New IRS rules for inherited IRAs
derryb
Posts: 36,809 ✭✭✭✭✭
Posted for the benefit of our Precious Metal IRA holders. (and also for everyone else)
"Interest rates, the price of money, are the most important market. And, perversely, they’re the market that’s most manipulated by the Fed." - Doug Casey
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Comments
FTIRS
i am dyslexia of borg futility is resistant your ass will be laminated.
The traditional IRA has to get taxed anyway -.
So does the ROTH, contributions (and all earnings) only get taxed only upon withdrawal instead of taxing the pre-contribution money. Question is: "will the loss of purchasing power that occurs between deposit and withdrawal be greater than the difference in taxes paid on each type of IRA?" Up until recent years it has always been a no brainer - go with the ROTH. But, the increased velocity of loss in purchase power is cause for us to rethink the "old."
"Interest rates, the price of money, are the most important market. And, perversely, they’re the market that’s most manipulated by the Fed." - Doug Casey
All things being equal including tax rates I think the math works out the same.
Not only that the government has devalued the currency by putting less paper in it. Have you weighed a $20 bill lately,
Wouldn't that be putting more paper in it and less rag?
Hummm LOL "all things being equal it's still $20"
is it?
"Interest rates, the price of money, are the most important market. And, perversely, they’re the market that’s most manipulated by the Fed." - Doug Casey
You are not taxed on a qualified Roth withdrawal - that is the point. Pay the taxes upfront you get tax-free investment growth. As long as the Roth IRA rules and conditions are followed, your distributions in retirement are not subject to federal taxes.
I am not sure what you are trying to say here.
Apologies to all, I had it backwards. Conventional IRA contributions are tax deferred until withdrawal. Contributions to ROTH IRAs are taxed when earned with all subsequent earnings and withdrawals being income tax free.
"Interest rates, the price of money, are the most important market. And, perversely, they’re the market that’s most manipulated by the Fed." - Doug Casey
No tax on the ROTH gains, only the deposits. It's a #NOBRAINER RGDS!
The whole worlds off its rocker, buy Gold™.
I'll take my withdrawals when I have a lower tax rate.. The Roth is questionable to me right now.
A lower tax rate is certainly not a guarantee........Unless of course you're a billionaire. RGDS!
The whole worlds off its rocker, buy Gold™.
Roth is a no brainer. Your IRA if invested properly will grow faster than the tax rate (and I am not talking about invested in PMs). In a Roth you have already paid the tax, the growth is all tax free! Paying a lower rate on 2x, 3x, 10x the value is not a savings.
I agree with what you are saying, but there are a couple of advantages for the Roth. First, With the Roth you are getting more purchasing power in retirement, so effectively you are putting more away each year by prepaying the taxes, and given the fact that most retirement accounts are exempt from legal action by creditors (except the IRS), that extra purchasing power could be a big deal if you incur a financial set back.
I do understand the arguments for and against Roth vs. Traditional. Ever since congress allowed Roth conversions without respect to income, and allowed Roth 401Ks I have been getting as much as I can into Roth accounts. The only thing I have not been able to get into a Roth are the company match to the 401K and Profit sharing contributions.
I'm not trying to give advice or disagree with anyone, I'm just stating what I do. I don't think there is a right or wrong answer to Roth vs Traditional. I think the mistake would be not to contribute to a retirement plan.
I lead a simple life. Buy for a dollar, sell for a dollar and ten cents. Unlike the following,
https://dnyuz.com/2023/08/23/the-inheritance-case-that-could-unravel-an-art-dynasty/
@psuman08 said "Roth is a no brainer"
That's not true. As @streeter said, it is all about tax rate. The growth rate is the same for a Roth and a regular IRA -- that is, the amount invested grows without tax in both cases. What matters is the tax rate on either end.
If your tax rate at retirement is lower than it is now, the regular IRA will be better. Even with future tax rate increases, there will almost certainly be people in this situation.
But, I agree with @tyler267 that is a mistake to not contribute.
A lower tax rate is certainly not a guarantee.
Hey, hey, hey..............I agree with blitzie, probably for the very first time, but only with regard to taxes. Tax revenues are going down, along with the economic indicators.
The only way gov.com can cope is to inflate and raise taxes, both of which kills the consumer. Hey, at least Washington DC is still booming!
I knew it would happen.
Gee, shrinking Gov would help a lot. Quit giving our tax dollars to foreign gov's would help, too. How many foreign gov's tax their citizens to repay the US?
none..
bob
vegas baby
I could not disagree more. My tax rate will be lower (I assume) when I retire. However, if I have to pay taxes on all the gains I will have made over the years in my 401K (traditional), I will end up paying more taxes. I expect much more in taxes even at the lower tax rate.
