WakeWorld (http://www.wakeworld.com/forum/index.php)
-   Non-Wakeboarding Discussion (http://www.wakeworld.com/forum/forumdisplay.php?f=4387)
-   -   The things college didn't teach me.... (http://www.wakeworld.com/forum/showthread.php?t=787603)

sidekicknicholas 05-17-2011 7:22 AM

The things college didn't teach me....
So I graduated last Saturday and have started my new "career" and have some questions about things college didn't teach me.

WTF am I suppose to do with a 401K ?!..... So freaking lost. I've had my dad/future father-in-law try to help but they just made it worse.
Is there any simple way to go about how to split up my money that goes there?

I'm currently (have since Feb when I got the position/started getting salary) putting away 10% - company matches 5%... of that 10% its broken up to a few different places - thats all the more specific I can be.... the only thing I've been told is "be risky - you're young".

My if anyone has simple answer to the following:
How much should I put away ? -- any rule of thumb?
Where to do put it?
Does it make more sense to put the 5% match in and then take the other 5% and dump it into an IRA I started a few years ago or just keep all 10% going through my work's plan?

fly135 05-17-2011 8:25 AM

Have you researched how much you can put in your IRA after contributing to your 401K? As long as you can get the max match in the 401K and still put the 5% in your IRA I would probably opt for the IRA. You have more control over your money in an IRA and 401Ks are bad about high management fees because you are trapped.

liquidmx 05-17-2011 8:45 AM

I agree with John's comment about the diversification between 401(k) and IRA. You should be at least putting in the maximum your company will match...so 5% minimum. My next question would be: "how much can you control where your investment goes?" Do they allow you to dictate which funds within a investment house or is it all at their discretion? One other important question is your vesting requirements...how long until you are fully vested in the 401k, 80%, 60% etc...?

Other factors to consider are how much you need to live, save for a home, etc. 401k's offer a first time homebuyer exclusion on early withdrawals so you have that option for a future home purchase.

As far as being "risky" goes that's all dependent on your comfort levels and ability to sleep at night. I personally diversify between risk and non-risk laden investments with the understanding that the compounding of money over time is a very powerful way to build a strong retirement fund.

stanfield 05-17-2011 8:48 AM

The simple answer is to put as much away as u can afford while you're young. The more u put away now, the longer it has to grow. What u put away in your first 10 years will have a much greater impact than what u put away later in life. Assuming you stay a working class citizen for your whole career of course.

As for the other stuff, too many variables too little details.

phatboypimp 05-17-2011 10:17 AM

All of this needs to start with a budget. If you don't know how much money you are spending on a monthly basis then you really don't know how much money you can save. You need to know what your monthly averages are for all of your expenses (and I mean all of them from car payment, licensing fees, insurance, groceries, food).

The no brainer with the 401K is to always match the match. After that you should pay down any existing debt. After that you should put away six months cash in a high interest savings account. After that high I would look into interest bearing savings accounts and IRA's for longer term investment strategies as they offer more flexibility if you want to pull your money out at some point (whores, cocaine, buying a house, etc). Make sure your 401K is moderately aggressive at your age and that you are diversified across geography and industry as well as diversified between equity positions and some sort of cash position. 401K's are usually managed by a decent money manager that will give you the option of investing between 4-15 different funds. Do the research, look at the management fees, the growth over the last 1-5-10 years the distribution of their investments, who pays a dividend (always reinvest your dividends). Invest in things that interest you and can make you money.

I can not stress the importance of having a budget. This way you know exactly what you spend each month and how much you can put away.

phatboypimp 05-17-2011 10:51 AM

To answer your last question.....401K is withdrawn from your check before taxes - huge advantage - but offers less flexibility and higher penalties if you want to remove it. IRA's have different tax ramifications (I am not a tax lawyer and I don't have any IRA's) than a 401K (typcially less servere since you have already paid taxes on the money) on the removal of funds. You hopefully wont be needing either until you are 65. I would say the right option would be to invest it all in your 401K because it is harder to take out (which you should never do until retirement) but has better tax advantages IMO.

