# Starting an IRA Question **URL:** \ **Category:** Factual Questions\ **Created:** [February 9, 2011, 5:38am UTC](https://boards.straightdope.com/t/starting-an-ira-question/570738 "2011-02-09T05:38:03Z")\ **Posts on this page:** 18\ **Page:** 2
**Author:** ![j666](https://avatars.discourse-cdn.com/v4/letter/j/9de0a6/32.png) [@j666](https://boards.straightdope.com/u/j666)\ **Post date:** [February 10, 2011, 6:38pm UTC](https://boards.straightdope.com/t/starting-an-ira-question/570738/21 "2011-02-10T18:38:52Z")
> [@Ruken](#): > > Correct, but that’s not what **nivlac** wrote. ? No, it was what I wrote. Was this a test? ---
**Author:** ![Ruken](https://avatars.discourse-cdn.com/v4/letter/r/f475e1/32.png) [@Ruken](https://boards.straightdope.com/u/Ruken)\ **Post date:** [February 11, 2011, 2:13am UTC](https://boards.straightdope.com/t/starting-an-ira-question/570738/22 "2011-02-11T02:13:17Z")
> [@j66](#): > > ? > No, it was what I wrote. > Was this a test? It’s not terribly important but I’ll spell it out. Nivlac writes that retirees will be in a \*lower \*tax bracket. Rysto questions that statement. You reply that the assumption is that retires will be in a \*higher \*tax bracket. That clearly was not the assumption. However, your assumption is likely correct for the OP. > [@DrDeth](#): > > Actually, that’s a HUGE _dis_advantage. The temptation to dip into the fund before retirement is too high. :dubious: That kind of sounds like what I hear from the people I work with who deliberately overwithold their paycheck throughout the year because the temptation to spend the money they owe the feds in April would be too high. I’ll take the option that gives me the most gain, thanks. > [@dalej42](#): > > You can withdraw contributions from Roth IRAs at any time without penalty. Lest anyone be confused, that’s contributions only, not earnings. As noted, there are circumstances under which earnings can be withdrawn without penalty. ---
**Author:** ![Rumor\_Watkins](https://avatars.discourse-cdn.com/v4/letter/r/d9b06d/32.png) [@Rumor\_Watkins](https://boards.straightdope.com/u/Rumor_Watkins)\ **Post date:** [February 11, 2011, 2:24am UTC](https://boards.straightdope.com/t/starting-an-ira-question/570738/23 "2011-02-11T02:24:06Z")
> [@dracoi](#): > > I always recommend that clients have BOTH a taxable (IRA/401k) and nontaxable (Roth) source of income in retirement. The taxability of Social Security depends on total taxable income, and your standard deduction and personal exemptions can cancel out some of the taxable income. By supplementing taxable and non-taxable, you can effectively make it ALL nontaxable and get the best of both worlds. (For example: $25k from Social Security, 20k from 401k and 25k from Roth would give you almost $6,000 a month in living expenses, and you’d pay $0 tax if you’re married. Taking $45 from 401k makes $20k of the social security taxable, and you tax is now ~$5,000.) can you explain how having the taxable source of income in retirement served a tax purpose in your example? not being glib, but i’m scratching my head sure why you’d recommend to have both types of (non-roth/roth) accounts? ---
**Author:** ![pulykamell](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/pulykamell/32/3166_2.png) [@pulykamell](https://boards.straightdope.com/u/pulykamell)\ **Post date:** [February 11, 2011, 2:28am UTC](https://boards.straightdope.com/t/starting-an-ira-question/570738/24 "2011-02-11T02:28:07Z")
So, explain to me how a Roth would be a worse idea than a Trad IRA. Right now, I’m split between a SEP and a Roth, so it’s not really that big a deal for me, although I can make the Roth contributions into a traditional IRA, if I wanted to. The years before I set up a SEP, though, I contributed all $5000 to a Roth. At 35, is there any reason I would want to lower my tax burden now, and put that $5000 to a traditional IRA, as opposed to a Roth? I really don’t see it. I have not doubt that I’m not going to touch this money for 30 years. Isn’t paying taxes on $5000 now, no matter my bracket, going to be better than paying capital gains/income tax on what that $5000 turns into 30 years from now? ---
