# What use is an IRA? **URL:** \ **Category:** Factual Questions\ **Created:** [June 13, 2010, 11:56pm UTC](https://boards.straightdope.com/t/what-use-is-an-ira/543070 "2010-06-13T23:56:05Z")\ **Posts on this page:** 18\ **Page:** 3
**Author:** ![Magiver](https://avatars.discourse-cdn.com/v4/letter/m/4491bb/32.png) [@Magiver](https://boards.straightdope.com/u/Magiver)\ **Post date:** [June 22, 2010, 2:16am UTC](https://boards.straightdope.com/t/what-use-is-an-ira/543070/41 "2010-06-22T02:16:56Z")
> [@DrDeth](#): > > Except that if you **REALLY FUCKING NEED** the money, you are quite likely in a lower tax bracket, eh? Even if you’re in a lower tax bracket you’re still stuck paying the tax plus a 10% penalty. If you need 10K to keep from going under then you’ll need to take 11,000 out of a 401K account plus the lower tax rate. That’s a lot of money to throw away in time of need. You’re objection revolves around people too weak minded to go through life without raiding a Roth IRA account. That is not an argument against planning for financial crisis. ---
**Author:** ![tim-n-va](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/tim-n-va/32/3001_2.png) [@tim-n-va](https://boards.straightdope.com/u/tim-n-va)\ **Post date:** [June 22, 2010, 2:24am UTC](https://boards.straightdope.com/t/what-use-is-an-ira/543070/42 "2010-06-22T02:24:03Z")
> [@DrDeth](#): > > Yes, but now you are assuming that your earnings will be greater than your contributions. Of course there will be earnings, but how much and when? In general, the bad thing about a Roth IRA is not the tax differnce but the fact that it’s easier to take money out. It makes it too damn easy, thus dudes who can’t afford to take the money out will anyway, which is bad. For the filthy rich, a Roth is better. > > And yes, there are circumstances where you can’t get a conventional tax free contribution to a IRA, but then we are comparing apples to oranges. No, you are just assuming that the\*\*\* tax \*\*\*on your earnings would be greater than the difference in the tax on your contributions at investment and withdrawl. ---
**Author:** ![DrDeth](https://avatars.discourse-cdn.com/v4/letter/d/b487fb/32.png) [@DrDeth](https://boards.straightdope.com/u/DrDeth)\ **Post date:** [June 22, 2010, 5:07am UTC](https://boards.straightdope.com/t/what-use-is-an-ira/543070/43 "2010-06-22T05:07:22Z")
> [@Magiver](#): > > Even if you’re in a lower tax bracket you’re still stuck paying the tax plus a 10% penalty. If you need 10K to keep from going under then you’ll need to take 11,000 out of a 401K account plus the lower tax rate. That’s a lot of money to throw away in time of need. You’re objection revolves around people too weak minded to go through life without raiding a Roth IRA account. That is not an argument against planning for financial crisis. Indeed it is, which is why we have penalties in the first place. In any case, a IRA is _not_, NOT, **NOT** “planning for financial crisis” it is planning for retirement. ---
**Author:** ![DrDeth](https://avatars.discourse-cdn.com/v4/letter/d/b487fb/32.png) [@DrDeth](https://boards.straightdope.com/u/DrDeth)\ **Post date:** [June 22, 2010, 5:12am UTC](https://boards.straightdope.com/t/what-use-is-an-ira/543070/44 "2010-06-22T05:12:09Z")
> [@tim-n-va](#): > > No, you are just assuming that the\*\*\* tax \*\*\*on your earnings would be greater than the difference in the tax on your contributions at investment and withdrawl. Not always. Let us say you have a new career, few years out of college, looking forward to 30 years of work. Now sure, then your IRA earnings over 30 years would be much higher than your contributions, so you’d think- perfect time for a Roth, right? Not so, since a new job usually means you can barely afford any contributions at all, and the 28% savings now means you can save a extra 28%, which means in the end you’ll have a much bigger retirement. At the start of your career, you need to worry about how much you can afford to put in, and tax free NOW means more IN _now._ ---
