Roth IRA

[ArrestMeRedZ]

Effectively, if you follow certain rules, the limits don't really exist.
For instance, your max deductible IRA contribution this year if under 50 years old is $6,000. You can contribute $106,000 to your IRA if you have it, have the earned income and want to, but only $6,000 is deductible.
That same base $6,000 could be contributed to a Roth IRA instead if your income is under a certain amount. But even if your income was above the limits set, you can roll as much as you want from your regular IRA into your Roth IRA.
In the example above, if you rolled your excess (after tax) $100,000 IRA contribution into your Roth, there would be no additional taxes owed. You could roll the whole $106,000 into the Roth, but you would owe income tax on the $6,000.

This backdoor Roth contribution is why the limits are only pretend. A few very rich people have taken advantage of the current law, and as mentioned above, it may change. But as of now, it is still available.

 

[JeffKeryk]

I am pretty sure I do not understand the details in a Roth IRA. If it were that good, why wouldn't everyone do it? And wht wouldn't Schwab and Fidelity advise me to do so?

 

[Wolf359]

I am pretty sure I do not understand the details in a Roth IRA. If it were that good, why wouldn't everyone do it? And wht wouldn't Schwab and Fidelity advise me to do so?

You probably make too much money. Limit is 125-140k. You should look into a back door Roth IRA conversion before it gets outlawed.

 

[wag123]

There's a saying, "The 1st million is the hardest..."

And the saying that goes with it... "It takes money to make money"

 

[ATex7239]

I am pretty sure I do not understand the details in a Roth IRA. If it were that good, why wouldn't everyone do it? And wht wouldn't Schwab and Fidelity advise me to do so?

In all fairness go look at the average and median retirement account stats in the US. It’s pretty pathetic. I wouldn’t hang your hat on what the masses are doing in this particular area.

 

[JeffKeryk]

In all fairness go look at the average and median retirement account stats in the US. It’s pretty pathetic. I wouldn’t hang your hat on what the masses are doing in this particular area.

No that's scary.

 

[PimTac]

It's not a theory, it's a fact. The tax code has changed over time. I don't care about Warren Buffett says but if he really wants to pay more taxes I'm supremely confident that the government will take his money. No one is stopping him.

This is a key point. The Buffett can write a check anytime to Uncle Sam if he is feeling so guilty but he hasn’t yet.

The Buffett is a political hack.

 

[Dave Hess]

Buffett and Munger won’t be around for that much longer.

I do agree with any wealthy person trying to pay the least amount of taxes as possible.

 

[ATex7239]

Buffett and Munger won’t be around for that much longer.

I do agree with any wealthy person trying to pay the least amount of taxes as possible.

Why just the wealthy? I don’t know a single person, rich or poor, clamoring to pay more than absolutely necessary. And rightfully so. Some are just more honest about it than others.

 

[JeffKeryk]

Why just the wealthy? I don’t know a single person, rich or poor, clamoring to pay more than absolutely necessary. And rightfully so. Some are just more honest about it than others.

Sometimes you find yourself in a middle ground area. You don't want to pay the big bucks for good tax advice and end up following a less beneficial strategy.
I hate it when that happens.

 

[wpod]

Fortunately the super rich have better accountants and investment advisors than the IRS! That’s why many big corporations pay very little to nothing in income taxes.

They have cost of operation deductions and with companies a tax is the cost of dong business and it has to be paid for so it is factored into the cost of their products.

 

[Wolf359]

They have cost of operation deductions and with companies a tax is the cost of dong business and it has to be paid for so it is factored into the cost of their products.

The rich also invest in long term products that are subject to lower tax rates than people who are working a regular W-2/1099 job. Long term capital gains are much lower than the regular income tax bracket. Like the top bracket is 37% for regular income but just 20% for long term capital gains. So Buffet only gets paid about 100k a year but if he needs money, he can sell some stocks and he doesn't have to pay any taxes on the gains until he sells unlike regular W-2/1099 income which you have to pay every year.

 

[JeffKeryk]

The rich also invest in long term products that are subject to lower tax rates than people who are working a regular W-2/1099 job. Long term capital gains are much lower than the regular income tax bracket. Like the top bracket is 37% for regular income but just 20% for long term capital gains. So Buffet only gets paid about 100k a year but if he needs money, he can sell some stocks and he doesn't have to pay any taxes on the gains until he sells unlike regular W-2/1099 income which you have to pay every year.

Part of the C level salary package is lifetime tax preparation. And I ain't talking Turbo Tax...
Lemme tell ya, I was offered a free 1 hour advice session once. What a building; what an office!
The gal told me she has a staff to handle "different parts" of the tax advice...

 

[Wolf359]

Oh here's that article on the back door Roth. I guess there's a guy out there with 5 billion in his Roth and he won't have to pay any taxes on it when he takes it out. I guess he was able to buy paypal shares when they were 30 cents and later it got bought out at $19 a share. He also bought other stocks like facebook with those shares to jump up to 5 billion.

https://www.forbes.com/sites/sarahh...-save-for-retirement-according-to-new-report/

 

[ArrestMeRedZ]

I am pretty sure I do not understand the details in a Roth IRA. If it were that good, why wouldn't everyone do it? And wht wouldn't Schwab and Fidelity advise me to do so?

