When I graduated college in 2007 I promised myself I would fully fund my Roth IRA every single year. We are in 2012 now, and so far, I’ve stayed true to my word. BUT NOT FOR LONG. One of my resolutions for 2013 is to STOP contributing to my Roth IRA.
That’s right, I’ll probably never contribute to my Roth IRA again. Like ever.
If you’ve read my blog for a while you’ll have seen many a posts where I confess my undying love for Roth IRA’s, like this one six weeks ago. The more I think about it, however, the less convinced I am that it’s the right place for my money.
Girl Ninja and I are in the 25% tax bracket. Looking at historical averages, we will likely remain in the 25% tax bracket for a very long time, likely our entire working lives. I could nearly double my already decent salary, and we would still be in the 25% tax bracket.
What’s more, I don’t necessarily think the government will attack the middle class anytime soon. Politicians argue about the richest and poorest people in America, not us middle-classers. Republicans want to cut entitlement programs, and Democrats want to tax the wealthy. That’s the way it’s been, and the way it will continue to be. When’s the last time you heard someone run for president say “I want to stick it to the middle class”?
Let’s say the government does get greedy though. My taxes could theoretically go up at some point in the future, but guess what, Roth IRAs could also be taxed at some point in the future. Roth IRA’s were made for the middle class. Literally. (A single person making more than $125K and a married couple earning more than $183k aren’t even allowed to contribute to a Roth because, by the government’s standard, they make too much.)
So if the government would wage war on the middle class by increasing their income tax obligation, why wouldn’t they wage war against the middle class by taxing Roth IRAs? Heck, they’d likely go after the Roth first since that would only piss off a portion of Americans (those who actually have a Roth) as opposed to enraging the entire middle class. (note: I don’t think the Roth will be taxed at any point, FOR THE SAME REASON I don’t think middle-class taxes will increase, it would be political suicide).
If taxes aren’t likely to increase for the middle class, and I have no reason to believe I’ll be in a higher tax bracket come retirement, I see no benefit to a Roth IRA.
Why give the government more than I have to?
Last night, I logged in to my 401k plan and upped my contributions by exactly $6,667 annually (this pretax amount is equivalent to $5,000 after taxes…the amount I would have put in my Roth). This increased my 401k contributions from 8% to 16%. Who knows, if I’m feeling crazy I might even try to max it out to a full $17,000 annual contribution.
I don’t hate my Roth. I’ll continue to let what money is in there grow tax-free, but I’ll probably never contribute to it again.
And regardless of the things I’ve said in the past, you might want to consider kicking your Roth IRA to the curb as well.
To further prove the point here was a blurb from a comment below:
“If you are in the 25% tax bracket and contributed $100 to a Roth IRA and it grew 10% you would be able to withdraw $110 tax free (let’s ignore the 5 year rule etc). For the 401k if you contributed $133.33 (which works out to $100 pretax: $100 / 0.75) and it also grew 10% you would have $146.67, and after paying 25% taxes it would give you $110, which is the exact same as the Roth IRA.”
p.s. If you want to disagree with me, or call this decision stupid, use MATH to back your claims up. If my tax bracket is not higher in retirement, the Roth benefits are significantly diminished.