**Author:** ![Magiver](https://avatars.discourse-cdn.com/v4/letter/m/4491bb/32.png) [@Magiver](https://boards.straightdope.com/u/Magiver)\ **Post date:** [June 22, 2010, 5:45am UTC](https://boards.straightdope.com/t/what-use-is-an-ira/543070/45 "2010-06-22T05:45:28Z")
> [@DrDeth](#): > > Indeed it is, which is why we have penalties in the first place. In any case, a IRA is _not_, NOT, **NOT** “planning for financial crisis” it is planning for retirement. You[re flat wrong. It’s stupid to put emergency money in a savings account or CD. It will earn nothing. Planning for the loss of a job involves placing money where it will earn the best return. If you never lose your job it’s a retirement fund. If you lose your job it’s the money that is suppose to be set aside for that specific event. I’ll add another scenario where it makes sense. I paid an additional $5,000 a year in COBRA HMO health insurance over a private policy. It makes financial sense to put that money in a ROTH where it will earn money and use it to back up the deductible in the event of an emergency. ---
**Author:** ![amarone](https://avatars.discourse-cdn.com/v4/letter/a/e0b2c6/32.png) [@amarone](https://boards.straightdope.com/u/amarone)\ **Post date:** [June 22, 2010, 11:59am UTC](https://boards.straightdope.com/t/what-use-is-an-ira/543070/46 "2010-06-22T11:59:54Z")
As long as you have the discipline to maintain it as an emergency fund and not keep dipping into it evry time you fancy a new TV, it is perfectly sensible to use a Roth as your emergency fund for the reasons **Magiver** says. It is an approach often suggested by personal finance experts. ---
**Author:** ![tim-n-va](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/tim-n-va/32/3001_2.png) [@tim-n-va](https://boards.straightdope.com/u/tim-n-va)\ **Post date:** [June 22, 2010, 12:06pm UTC](https://boards.straightdope.com/t/what-use-is-an-ira/543070/47 "2010-06-22T12:06:58Z")
> [@DrDeth](#): > > Not always. Let us say you have a new career, few years out of college, looking forward to 30 years of work. Now sure, then your IRA earnings over 30 years would be much higher than your contributions, so you’d think- perfect time for a Roth, right? Not so, since a new job usually means you can barely afford any contributions at all, and the 28% savings now means you can save a extra 28%, which means in the end you’ll have a much bigger retirement. At the start of your career, you need to worry about how much you can afford to put in, and tax free NOW means more IN _now._ You might be right but I can’t see someone, with finances that tight, making the IRA decision based on tax implications. Still, the point I made earlier and still maintain is that both a traditional IRA and a Roth IRA are viable options depending on individual circumstances and a blanket “no Roth” is just poor advice. ---
**Author:** ![DrDeth](https://avatars.discourse-cdn.com/v4/letter/d/b487fb/32.png) [@DrDeth](https://boards.straightdope.com/u/DrDeth)\ **Post date:** [June 23, 2010, 2:18am UTC](https://boards.straightdope.com/t/what-use-is-an-ira/543070/48 "2010-06-23T02:18:29Z")
> [@Magiver](#): > > You[re flat wrong. It’s stupid to put emergency money in a savings account or CD. It will earn nothing.. Where do you get the idea that a Roth earns more than other investments? You **do** know that your IRA -_Roth or not_- is simply invested- in Gov’t bonds, Mutual funds or other places where you could often place your cash yourself- _and_ not pay extra IRA fees. Yes, right now a traditional Savings account is not earning much. ---
**Author:** ![amarone](https://avatars.discourse-cdn.com/v4/letter/a/e0b2c6/32.png) [@amarone](https://boards.straightdope.com/u/amarone)\ **Post date:** [June 23, 2010, 3:52am UTC](https://boards.straightdope.com/t/what-use-is-an-ira/543070/49 "2010-06-23T03:52:42Z")
> [@DrDeth](#): > > Where do you get the idea that a Roth earns more than other investments? You **do** know that your IRA -_Roth or not_- is simply invested- in Gov’t bonds, Mutual funds or other places where you could often place your cash yourself- _and_ not pay extra IRA fees. What are you talking about? I get to choose exactly where my IRA funds are invested and I pay zero extra fees compared to an non-IRA account. ---
**Author:** ![DrDeth](https://avatars.discourse-cdn.com/v4/letter/d/b487fb/32.png) [@DrDeth](https://boards.straightdope.com/u/DrDeth)\ **Post date:** [June 23, 2010, 5:09am UTC](https://boards.straightdope.com/t/what-use-is-an-ira/543070/50 "2010-06-23T05:09:32Z")
> [@amarone](#): > > What are you talking about? I get to choose exactly where my IRA funds are invested and I pay zero extra fees compared to an non-IRA account. Some dudes often pay more in a managed retirement account, but certainly, YMMV. Ok, but do your Roth investments magically earn more ROI just because they are in a Roth? ---
