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.

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?

What would I do differently?

When my parents introduced me to mutual funds with a Roth IRA, I thought the idea of dividend reinvesting was so novel! I did nothing and yet my fund kept growing and growing with more and more shares. I continued this practice, except in a normal taxable account. This is one thing I wish I did differently.

I keep having to pay taxes each year on my mutual funds that I have outside of a 401k or IRA account. In the future I plan to segregate all dividend-paying stocks and mutual funds into my 401k or IRA accounts, and hold stocks in both retirement and taxable accounts. Of course, I wasn't as patient an investor nor as wise as I am today, so if I had been in more stocks back in 1999, I probably would have gotten trashed during the dotcom bust and left the stock market forever discouraged.

I probably should have bought a home back in 2003, when the interest rates were among the lowest ever, and a townhome in Santa Clara still cost $400,000. I would have gotten a 30 year fixed mortgage, and I would be diligently paying it down to this day. With my rent now at $2500/month, I think I'd be paying the same for my mortgage today. It's difficult to say how that would have affected my thinking, as I have switched jobs twice in the past 5 years, to higher position and salary. Perhaps I might have been more conservative and less likely to look for jobs while I had a mortgage.

Also, there are now very inexpensive online brokerages that let you nibble on small stock purchases with low commissions like Sharebuilder, Tradeking, Zecco. These brokerages offer much lower commissions than Datek (now Ameritrade), E*Trade, Ameritrade back in the early 2000 years. I have Scottrade and Zecco accounts, as well as direct accounts with several mutual funds.

I use the Scottrade account for their free real-time java applet, and Zecco for their free 10 trades / month. Since I'm investing for the long term, I want to just buy and hold for at least a year. Sometimes I sell losing stock at the end of the year for capital loss deductions on my tax return, and then buy it after 31 days to prevent a wash sale.