

I can't even believe you, Flagpole. This is NOT what you said. Normally you post facts and have well-reasoned arguments to support your opinion, regardless if I agree with you or not. I this thread, none of it applies. In fact, you deliberately left out pertinent parts of the passages that you quoted. This is disingenuous.

I posted the links that YOU provided that explicitly contradict what you've claimed in this thread. It's all there in black and white. Kaitanen has been consistent and correct throughout this entire thread.

"Traditional IRA that is ALWAYS true"

Additionally, you CAN take money out of your traditional IRA without penalty for certain purposes (home purchase, college expenses and others). (sorry Kaitainen, I just opened another can of worms!)

"and for a Roth IRA that is true MOST of the time."

Not so. Contributions always come out first, tax free and penalty free, with minor exceptions (the 5 year rule).

1) Go with the part where you agree with the thrust of my argument.

2) What I've written there (the stuff you copied) is true the VAST MAJORITY of the time. Yes, you can take your CONTRIBUTIONS to the Roth IRA without penalty, but that is a BAD idea and not what most people would want to do. Here's a real-world example. Let's say you open an IRA at age 19, and you put just $2,000 into it for 7 years for a total of $14,000 contributed. Then for whatever reason you stop contributing (by age 26). At age 55, you will have $193,940, FAR more than the $14,000 you put into it, and, if you take out $100,000 to help pay for a house or a couple of cars or whatever, you'll be dinged with a 10% penalty on $86,000 of that. Holy crap, who wants to do that? Of course, if you plan to use it the way that kaitainen says is "having your cake and eating it too" then not only would it never have gotten up to $194,940, but you would have taken out some of the $14,000 you contributed too, so you'll have next to nothing.

So, think about Roth IRAs the way kaitainen does if you want. My way is WAY more prudent, will allow you to build wealth, and ensures that you won't get dinged with any penalties -- though to kaitainen's credit, you won't get dinged his way either, but you just won't have any more left to retire on. I pick my way.

My way is better.

kaitainen wrote:

Flagpole Willy wrote:

I gave info initially that said that with IRA's that you would be subject to a 10% penalty for early withdrawal, and for Traditional IRA that is ALWAYS true, and for a Roth IRA that is true MOST of the time.

you can only be pushed so far by this guy before you allow yourself to be bothered and you find yourself responding.

kaitainen, now, not only are you guilty of giving bad investing advice, but you're proven not to be a man of your word -- you've said several times you were going to stop responding, yet you can't.