**Author:** ![Magiver](https://avatars.discourse-cdn.com/v4/letter/m/4491bb/32.png) [@Magiver](https://boards.straightdope.com/u/Magiver)\ **Post date:** [June 23, 2010, 6:04am UTC](https://boards.straightdope.com/t/what-use-is-an-ira/543070/51 "2010-06-23T06:04:51Z")
> [@DrDeth](#): > > Some dudes often pay more in a managed retirement account, but certainly, YMMV. Ok, but do your Roth investments magically earn more ROI just because they are in a Roth? I listed savings accounts and CD’s which is traditionally where you store short term money for emergencies. When looking for a financial instrument that can be liquidated quickly and has the earning potential of a 401K (without the penalties) a Roth IRA is a logical choice. It is one of many financial instruments that should be in a portfolio. ---
**Author:** ![amarone](https://avatars.discourse-cdn.com/v4/letter/a/e0b2c6/32.png) [@amarone](https://boards.straightdope.com/u/amarone)\ **Post date:** [June 23, 2010, 11:07am UTC](https://boards.straightdope.com/t/what-use-is-an-ira/543070/52 "2010-06-23T11:07:51Z")
> [@DrDeth](#): > > Some dudes often pay more in a managed retirement account, but certainly, YMMV. Ok, but do your Roth investments magically earn more ROI just because they are in a Roth? Yes, because I don’t pay tax on the earnings. ---
**Author:** ![Ass\_For\_A\_Hat](https://avatars.discourse-cdn.com/v4/letter/a/ec9cab/32.png) [@Ass\_For\_A\_Hat](https://boards.straightdope.com/u/Ass_For_A_Hat)\ **Post date:** [June 23, 2010, 2:57pm UTC](https://boards.straightdope.com/t/what-use-is-an-ira/543070/53 "2010-06-23T14:57:10Z")
> [@amarone](#): > > If you disagree, find me actively managed funds where the ER when provided through 401(k)s is below the 0.18% of the Vanguard S&P 500 investor fund, and that you cannot get for yourself in an IRA. You’re still missing the point. I’ve argued that you can typically get the same funds at a lower expense ratio funds inside a 401(k) than you can in an IRA. You haven’t offered anything to dispute this. Your counter argument seems to be that an IRA is cheaper because you could choose passively managed funds. Why do you assume that you can’t choose choose a passively managed fund in the 401(k), where you could be in an institutional share class? I chose Vanguard Index 500 as my example for a reason. If I had to pick the most commonly held fund among the 401(k) plans that my firm administers, that would probably be the one. Low cost investments do exist inside 401(k) plans. They may not in yours. Sorry if that’s the case. BTW, the appropriate comparison on American Funds would have been their R shares. R6 is their lowest cost share class. American Funds only offers their R shares to retirement plans. ---
**Author:** ![DrDeth](https://avatars.discourse-cdn.com/v4/letter/d/b487fb/32.png) [@DrDeth](https://boards.straightdope.com/u/DrDeth)\ **Post date:** [June 23, 2010, 5:55pm UTC](https://boards.straightdope.com/t/what-use-is-an-ira/543070/54 "2010-06-23T17:55:29Z")
> [@amarone](#): > > Yes, because I don’t pay tax on the earnings. Well, then a traditional IRA has greater ROI (at least for 5-10 years, depending) as the contributions are tax free. ---
**Author:** ![amarone](https://avatars.discourse-cdn.com/v4/letter/a/e0b2c6/32.png) [@amarone](https://boards.straightdope.com/u/amarone)\ **Post date:** [June 23, 2010, 6:27pm UTC](https://boards.straightdope.com/t/what-use-is-an-ira/543070/55 "2010-06-23T18:27:17Z")
> [@DrDeth](#): > > Well, then a traditional IRA has greater ROI (at least for 5-10 years, depending) as the contributions are tax free. This recent sequence of posts is about using a Roth IRA as an emergency fund. A traditional IRA is unsuitable because of withdrawal penalties. As for whether traditional IRAs are better or worse vehicles for investments, that is something I have not offered an opinion on. It varies according to circumstances, some of which we can only guess (future taxes). ---