fly135 05-17-2011 11:03 AM

Only Roth IRA contributions are on taxed money. A regular IRA is on untaxed income and taxes need to be paid when withdrawn. Which brings up the point that at a young age it may be better to put some money in a Roth instead of a regular IRA. Especially if your income is low.

sidekicknicholas 05-17-2011 12:27 PM

Here is my financial situation / budget using the following numbers:

I take 10% off for 401k right off the bat
I lose 30% from taxes
Monthly NO CHOICE payments -- $250 school loans (ball park - I have $17k in loans total) -- $410 car payment / car insurance-- $70 direct tv -- $250 gas
** No other bills or rent (living with mom) - food not factored it either **

With that said I'll be putting away 10% to the 401K - make all my monthly payments on things that need to be paid and am pocketing ~$1650 / mo. that needs direction. Obviously I'll be spending money on fun things here and there (boat gas wasn't listed above) -

I can handle saving more, but this is also the first time in my life where I can live a little large.... I know a down payment on a house is on the way too....

What I'm really most concerned with is where are the most logical places for a 23 year old to put money and like some posted, does:
10% 401k
5% 401k + 5% IRA (roth)
make more sense.

Thanks everyone!

fly135 05-17-2011 12:48 PM

I'd put the 5% in the IRA (after verifying that you can). Choosing between the roth and regular is a tough decision because of the immediate tax impact of the Roth. The Roth allows you to take your lifetime earnings tax fee when you retire.

guido 05-17-2011 1:39 PM

Good on you for getting this started early. You'll thank yourself later in life. All these guys are smarter than I am, but I follow some basic rules. Put in as much as you can afford. Try to get to the level where you're maxing out what your employer will match. That way you're getting the most out of their program.

Eventually when you get older and get married/buy a house you can consult with an accountant about how best to divide your investments and how much to put where. It's helped me a lot to get the most out of my money without wasting. Balancing paying debt with investing, etc. Some of my debt has proven better to hold onto than to pay off (i.e. it's lower interest than what I can make with my money).

People told me to take risks with my money, too. I looked at it the other way around. I was starting young and figured my money had time to grow. I diversified, but leaned toward the conservative. I've done well with it. Even through the economic downturn.

I look at my 401k like a fall back. I'd love to not count on it for retirement (not be working class for life), but I figure at the least it'll be very solid when it comes time. Hopefully that money will just be icing on the cake by that point. In 30 years I'll let you know how my plan has worked out. Ha, ha, ha.

Good luck with everything.

acurtis_ttu 05-17-2011 2:34 PM

For me it's alwasy been easier to have it all go into my 401k, If you start off that way you'll never notice it coming out of your check. Having to account for 5% of yrou paycheck every two weeks and electonically move money over IMo, is alot harder than it seems.........most people eventually fall into the " I'll make it up on hte next months's check, it's just this one time" lol.

But oddly enough I choose to escrow my own property taxes, and it's' worked out fine for the last 5 years. (my property taxes are close to $1k/month)

hunter660 05-17-2011 4:04 PM

Only put in the max of what your employer is willing to match in your 401K. Then max out your Roth.

phatboypimp 05-17-2011 5:10 PM

I don't know what the right answer is for you regarding saving for a down payment. I am not sure if the Roth/Stanard IRA is the right option for you(Sounds like John Anderson knows what he is talking about)- because of the different tax implications/penalties or if you want to start a investment account where you could invest the money in the short term (3-4 years) or long term without withdrawl penalties (although most mutual funds do have penalties for removal within 6 months). I am pretty uneducated about IRA's because I don't use them. It would be pretty easy to find out.

I manage my own money through Charles Schwab. Under their recommendations for Moderately Aggressive they list: 45% Large Cap, 15% Small Cap, 20% International, 15% fixed income and 5% cash. I have used this profile for the last 15 years (I am 39 years old) and it has worked out well for me in the peaks and valley's of the stock market. I am averaging 7.25% annual growth over that 15 years. I invest exclusively in mutual funds - I do not have the time or the patience to manage individual stocks and my heart can not take the volitility. I love my money and I am fairly conservative. You can open a Schwab Account (for free with some minimal deposit) or some other brokerage account and gain access to all of their investment tools and research. It is a little overwhelming at times but you will certainly learn a lot.

mc_x15 05-18-2011 7:05 AM

People told me to take risks with my money, too. I looked at it the other way around. I was starting young and figured my money had time to grow. I diversified, but leaned toward the conservative. I've done well with it. Even through the economic downturn.


