2 dumb excuses for not having a Roth IRA

by Nick on March 27, 2012

 

Oh man, you all know how much I love Roth IRAs, right?  Well Jeff Rose, a CFP, snazzy dresser and fellow Cross-Fitter, who blogs over at Good Financial Cents, reached out to what turned into over 140 superstar bloggers (and me too) to start a “movement” to spread Roth IRA awareness around the Interwebs.

You can check out his reasons in his post but basically he was speaking went to his alma mater and a bunch of seniors had no idea what a Roth IRA was.  “No es bueno,” if you ask me.  So I quickly jumped on board to further spread the word to both of my readers… wah wah wah

Anyhow, I can’t tell you how excited Jeff was to have me on board.  I mean, he just couldn’t contain himself – how can you call it a movement without Step Away from the Mall, right?!  ;)  Haha!  Seriously though – there are some pretty “pimp daddy” bloggers on the list, so check out Jeff’s site for what I assume will be a bunch of more interesting and informative posts from some kick-a$$ bloggers.  In the meantime, enjoy my two cents.  Keep the change.

Because I linked to my top three reasons why I love Roth IRAs above (and here again) for you to check out at your leisure, I want to focus today on two pretty annoying excuses that silly, underachieving and just average-looking people use for not investing in a Roth IRA and why I ignore that “dumbassity” and pile as much money as I can (currently $10,000 per year) into Roth IRAs.  (If my work ever offered a Roth 401(k) I would keep piling in the money there, too.)

For brief background, the prettiest thing about a Roth IRA is that you don’t get a tax deduction for putting money in.  (You read that right).  Because you don’t get a tax deduction on the money, the government has agreed to never tax the money again (even the growth) as long as you “respect the Roth laws” (basically, leave the money in until you’re 59 1/2 and you’re good to go…).  So you pay taxes on the 5 grand now and that’s it.

Other retirement accounts like traditional IRAs and 401(k)s give you a tax deduction now for what you contribute.  But when you take money out in retirement you’re taxed at whatever your ordinary income rate is at that time for all of the money – growth, too.  So if you put $5,000 in you get a tax deduction for $5,000, which if you’re in the 25% tax bracket saves you $1,250 in taxes this year.  But you then pay income tax on all of the money, including growth, when you take the money out.

So some silly folks think it’s a dumb idea to invest in Roth IRAs because:

1. “I’ll be in a lower tax bracket in retirement when I take the money out, so I would rather pay them later.”

Really?  First, how do you know?  Second, if you really think you’ll be in a lower tax bracket in retirement you’re not trying hard enough.  Seriously.  I’m no tax expert and hate paying taxes as much as the next guy, but in order to be in a lower tax bracket in retirement you basically need to be broke or have all of your money in tax sheltered accounts (like Roths…)!  Great job aiming low, jerks!  :)

Also, even assuming you might be in a lower “tax bracket” you have no way of knowing what the “tax rate” for each bracket will be.  Your taxable income could be half of what it is now, but the tax rate for it might be even higher!  (We do have a bunch of debt to pay back… using tax dollars, right?  So if you were to bet which direction would you think tax rates would go over the long term?  I thought so.)

This is why I ignore all of this “I’ll be in a lower tax bracket when I retire” noise.  Just spend less than you make and pile as much money as you can into savings and investments.  Do this for decades and you’ll be rocking it.  And you can count me as one guy making sure at least some of my pile will never be taxed again.  Don’t let some hypothetical concern (that’s based on very little logic) about your “tax bracket” twenty years from now hold you back.

I’d much prefer to have tax certainty than some crazy “what if” scenario.  And when I ran the numbers, if I stick $5,000 in a Roth IRA every year and invest in an index fund that mirrors what the Dow Jones Industrial Average returned for the twenty years ending on December 31, 2011, including dividends, I’ll be staring at a cool million bucks 33 years down the road.  That’s right, an auto-pilot million dollars (see here for details).  Of course, what happened in the past can never predict what will happen in the future, but you get the point… I’ll take “never be taxed again” over “what if I’m in a lower tax bracket” any day of the week.

And here’s the second dumb excuse to not have a Roth IRA:

2. What if the government changes the Roth rules?

What if they don’t, jerk?  But to address the question, I highly doubt they will.  You already paid taxes on the money you put in and it would be an incredible mess to undo what they did.  Also, until very recently when they lifted the income limits for converting a traditional IRA to a Roth, pretty much everyone who invested in Roth IRAs was a “middle-income American.”  Good luck getting reelected if you start taxing Roth distributions… Get the point?  Roth taxes would be very far down the list to mess with if you ask me.

So stop the excuses and just start saving.  The only real negative that I can see with a Roth IRA is that they only allow $5,000 per person or $6,000 if you’re over 50.  That’s right – the worst part about the Roth is that you can’t put enough in it!