**Author:** ![Rumor\_Watkins](https://avatars.discourse-cdn.com/v4/letter/r/d9b06d/32.png) [@Rumor\_Watkins](https://boards.straightdope.com/u/Rumor_Watkins)\ **Post date:** [February 11, 2011, 2:57am UTC](https://boards.straightdope.com/t/starting-an-ira-question/570738/25 "2011-02-11T02:57:27Z")
> [@pulykamell](#): > > So, explain to me how a Roth would be a worse idea than a Trad IRA. Right now, I’m split between a SEP and a Roth, so it’s not really that big a deal for me, although I can make the Roth contributions into a traditional IRA, if I wanted to. The years before I set up a SEP, though, I contributed all $5000 to a Roth. At 35, is there any reason I would want to lower my tax burden now, and put that $5000 to a traditional IRA, as opposed to a Roth? I really don’t see it. I have not doubt that I’m not going to touch this money for 30 years. Isn’t paying taxes on $5000 now, no matter my bracket, going to be better than paying capital gains/income tax on what that $5000 turns into 30 years from now? inflation concerns. the dollar you paid .15% on in tax now is worth more than the dollar you would be paying .15% on in the future. say with the ROTH, you earned $100, and you paid 15% , $15 tax on that, so you have $85 after tax. you save that all, and, let’s pretend it doubled by the time that you take it out. so it’s worth $170 with the “normal” IRA, you earned $100, you saved $85 in the IRA, and then you paid your 15% income tax on your remaining $15. $2.25 in taxes. The money doubles the same, so it’s worth $170. now, invariably, tax brackets are not going to be at the same dollar level because of the inflation, so let’s say that $170 is taxed at 10% in the future, and the dollar has 60% of its present value IRA: So you paid (2.25 in tax yesterday) ($3.75 today’s value) + $17 in tax today, $20.75 total, for your $170 bucks Effective tax rate on your cheddar cheese: 12.2% RIRA: You paid $15.00 in tax yesterday (25 today) for your $170 dollars Effective tax rate on your cheddar cheese: 14.7 now let’s pretend that inflation was really bad, so that $170 nominal has a 40% present value (60% off) also, now that $170 is taxed at 5%. IRA: So you paid $2.25 in tax yesterday (5.62 today’s value) + $10.75 in tax today, $16.37 total, for your $170. Effective tax rate on your cheddar cheese: 9.6% RIRA: You paid $15.00 in tax yesterday ($37.50 today) for your $170 dollars Effective tax rate on your cheddar cheese: 22% i think 🙂 ---
**Author:** ![DrDeth](https://avatars.discourse-cdn.com/v4/letter/d/b487fb/32.png) [@DrDeth](https://boards.straightdope.com/u/DrDeth)\ **Post date:** [February 11, 2011, 3:13am UTC](https://boards.straightdope.com/t/starting-an-ira-question/570738/26 "2011-02-11T03:13:37Z")
> [@Ruken](#): > > :dubious: That kind of sounds like what I hear from the people I work with who deliberately overwithold their paycheck throughout the year because the temptation to spend the money they owe the feds in April would be too high. I’ll take the option that gives me the most gain, thank. Except that’s on a year to year basis, not retirement. Few can really think ahead to retirement. And, there’s no evidence that a Roth gets you better gains. Maybe, or maybe not. ---
**Author:** ![CookingWithGas](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/cookingwithgas/32/485_2.png) [@CookingWithGas](https://boards.straightdope.com/u/CookingWithGas)\ **Post date:** [February 11, 2011, 3:14am UTC](https://boards.straightdope.com/t/starting-an-ira-question/570738/27 "2011-02-11T03:14:06Z")
> [@dalej42](#): > > You can withdraw contributions from Roth IRAs at any time without penalty. [That is not correct according to the IRS](http://www.irs.gov/publications/p590/ch02.html#en_US_2010_publink1000231057). ---
**Author:** ![CookingWithGas](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/cookingwithgas/32/485_2.png) [@CookingWithGas](https://boards.straightdope.com/u/CookingWithGas)\ **Post date:** [February 11, 2011, 3:17am UTC](https://boards.straightdope.com/t/starting-an-ira-question/570738/28 "2011-02-11T03:17:03Z")
> [@nivlac](#): > > With a Roth you pay your taxes up front unlike for a regular IRA (which is tax-deductible). However, the benefits are that you can withdraw the money down the road tax-free. This can be a big advantage since you will likely be withdrawing the money when you’re retired and therefore at a lower tax-bracket. I say take the Roth if you meet all its qualifications, which I think you will since you’ve just started working. This rationale argues \*against \*the Roth. Why would you want to pay taxes today in a higher bracket than you would when you retire and are at a lower bracket? All other things being equal, deferring taxes is preferred. ---
