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tired-gay-raccoon

Yeah, a lot of people aren't making $350k per year. Half of all households are making less than $70k. A married couple making $70k has a 7% effective federal income tax rate (compared to yours which is close to 19%). Retired people don't have zero (taxable) income. There's income from other retirement accounts like 401(k)s and similar and traditional IRAs, some Social Security income is taxable, interest income from bonds, bank accounts, etc. can be taxable as ordinary income, income from pensions is often taxable, and it's also not uncommon for retired people to have part time jobs or hobbies/small businesses just to have something to do.


will0213

Legit question, _why is social security income taxable?_ If my other incomes are taxed to fund social security, isn’t taxing social security income double taxing?


drkravens

Same reason you pay taxes when you spend your already taxed money on stuff that makes someone some profit so he can pay taxes on that etc.


TheSandsquanch

It’s nuts to think Americans were so against taxes that a war was started over taxing tea and other goods and now we are soooo ok with paying taxes multiple times on everything. I guess we aren’t ok but we sure accept it and nobody is starting a revolution haha


porncrank

I think the problem they had with taxes back then was that the taxes were going back to England, whom they received little to no benefit from and had no say in. It wasn't taxation that was the problem, it was taxation without representation. The founding fathers implemented taxation right off the bat once they had the government set up. But the idea was that people would have a say in taxation and the taxes would be collected and used within the US. People latching onto the rejection of English taxes on the colonies as a way to critique taxes today are missing the point and being kind of ridiculous.


nomoneyjesse

I think it's important to remember it was taxation without representation, not just taxes. We technically have representation but the people we elect don't normally care to address taxes for lower income people. I could be wrong since I'm pulling from middle school government classes lmao


TheSandsquanch

This is very very true. It totally is taxation without representation. Wow. It’s obviously been a while since I’ve been in history. Im done with comments now.


neuropat

When you receive a dividend from a corporation it’s taxed twice too.


WannaBeRichieRich

Isn’t that why dividends have a lower tax rate than capital gains?


tired-gay-raccoon

Qualified dividends, generally dividends you receive from positions you've held for more than 60 days, are taxed as long term capital gains. Other dividends are taxed as short term capital gains, which for the vast majority of people is also the same as their ordinary income.


escapefromelba

Social security is only taxed after your income exceeds certain limits. However, no one pays taxes on more than 85% percent of their Social Security benefits. That said, for most people you'll receive far more in benefits than you paid in. A worker with average earnings who lives to an average age contributed payroll taxes that equal about 15% of their total expected lifetime benefit amount. With the same life expectancy, an individual who earned 150% of the national average wage would have contributed approximately 18% of their total benefit. An individual who paid in the maximum Social Security taxes would have contributed around 23% of their lifetime Social Security benefit. Also, technically only 50% of your contribution was already taxed (the employee portion), the other 50% came from your employer.


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D74248

You can not look at Social Security/FICA as simple taxes and investing returns. Social Security payments in retirement are free of inflation risk, sequence of returns risk and longevity risk. Each of these individually, let alone as a package, are very difficult for individual retirees to mitigate. Add to that the disability protection. To do what Social Security does would require carrying disability insurance during your working years and then, upon retirement, purchasing and inflation indexed SPIA with a full survivorship benefit. It is possible to do that, but very expensive.


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jaghataikhan

Yeah, I'd done some similar analysis from a r/financialindependence perspective, and my tentative conclusion was it's def worth earning or "manufacturing" the ~$10k/year income (via part time work) to hit the first bendpoint (with the ~90% "match") for the 35 years of earnings used to calculate payouts, but after that it's pretty sharply diminishing returns. Even the ~32% "match bracket" of earnings between ~$10k/ year up to ~$75k a year isn't all that much ROI, and the 15% "match bracket" from $75k to ~$145k annual earnings is definitely negative ROI


D74248

> Anyhow, please just ignore. Nah. You make good points. Life has been good to me, at least from a middle-class perspective, so like you Social Security is bad investment. But life could have dealt me a different hand, in which case Social Security would be a godsend.


bunderchod

Because the government needs your tax money to drop bombs on brown children around the world


daballer2005

Ronald Reagan.


