A Facebook question from a friend:
Should I have a Roth IRA or a traditional IRA?
The short answer: Roth? Absolutely not.
The long answer: Having a Roth IRA means that you are essentially volunteering to pay taxes now—taxes that you may never have to pay in the future. In my humble opinion, Roth IRAs are a scam to trick you into thinking that it is in your best interest to pay taxes now and—hopefully—you will do better later.
That line of thinking is folly.
A Roth IRA guarantees that the IRS gets their money from you now—money that they may never get in the future.
In 1997, the government allowed people to begin converting their regular IRAs to Roth IRAs. The stock market was doing incredibly well and people all thought, “Great! I used to have $10,000 and, but now I have $100,000, thanks to the dot-coms. Since I’ll soon have $1,000,000, it’s better to pay the $30,000 in taxes now, rather than $300,000 that I’ll owe when my stock is worth $1,000,000.”
But then the market crashed in 2000, the market fell 60 percent, and people who had $100,000 now had only $28,000—and the government already got $30,000 from the original stock value of $100,000 ($100,000 less $30,000 in taxes = $70,000 less 60 percent = $28,000)
It was so bad that the government made an exception that allowed these people to reverse the converted Roth back in to a traditional IRA—but with the caveat that they had to do it over a two-year period so that the government did not have to refund the $30,000 all at once.
Don’t believe me? Check out irs.gov. It’s all on there.
The Roth has been around now for fifteen years, and I have yet to see a Roth IRA account that has made anyone wealthy or even rich. And I have seen thousands of them!
Moreover, I see hundreds of people who are now retired and legally pay no taxes on their IRA withdrawal income.
Here’s how. First, two questions:
1.) Are you going to take your personal exemption of $3,700 this year?
2.) And are you going to take your standard deduction of $5,800 this year?
I am sure the answer is yes—why would you pass up a $9,500 ($3,700 + $5,800) deduction on your taxes?
So, assuming a single guy, fifty-nine-years old, has no income for 2011. But for the tax year 2010, he contributed a $5,000 deductible traditional IRA.
Now he meets a woman and takes her on a vacation to Jamaica. Now he wants to pull out $9,500 out of his IRA for the trip.
What does he pay in taxes, assuming he had no other income for 2011?
Answer: Zero! None! Nada!
He simply uses his total $9,500 mentioned above to zero out his income of $9,500. No problem!
But if he had done in a Roth IRA in 2011, he would have already paid at least $1,000 extra in taxes (using the lowest tax brackets for federal and Minnesota).
Please—if anyone knows of a Roth IRA that has done well since they were introduced fifteen years ago, let me know.
But I doubt it