**Author:** ![amarone](https://avatars.discourse-cdn.com/v4/letter/a/e0b2c6/32.png) [@amarone](https://boards.straightdope.com/u/amarone)\ **Post date:** [June 23, 2010, 6:35pm UTC](https://boards.straightdope.com/t/what-use-is-an-ira/543070/56 "2010-06-23T18:35:07Z")
> [@Ass\_For\_A\_Hat](#): > > You’re still missing the point. I’ve argued that you can typically get the same funds at a lower expense ratio funds inside a 401(k) than you can in an IRA. You haven’t offered anything to dispute this. Your counter argument seems to be that an IRA is cheaper because you could choose passively managed funds. Why do you assume that you can’t choose choose a passively managed fund in the 401(k), where you could be in an institutional share class? > > I chose Vanguard Index 500 as my example for a reason. If I had to pick the most commonly held fund among the 401(k) plans that my firm administers, that would probably be the one. Low cost investments do exist inside 401(k) plans. They may not in yours. Sorry if that’s the case. > > BTW, the appropriate comparison on American Funds would have been their R shares. R6 is their lowest cost share class. American Funds only offers their R shares to retirement plans. I do get it and I have not attempted to dispute that you can get access to cheaper classes of fund in a 401(k) because I am not disputing it. I even offered you another example myself. My point is that for very many people that benefit is swamped by their 401(k) plans not offering lower ER funds, and by 401(k) fees as most plans take their admin fees out of the participants accounts. In my own personal case, my 401(k) offers cheap funds and does not take administration fees out of my plan, so my plan is pretty much as cheap as I could get in an IRA. That is because I chose the plan for the company. It was my research at that time that taught me how expensive 401(k) plans are in general. I know not all of them are (e.g. mine. And maybe yours, from what you say - what are the admin fees?), but very many are and people should understand better all the possible fees that they may be paying rather than just assume they are getting a good deal because they can get institutional classes of funds. ---
**Author:** ![Ispolkom](https://avatars.discourse-cdn.com/v4/letter/i/e47774/32.png) [@Ispolkom](https://boards.straightdope.com/u/Ispolkom)\ **Post date:** [June 23, 2010, 7:11pm UTC](https://boards.straightdope.com/t/what-use-is-an-ira/543070/57 "2010-06-23T19:11:24Z")
> [@Ass\_For\_A\_Hat](#): > > You’re still missing the point. I’ve argued that you can typically get the same funds at a lower expense ratio funds inside a 401(k) than you can in an IRA. You haven’t offered anything to dispute this. Your counter argument seems to be that an IRA is cheaper because you could choose passively managed funds. Why do you assume that you can’t choose choose a passively managed fund in the 401(k), where you could be in an institutional share class? You’re talking about better 401(k) plans that some that I have encountered, then. My wife’s last two jobs featured 401(k) plans that offered poor fund choices with high expense ratios. There were no index funds offered, for instance. If it were not for the employer match (and the higher contribution limit), she would have been better off with an IRA. I assume that her employers chose these plans to save money on 401(k) plan administration. Whether they were aware that this was done by foisting higher expense costs onto their employees, I don’t know. ---
**Author:** ![amarone](https://avatars.discourse-cdn.com/v4/letter/a/e0b2c6/32.png) [@amarone](https://boards.straightdope.com/u/amarone)\ **Post date:** [June 23, 2010, 11:32pm UTC](https://boards.straightdope.com/t/what-use-is-an-ira/543070/58 "2010-06-23T23:32:27Z")
> [@Ispolkom](#): > > You’re talking about better 401(k) plans that some that I have encountered, then. My wife’s last two jobs featured 401(k) plans that offered poor fund choices with high expense ratios. There were no index funds offered, for instance. If it were not for the employer match (and the higher contribution limit), she would have been better off with an IRA. When you are in a poor plan, the longer you are in the less valuable the match becomes because the growing (one hopes) plan balance all attracts high fees. For example, let us say someone earns $100k, has a plan with $200k, gets $3k per year from the match but pays 2% in fees over and above what an IRA would cost (some small plans are in the 2 - 3% or even more range). Now this person gets $3k in the match, and loses $4k (and rising) in excess fees. From a purely 401(k) perspective, it would make sense to quit the job and roll over the 401(k) into a low cost IRA. [Previous page](https://boards.straightdope.com/t/what-use-is-an-ira/543070.md?page=2)