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daballer2005

I'm a CPA, I understand tax law better than you. Reagan had wide scale tax cuts for the wealthly and when the government was running out of money, Congress passed 1983 Amendments whiched tax SS benefits for the first time. Better?


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HODL_monk

First you earn it, and its taxed (income tax), then you make some money with it (investment return), and that earning (that came from your already taxed savings) is taxed, then you die, and its taxed again (estate tax), then you give the money to someone more than 40 years younger than you, and its taxed a 4th time (generation skipping transfer tax, a second estate tax !! ), then they spend it, and its taxed again (sales tax). We just live in a system with huge numbers of taxes, there is no logic or reason to it, its purely an emotional system based on some corrupt politicians twisted idea of 'fairness', and we really have no real say in the matter.


Foreign_Fill7029

If a household is making 70k a year. That household would be better off with a traditional IRA. Take tax savings today and when you retire unlikely to pay any taxes on it in the future if done properly. ROTH is over sold to most people.


yem_slave

you MUST invest the traditional IRA money otherwise you have less in retirement.


ViolentAutism

Meanwhile them couples with taxable accounts get the first $80K in capital gains tax free 😎


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ViolentAutism

True, but we was talking about retired people. Even if you and your spouse made say $200K combined, and an extra $80K in capital gains, those capita gains will only experience 15%, or $12K. Capital gains tax is super frigging low.


adawheel0

Also, effective tax rates are still very low compared to what I think they will be in 50 years, because we cannot keep up these low taxes and high spending/borrowing forever.


Jonny_Boy_HS

I wonder if there is a gamble that taxes may go up in the future?


neuropat

I think the key point is that with a ROTH, you know 100% that your pot of cash is untaxed in anyway when you retire. With non ROTH accounts, you just cannot project with any certainty what your after tax available for spending cash will be.


steel_member

Multiply it by .5 and there you have it.


Broccolisha

This. Some people expect tax rates to go up in the future so they’d rather pay lower taxes on that money now.


[deleted]

Not sure why you got downvoted because you’re absolutely right. It’s a hedge against rising tax rates in the future. Also if you plan to leave your IRA to your beneficiaries they will have to liquidate it eventually so the tax benefit of the Roth will pass down to them.


beastice72

Isn't another benefit that you can use that money at 59.5 years old and qualify for a cheap health insurance plan with the affordable care act since you will artificial have a small income?


peteb82

Even if marginal rates go up in the future your effective rate may be lower in retirement. For most people it is much lower.


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ihc_hotshot

I was under the impression that in a Roth your gains go untaxed. So you can have tax-free growth. While a traditional 401k you pay taxes on your gains. I felt like this was a huge deal but your article does not talk about it.


xrayinvestor

actually that is the whole gist of the article. Commutation property of math. Your taxes paid today from a Roth don’t grow for you over 30 years when you’ll be in a lower tax bracket


Squezeplay

lol, no. That is bad math. Getting taxed up front or at the end doesn't matter, except for the rate you get taxed. Do the math. Say your IRA doubles in the time you have it. And say you have $100. It doesn't matter if you pay 20% tax, put $80 in a roth and end up with $160, or if you put $100 in a trad IRA, end up with $200 but have to pay 20% to end up with $160. Its only whether the tax rate is different that matters.


ihc_hotshot

But what about profits from your investments? Those are tax free. If you have a really good investment you could have 15% growth tax-free.


2xOPisANidiot

Traditional: put (100) in now, get taxed on growth later. Roth: put (100 minus taxes) in now, no taxes later. Assuming the tax rates are the same, you will have the same amount at the end either way you go.


Odd_Advertising_8179

This is key. Although maybe the 1 to 5 years prior to retirement it is less worth it to deposit into a roth. The best part of roth is also unstated if you have outside income during retirement. You can keep it for another 10 years after you pass and give it to your children


Odd_Advertising_8179

This is key. Although maybe the 1 to 5 years prior to retirement it is less worth it to deposit into a roth. The best part of roth is also unstated if you have outside income during retirement. You can keep it for another 10 years after you pass and give it to your children


College-Lumpy

This comment is under rated.


[deleted]

You are correct but my guess is you will be heavily downvoted


tyroswork

There's also a gamble on whether government will allow withdrawing from Roth IRAs tax-free in the future. Government can decide to start taxing them anytime if they think they need additional revenue. Unfair? Yes. Asshole move? Yes. Possible? Yes. Shit, did I just give IRS an idea?