**Author:** ![Doug\_Bowe](https://avatars.discourse-cdn.com/v4/letter/d/df788c/32.png) [@Doug\_Bowe](https://boards.straightdope.com/u/Doug_Bowe)\ **Post date:** [February 11, 2011, 3:32am UTC](https://boards.straightdope.com/t/starting-an-ira-question/570738/29 "2011-02-11T03:32:15Z")
> [@TNWPsycho](#): > > Just to clear up a little confusion up the thread. The plan my employer offers is indeed a simple IRA. > > What happens is that he pulls out whatever i choose to contribute out of my check and direct deposits that into an IRA set up in my name at my bank. Then matches 3% > > The IRA is not in any way tied to the company, it is all under my name. The fact that the IRA is set up at your bank suggests that you’ll get CD’s. Get your employer match with the private understanding that if and when you’ll move on to another job you’ll move the IRA to a no-load, low cost mutual fund company. ---
**Author:** ![pulykamell](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/pulykamell/32/3166_2.png) [@pulykamell](https://boards.straightdope.com/u/pulykamell)\ **Post date:** [February 11, 2011, 3:34am UTC](https://boards.straightdope.com/t/starting-an-ira-question/570738/30 "2011-02-11T03:34:28Z")
> [@Rumor\_Watkins](#): > > inflation concerns. OK, let’s take my $5000 in a Roth. That’s about a 33% tax hit for me (I’m self employed.) So I pay $1650 in taxes today to invest that $5000 in a Roth. I invest that in an S&P500 index fund. Historical annualized returns are, what, about 7% if we’re being really conservative? Over a period of 30 years that’s, what, $30-$40K? Taking inflation into account, I don’t see how the real dollar value of that makes paying taxes on that later more worth it than paying on it now. ---
**Author:** ![Rumor\_Watkins](https://avatars.discourse-cdn.com/v4/letter/r/d9b06d/32.png) [@Rumor\_Watkins](https://boards.straightdope.com/u/Rumor_Watkins)\ **Post date:** [February 11, 2011, 3:46am UTC](https://boards.straightdope.com/t/starting-an-ira-question/570738/31 "2011-02-11T03:46:03Z")
> [@pulykamell](#): > > OK, let’s take my $5000 in a Roth. That’s about a 33% tax hit for me (I’m self employed.) So I pay $1650 in taxes today to invest that $5000 in a Roth. I invest that in an S&P500 index fund. Historical annualized returns are, what, about 7% if we’re being really conservative? Over a period of 30 years that’s, what, $30-$40K? Taking inflation into account, I don’t see how the real dollar value of that makes paying taxes on that later more worth it than paying on it now. what’s the $1650 in deferred taxes worth in 30 years? and if you’re a big baller whose paying 33% marginal tax rates, you probably want a normal IRA. Highly unlikely you’ll be in that tax bracket when you retire. (or is there some wonky tax going on for self-employed IRA people?) ---
**Author:** ![pulykamell](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/pulykamell/32/3166_2.png) [@pulykamell](https://boards.straightdope.com/u/pulykamell)\ **Post date:** [February 11, 2011, 4:51am UTC](https://boards.straightdope.com/t/starting-an-ira-question/570738/32 "2011-02-11T04:51:02Z")
> [@Rumor\_Watkins](#): > > what’s the $1650 in deferred taxes worth in 30 years? > > and if you’re a big baller whose paying 33% marginal tax rates, you probably want a normal IRA. Highly unlikely you’ll be in that tax bracket when you retire. (or is there some wonky tax going on for self-employed IRA people?) I’m not a big-baller by any stretch. It’s just that I pay self-employment tax. ---
**Author:** ![pulykamell](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/pulykamell/32/3166_2.png) [@pulykamell](https://boards.straightdope.com/u/pulykamell)\ **Post date:** [February 11, 2011, 5:07am UTC](https://boards.straightdope.com/t/starting-an-ira-question/570738/33 "2011-02-11T05:07:42Z")
> [@Rumor\_Watkins](#): > > what’s the $1650 in deferred taxes worth in 30 years? I’m assuming in the $4k-$4.5K range. I’m not sure how the math works out to make the traditional a better deal for me. ---
**Author:** ![Rumor\_Watkins](https://avatars.discourse-cdn.com/v4/letter/r/d9b06d/32.png) [@Rumor\_Watkins](https://boards.straightdope.com/u/Rumor_Watkins)\ **Post date:** [February 11, 2011, 12:59pm UTC](https://boards.straightdope.com/t/starting-an-ira-question/570738/34 "2011-02-11T12:59:42Z")
> [@pulykamell](#): > > I’m not a big-baller by any stretch. It’s just that I pay self-employment tax. I’m not a tax guy, but I’m pretty sure there are many self-employed “employer-esque” retirement plans that you can contribute to as a business expense which reduces your profit (which is the number that SE earnings is taxed on) so you wouldn’t necessarily be paying 33% on your retirement savings. ---
