Roth may not be perfect for everyone

Like many, I have certain expectations of camping.  Hard ground.  Hot food.  Cold drinks.  The simple things in life.  I certainly do not expect an eye-opening conversation about tax codes and retirement policies.  So, when the topic came up this last weekend around a campfire, I was quite surprised. One of my friends, generally very astute, was convinced that there was no reason to invest in a traditional IRA.  A Roth, she told us, was just plain better.  Why pay taxes when you don’t have to? I tried to interject to give an even-handed comparison.  “They are different plans,” I protested, “for different circumstances.  Neither one is always better.” My friend ignored me.  She continued.  And I was amazed. A Roth, it turns out, is no mere retirement account.  It can hold stock in Apple and Microsoft.  It compounds in value every nanosecond.  It’s gluten free.  Bluetooth compatible.  Standard and metric.  Faster than a speeding bullet. My account is slightly exaggerated.  Well, borderline untrue.  Fine – a complete and utter fabrication.    But hearing the way many people, my friend included, talk about Roths, it doesn’t seem all that far-fetched Let’s be clear: there are many advantages to a Roth.  The funds can be withdrawn or transferred with relative ease.  It is more flexible in estate planning.  It is not subject to a required minimum distribution at age 70.  And it can save money in the long run, depending on your tax situation. But that is the key: depending on your tax situation.  Roth IRA contributions are included in your taxable income, while traditional IRA contributions reduce it.  All else being equal, the person who uses a traditional IRA will be able to invest more in their plan than the person who uses a Roth IRA, because their tax load is lower.  Assuming both plans are invested identically, with similar tax brackets in retirement, the traditional IRA will have exactly as… | Read More »

A Millennial Conundrum and the Case of the Disappearing Inheritance

The rising tides of exponentially increasing health care costs and a longer life span have led to a relatively new wrinkle in retirement planning, the disappearing inheritance. In the past few years, the primary goal of most retirees, which had centered on legacy planning, has become survival and making sure their money lasts their whole lives. Happily, their lives are growing longer; the average lifespan of an American female is now 81.2 years, and for males it’s 76.4 years, a record high according to a new report on mortality by the Centers for Disease Control and Prevention. Unhappily, the cost of care to maintain that life span is growing at an equally swift pace. Healthcare costs run higher in the United States than in any other developed country in the world, according to Consumer Reports. Add to that statistic the threat of an increasing cost of living, and elderly investors have their hands full just keeping their heads above water. For millennials, who already face a potential loss of Social Security and work related benefits (Does anyone get a pension anymore?), this is another indication that the health of their own ideal retirement rests squarely on their shoulders. Years ago, as Americans reached retirement age, many middle class Americans could count on some form of inheritance from their parents as a bonus to their own pension and life savings. Two of these three vehicles are becoming obsolete.. Fortunately, Millennials are saving earlier and more aggressively than any age group before them, according to a survey from the nonprofit Transamerica Center for Retirement Studies. Among Millennials whose companies offer an employer sponsored retirement plan like a 401(k), 71% are participating in the plan, and they’re investing a healthy median 8% of their annual salary, the survey of more than 4,000 workers found. What many 401(k) investors don’t realize is that they not only control the amount they invest in their company… | Read More »