I totally agree with this. I took the coservative route and have done well. The economy has hurt everyone but the high risk people seem to have really paid the price. Long term slow growth from a young age can really do well. Dont expect it to happen over night though. But in 10 yrs you will be proud of what you have saved. Good luck. Saving early is the way to go, makes life later on so much easier and exciting.

jason_ssr 05-18-2011 8:04 AM

It is very smart to get started young. At a young age, contribute as much as you can possibly afford. What you dont realize is that saving larger sums of money pre-tax, doesnt affect your paycheck like you think it would.

Why do you think people advise you to be aggressive because of your age? Its because the market cycles, but it always cycles up! What is aggressive? its investing in things that are risky, but earn big percentages. You can afford several 30% dingers in your lifetime. What you cannot afford is to be 50-60 years old and take a 30% dinger as you do not have many working years ahead to make it up. So, buy aggressive funds and ride the wave of money until you get to an age where you cant afford a dinger.

So, you toss your money into the abyss and hope it does well, but how can a guy who isnt a finance major have any idea how his money is being invested? Look up two terms, growth and value. Both strategies are successful, but which camp do you fall into? Over the history of the market, value has slightly outperformed growth. However, there have been decades where growth outperforms value exponentially (1990's).

What I do is put my percentages in place, then I dont look at it for a year. Once a year I look at the funds, and replace where needed, and I rebalance the percentages (your aggressive investments will grow at a faster rate and will become a large part of your total nut in very short order. You have to take some of the money those are earning and move it to your other funds until your original distribution percentages are achieved.)

brettw 05-18-2011 8:42 AM

In the long-term, you'll probably do much better to invest in higher risk investments and then lower risk as you get older. Putting the 5% matching into your 401k and then investing into a ROTH is a good idea. It may be easier, though to put all of the money into the 401k. Most 401ks have a pretty good choice of funds and investments with low fees. Since you're just starting out, it would be a good idea to get some idea over time of what kind of investments to get into. Get a subscription to a financial magazine or two like Smart Money, Smart Investor, Money, or maybe even the Wall Street Journal. Bottom line personal is a great short article type magazine to get some ideas. Also, your work or the company your 401k should have some summaries and info on investing. They might even have some little online training or something like that. Just do a little research.

Good luck. The most important thing is that you're starting early, and 10% is a good % of your income to start with and continue to invest.

phantom5815 05-18-2011 4:33 PM

I wish I could find the article about the ROTH IRA and how the feds are trying to eliminate or make changes.
The advantage of the ROTH ( pulling from my oldtimers memory) there's no mandatory withdraw when you hit a certain age.... Where as ( please correct me people) the traditional IRA you need to make a withdraw by a certain age.

Here's a limit table if you haven't seen it:

liquidmx 05-18-2011 4:53 PM

Phantom...there is a LOT more than that in relation to saving (or converting) to a Roth IRA. Here is a quick cut and paste of a Power Point Presentation I did on this issue/concept (primarily centered at converting to a Roth for our HNW clients... hopefully it makes some sense as to the basics of the concepts. FYI this is NOT tax advice in any way, just intended for reference to some ideas and concepts related to the differences between regular and Roth IRA's.

Reasons for Considering the Conversion
 Starting in 2010 the $100k AGI phase-out limitation is gone. Anyone can convert a regular IRA into a Roth
 What plans are allowed to be converted / transferred over to a Roth?
– Traditional IRA's, 401(k) plans, profit sharing plans, 403(b) annuity plans, 457 plans, "inherited" 401(k) plans, SEP-IRA's and Simple IRA's
 However the Simple IRA can only be made after the 2 year period beginning on the date which the taxpayer first participated.