Jeff, I have a couple of cynical theories for the reasons the big houses don't advise more Roth conversions.
The first is that before tax contributions to retirement accounts tend to be larger. The $6k you have available to contribute to an ordinary IRA may be only $5.4k available to contribute to a Roth after you pay tax on it at the 10% rate (notional number). Being pre tax, ordinary IRAs/401ks tend to be larger. Larger accounts pay more to the house, even if it's in low fee ETFs.
The second theory is that if all funds are in one [larger] account, the likehood of someone qualifying for and using a managed account (which the account executives at Fidelity push) is much higher. It's just good business practice to not encourage behavior that will reduce house commissions.
I have a co-worker that earns rental income, Air Force retirement income, and a 6 figure salary. His wife is an IRS enrolled agent. She does all the family finances. When he told me she makes him max out the Roth 401k instead of the ordinary 401k I knew I might have been doing it wrong not doing the Roth.

 

[wwillson]

While that may be true the real reason why they pay less in taxes by default is because they contribute to more of what the government wants, investment and development. The less money that they are assessed through taxation the more they can invest and develop thus leading to more jobs and more tax revenue from consumers. If there was nothing for consumers to consume due to lack of investment and development than the economy starts going backwards. So if anyone thinks it's unfair I would ask you to consider who should be paying more in taxes, those on the giving end or those on the receiving end? The more that those on the paying end pay the less that they would be able to pay to those on the receiving end.

I couldn't have said it better myself.

The reason companies don't pay much for taxes, is because they carefully reinvest up to the point that they can deduct and show no accounting profit. This is fantastic, because it shoves so much productive money back into the economy. I don't know of any company that sits on a pile of cash from profits and hands uncle same his cut at the end of the year. If they do, there is no way they can compete, because their competition reinvested and frankly they aren't helping the economy grow.

 

[Wolf359]

I couldn't have said it better myself.

The reason companies don't pay much for taxes, is because they carefully reinvest up to the point that they can deduct and show no accounting profit. This is fantastic, because it shoves so much productive money back into the economy. I don't know of any company that sits on a pile of cash from profits and hands uncle same his cut at the end of the year. If they do, there is no way they can compete, because their competition reinvested and frankly they aren't helping the economy grow.

You do realize that Berkshire Hathaway is sitting on top of 149 billion in cash right? And instead of reinvesting the money, lots of company just buy back their stock with profits to boost up the price instead of investing it.

https://www.business-standard.com/a...ith-149-2-billion-on-hand-121110700092_1.html

 

[Blagoje]

You do realize that Berkshire Hathaway is sitting on top of 149 billion in cash right? And instead of reinvesting the money, lots of company just buy back their stock with profits to boost up the price instead of investing it.

https://www.business-standard.com/a...ith-149-2-billion-on-hand-121110700092_1.html

What exactly do you think that people that have this much money actually do with it? Do you think that they have hundreds of stacks of $100 bills that fill up some massive bank vault? Since we're talking about avoiding taxes I can tell you that THEY DO invest that money into things like real estate so that they avoid having to pay taxes on it. It is their money so they can do whatever they want with it, get over it.

Like I alluded to earlier, it amazes me how many people flip out on me when it comes to the details of car buying and how they feel like they're entitled to discounts and whatever else but God forbid wealthy people be able to cut themselves a better deal and do whatever they want to do with their money.

IT'S JUST NOT FAIR!!!

I WANT TO IMPOSE MY RULES ON OTHER PEOPLE BUT NOT HAVE THEM APPLY TO MYSELF, WELCOME TO COMMUNISM

 

[Wolf359]

What exactly do you think that people that have this much money actually do with it? Do you think that they have hundreds of stacks of $100 bills that fill up some massive bank vault? Since we're talking about avoiding taxes I can tell you that THEY DO invest that money into things like real estate so that they avoid having to pay taxes on it. It is their money so they can do whatever they want with it, get over it.

Like I alluded to earlier, it amazes me how many people flip out on me when it comes to the details of car buying and how they feel like they're entitled to discounts and whatever else but God forbid wealthy people be able to cut themselves a better deal and do whatever they want to do with their money.

IT'S JUST NOT FAIR!!!

I WANT TO IMPOSE MY RULES ON OTHER PEOPLE BUT NOT HAVE THEM APPLY TO MYSELF, WELCOME TO COMMUNISM

You should read carefully what I was replying to and what I said and didn't say. The previous poster made a point and I just posted something that didn't exactly prove their point. Not that I'm for or against a particular point.

 

[PWMDMD]

They want to keep wealthy people from exploiting this tax loophole.

NOTE - You can convert your IRA to a Roth, but you have to pay income tax on these funds. People typically do this once they retire and are in lower tax brackets.

Or if you have a long time before retirement it can also make sense as it will reduce your taxable income after retirement. I do a $6K tradition IRA and a spousal traditional IRA for another $6K every year and then do a backdoor Roth conversion. While we pay a high income tax now, we aren't retiring for at least 25 years and the 25 years of tax-free growth will easily make up for the increased income tax now. Also, the idea is to have a mixture of taxable and non-taxable retirement sources to lower our tax burden after retirement - ex. If we need $100k per year to live we want to pull $50K from taxable sources (401k) and the other $50K for the Roths so we're only taxed on $50K.

Some say it does not make sense if you're going to retire in 5-10 years as there isn't enough time for growth BUT remember all your retirement planning should not be for day 1 of retirement! If you're going to live +20 years in retirement, your plan now should include those 20 years of potential growth for some portion of your money. So for us, we may be doing things now that don't make as much sense in 20 years but they do in 40-45 years.