Readers:  Have you maxed out your 2011 Roth IRA?  If you haven’t filed your taxes yet, there’s still time! Now get saving.  Who’s with me?

Ok – now that you know two crap excuses for not having a Roth IRA, you’ll be equipped to tell the doubters why they’re just plain wrong!

Until next time, put your credit card down and slowly step away from the mall!

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{ 30 comments… read them below or add one }

Money Infant March 27, 2012 at 10:01 am

Plus the government does have a Constitutional mandate not to break it’s contracts…which is what they would be doing if they tried to change the rules of the Roth. A pretty sure bet that the Supreme Court would shoot down any proposed chages as well. Nice having you in this ballin’ group of IRA Movement posters, it wouldn’t have been the same without SAFTM!
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Nick March 27, 2012 at 5:00 pm

Yeah, it would totally be a mess if anyone tried to implement a Roth rule change. Haha… well I’m no MC Money Infant, but I got plenty to say…
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Kari@Small Budget Big Dreams March 27, 2012 at 10:23 am

I think all of your points make perfect sense (but I’m also a firm believer in the benefits of the Roth). I can’t understand how anyone could actually use the logic of being in a lower tax bracket. Like you said, I think that it’s highly likely that taxes will go up, not down by the time I retire. Also, even if I’m in a lower tax bracket (and I hope I’m not), I’d rather have the security of knowing the money is there and won’t be taxed again or subject to any sort of rule changes in the future. I sort of look at it like a fixed mortgage versus a variable. Maybe the variable rates are a little lower now, but I’m not willing to take that chance that 5 years from now they’ll stay low.
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Nick March 27, 2012 at 5:04 pm

Yeah, the way I see it, if the rules or facts change at some point I can always adapt from then on. So I play the rules as they come. And I’ll take the rate certainty of a fixed mortgage too… a lot can happen in 5 years.
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Nell @ Housewife Empire March 27, 2012 at 2:12 pm

Good reasons to can the excuses. Mine is that the good ole IRS won’t let me open one since I file separately, but I’m filing jointly next year and opening mine – finally!!
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Nick March 27, 2012 at 5:07 pm

Sent you a little note over at Housewife Empire… maybe a conversion would work. But definitely talk with a C.P.A. instead of just an A.S.S. like me :)
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Michelle March 27, 2012 at 2:29 pm

I’ve never heard those excuses. You’re right…those people are dumb jerks :p (Sorry, dumb jerks…but you’re kind of askin for it!)
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Nick March 27, 2012 at 5:08 pm

Haha! They certainly are!
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CultOfMoney March 27, 2012 at 2:50 pm

I actually just got things sent in for the 2011 tax year (I’m late, I know) for both my wife and I. And there is something to say about the lower tax brackets. If you could pay 25%+ tax now, or 10% or 15% tax later, it would probably be worth it. Granted it would tax effort and planning, but there is an arguement. Ordering of income in retirement is a big job, and it will get exciting for many. Remember, only pay the taxes you’re legally required to.
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Nick March 27, 2012 at 5:10 pm

Better late than never, Karl. I think I’m just way too far away from 59 1/2 to be able to predict/guess what the rates would be. Maybe during a more stable economic time and with only a handful of years left I could do the apples to apples, but for now I’m banking on tax certainty. I year you on only paying taxes that are required though… there is a chance I could end up paying a few more bucks on this $10,000 though.
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WorkSaveLive March 27, 2012 at 2:53 pm

I love your first argument, Nick. A lower tax bracket in retirement was one of the old reasons CPAs and financial professionals recommended the Traditional IRAs. But I agree with your assessment 100%:

1) How do you know taxes won’t go up? The better question is, do you really think they won’t? If so…I think you’re crazy.

2) If you are in a lower tax bracket in retirement then you best hope SS is still around…because if it’s not that means you’re going to be struggling a bit.
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Nick March 27, 2012 at 5:12 pm

Thanks Jason. And yeah, I think in my typical meek style (haha) I was being a bit diplomatic… But yeah, if I were a betting man (I am) my money is on taxes rising between now and then. I’d also bet that SS will be “around” but I’m not sure it will be “around me” or what it will look like.

I guess in that sense I’m just trying to pile as much money as possible to not need any help from the tax man or SS to live comfortably in retirement.
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Christopher @ This That and The MBA March 28, 2012 at 9:50 am

Nooo way taxes are not going to go up over the next 30 years!

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Nick March 28, 2012 at 10:43 am

I certainly hope you’re right, Christopher! But from what I understand income taxes (which is what traditional IRAs would be subject to) are at relative “lows” percentage-wise historically and we have a pile of debt as a country. So while I’m not Debbie Downer or “the sky is falling” sillyman, I lean the other way… Sure they can raise other taxes and get rid of some deductions – or switch to a fair tax or something, but who knows.