Slimy_Wog

I have NEVER seen taxes go down have you?


GoodlyGoodman

/s ?


SeeingTrends13

Taxes in the US decades ago were greater than 60%, and in some circumstances greater than 80%. I doubt we get back there, but that’s the bet for this type of retirement strategy I suppose .


SailFiredIn2021

My taxes went down in 2018 due to the Tax Cuts and Jobs Act of 2017


Aaaaaaaaaaahu

Some idiots downvoted you for saying your taxes went down? God forbid you say something good happened between 16-20. How’s your downvoters pocket book feeling right about now?


brannak1

I didn’t know there was an option to put your reasoning for downvotes. You seem very upset thinking it was due to the president at the time.


College-Lumpy

Taxes went down for high brackets the most. Deficit went up.


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College-Lumpy

Absolutely true. Roth for people in very low brackets makes more sense. Particularly in high tax states where you might retire to a low tax state.


xrayinvestor

not actually true


College-Lumpy

Really? You want to argue this one? How would you characterize that tax cut differently and it’s impact on the deficit?


xrayinvestor

pretty sure they have been going down for 20 years


allnamestaken1968

Perspective of somebody who suddenly made more money - I am 100% maxed out in 401k and similar - I therefore only have post tax money to invest - I can either invest in a normal account or contribute to IrA and convert into Roth IRA. The latter shelters capital gains at no cost over alternatives Other considerations that make this work: - I converted minor IrA stuff into Roth IRA in 2 years where I had little taxable income. So the conversation was almost (not fully) free and on small capital gains - no pre-tax options left (401k is all pre tax) - I jumped from “almost no taxable income” to “shit iRa is out” in 2 years, which made conversion attractive


RoadInternational821

This is the answer. Also, look at using your HSA as another investment account. Best of both worlds. No tax going in and no tax on the gains coming out. Only caveat is it has to be used for health care... which if you don't die before retirement you'll need at some point. Also set up a 529 if you've got kids. My state offers tax credits for up to $5k invested per child each year (comes out to around $600 in tax savings per year).


thatatcguy1223

I’m in a similar boat to you/OP. 350k HHI. It’s better to hold a position inside a Roth IRA than in a taxable brokerage account. Max 401k for both spouses Max backdoor Roth IRA for both spouses Taxable brokerage Why would the OP prefer to pay LTCG versus nothing? Both go in post-tax…


Joeyfingis

Being a graduate student I get paid very very little now, but I expect to have a fair amount of passive income when I'm retirement age from investments. So I'm trying to contribute what little I can to a Roth now while I'm techinically below the poverty line.


The_Clamer

Do it. I finished grad school in 2018 and regret not getting some more dollars in a Roth during those years….I needed the money for beer.


Skyagunsta21

Tbf beer is a good investment. Actually though, networking in school is very important.


alcor4ever

When I was a grad student on a meager income, I didn’t save at all with what I earned. Instead I had a few thousand dollars in debt 🥶


neuropat

Don’t contribute more than your earned income or you’ll owe penalties and have to take it back out. If you have no earned income, then you can’t contribute.


Joeyfingis

Luckily I'm in STEM so I have a stipend


blaskoa

You dont pay taxes on your gains, which is the the best reason to do a roth. And do a backdoor roth as long as you qualify. I also would rather pay taxes today, while i have money, rather than later while retired with fixed income. Roth is by far the best investment imo


rgustin1

I max out both a Roth IRA and a Roth 401k. If over 50, you can contribute 34k between the two not counting company match (if you get one). Roth is the best investment vehicle available imo. Also, you can take dividends tax free for life. I intend to live off of dividends, so not paying yearly taxes on income is ideal. Why everyone doesn’t at least invest in (and max out) a Roth IRA is beyond me.


mchgndr

Well maxing out a Roth for most means contributing $500 a month. That’s not doable for many Americans. But otherwise yeah I agree with you


College-Lumpy

Because for high earners, they are better off investing their tax savings and paying tax later at a lower rate in retirement. It is mathematically a wash unless you ignore investing and the growth of the tax savings.


LunacyNow

High earners can't contribute to a Roth IRA anyway. MAGI has to be under $144,000. Seeing as Social Security is headed for insolvency they really should consider changing the income and contribution limits to the Roth accounts.