**Author:** ![pulykamell](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/pulykamell/32/3166_2.png) [@pulykamell](https://boards.straightdope.com/u/pulykamell)\ **Post date:** [February 11, 2011, 4:01pm UTC](https://boards.straightdope.com/t/starting-an-ira-question/570738/35 "2011-02-11T16:01:59Z")
> [@Rumor\_Watkins](#): > > I’m not a tax guy, but I’m pretty sure there are many self-employed “employer-esque” retirement plans that you can contribute to as a business expense which reduces your profit (which is the number that SE earnings is taxed on) so you wouldn’t necessarily be paying 33% on your retirement savings. Yes, that’s what the SEP is for. I’m allowed to put a certain percentage of my income (25% up to a maximum of a $49,000 contribution), but I still have an extra $5K I’m allowed to put either a Roth or traditional. I max out the SEP (at 25%), and put the rest in the Roth. ---
**Author:** ![dracoi](https://avatars.discourse-cdn.com/v4/letter/d/90db22/32.png) [@dracoi](https://boards.straightdope.com/u/dracoi)\ **Post date:** [February 11, 2011, 9:01pm UTC](https://boards.straightdope.com/t/starting-an-ira-question/570738/36 "2011-02-11T21:01:54Z")
> [@Rumor\_Watkins](#): > > I’m not a tax guy, but I’m pretty sure there are many self-employed “employer-esque” retirement plans that you can contribute to as a business expense which reduces your profit (which is the number that SE earnings is taxed on) so you wouldn’t necessarily be paying 33% on your retirement savings. No, there are no retirement plans like that. Any sole proprietor or partner will still pay SE on the full amount of earnings. The retirement contributions are NOT an expense to the business for these owners, and they’ll still pay SE tax. (The contributions are still subtracted from gross income subject to income tax, but are not subtracted from net SE income). The best you can do if you want to reduce SE tax is to incorporate. Then you pay yourself as an employee and are permitted to do profit-sharing retirement contributions (under a 401k or SEP) of up to 25% of the wages (up to 49,500). In this case, the retirement contributions are an expense to the company, they are exempt from FICA tax (because they’re not wages) and the owner doesn’t pay SE taxes on them either. (Note: elective deferrals within a corporation are subject to FICA, which is equivalent to the SE tax. So the profit-sharing component is the only part that avoids SE tax.) ---
**Author:** ![pulykamell](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/pulykamell/32/3166_2.png) [@pulykamell](https://boards.straightdope.com/u/pulykamell)\ **Post date:** [February 11, 2011, 9:09pm UTC](https://boards.straightdope.com/t/starting-an-ira-question/570738/37 "2011-02-11T21:09:47Z")
> [@dracoi](#): > > No, there are no retirement plans like that. Any sole proprietor or partner will still pay SE on the full amount of earnings. The retirement contributions are NOT an expense to the business for these owners, and they’ll still pay SE tax. Shoot, I forgot about that. That’s right. The amount I pay in self-employment tax stays the same whether I have a SEP or not, but the amount I contribute into the SEP comes off my adjusted gross income, so that lightens the load on my federal taxes a good bit. I thought the SEP comes out as a business deduction, but it doesn’t, according to last year’s returns. Sorry about that. ---
**Author:** ![dracoi](https://avatars.discourse-cdn.com/v4/letter/d/90db22/32.png) [@dracoi](https://boards.straightdope.com/u/dracoi)\ **Post date:** [February 11, 2011, 9:22pm UTC](https://boards.straightdope.com/t/starting-an-ira-question/570738/38 "2011-02-11T21:22:08Z")
> [@pulykamell](#): > > Shoot, I forgot about that. That’s right. The amount I pay in self-employment tax stays the same whether I have a SEP or not, but the amount I contribute into the SEP comes off my adjusted gross income, so that lightens the load on my federal taxes a good bit. I thought the SEP comes out as a business deduction, but it doesn’t, according to last year’s returns. Sorry about that. It’s all right. I have to re-explain it to my clients every year too. 🙂 [Previous page](https://boards.straightdope.com/t/starting-an-ira-question/570738.md?page=1)