ROTH vs Standard IRA
(I will try to eventually put this on my web site as an article I can update after I get some feedback here to help improve this.)
I stopped contributing to my regular IRA once I started working for myself in 1998 and didn't get an employer match.
IF you can afford it, contributing after tax money to a ROTH and/or buying individual stocks is better in my opinion than saving in an IRA without a company match. IF you get a company match, then I'd contribute what is needed to get the full match, then use excess funds to contribute to a ROTH plus individual stocks and index funds.
Often you take money out of an IRA in retirement and the income can push you into a level where your Social Security payments are taxed.
Get even more successful as many of us here have, and the required RMDs push you into higher Medicare brackets where the government punishes us for saving rather than spending our money when we made it. The last I calculated it, the maximum "penalty" for being a good saver is about $4,000 a year in extra Medicare premiums. That is worth another article showing how the government gets middle income people to "pay our fair share" simply as punishment for saving for retirement in successful investments.
Even if you don't reach the levels to lose benefits, Money taken out of regular IRAs are taxed as regular income but if you invest in index funds or individual stocks with taxable funds, then the income years later is taxed at capital gains rates. IF your total income in retirement is low enough, there is no Fed tax on long-term capital gains.
From irs.gov
A capital gains rate of 0% applies if your taxable income is less than or equal to:
- $44,625 for single and married filing separately;
- $89,250 for married filing jointly and qualifying surviving spouse; and
- $59,750 for head of household.
Don't forget that as seniors, we get a bonus to the standard deduction so the total income we can earn and pay zero capital gains tax is significantly higher.
irs.gov
Additional standard deduction – You're allowed an additional deduction if you're age 65 or older at the end of the tax year. So, for 2024:
- 2024 Income for 0% LTCG Bracket = $47,026
- 2024 Over 65 Deduction = $1,950
- 2024 Standard Deduction = $14,600
Add the three above for: - 2024 Max Inc for zero LT Cap Gain Tax = $63,576
Even if you are successful with your regular IRA and RMDs plus SS push you above the 0% rate, your capital gains tax rate is still significantly lower than the fixed income rate.
Again From irs.gov
A capital gains rate of 15% applies if your taxable income is:
- more than $44,625 but less than or equal to $492,300 for single;
- more than $44,625 but less than or equal to $276,900 for married filing separately;
- more than $89,250 but less than or equal to $553,850 for married filing jointly and qualifying surviving spouse; and
- more than $59,750 but less than or equal to $523,050 for head of household.
Beware that California taxes long-term capital gains as ordinary income and our top tax rate is 13.3%. IF the country continues to move to the left to "follow California's 'progressive politicians'" then we could see this whole calculation change. |
