Weekly Update 2
Hey everyone!
The highlight of our week was the big game between our university’s men’s basketball team and our rival. We had a bunch of our friends over to our place to watch it. It was a nail-biter and had the most unlikely last minute (2.5, really) I’ve seen. I love watching basketball with other fans (in fact, we made it a rule). Our living room was absolutely exploding in the last minute. We also attended a home basketball game on Saturday, but since we arrived late we didn’t have much of a view of the court.
This week was also recruiting week for Kyle’s program so he did a lot of social and work-related activities related to that, and I joined him at a party for the student and “recruits” on Saturday night, which was a lot of fun. I am giving lab meeting on Monday so I’ve spent the weekend preparing for that!
Blogging Update
I decided to join the Yakezie Challenge this week! I have been thinking about joining for a while and I just had no reason to delay further. As of this writing my Alexa ranking is 2,891,707 and I’m looking forward to seeing it drop with your help!
Posts I Liked
Katie at Girl with the Red Balloon announced this week that she is DEBT-FREE!! She has had a crazy ride to get to this point so definitely check out her story!
Well Heeled Blog listed what she sees as the pros and cons of the “no-spend challenges” that bloggers occasionally undertake. She concluded that it might be worth a try, but most of the commenters came down on the opposite side.
Suba at Wealth Informatics calculated what you’ll be able to withdraw in retirement if you invest with a Roth account vs. a traditional account at various marginal tax rates. Surprisingly, the numbers didn’t work out in favor of the Roth in any of the scenarios she published on, but she explained why Roth accounts are still part of her retirement mix. She made her calculations available so I was able to plug in our tax rate (15%) and found that Roths had a slight edge. Very informative post!
Corey from 20’s Finances wrote a guest post on Budgets Are Sexy explaining why he prefers cash flow through retirement to a bucket of $1,000,000. He makes a very convincing argument! Of course, accumulating $1,000,000 and creating cash flow from passive income are not mutually exclusive and one goal or the other may be more motivating depending on your personality.
The Happy Homeowner shared her strategies for paying for a private graduate school education without going into debt – an amazing and rare accomplishment!
Jacob at My Personal Finance Journey wrote a comprehensive post on health-care options if it’s not provided by the workplace.
Carnivals
Delay Marriage Until You’re Debt-Free? was featured in The Carnival of Personal Finance #347!
Highlighted Comment
The best comment I received this week was from Renee, who in response to Hobbies vs. Values in Targeted Savings wrote “[ Should birth control be considered “household”, “medical”, or “hobby”? ] ;)”
Top Commenters
- Renee
- jcollinsnh
- Jon White
- Leigh
Top Referring Sites
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I love this weekly roundup post, Emily! I just read Wealth Informatics post on Roth vs. Traditional IRAs and just wanted to comment that there’s a pandoras box waiting to be opened with respect to some additional Roth-favored factors. Suba mentioned RMDs for traditional IRAs(required minimum distributions) -which offer flexibility with when you can withdraw funds, estate tax considerations, etc… which can be really powerful motivators for going the Roth, route and the list could go on with roth conversion and recharacterization considerations, etc. I’d just caution that there is more to the discussion than what meets the eye – and expert advice from a CPA (or CPA/PFS) who understands the interplay & can give you holistic advice is important!
I’m glad to hear from you, Suz! I have noticed that most people who might, by the numbers, prefer traditional IRAs opt to have Roths as well to diversify their portfolios for tax purposes. Do you think that all the less-tangibles (i.e. what Suba wasn’t able to take into consideration in her spreadsheets) are in favor of Roths? Another way of phrasing: if diversity of tax-advantaged accounts is a good idea and people who perhaps by the numbers should stick with traditional IRAs should use Roths too, are there any reasons for a person who by the numbers should go with a Roth (like us!) should diversify into traditional IRAs? Woah, perhaps a bit of a complex question for a Sunday afternoon!