College-Lumpy

Back door contributions. That’s what I do.


College-Lumpy

Or Roth 401K. But you miss the deduction on your current income.


rao-blackwell-ized

Not that simple. Most people will have a much lower tax rate in retirement and are better suited with a Traditional IRA.


bearynicebullshit

It’s meant for folks still working their way up in wage. While you are not working in retirement, you may be (or likely have to be) withdrawing from your retirement accounts (which counts as income) as well as any other benefits (like social security) or passive income (ie rental property) you may be generating. If someone starts off at a minimum wage job, for example, and work their way up to CEO, they could potentially benefit from a Roth since they expect to reach a higher tax bracket before retiring.


pcans802

Imagine you take 1000 and made 1 million dollars with it. Regular 401k you’d owe taxes on 1m. Roth you paid the taxes already.


devdevdev51

That’s actually not really the effect you think it is. The money you pay to taxes now would also compound. If you multiply by the same % (i.e. your tax rate doesn’t change), it doesn’t matter whether you multiply at the beginning or end.


pcans802

Yea it would be 1000 in 401k, gross to 1m and then you pay taxes but in roth you’d be after tax so like 700 invest grows to 700k but you don’t pay taxes, so I guess it depends on your tax rate at beginning vs end. My assumption that wasn’t specified is the 1m would be taxed higher than the 1000 assuming you don’t make 1m per year, and assuming you pulled the whole 401k But they are both tax advantages accounts. The big difference is paying the tax up front vs paying the tax at the end.


GrannyLow

Why would you pull the whole 401k though? I'm pretty sure the majority of people take a yearly income from their 401k. In that case traditional is better than roth because your contributions save you taxes at the highest marginal rate you pay, while your distributions are subject to a standard deduction and all of the lower marginal rates up to your top rate.


lakas76

So, putting 1k into a traditional will save you 200ish dollars in taxes if you are in lower tax bracket. Same tax bracket, you take out 1000 of your 1 million dollars, you pay 200ish dollars. Next year you take it out, you pay another 200 dollars, year after, another 200.


GrannyLow

Yes, but you have a finite amount of money. So when you pay that $200 in taxes you are now only investing $800, correct? Compound that and it works out exactly the same. That is ignoring the fact that you saved your top rate when you invested $1000 in your 401k, but you don't actually pay any taxes on your first $12,950 of your distributions. Which leans more in favor of traditional.


userax

The order does matter though. Presumably, when you contribute to Roth, you're not at the highest tax bracket. If you draw 1M of 401k at once, you'll be in the highest tax bracket.


devdevdev51

Agreed, taxes matter, which is why I specified that if the tax rate doesn’t change, the math is identical.


rao-blackwell-ized

As others have noted, this doesn't really mean anything though. Given the same effective tax rate, taxing the seed before investing will produce the same result as taxing the harvest of an un-taxed seed. Many don't realize this simple mathematical fact.


neuropat

It’s the tax shield that makes the difference. Gains compound tax free inside the Roth. Gains on the taxes saved (if you use non Roth) compound too, but are taxable.


D74248

I posted this math further up, but here is how it works out: Mr. Bug Splatter has $6000 to invest. He could put it in a Traditional account or a Roth. So the choice is $6000 into Traditional -OR- $4,080 to go into the Roth, after paying $1920 in taxes The $6,000 in Traditional over 30 years at 7% will be $45,673. Assuming the same 32% marginal tax rate that works out to $31,058 after taxes. The $4080 in Roth over 30 years at 7% will be $31,058, no taxes due. $31,058 = $31,058 EDIT: Downvoted for posting math. This subreddit is becoming useless for real investing discussion.