I agree with @tyler267 's take and will take back my no brainer statement. It is what I do, We all agree the biggest mistake is not contributing to a retirement plan. And @tyler267 , my company match is also in a traditional IRA.
@psuman08
The math works out in my favor. (i.e., I am correct
)
The following mathematical arguments will show that if the tax rate is lower at the time of the retirement withdrawal than it was at the time of the deposit to the IRA, then the regular IRA is superior to the Roth.
Let A = the amount before tax that you set aside for the IRA.
Let r1 = tax rate at the time of deposit.
Let r2 = tax rate at the time of withdrawal.
In our scenario outlined above, r2 < r1.
Let i = annual earnings rate during the accumulation period, and let n = the number of years of accumulation.
In the regular IRA case, the net amount that is deposited to the IRA is A, that is, it is deposited before tax.
Since the amount in the IRA accumulates without tax, at the time of withdrawal this accumulates to A * (1 + i) ^ n.
Upon withdrawal, the full amount is taxes, so the net amount after tax is (1 - r2) * A * (1 + i) ^ n.
In the Roth IRA case, in the year of deposit, the amount you deposit is taxed, so if you have A available to save in the IRA, you can only deposit (1 - r1) * A.
This amount then accumulates tax free at the rate i, so it accumulates to (1 - r1) * A * (1 + i) ^ n. It is not taxable on withdrawal, so this is the amount you end up with a Roth.
Since r2 < r1, then (1 - r1) < (1- r2).
So, the Roth IRA amount (1 - r1) * A * (1 + i) ^ n is less than the Regular IRA amount (1 - r2) * A * (1 + i) ^ n.
The other advantage to the Roth is that there are no Required Minimum Distributions, the money can stay in the plan longer.
I think the right answer boils down to individual circumstances.
For someone who expects to remain in a high tax bracket in retirement and has enough income that they don't need the retirement plan withdrawals to live on, the Roth makes sense.
For someone that expects to be in a lower tax bracket in retirement and will rely on the retirement plan withdrawals to live the traditional might be better. This person might consider having both so they can manage the tax bracket in retirement while still withdrawing enough to live on.
There's really no debate... Again, The Roth is a no brainer. Gutter bugs in like a decade or so from now will be like damn, should've got that Roth. Lol SMH!
P.S.: Life in the gutter 1 step forward 2 steps back.
The whole worlds off its rocker, buy Gold™.
Blitz -- it's not a matter of debate as in politics or social philosophy. It's a fact that some people will do better with the Roth, and some will do better with the traditional.
As an example, many upper middle class professionals or successful small business owners nearing retirement will have done better by going the traditional route. A not atypical income profile in this group might be, for example, $ 350 - 500 K in annual income over the past 20 years, but a significantly lower post retirement income, e.g. $150 - 200 K. Even accounting for significant tax increases, they will be paying lower income tax rates after retirement. If they move from a high tax to a low tax state (CA or NY >>> FL), which of course if common for retirees, the traditional IRS or 401k will be even more favored relative to the Roth.
So? Who inherited one? I know that I did.
Living on $150k to $200k in retirement alone is bad enough with regard to taxes, but touch the inherited IRA. YOU DON'T WANNA KNOW.
You know Victor Davis Hansen might just be right the USA is in the throws of the second French Revolution. Taxes on an inherited IRA it just could be a SPIRITUAL thing happening, something driven right thru the soul of America.
Of course it behoves you yo watch his latest YouTube video before you attempt to rip my head off.
PS Railroad Pensioners IRA inherited stupidity; union agreeing to that deal.
My tax rate will be lower (I assume) when I retire.
That's the assumption you've been sold.
The truth is that gov.com can do anything they want, and your IRA represents the largest untapped pool of cash that they can get their hands on via a change in tax law.
So, let me ask you, "do you feel lucky?"
I knew it would happen.
@Higashiyama, I think your model is flawed as it lacks any growth factor. It is the growth in your value A that matters.
If I start with $10,000 and grow it to $100,000, do I want to pay taxes on the 10K at a current tax rate or 100K at potentially a lower rate. For me, I choose to pay now and reap the rewards of growth tax-free.
@psuman08:
My model is correct, ie., both the concept and the formulas.
The growth is reflected in formula by the earnings rate i and the number of years n, and the formula (1 + i ) ^ n.
So, for example, if we start with $10,000, earn 5 % for 20 years, we end with 26,533.
(Possibly the point you are missing is that the taxes up front reduce the amount that is available for you to invest)
I am definitely correct, but if you'd like additional references, there are plenty available on the web, including this handy calculator provided by the AARP:
https://www.aarp.org/work/retirement-planning/roth_vs_traditional_401k_calculator.html?KNC-DSO-COR-Core-Retirement-NonBrand-Phrase-35115-GOOG-RETIREMENT-Rothvs.Traditional401(K)Calculator-Phrase-NonBrand&gclid=Cj0KCQjw_5unBhCMARIsACZyzS2o5d_sAkglxLXnXRzxmfIIrWCPh8JX2I1N17EfX2wiTQc116prrNcaAgOKEALw_wcB&gclsrc=aw.ds
If you do some examples, it verifies exactly what I am saying.