Reasons for Converting - Continued
 You can roll over distributions from a 401(a) into a Roth as well.
 When converting property held within an IRA, the conversion amount is the fair market value of the property on the date of distribution/conversion.
 When converting an IRA annuity to a Roth IRA, the amount that is treated as distributed is the FMV of the annuity.
Reasons for Converting - Continued
 You get a free “undo” option
– An individual who has made the conversion from a regular IRA to a Roth IRA may subsequently decide that a they did not want to make the conversion.
 The election to re-characterize and the transfer of the assets must both take place on or before the due date (including extensions) of the tax return for the year in which the conversion was first made.
 Once a re-characterization is made it cannot be revoked; however in some situations, the amount may be reconverted at a later date.
Reasons for Converting - Continued
 The free “undo” option
– The re-characterization election must include:
 Original type and amount of the contribution to be re-characterized
 The date on which the taxpayer originally contributed the amounts to the first IRA and the year which the contributions was made.
 Directions instructing the trustee of the first IRA to make a trustee-to-trustee transfer of the amount contributed plus any resulting net income to the trustee of the second IRA
 The names of the trustees of both IRA's.
When is the Tax Due?
 Taxpayers have the option of paying the tax on the conversion when they file their 2010 returns, or deferring the tax hit until 2011 or 2012
 Allows taxpayers to convert to a Roth before year end and wait until 4-15-11 to see how the conversion should be handled.
 A unique option for 2010 allows the taxpayer to recognize half of the conversion amount in 2011 and the other half in 2012 (unless otherwise elected)-IRC §408A(d)(3)(A)(iii).
When is the Tax Due - Continued
 Recognizing half of the conversion gain(s) in each year: 2011 and 2012
– Taxpayers who elect to include all the conversion amounts in their 2010 return cannot change their election after the due date of the return.
– Taxpayers who roll over a 2010 plan cannot retain the benefit of 2 yr spread of inclusion of income to the extent they receive distributions from the Roth IRA in 2010 and 2011. - 10% penalty also applies since its less than 5 year period.

Why Converting Looks Good
 Most basic Analysis = Traditional IRA and a ROTH IRA will produce the same “after tax result” provided:
– The annual growth rates are the same
– The tax rate in the conversion year is the same as the tax rate during the withdrawal years
 Roth begins to look better when:
– Taxpayer “cherry picks” volatile funds… (Gambling on future growth)
– Future tax rates expected to increase (taxpayer is in a higher bracket or has current tax attributes)
Why Converting Looks Good - Continued
 Regular IRA is subject to lifetime Required Minimum Distributions (RMD's), starting at 70 1/2, Roth IRA is not
– This allows the taxpayer the flexibility of pulling money out when they need it, allowing it to continually grow tax free at their discretion.
– Since Roth distributions are tax free it can keep the taxpayer in a lower tax bracket than if they were taking IRA distributions.
– Roth distributions do not impact the calculation of taxable social security received (regular IRA's do).
– Roth distributions do not impact your AGI limitations and phase outs for deductions.

Why Converting Looks Good - Continued
– Benefits of a Roth IRA flow through to beneficiaries, who can also make tax free withdrawal (subject to same annual post-death required minimum distribution rules that apply to regular IRA's).
– Historically tax rates continue to rise throughout the years. If you follow the trend taking money out now at a lower tax rate looks better than being taxed at a higher rate in the future.
– “Opportunistic Conversions” - In a down economy…if your retirement investments are in the market(s) your portfolio may have dropped substantially. This means converting from a regular to a Roth IRA may be enticing as the taxable portion will carry a smaller value.

Why Converting Looks Good - Continued
– “Opportunistic Conversions” (Continued)
 “Anti Cherry Picking Rules” – (Notice 2000-39)
– Can be avoided by specifically identifying assets to be transferred to a newly established Roth IRA (one for each grouping of assets), shortly after re-characterizing the segregated Roth IRA (with devaluing assets) back to a traditional IRA.

Why Converting Looks Good - Continued
– “Opportunistic Conversions” (Continued)
 “Anti Cherry Picking Rules” – (Notice 2000-39) (Continued)
– Compliance note - - Steps for accomplishing Roth IRA conversion strategy:
 Indentify specific groups of assets and create new traditional IRA's for each asset class
 Convert the separate traditional IRA's to separate Roth IRA's
 Extend the tax return and pay income tax on the total Roth IRA conversion
 Re-characterize specific underperforming Roth IRA's back to traditional IRA's
 File the extended tax return reporting the Roth IRA conversions and recharacterizations.

