Roth for a kid?

[peterk1234]

I have two girls. Made them get jobs the minute they hit 16. Started funding their Roths the day they started to work. One is now 27 the other is 25. We continue to fully fund those things. And plan to do it until the day I'm dead.


Time in the market is a huge thing. It cannot be overstated how important that is. I'm not worried about them needing money prior to 59 1/2. That's their problem. It's called life. I want to help them get to the point that they can retire at a reasonable age.


Kudos for your willingness to do this!

 

[Bonasababy]

If you do the math they are identical on earnings. The pretax option will grow larger but when you withdraw it and pay taxes you end up in EXACTLY the same place assuming the tax rates are the same.

The reason people focus so much on the tax angle is because that is the only thing that matters. Is your tax rate now higher or lower than what you think your tax rate will be when you withdraw the funds.

Not sure why you would need to talk to accountant to tell you how to do basic math.

Having an opportunity to put in tax advantaged money at a young age can be a true game changer.

How do you do the math? And are you assuming the math is the same for everyone? It's not.

Appears certain I will be paying less taxes when I retire than when I was working. We are not alone in that.

It's an individual, and an individual by state--question. Having a pension that isn't taxed or not having any tax on social security in your state can dramatically lower your taxes due in retirement. If you take home the same money in retirement while you were working but 1/2 or more of that take home isn't even taxed, it makes a difference!

I think Roths get pushed so hard by folks who sell their services to start one as some employers only allow pre-tax. Gotta think about what is best based on individual situations.

 

[npaden]

How do you do the math? And are you assuming the math is the same for everyone? It's not.

Appears certain I will be paying less taxes when I retire than when I was working. We are not alone in that.

It's an individual, and an individual by state--question. Having a pension that isn't taxed or not having any tax on social security in your state can dramatically lower your taxes due in retirement. If you take home the same money in retirement while you were working but 1/2 or more of that take home isn't even taxed, it makes a difference!

I think Roths get pushed so hard by folks who sell their services to start one as some employers only allow pre-tax. Gotta think about what is best based on individual situations.

Does 2 + 2 = 4 for everyone? Seems like the same math to me. If you need me to I can work the math out for you. Assuming the same rate of return and the same tax rate the end result of a Roth vs pre-tax is identical.

Like I said, the question is almost entirely about tax rates on making the decision. If you are expecting your tax rate to be lower at retirement than it is now then a Roth might not be for you. Then again it might be if you are maxing out your 401k contribution and would like to benefit from more tax advantaged savings.

I understand how taxes work pretty well. I understand Roth options pretty well. I think everyone should look at their specific situation and do what is best for them.

I don't make blanket statements like "Your money grows faster in pre tax than Roth. People focus so much on the future tax angle they forget about earnings!" when they are misleading at best.

For young kids with tax rates at or near zero, being able to stick some money into a tax advantaged vehicle that can grow for 50+ years with not ever having to pay any taxes on the earnings is a gold mine. That's what the original poster was asking about and what most of us have responded to.

 

[homers]

Roth’s have other advantages as well. Not subject to RMDs, for example. The people who inherit the 401k with thank you if it’s a Roth as well.

 

[npaden]

Okay, I have other things to do but I did some math.

So let's say the kid has a lot of other income some how and actually owes taxes. Even crazier let's say he is all the way up in the 22% tax bracket.

He takes $5,000 and invests it in a traditional IRA and saves $1,100 of taxes. He leaves that money in there for 50 years and does well with a 9% rate of return. After 50 years it has grown to $371,788! Then when he takes it out he pays taxes of 22% which is $81,793 leaving him $289,994 net of taxes.

Note that both sides of that are probably wrong, he more than likely is not in the 22% tax bracket now, and more than likely he will be paying more than 22% at retirement but to make the math computation we are assuming the same tax rate on both sides.

If he put that money in a Roth IRA instead he would have to pay that $1,100 of taxes so he would only have $3,900 to put into the Roth. Same thing, leaves the money in there for 50 years and does well with a rate of return of 9%. After 50 years it would grow to... wait for it.... any ideas?? $289,994. The same exact number as the traditional IRA.

The math is the math. If the tax rate is the same then the amount that you have at retirement after tax is going to be the same. That's why people focus on the tax rate side of it.

And for the kid in the original post, I doubt they are in the 22% bracket. More likely 10% or 12% or maybe even 0%. And again, most likely he will be way over the 22% tax bracket at retirement, a kid willing to get a job and work is more likely going to do well in life and might be in a higher bracket because of that and at some point we as a nation are going to have to pay off our debt and that is going to cause tax rates to go up as well.

As a general rule of thumb Roth works great for younger people and not as good for older people. Not because of potential return and time in the market, but because younger people are typically not at their top tax rates yet and older people probably are.

There are instances when you still might want to put money in a Roth even if you are at a high tax rate if you have already maxed out your pre-tax traditional options and still have money to save. The Roth still allows the earnings to grow tax free and if your window of when you need the money is longer than 5 years or so you can save quite a bit that way.

 

[Greyman]

If you do a 529 college savings plan, your child can roll up to $35,000 over to a Roth without penalty in the event it's not used for education.

 

[peterk1234]

Okay, I have other things to do but I did some math.

So let's say the kid has a lot of other income some how and actually owes taxes. Even crazier let's say he is all the way up in the 22% tax bracket.

He takes $5,000 and invests it in a traditional IRA and saves $1,100 of taxes. He leaves that money in there for 50 years and does well with a 9% rate of return. After 50 years it has grown to $371,788! Then when he takes it out he pays taxes of 22% which is $81,793 leaving him $289,994 net of taxes.