I appreciate your sharing this, and I find it is closer than I expected. Thanks for the clarification.
Where I differ, is that upfront taxes do not reduce the amount that I contribute. I would contribute $10K after taxes or $10K pre-tax. My company takes the percentage that I specify. The difference would be in a traditional IRA I could reduce my taxable income for the current year.
Exactly the amount you contribute is the same the difference is when you pay the taxes. Traditional you get reduced taxes now but you pay taxes when you take the withdrawals in retirement. Roth there is no tax break now but the withdraws are not taxed in retirement. So its pay me now or pay me later. Which one is best depends on individual cirxumstances. My opinion is that unless you know you will have a lot of ordinary income in retirement it's best to have both so that withdrawals can be taken in a way that efficiently manages tax brackets.
Unless you expect losses with your retirement account, it is normally always better to use a Roth to avoid taxes on the profits
"Interest rates, the price of money, are the most important market. And, perversely, they’re the market that’s most manipulated by the Fed." - Doug Casey
@derryb: as my prior posts very precisely show, it is all about tax rates. If your tax rate will likely be higher in retirement than it was during your working years, go with the Roth.
PS: as others have pointed out, the fact that the Roth does not require withdrawals is also advantageous to people with good resources. With this consideration, if tax rates before and after retirement are equal, there's a strong argument to go with the Roth. If tax rates are materially lower after retirement, do with the traditional.
There are many variables to decide upon to determine which is best, Roth vs. Traditional IRA. It depends on:
There are other variables. Do some DD or consult your tax or financial advisor.
Lots of assumptions in this thread that the Govt/IRS will keep current "rules" or tax law in effect. I suspect they will but into everything they can including Roths. Why not tax actual assets and not just earnings or wages......the "little people" will clamor for it. I fully expect a wealth tax to be paid annually in the next 3-10 yrs. Coin collections too. You won't be able to put stuff aside for 10 yrs down the road unless you're in the elite and well-connected class. There will be no safe havens except possibly one primary residence. And I wouldn't even be sure of that. Precious metals will be on that list too. If they don't ban or limit PMs ownership like they did in 1934 they will at least tax the heck out of it to make it useless for most people in protecting their wealth. The Banks will spin up the little people to demand Windfall Profits Taxes to anyone trying to "avoid their fare share" of the pain. It's going to be a fun from 2024-2033. Rules are made to be changed. One of the early changes will be the shift to sovereign digital currencies....while competing digital currencies are "assumed" or removed. Cash will end. Any asset you sell will show up in a digital transaction.
You can't change the rules in midstream? Isn't that what was done to 30 yr Treasury Bonds originally taken out in 1980-1982 at interest rates of 15%+? The Govt ended those high interest rate payments years before maturation. That's just one example. When it comes to bank bailouts we know that OTC derivatives are higher on the pecking order over cash accounts. Betting Banks get paid first to settle their derivative's bets........bank depositors last. That them will continue with TBTF Banks at the head of the line.
Nothing is written in stone except breaking sovereign debt ceilings and continued lawmaker pay raises.
"Interest rates, the price of money, are the most important market. And, perversely, they’re the market that’s most manipulated by the Fed." - Doug Casey
If you're taking financial advice from this forum you're a moron.
Loves me some shiny!
Buffet is right.
All money in an S&P fund throughout your life is the best option.
Traditional IRA / 401k has required distributions, Roth do not. Any withdrawel from a traditional generates taxable income. Forced withdrawels may force you into higher income brackets which not only result in higher potential taxes, they will also affect things like your Medicare payments, etc., causing you to not qualify for lower payment plans. Any Roth withdraws, besides at your discretion, are NOT income thus allowing for more generous plan qualifications due to lower "income".
No brainer indeed.
First.....no, the interest rate on 30-year Treasury bonds was not cancelled. They were non-callable and they paid those coupons for 30 years. The U.S. Govt NEVER ended that bond coupon.
Second....bank derivatives are NOT higher than bank depositors in the capital order during a liquidation or reorganization. It depends on if the derivatives are secured or not and all depositors are protected up to the FDIC limit. You are confusing 2 different obligations under different scenarios (stressed vs. bankruptcy) which are not comparable.
Does that include the guy who says that such advice is moronic ? Wouldn't THAT advice also be moronic ?
Buy low, sell high . . or don't.
"Interest rates, the price of money, are the most important market. And, perversely, they’re the market that’s most manipulated by the Fed." - Doug Casey