Another reason I like the tax certainty part of a Roth. I do max out a 401(k), too, so I’m “tax diversified” for what it’s worth…
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Well Heeled Blog March 28, 2012 at 10:14 am

I’ve been contributing to the Roth for 7 years straight now… just $2K more and I will have maxed it out for 2012. I joke that it’s one of my longest relationships. Hopefully it’ll remember me when I’m old!
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Nick March 28, 2012 at 10:46 am

Way to go! You’re 60% of the way through only 25% into the year. Good stuff. If you’re maxing out Mr. Roth for so long, I’m sure he’ll treat you nice well into your golden years, buying you all the heels your 60-yer-old legs can handle! :)
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MoneySmartGuides March 28, 2012 at 12:12 pm

I hate the argument of future tax brackets in retirement. As you mention, we don’t know what taxes will be in the future. With government spending like it is today, taxes could be much higher. My advice is to not worry about this and invest. Don’t worry about things that are 30+ years in the future.
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Nick March 28, 2012 at 7:40 pm

I’m with you! And I also try not to worry about things I really can’t control. As things change I’ll change. And as things become clear or more certain I’ll try and be proactive.
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Southland Property Management March 28, 2012 at 2:32 pm

Haha !! The dumb excuses for not having a Roth IRA are actually so dumb :P Cheers !!
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Nick March 28, 2012 at 7:40 pm

There are plenty more where these came from, too…
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MyMoneyDesign March 28, 2012 at 5:07 pm

I love Number 2! I’ve read that excuse so many times before and thought exactly what you wrote. I’m maxed for 2011!
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Nick March 28, 2012 at 7:44 pm

Nice! By the way, I need to spend way more time reading your commentluv post. I ran the numbers, too, and it wasn’t even close with my policy and a proposal from a permanent life insurance salesperson… her response, by the way, was “but you could do it for much less of a premium.” Of course, when I said “then your laughable ‘returns’ would be even worse, right?” she had no answer…

Yet she still wants to have coffee with me thinking she can sell me on it. And I keep going for some sadistic reason… more in a full post.
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Young Professional Finances March 28, 2012 at 7:21 pm

I’ve heard these excuses and I don’t get it either! Why take a gamble on low tax rates in the future when you can be guaranteed NO taxes? I can see wanting a tax break now rather than later but that’s just another thing we have to get over – that instant gratification thing.
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Nick March 28, 2012 at 7:46 pm

Yeah, I’ll lock in the future tax-free growth all day long. And if they up the limit I’d max it out until I couldn’t squeeze any more money out of my budget! :)
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MaryAnne @ Parenting and Money March 29, 2012 at 8:37 am

The two most common excuses I hear all the time. Great work on covering this. I’m already maxing out our Roth and I wish we could put more. Good point on #1. If you think you’re going to be in a lower tax bracket, then you definitely are not working to improve your income.

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Nick April 3, 2012 at 10:37 pm

Thanks Maryanne! I know – I’m aching for a higher Roth limit. Way to rock your retirement savings!
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Bichon Frise April 15, 2012 at 9:35 am

I’m one of those aim low jerks. And, I think the middle class will be sheltered from significant federal income tax hikes in the future. We have a whole example of this on our blug, with a neat spreadsheet where you can plug in your income and see what you would have paid going back to 1913. http://wp.me/p2h40p-R

There are many people who live on $50,000/yr and pay virtually no federal income tax. I live a very comfortable lifestyle, and if I could get enough money to support me and my family on $50k/year, I would be out the door, because we spend less than that. And I bring home significantly more than that with my work.

I use your excuses above. That is not to say I don’t have significant Roth $ invested already. But, there are ways the Roth can be “taxed.” Perhaps it becomes part of the equation which helps to reduce SS benefits? Included on the FAFSA form.

So, chalk me up to believing a Roth IRA is a powerful investment tool, but that it isn’t for everyone. A couple more decades of work should grind you down enough become an “aim low” “jerk”. Give it a little time.
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Nick April 18, 2012 at 12:21 am

Haha! It’s ok. We can still be friends. I’m friends with a lot of “jerks” ;)

I’ll definitely check out the spreadsheet too. And fwiw I max out my 401(k) on top of the Roth, too, which also results in some tax diversification.

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jlcollinsnh April 15, 2012 at 10:40 pm

Kudos on spreading the Roth word.

Roths are the most powerful bucket we have for our investments. Now retired, I am busily converting our regular IRAs into Roths as fast as I can without hitting the next tax bracket up.

In ten years or so, we’ll be forced into mandatory IRA withdrawals and the taxes then due. Hopefully between now and then we’ll get enough Roth’ed to ease the pain.

Nice problems to have, but problems that need attention none the less.

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Nick May 2, 2012 at 10:48 am

Thanks JL. That’s the best part about proper planning – you create great problems to have!
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