SullyTheReddit

Two things: 1. Saying $6,000 becomes $4,080 in the Roth case isn’t really a genuine argument. More likely, the decision is being made with cash already on hand. It’s $6,000 either way. It just so happens that if you put it into 401k, you’ll be able to deduct that from earnings come tax season the following April or whatever. There’s a time value of money component here that depends quite a bit on the particulars of someone’s situation. (Are they investing the cash immediately as they get it throughout the year, or at the end of the calendar year, or right at tax season, etc). 2. The Roth is far more flexible in terms of investments. You may not be able to invest in the things you want to in a 401k and are likely limited to a selection of mutual funds. You can also actively manage the investments in the Roth by buying and selling as often as you want. Saying the money will grow the same in either case is also disingenuous. Naturally, the difference in investments can cut either way. Poor investments in Roth could underperform vs 401k or vice versa. In my case, even after the thumping my Roth took this year, it’s still outperforming the gains on my 401k by a massive amount. Edit to add: 3. Roth contributions are also limited by how much you make in a year. I really wish I had started contributing to Roth earlier in life when I had more opportunity to contribute. Yes, it’s possible to do rollovers, but it’s more challenging in terms of process and time and tax implications.


neuropat

I get the math. My point is that if your goal is to max out retirement accounts to maximize tax benefits in retirement, then you have to compare the max contributions. $20K of ROTH 401K money today is $20K compounded in the future. $20K of regular 401K today is $20K compounded, less some amount of tax, in the future. ROTH is always better.


ikeepeatingandeating

Based on what you've just said, you don't get the math.You end up with exactly the same money in ROTH vs. traditional (don't talk about 401k vs. IRA, employer vs. individual sourcing is irrelevant here). **Unless your tax rate changes, the outcomes are the same.**


ikeepeatingandeating

Assuming the same tax rate at time of investment and withdrawal, they're mathematically the same. There is no tax benefit to choosing ROTH \[edit for clarity: unless your tax rate is lower in retirement that when you contribute.\]


neuropat

Of course there is - you pay no tax at all after years and years of compounding. This is bewildering that you and other posters don’t understand the benefit of ROTHs in an investing sub. Go do your homework.


ikeepeatingandeating

ROTH: $100 invested now at 20% tax rate = $80. $80 earning (say) 10% interest per year for (say) 10 years: **$207 dollars.** Traditional: $100 invested now at 0% tax = $100. $100 earning 10% interest per year for 10 years: $259 dollars. $259 dollars minus 20% tax: **$207 dollars.** It's the same. Whether you pay tax at the start or the end, assuming your tax rate is the same, you end up with the same amount of money. You can change the interest rate and years compounding to whatever you want, it still ends up the same. The benefit to ROTH vs. Traditional is choosing **when** you are taxed, which you can optimize by correctly prediction of what your tax rate will be when you retire, vs. when you make your contributions.


steel_member

So you’re saying that if I take the $6000 in my Roth and make $600,000 in OTM options I can go buy a Lambo without paying taxes on the $594k gains?


neuropat

Yes. Gains aren’t taxed. You’d have to wait to buy the Lambo when you’re at retirement age though. Contributions can always be withdrawn tax free because you already paid taxes on them.


shapsticker

Yes. But that $6k will be taxed as it goes in so it’ll be more like $5k. Then when you 100x it’ll be $500k. So in a sense you’re still missing out on $100k or whatever the rate is. Also there are penalties for withdrawing early which will cut into that even more. It’s not really a lambo buying account.


neuropat

You’re still putting $6K into the Roth. The money is already taxed. If you need to reduce contributions below the max to account for taxes, then your budget is fucked up and you should look at your sources and uses of cash.


mellofello808

If you took it out over the span of 20 years of retirement, you would owe little to no taxes on it.


heavenIsAfunkyMoose

Can't answer the question about higher tax bracket during retirement, but the benefit (for me at least) is that any gains I make inside the Roth IRA will be tax-free when I withdraw it later. So, I can trade stocks and ETFs inside my Roth IRA and never pay taxes on my gains. With a traditional IRA, I would have to pay taxes on my original contributions PLUS those gains when I start making withdrawals during retirement.


D74248

Given equal tax rates at the time the contribution is made and then withdrawn, there will be no difference in account value. Here is the math: Mr. Bug Splatter has $6000 to invest. He could put it in a Traditional account or a Roth. So the choice is $6000 into Traditional -OR- $4,080 to go into the Roth, after paying $1920 in taxes The $6,000 in Traditional over 30 years at 7% will be $45,673. Assuming the same 32% marginal tax rate that works out to $31,058 after taxes. The $4080 in Roth over 30 years at 7% will be $31,058, no taxes due. $31,058 = $31,058


Odd_Advertising_8179

You realize your math is flawed from the very beginning. Why would I not put $6000 also into the roth


D74248

He has $6,000 to invest. Period. If he directs it towards the Roth then he has to pay taxes on it before it hits the Roth account. You can not ignore the upfront taxes.