Suz, I agree there are so many other factors that go into the decision, it is almost impossible to consider all of them. The only point I wanted to get across was, and you mentioned that, not base your retirement on a one-size-fits-all advice. As Emily found out ROTH was beneficial for her based on just numbers, it was not for me (again based on my number AND my plan for my future). There are several other factors that cannot be determined like in 2011 people were able to donate to charity directly from their traditional IRA and that counted as RMD. ROTH folks got a bad deal here. That may or may not extend, so there is no way to count that in into any calculation. Then another can of worms – sales tax. What if in the future, the Govt. decides that they are going to tax everyone more based on consumption rather than income? So the income tax will be low but sales tax go up, again ROTH folks get ripped off. No blogger can decide what is right for everyone, so I get annoyed reading advice like “if you are below 30, you should always go for ROTH” or “ROTH is better any day so you should convert everything to ROTH IRA asap”. ROTH IRA is an excellent retirement plan, no doubt. But I want to emphasize that – No one cares about my retirement more than I do, so I should not be blindly following advice from an online blogger without consideration. That includes my advice 🙂
Emily, thanks a lot for trying it out, I really appreciate it!
Thanks for bringing up these points, Suba! I hadn’t thought of all these variations.
Good morning!
As I mentioned -this is a topic way too in-depth for a comment box (we’ve spent hours upon hours educating CPAs on this topic which is why –especially for sophisticated considerations- I’d recommend consulting with a CPA who can help weigh all of those factors) BUT – to quickly answer your question, there are a few reasons that come to mind (as Suba mentioned in her post) for why you may want to “diversify” into traditional IRAs. For example, if you plan to gift an IRA to a charity – it makes no sense to gift a Roth IRA as a charity doesn’t pay income tax, so a traditional IRA makes more sense in this scenario. Further, there are asset protection issues (depending on your state) where Roth IRAs may not have the same protection as traditional IRAs.
Most significantly, it boils down to the question of your current vs. future income tax brackets. If you think you’ll be at a higher income tax bracket in retirement or that tax rates are trending up (which – for high income tax payers, the addition of the medicare surtax and expiration of the Bush tax cuts could usher in a big jump in the highest marginal rates), then a Roth IRA makes sense. No one has a crystal ball, so the environment could very well change where a Roth isn’t the most favorable, but I’d recommend evaluating your current & and anticipated future situation (as Suba suggested) and making an informed, advised decision.
When I consider all of the factors (tax & non-tax considerations), I tend to think for someone in your/our situation, Emily (and I say this because I’m familiar with your situation), I think the Roth makes the most sense… to be completely transparent – outside of our employer deferred comp plans, we ONLY contribute to Roth IRAs and not traditional IRAs. Generally speaking, I expect that we will be in a higher tax rate at retirement, we may not want to start taking required minimum distributions at age 70 ½ (in which case the Roth allows those savings to continue to grow tax-free with no RMD required), because federal tax brackets are more favorable for married couples filing joint returns than single individuals… Roth distributions won’t cause an increase in tax rates for a surviving spouse, and finally, from an estate tax and inheritance perspective – Roths are generally favorable (which is too complicated to dive into in this post).
SUBA – I appreciated your analysis and wasn’t trying to knock it – I just wanted to point out that retirement issues can get very complex and cross over into other planning areas (estate tax, charitable considerations, etc.) and that folks may want to weigh the other considerations and/or consult with an expert who can help them make an informed decision. Full disclosure- I’m partial to CPA financial planners, who are independent and objective and understand the holistic nature of planning issues….
Phew… that’s a lot of thoughts crammed into a tiny comment 🙂 Thanks for listening to me ramble.
Wow! Thanks for the additional details. It definitely seems like consulting with a professional will be necessary down the line to get a customized plan. We haven’t talked with a financial planner yet but it’s in the back of our minds to check in at some point, maybe when we get real jobs and are looking to buy a home. The biggest problem of course is our inability to see into the future, but you’ve gone a bit further in making reasonable predictions here than I’ve read before, so thanks!
[…] of details on tax-advantaged retirement accounts between two very smart ladies, Suz and Suba, on my weekly update from last week. Definitely worth reading (several […]
Thanks so much for the mention on my health insurance article!
My pleasure.