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.

Goals for May 2008

Since rent is expected to increase, I'm going to take my 401k contributions to 15% pre-tax instead of the 10% pre / 5% after tax contributions I was making before. I'll check my paycheck in two weeks to see how much more money I net. PayCheckCity has an excellent calculator for this.

Mint.com has some recommendations on how to save more money, such as moving to an E*Trade Checking account (which I've already done), and let us know that Starbucks and Peets Coffee are our most frequented merchants. I'll have to talk to the wife about that again.

Cleaning up clutter. I have lots of stuff lying around the house that I could probably put up on Craigslist. I'm too lazy to pack stuff up to sell on E-Bay. I figure I could gain another $200 or so selling all this crap I haven't been utilizing. Better yet, I might be able to donate and take an itemized tax deduction... except I don't expect our itemized deductions to top the standard married filing jointly deduction this year.

Mint.com and our net worth: $370,000

After looking for online tools for managing my finances, I found mint.com and loaded a bunch of my accounts. I was surprised that they even support Dodge & Cox, our largest taxable investment account, as well as our local credit union. Apparently they use Yodlee as their backend to access your accounts. I'm still leery about providing the username/password information though.

After loading up all our credit cards, savings, checking, and investment accounts our total net worth is around $370,000. We don't have a house, so no difficult calculations on principal and current value. We do plan on buying a home, but that's another story.

Mint.com is does the job of aggregating finances together on a single site. It does not keep track of individual investment positions, just the total value of your investment accounts. It takes recent purchases and finds possible alternatives, like our Wells Fargo checking account could be making more money if it were instead an Etrade Max Checking account. Or our credit card could be getting a lower interest rate.

We can set up budgets for particular spending categories like Entertainment, Grocery, Gas, Restaurants, and Shopping to begin with and starts with a default budget based on the past transaction history. We can set up E-mail or SMS alerts based on certain criteria such as large purchases, low bank balances, if there are any Fees charged on your accounts.

Update 3/26/2008:
I haven't added everything in Mint.com so our current net worth is probably a lowball figure. Current estimates bring it to around $450,000. Current 401k plans and Employee Stock Purchase Plans add at least another $80,000 to the $370,000 quoted in the title.

Cutting costs

Tallying a list of my recurring monthly costs...January 2008 - March 2008

• Cell Phone Family Plan: $125/month
• High Speed Broadband Internet: $125/month
• Utilities: $100/month
• Public Transportation and commuting: $175/month
• Cable TV: $0/month - antennaweb.org - hulu.com
• Eating out and Entertainment: $400++/month
• Netflix: $22/month
  
• Rent: $2500/month
  

Living in San Francisco can be quite expensive. I see an opportunity to lower our rent by looking for a cheaper place, and to eat out less. We don't have a home phone, so our cell phones are our lifeline. The broadband internet package could be a slower package, but I really love my internet.

Taking the time to actually write down and list my expenses really is eye-opening. We're lazy and like to eat out a lot -- and not fast food either. Neither I nor my wife cook much. So how can we motivate ourselves to eat at home more often? Tallying up our meal costs will surely be eye-opening to her as well, but still $400 doesn't seem that expensive. I should probably restart Microsoft Money and put our credit cards into there so we can actually get some charts on our spending habits.