Note that both sides of that are probably wrong, he more than likely is not in the 22% tax bracket now, and more than likely he will be paying more than 22% at retirement but to make the math computation we are assuming the same tax rate on both sides.

If he put that money in a Roth IRA instead he would have to pay that $1,100 of taxes so he would only have $3,900 to put into the Roth. Same thing, leaves the money in there for 50 years and does well with a rate of return of 9%. After 50 years it would grow to... wait for it.... any ideas?? $289,994. The same exact number as the traditional IRA.

The math is the math. If the tax rate is the same then the amount that you have at retirement after tax is going to be the same. That's why people focus on the tax rate side of it.

And for the kid in the original post, I doubt they are in the 22% bracket. More likely 10% or 12% or maybe even 0%. And again, most likely he will be way over the 22% tax bracket at retirement, a kid willing to get a job and work is more likely going to do well in life and might be in a higher bracket because of that and at some point we as a nation are going to have to pay off our debt and that is going to cause tax rates to go up as well.

As a general rule of thumb Roth works great for younger people and not as good for older people. Not because of potential return and time in the market, but because younger people are typically not at their top tax rates yet and older people probably are.

There are instances when you still might want to put money in a Roth even if you are at a high tax rate if you have already maxed out your pre-tax traditional options and still have money to save. The Roth still allows the earnings to grow tax free and if your window of when you need the money is longer than 5 years or so you can save quite a bit that way.

Another consideration is future tax rates. I'm gonna go out on a limb here and say they will be higher 50 years from now.

 

[Bonasababy]

"Kids" was the topic, and I assumed that meant a kid out of college gainfully employed with their degree and earning decent money. If you are taking someone much younger I would agree a Roth is the way to start--but you might want to pivot to pre tax depending on your situation.

Here's one example of an actual calculator for this--from bankrate:

 

[SAJ-99]

Another consideration is future tax rates. I'm gonna go out on a limb here and say they will be higher 50 years from now.

I’ve heard that for 40yrs.

 

[Bonasababy]

The assumptions on that run were not atypical--assuming a higher tax rate while working than while retired. A 7 percent average return (which might be more generous than I would use although it's fair going backwards) and 6K a year kicked in.

All contribution amounts with those assumptions show a slightly higher return over time with pre-tax than Roth.

Why--well you have to factor taxes in on both sides. Taxes saved with pre-tax--and taxes saved on the back end with Roth.

But again everyone's situation is different. It's just not nearly as simple as Roth is always best (which is the sense I get from some of the advice here).

I will say a key factor in pre-tax advantage--the up front tax savings--if you aren't using that savings to add even more into your retirement account the advantage can be less and wash out some of the difference.

Now if your young kid who pays very little taxes now never gets a good job and never pays a lot of taxes, then yes Roth all the way.

I suspect the reality for many as I said before might depend on where they are in their life--and some of both.

I am a big fan of having enough in Roth to cover major unplanned needs in an year above normal expenses--or in any year when a withdrawal to fill any non regular desire might kick you way up into a higher tax bracket.

 

[Bonasababy]

I’ve heard that for 40yrs.

The politics of the changing demographics--with a huge and growing pulse of boomers retiring and beginning to live on a fixed income--and they VOTE--makes me question whether they will rise much for the middle class. The wealthy I sure agree they will, they have to to begin work to ease the national debt, shore up SS etc.

 

[brymoore]

I’ve heard that for 40yrs.

Trump is going to pay off the national debt with crypto so we have that going for us.

 

[npaden]

"Kids" was the topic, and I assumed that meant a kid out of college gainfully employed with their degree and earning decent money. If you are taking someone much younger I would agree a Roth is the way to start--but you might want to pivot to pre tax depending on your situation.

Here's one example of an actual calculator for this--from bankrate:

View attachment 338074

In the first post he gave the age of the kid. 16. The 24% tax bracket starts at $100k in 2024. Not a lot of 29 year olds making that in taxable income (not gross) and for sure not a 16 year old. The 12% bracket ends at $47k in 2024. Not a lot of retired folks making less than that especially if they loaded up a 401k and are having to take large RMDs. Doesn’t take a lot of income to move social security to 85% taxable.

So the scenario you showed with the 25% tax rate for the 29 year old and the 15% tax rate at retirement isn’t super realistic although it could happen. As mentioned several times it all comes down to that. What is your tax rate now and what is your anticipated tax rate at retirement. That needs to be considered every year.

My personal opinion is that if you are in the 24% or less tax bracket you should at least consider a Roth. It’s hard for me to believe that someone living a comfortable lifestyle in retirement isn’t going to be at least in the 22% bracket. The 2% juice is probably worth it to have the flexibility of the Roth. Maybe do 50/50 Roth and Pretax to play it safe.

If you are up in the 32%+ bracket then you should probably max out your pretax options before looking into backdoor Roth type options.

 

[SAJ-99]

The politics of the changing demographics--with a huge and growing pulse of boomers retiring and beginning to live on a fixed income--and they VOTE--makes me question whether they will rise much for the middle class. The wealthy I sure agree they will, they have to to begin work to ease the national debt, shore up SS etc.

Top 50% of tax payers pay 98% of taxes, the bottom 50% pays the other 2%. The goal is to minimize taxable income when you are in the top 50% and move in to the bottom 50% after retirement.

 

[ismith]

Trump is going to pay off the national debt with crypto so we have that going for us.

And the Democrats/Republicans are going to mint some trillion dollar platinum coins so the can “borrow” more money, lol.

 

[ismith]

they have to to begin work to ease the national debt, shore up SS etc.

Where??? Ukraine?