Why Converting Looks Good - Continued
– It reduces the taxable estate of the IRA owner as a Roth IRA is NOT taxable upon distribution and does not require minimum distributions from the primary Roth IRA owner.
– You can utilize a "tactical conversion" (What is a "tactical conversion"?)
 Tactical conversions are used to "soak up" special income tax attributes that are set to expire
– I.E. NOL’s that could be expiring
– Ordinary Losses
– Deductions and Exemptions (although conversion will increase taxpayer’s AGI)
– Expiring charitable contributions
– Non-refundable tax credits
Who Should Consider Converting?
 Taxpayers who have a substantial number of years to go before retirement (therefore able to regain the dollars lost in the conversion through tax free growth).
 Taxpayers who anticipate being in a higher tax bracket (in the future) than currently
 Taxpayers who can pay the tax on the conversion from non-retirement account assets.

What are the Variables?
 Future tax rates…will they go up?
 Future estate tax…will your client be subject to estate tax?
 Future securities markets…will securities increase or decrease in values?
 Future inflation/deflation of the dollar…will the dollar be more or less valuable in the future?

What Would the “Ideal” Roth IRA Conversion Taxpayer Look Like?
 Has outside funds to pay the tax on the conversion
 Does not need the IRA to meet their annual living expenses (for at least 5 years…preferrably longer)
 Expects to be in the same or higher tax bracket in future years
 Has current year tax attributes that are offset-able against conversion income amounts.
“Ideal” Roth Conversion Taxpayer - Continued
 Has a large estate (benefit in getting Roth IRA out of potentially taxable estate)
– Wants to leave a tax free asset to their heirs

Factors to Consider in Analyzing a Conversion
 Projected tax rate differentials between conversion years and withdrawal years.
 Use of outside funds to pay the conversion tax and the “opportunity cost” lost through the expenditure of funds.
 Taxpayer’s potential requirement to “dip into” their IRA…Rising living and medical costs, etc.
 Time horizon…how long can the taxpayer keep their hands out of their investment?
Arguments Against Converting
 It’s a large tax hit to make the conversion requiring lots of cash outlay and “lost opportunities”.
 Retirement is too close to utilize the tax free growth…analysts project 15-20 years to recoup taxes paid/lost.
 Taxpayer’s expecting to be lower future tax brackets.
 Will the conversion income kick the taxpayer into a higher tax bracket currently?
 Will the government eventually relinquish the tax free treatment of ROTH IRA’s (conspiracy theory).
Primary Questions to Ask Your Clients
 Can you handle the tax bite from converting?
 Do they need the funds anytime soon?
 What does their future projected income look like…lower or higher tax brackets?
 What does their current tax situation look like…can they utilize current (or expiring) tax attributes?
Any Questions?

IRS Circular 230 Disclosure
Pursuant to U.S. Treasury Department Regulations, we are now required to advise you that any federal tax advice contained in this communication,
including attachments and enclosures, is not intended by the Sender to constitute a covered opinion pursuant to
regulation section 10.35 or to be used for the purpose of (i) avoiding tax-related penalties under Internal Revenue Code or (ii) promoting, marketing,
or recommending to another party any tax-related matters addressed herein.

shawndoggy 05-18-2011 7:38 PM

If it's money you remotely think you'll need before retirement (i.e. house down payment), go roth vs. 401k. You will pay a 10% penalty (in addition to taxes) on a 401k withdrawal, whereas on a roth ira, you can withdraw your contributions (but not growth on contributions) after 5 years, penalty and tax (well, you already paid the tax) free.

