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Roth Q For Kaye Thomas
Posted by: Geraldson, March 16, 2013 10:47PM
What assets would you put into a Roth IRA? On the one hand, bonds and REITS pay highly taxable dividends and interest that can be nicely avoided in a Roth. And stocks can enjoy low tax status if you buy and hold till death. On the other hand, stocks have the highest expected total return, which is also a goal of a very long term, perhaps 2 generation Roth IRA. I get it that personal circumstances are important, but I'm just wondering what you think about the trade offs mentioned here.

Re: Roth Q For Kaye Thomas
Posted by: Kaye Thomas, March 19, 2013 12:16PM
I've seen the issue argued both ways for people who have investments in a retirement account and also in a taxable account. (Considerations are about the same whether the retirement account is a Roth or a traditional account.) Some say you enhance your results when you use the retirement account for items that produce interest or nonqualified dividends, such as bonds and REITs, and hold stocks in the taxable account for long-term capital gains and qualified dividends. Others say that in the long run you're better off with the opposite approach because stocks grow faster than other investments and there's a greater long-term advantage in holding the faster-growing investment in the retirement account. In the end the result depends on various individual factors including tax rates and investment style.

I'm not aware of any comprehensive study of the question using today's tax rates. I suspect that at these rates most people are better off allocating stocks to the taxable account because of the large differential in rates, especially if there is any prospect for using the zero rate for capital gain income when cashing in stocks during retirement.

Kaye Thomas
Fairmark.com

Re: Roth Q For Kaye Thomas
Posted by: Geraldson, March 20, 2013 02:29AM
Pretty good answer, thank you.

Re: Roth Q For Kaye Thomas
Posted by: Sven, March 21, 2013 12:43AM
And while it currently is not on the radar scope, should the day ever come when we enact some version or another of a value added tax (which could easily reduce the Internal Revenue Code to what, 6 or 7 pages?) people with Roth IRA's may feel monumentally betrayed. Yes, they will pay no "income tax" on their Roth withdrawals, but every spent dollar of withdrawn Roth money would be subject to the VAT. Not what Sen. Roth had in mind, right????

Re: Roth Q For Kaye Thomas
Posted by: Geraldson, March 21, 2013 01:19AM
I disagree. I would hate a VAT. But VAT or no VAT makes no difference to the ROTH owner, provided regular IRAs are still taxed upon withdrawal.

Now if a VAT is put IN PLACE of income tax, then you are right. But it would appear at this juncture that any new tax would be IN ADDITION to current taxes.

The bigger risk to a ROTH owner is a lower, flatter income tax. In 2010, the first year where high income taxpayers could convert to a Roth, it seemed just as likely that this would happen as what actually DID happen since last November's election. Now, however, lower income tax rates appear very remote, at least in the intermediate term, and having converted at 2011 and 2012 tax rates appears to have been a good decision.

Re: Roth Q For Kaye Thomas
Posted by: Sven, March 21, 2013 08:11PM
My "boy are you screwed with a Roth" premise is a VAT replaces the income tax. Highly unlikely but one never knows, does one? I agree with you on the lower, flatter income tax.

If we ever see something like a national sale tax on top of federal and state income tax it's time to join that French actor wherever he moved.



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