Roth IRA

[mjk1967]

Hello,

I am sure there is a very simple answer to this question (google didn't reveal): given where we are going with funding retirements, compared to the past, why is there a contribution limit? You would think they would encourage people to fund it as much as possible.

TY

 

[Knerml12]

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.

 

[Wolf359]

Because they're tax free, they want to limit the amount of a tax discount given to people. Contribution limits also increase once you hit 50.

Also while there's a max for your IRA, you can also invest in a 401k if available or a SEP-IRA if self employed in addition to an IRA if your income isn't too high. And outside of that, you can also invest in a regular taxable account, but because you have to pay taxes every year, the returns won't be as high. One way to avoid the taxes would be to buy ETFs or shares that don't spit out dividends or taxable capital gains. For instance, Berkshire Hathaway which Warren Buffet runs doesn't pay dividends so if you don't sell and hold onto for years, you only get hit with taxes when you sell.

 

[eljefino]

The really good loopholes have limits. If you can manage to hit them you're doing better than a lot of the populace.

If you have kids you can pack their 529 plans as well.

 

[Wolf359]

There's some big loop holes about converting 401ks or IRAs into Roth IRA called a back door Roth conversion. There's some billionaires out there that have billions in their Roth IRA so there won't be any taxes when they sell. I think they bought warrants or had stock options that vested while it was in the 401k and they converted it to a Roth before the value shot way up. I think they're closing that loophole next year.

 

[ATex7239]

Hello,

I am sure there is a very simple answer to this question (google didn't reveal): given where we are going with funding retirements, compared to the past, why is there a contribution limit? You would think they would encourage people to fund it as much as possible.

TY

Because of the tax advantages. Uncle Sugar wants his

 

[bullwinkle]

Because of the tax advantages. Uncle Sugar wants his

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.

 

[ATex7239]

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.

I would do the exact same thing if I was uber rich and stood to gain millions. Wouldn’t you?

 

[Wolf359]

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.

Well doesn't that mean if you're not super rich, it's unfortunate for you? I think Warren Buffet goes on about how he's in a lower tax bracket than his secretary.

 

[JeffKeryk]

Well doesn't that mean if you're not super rich, it's unfortunate for you? I think Warren Buffet goes on about how he's in a lower tax bracket than his secretary.

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

 

[Blagoje]

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.

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.

 

[Wolf359]

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.

It's an interesting theory. But how do you explain how tax rates were much higher in the 50's? And what effect does lobbyists that the rich and corporations can easily afford advocating for lower taxes for themselves play in your theory? The poor don't have any money to hire lobbyists for their positions. And why does even Warren Buffet say that his tax rate should be higher than his secretary?

 

[Gyro Gearloose]

The reason for Roth IRA limits may be because you never have to take a withdrawal on a Roth IRA. Cap gains, dividends, and trading profits can continue to accumulate until you die (although there isn't much point in being the richest guy in the cemetery) and then your heirs get the profits tax free. Regular IRA's and 401K accounts have required minimum withdrawals starting at age 72.

If you work for a company with a Roth 401K you can contribute far more to a Roth 401K than a Roth IRA (20,000 vs 6,000) and the tax treatment on the money is the same, but you have to take minimum distributions starting at age 72.

I agree with your original statement however. If you don't work for a company with a 401K your retirement savings options are pretty limited with IRA accounts. I'm very worried about my son who is self employed.

 

[UG_Passat]

Because they're tax free, they want to limit the amount of a tax discount given to people. Contribution limits also increase once you hit 50.

Technically, it's not tax free. your contributions to the Roth IRA are after you have been taxed on your taxable income.

Unlike a 401(k), which is pre-taxable income, so its contributions are not taxed going in. It is taxed when you withdraw from it (along with its growth)

Roth IRA since it has already been taxed, when you withdraw from it, it doesn't get taxed a second time.

 

[Dave Hess]

The reason for Roth IRA limits may be because you never have to take a withdrawal on a Roth IRA. Cap gains, dividends, and trading profits can continue to accumulate until you die (although there isn't much point in being the richest guy in the cemetery) and then your heirs get the profits tax free. Regular IRA's and 401K accounts have required minimum withdrawals starting at age 72.

If you work for a company with a Roth 401K you can contribute far more to a Roth 401K than a Roth IRA (20,000 vs 6,000) and the tax treatment on the money is the same, but you have to take minimum distributions starting at age 72.

I agree with your original statement however. If you don't work for a company with a 401K your retirement savings options are pretty limited with IRA accounts. I'm very worried about my son who is self employed.

Roth IRA and brokerage account can be worth big money in the future without having a 401K.

It would be nice if IRAs had a $50,000 max yearly contribution limit.

.

 

[Dave Hess]

Hello,

I am sure there is a very simple answer to this question (google didn't reveal): given where we are going with funding retirements, compared to the past, why is there a contribution limit? You would think they would encourage people to fund it as much as possible.

TY

To keep wealthy people from sheltering so much future gains and those gains will never be taxed when they eventually die.

.

 

[Spector]

The belief behind a Roth is that taxes in the future will be more than taxes today. In my case, the taxes (or tax bracket) for me today is lower than when I was contibuting to traditional IRAs working. So, I don't believe the Roth would have been a better route in my case. Not only is there a limit on how much you can contribute but that is also limited by gross income, above a certain amount and the excess of you contribution is taxed. You put in 6,000 for 2021 but earn too much and the excess is taxes at 6% Of course, the other advantage to a Roth is that you do not have to take RMDs from them, it can just sit there. That is a valid point for a Roth.

 

[supton]

IMO a Roth can be part of one’s financial plan, in that it could be considered part of an emergency fund, since you can pull the principal with penalty (assuming losses are not bad). Its not something ones wants to do, but it may be better than having all of ones emergency fund in a savings account making zip. Like, after getting 3 months in savings, put the rest into a Roth.

 

[Blagoje]

It's an interesting theory. But how do you explain how tax rates were much higher in the 50's? And what effect does lobbyists that the rich and corporations can easily afford advocating for lower taxes for themselves play in your theory? The poor don't have any money to hire lobbyists for their positions. And why does even Warren Buffet say that his tax rate should be higher than his secretary?

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.

Just so you know my position I don't think that ANYONE should have to pay taxes and I commend anyone that avoids paying them. Now someone might read that and think that's not fair but I assure you that they pay every last bit of taxes and they are of the mindset that if they pay taxes everyone else should have to become they do. People complain about buying cars and are always demanding when it comes to discounts and the like, I see taxes as being no different. I don't want to pay for a new car anymore that I absolutely have to and I don't want to pay any more taxes than I absolutely have to.

 

[Wolf359]

The reason for Roth IRA limits may be because you never have to take a withdrawal on a Roth IRA. Cap gains, dividends, and trading profits can continue to accumulate until you die (although there isn't much point in being the richest guy in the cemetery) and then your heirs get the profits tax free. Regular IRA's and 401K accounts have required minimum withdrawals starting at age 72.

If you work for a company with a Roth 401K you can contribute far more to a Roth 401K than a Roth IRA (20,000 vs 6,000) and the tax treatment on the money is the same, but you have to take minimum distributions starting at age 72.

I agree with your original statement however. If you don't work for a company with a 401K your retirement savings options are pretty limited with IRA accounts. I'm very worried about my son who is self employed.

If he is self employed, he can just open up a SEP-IRA. I believe you can also convert it to a Roth at some point but not sure if that's going away. You can contribute up to 25% of income to a SEP-IRA and I think the max for 2021 is 57k. It's pretty simple and straightforward to do. I did mine at Fidelity, they can walk you through it, but you just have to read the directions and send in the money.