My thought is to contribute the max, ALWAYS (max roth, max 401k). This is tax free growth that you don't get the chance to get back 10 years from now. Right now you are used to living on a limited budget. Take that income away from yourself before you see it in your bank account. Way harder to "save" money that makes it into your checking account... it's just too easy to say "next month".

jetskiprosx 05-18-2011 8:19 PM

Since you're just starting out I highly recommend the book 'Total Money Makeover' by Dave Ramsey! My wife and I have been on his plan for about 1.5 years now and it's changed the way we live. His teachings are nothing profound. They are basic and the advise is sound. He often says that what he teaches is how our grandparents lived. Here is the quick land dirty on it:

1. Save up 1k in an emergency fund
2. Pay off all debt except your mortgage
3. Build your emergency fund to 3-6 months of income
4. Max out your 401(k) and other investments
5. Save for college (if you have kids)
6. Pay off your mortgage
7. Save and give

Since starting his plan we've paid off our student loans and are now working on paying off my truck and looking forward to step number 3. I've listened to Dave speak live, and have gone through his Financial Peace University and loved it.

sidekicknicholas 05-19-2011 6:55 AM

Thanks again everyone for the good info! .... dispite most of it still being over my head.

I think for the next year my plan will go as follows: Assuming the fiancee' doesn't win Miss Wisconsin in June...
5% to 401k (max matched amount)
5% (that was going to 401k) + another ~15% that will go to the wedding fund (would like to save ~10k in the next 15 months for that - so she doesn't murder me) - I assume that our parents will pick up the tab on this - which would mean I could roll this over to a down payment
continue paying off debts as planned (car and school)
.... then after the wedding ~16mo re-evaluate and start taking a more hands on approach with everything.

The problem is right now, fresh out of school, I just don't really have the extra money/knowledge/freedom to save here/move the money there/etc etc.... where after the wedding I think it will be in my best interests to go to a financial advisor or something and get a personalized plan based off of what I'm making and whatnot.

*I've kind of got a step one/three but a little different.
I try to put $100 mo. into a CD with a 12 month run.... I do this every month for an entire year, so after a year and the first month I put in comes due, If I need it I take it, if not, add another $100..... its slow and steady but after a few years (lets say 5) of dumping a small amount of money into these I get $500 coming due each month if needed, etc etc etc

Thanks again everyone !

phantom5815 05-19-2011 7:17 PM

Thank you M-Dizzle ! I knew there was A LOT more to what I wrote .... it was a brief blurb of what I saw/read in an internet article is what you expanded upon.

There is a certain income level that prohibits one from participating in both 401k and IRAs, especially if you max out in one or the other.

stephan 05-20-2011 8:36 AM

Phantom, anyone can contribute to an IRA (as long as they are under the age of 70 1/2). If you participate in a company plan, depending on your income, your IRA contributions could become non-deductible. For a ROTH, your income determines your eligibility to contribute, under 107k and you can make the full contribution (but again, the ROTH is always non-deductible).

I recommend having a source of pre- and post-tax dollars. While you have access to a 401k, this should be your pre-tax vehicle (the employer match sells it). Establishing a ROTH is great while you are starting as your tax bracket theoretically will be low. Always be cognizant of where you fall with taxes, if you can get yourself into a lower bracket, jump all over that! As John said earlier, often times a 401k can be restrictive, but the match makes it worthwhile. Many people get new jobs and leave their stuff in a crap 401k, being able to rollover into a less restrictive (often, better managed) IRA is essential! Stay on top of your hard earned savings and let it go to work for you!

As M-Dizzle said, this is not tax or planning advice, I'm just trying to put out there what I tell my clients. Happy investing!

guido 05-20-2011 12:17 PM

Phatboypimp-- I like your game plan with Schwab. I've been thinking of getting into that to diversify a bit. We've got a chunk of money sitting in a ING account that is doing nothing for us. I think it's time to put it somewhere and make some money. I don't want to dump it into a IRA or 401k as it's our "emergency" fund, so I'm thinking Schwab about be a good option.

