Why ROTH doesn't make sense to me

Our AGI is above the Roth contribution phase-out limit, so we can't contribute to a Roth IRA anyway.

The Roth IRA allows you to contribute after-tax money into a retirement account, where future withdrawals after retirement age are income-tax free. The reasoning behind this is that one might expect to be in a higher tax-bracket come retirement age. That argument only holds water if you expect to SPEND as much as you do now.

Most people between the ages of 25-35 will have a rent/mortgage payment, a car loan payment, student loan payments, entertainment spending at bars/restaurants. Those really add up in terms of money being spent. By the time I retire, I don't expect to still be paying off any loans, which means the biggest reason for recurring income is nullified.

What if we move to a Value Added Tax like in Europe? A lot could happen in 30 years. Sure, your Roth withdrawals won't get taxed as income, but what are you going to do with that money? Spend it on goods/services. That pretty much means you've gotten taxed twice -- in 2008 when you put your money into the Roth, and in 2040 after you've retired and you bought a new set of golf clubs + 15% VAT. I don't play golf by the way. I hope I don't do that when I retire either.

So take advantage of the tax savings in a 401k for the NOW especially if your company offers 401k matching contributions, or a traditional IRA if you qualify. The Roth IRA is betting that your life situation will be more income-tax heavy after retirement. Who can see that far into the future? Instant gratification in this case is a good thing.

This post assumes you follow the generally accepted best practices of personal finance which are: Spend less money than you earn. Save the remainder. Grow that savings in dividends, investments, or interest.

Afterthoughts: Roth could make sense for the teenager getting a first-time job. If you have kids, and you've educated them in the merits of saving money, living frugally, etc, then encourage them to put their earnings into a Roth account. A teenager's first-time job is probably going to be taxed minimally anyway, so the Roth is ideal in that situation. Plus, that gives the Roth an investment horizon of at least 40 years.

Icarra.com portfolio tracking

Thanks to the first commenter on my blog, I was referred to icarra.com, a free portfolio tracking site. It's my first hour using it, but here's my Scottrade IRA account. I'm a Motley Fool subscriber, so pretty much my whole IRA contains picks from them. But back to Icarra.



Icarra gives me a portfolio breakdown by sector, so I can see where I might be overweight. I share my portfolio by NAV, which means now my whole IRA looks like a single Mutual Fund for the public to track as well. I don't know the mathematics behind NAV calculation, but Icarra makes it easy.

I imported my Scottrade transactions via .qif (Quicken). However it's a beta feature for Icarra currently, so all my Sell transactions had double-negatives, which treated them as positive cash and positive share additions. So I had to remove all the '-' symbols in the Sell transactions that were imported.

Icarra doesn't understand my Call/Put options, but that's small $ so I didn't worry about too much. Overall, the web site is a bit plain, but gives me a good tracking method for my portfolio. I might start using this over Cake in order to watch my taxable investment accounts as well, and comparing them with the S&P 500.

Apparently, Icarra also doesn't show the current day's performance until later in the night? The markets are closed after a huge rally today (4/1/2008), but I can't get it to show me performance statistics past 3/31/2008.

Lump sum vs dollar cost averaging

Since I chose to roll over my IRA into a stock trading account in January, I opted to buy a little at a time. This fortunately saved me from a massive drop during January and February. I suppose it simply depends on the timing.

Mymoneyblog.com had some interesting viewpoints on this. I had around $150,000 rolled into my IRA account. Here's my exception to the rule.

Beginning January 03, 2008, the S&P 500 ended at 1447.16. That's when I started purchasing stock in small bites. Throughout January, as the S&P 500 slid down to 1350 on January 22, I continued to add to my positions, averaging my initial costs down. So my IRA has a +4.44% gain year-to-date while the S&P 500 is currently sitting at -10.03% year-to-date. My previous blog entry was higher, but it got hit hard on Friday.

I'm curious though, if there is any software that can track my stock purchases versus an equal dollar cost of the S&P 500 for each of my stock transactions. Because as it stands, I believe most tracking software compares your portfolio against the S&P 500 as a single transaction from the start date of comparison, though there may have been multiple periods between where you may have purchased stock. That way I'd be more fair, because there are certainly some dips in the S&P 500 down to the 1273 and 1276 on separate days this year that would have come out to be gains as well.

Don't time the market with your retirement

At the end of December 2007, I completed the paperwork to roll over my former employer's 401k into a Scottrade IRA. The transfer completed in the first week of January and I started gradually buying up stock. The markets tanked in January, and my portfolio simply kept bleeding away as I continued to catch the falling knives.

A friend decided to move a chunk of his 401k into a cash fund, because he didn't want to lose money. In doing this, I felt he was trying to time the market. I referred him to various articles explaining the reasoning of staying in the market versus cash. But it was already done, and there was a 60-day waiting period before he could move the cash back into a mutual fund.

While I consider myself a long-term-buy-and-hold investor, I've also been fairly risky with my investments. I know I have a 30+ year time horizon for my retirement portfolio to grow, so I'm pretty heavily overweight on growth stocks and am prepared to ride the roller-coaster of volatility. My friend on the other hand probably had less tolerance for market volatility. His answer to me was "Nobody ever complained about not losing money."

So while my stocks jittered and juked up and down in January and February, my friend maintained a stabler portfolio. In the beginning of March I reminded him that his 60-day waiting period is probably over, and that he should be moving his cash back in. He missed the big rally that started on March 18. My IRA clawed its way out of -10% all the way up to +8% today, all in the span of 5 trading days.

His remark strikes me still, because while surely he didn't lose money, he lost the opportunity to make money. This is where risk aversion can have a detrimental effect on retirement returns. For my time horizon of 30+ years I am eager to see how my growth weighted stocks will perform. Hopefully, they're not all subprime, right?