As a side note... I've been tossing this idea around for the last few years. The wife and I are considering having kids very soon. I was thinking of taking all of my change and investing it to see if I can make it completely pay for a kids college fund. I think it'd be a cool way to do it. I think I'm sitting on about a grand in change right now. I've got it stashed all over my house in tupperware bins. I HATE CHANGE!!! Ha, ha, ha. Now I just need to get it to the bank.

wakeskatethis 05-20-2011 12:49 PM

this might teach you something

phantom5815 05-23-2011 7:38 PM

Small Light: Looked into contributing to a Roth after I maxed out my 401k 3 yrs ago...... no can do ..... Like you said it all depends upon your income level.

phantom5815 05-29-2011 5:14 AM

Here's the article I was looking for about Roth IRA:
Roth IRAs: A real 'fiscal Frankenstein'
In establishing Roth IRAs, Congress waived untold billions in future Treasury receipts. It's time to retire them.
April 10, 2011|By Gerald E. Scorse
The day after Congress passed the new healthcare law, an opponent called it "a fiscal Frankenstein." In fact, those are fitting words for Roth individual retirement accounts, or IRAs. Roths drive up the federal deficit and cause other pain. They're great for holders but grim for America. It's time to retire them.

Retirement accounts were designed by Congress to spur saving by Americans for their golden years. Let's compare a Roth IRA to other accounts, such as traditional IRAs, 401(k)s or 403(b)s.

In the other accounts, contributions are tax deductible and nest-eggs grow tax-free until money is withdrawn. Payouts can begin at age 59 1/2; they must begin after age 70 1/2 and be taken annually thereafter, and they're fully taxable. The accounts strike a two-way bargain: years of tax deferral and deductions, followed by years of taxpaying withdrawals.

Then, in 1997, Congress created the Roth IRA.

In a Roth, taxes are treated the other way around. There's no tax break on contributions. But from that point on, taxes simply vanish. As long as the account is at least 5 years old, there is no tax on any withdrawals made after age 59 1/2. There's no requirement that you make a minimum withdrawal — after age 70 1/2, or ever.

All of which makes Roths a perfect "fiscal Frankenstein." In return for little more than ordinary upfront taxes, Congress waived untold billions in future Treasury receipts. Then, too, Roths could be a drag on the U.S. economy. Since no withdrawals are required, assets can lie idle indefinitely.

For Roth holders, the accounts become a permanent, federally sanctioned tax shelter. For America, they're a bit like toxic instruments on the nation's books. Worse, Congress has them on steroids, and President Obama wants to up the dosage.

The limit on annual Roth contributions has risen from $2,000 to $5,000. Persons over 50 can add another $1,000 to "catch up." That's a $6,000 per-year maximum, $12,000 for a married couple — triple the original limits.

And conversions from a traditional IRA to a Roth IRA ballooned after 2010, when income limits were lifted. Conversions, set up in the 1997 law, are routine paperwork exchanges. Holders of regular IRAs cash out, pay any taxes due and convert the proceeds to Roths.

Originally, only those with adjusted gross incomes of less than $100,000 were eligible. But Congress removed the $100,000 limit for Roth converters.

In an article titled "The Rise of the Super-Rich," financial journalist Teresa Tritch condemned the change: "Under previous law, Roths had been off-limits to wealthy Americans, precisely because the government did not want to help people amass big estates under the guise of saving for retirement. That sound principle has now been turned on its head."

The rich rushed through the Roth open door. Fidelity Investments handled 22,000 conversions in January 2010, roughly quadruple the year-earlier level. The Vanguard Group had close to 30,000 Roth conversions in the same month (nearly 70% of its total for all of 2009), and conversions through May were five times greater than the year earlier. A December surge capped Fidelity's fourfold increase, lifting its 2010 conversion total to about 220,000 accounts.

Financial analysts endlessly debate Roth conversions. Many see them as a slam dunk. But naysayers point to red flags, starting with the hefty tax bite.

Roths could also multiply in an instant. A provision making Roth IRAs the default retirement plan for employees at certain companies is in the president's 2012 budget. The president, says Howard Gleckman, is being seduced by "the siren song of the Roth."

Gleckman is the editor of TaxVox, a blog published by the nonpartisan Tax Policy Center in Washington. Here's Gleckman on Roths for the rich: "In the long run, turning billions of dollars from tax-deferred to tax-free savings will be a huge loser for Treasury. My colleagues at Tax Policy Center figure that, through mid-century, allowing unlimited Roth conversions will reduce federal revenues by $100 billion."

Whatever the answer for individuals, there's little doubt that Roths are wrong for America. They're Frankensteins, fated to wreak havoc. It's time to retire Roth IRAs.


All times are GMT -7. The time now is 9:20 PM.