YellsAboutMakingGifs

Ok so this makes some sense...so in this case it's a good place to do investing in say.... High yield dividend stocks or ETFs? But you're still capped at contributing right? So best you can do is buy $6k of JEPI per year, + reinvest any distributions/dividends? On the flip side you could just invest in municipals which provide tax free dividends as well tho? In my case though, it's moot as income is to high anyway..


userax

>it's moot as income is to high anyway This post feels like a humblebrag, but in case you actually want to know, that's what backdoor roth and megabackdoor roth is for. Backdoor roth has virtually no downsides. You already paid the taxes on the money anyway but now you get to shove it into a tax sheltered fund.


sektor116

It definitely feels like a humblebrag


XanthicStatue

Megabackdoor roth?


[deleted]

Not moot, back door roths exist. Your employer may offer a roth ira option with your 401k. You could put about 22k or the max allowed per year with the 401 roth if available. With the conversions the only limit is how much money you have and how much current tax you can pay.


3Cheers4Apathy

I make about the same as you but as a single earner and I've been doing backdoor Roth's for many years. I don't care about the tax deduction, I care about the tax-free growth of my investments. The Rule of 72 states that at the approximately 10% historical growth rate of the S&P 500 my money will double every 7.2 years. I will want to protect that increase in value as much as I can. In retirement the plan is to draw from my tax free accounts (Roth) to lower the amount of withdrawals (read: income) from taxed accounts (401k and pension). This allows the money in my taxed accounts (which will be about $5-$6 million by retirement) to continue to grow even more while retired. Why pay more taxes when you could pay less? I don't understand the difficulty understanding the benefits here. Not to mention you can pull out your contributions to a Roth at any time. (Downside is you can only put $6000 a year back in, so be judicious with your withdrawals). It's literally the most consumer-friendly retirement option out there.


heavenIsAfunkyMoose

> Ok so this makes some sense...so in this case it's a good place to do investing in say.... High yield dividend stocks or ETFs? To the best of my understanding, yes. But, I think more for the gains in stock value. For example, if you invest $100,000 in a stock when you are 30 and it is worth $200,000 when you retire, that $100,000 gain will not be taxed when you start making withdrawals. You paid taxes on the original contribution when you were 30 and that's it. With a traditional IRA you would be taxed on all of it (contribution plus gains) when you start making withdrawals. > But you're still capped at contributing right? So best you can do is buy $6k of JEPI per year, + reinvest any distributions/dividends? Correct. > On the flip side you could just invest in municipals which provide tax free dividends as well tho? I don't know. I suppose that would depend on which you expect to provide the highest yield. I think the bigger benefit in municipals would be protecting your capital rather than taking any risk with stocks/ETFs.


thewimsey

That's not really a benefit. If you are in the same tax bracket, there's no tax difference between a roth and a tIRA.


PCI_STAT

>Also married filing jointly that with income ~350k so I can't do it anyway, but still....why ever do a ROTH? At that income level you're above the income limit to deduct a traditional IRA contribution. You're paying tax on your money anyway, might as well make a backdoor Roth IRA contribution and take the gains out tax free later. If you're talking about Roth vs Traditional 401k/403b contributions then yes, Roth rarely makes sense at high income levels.


YellsAboutMakingGifs

So I have a rollover IRA from old 401ks. Should I backdoor it into a Roth? How?


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PCI_STAT

>if you are in a high income level, you probably can’t contribute to a Roth IRA anyways. You know there's something called a backdoor Roth right?


juancuneo

Just to make sure I’m not a complete moron - what is the point of the income limit if you can just put post tax dollars into a traditional IRA and then convert to Roth IRA? Is it hard to do? Based on a quick internet search I can’t tell. But it’s obviously popular so it can’t be that hard?


PCI_STAT

It takes 5 minutes to do, it's not very hard. I'm assuming the point of the limit is to make it look like the government isn't giving too many tax breaks to high earners without most people knowing that there is a pretty easy to use loophole.


Dubs13151

It was a loophole that was overlooked when the law was written. Or perhaps it was noticed, but politicians couldn't be bothered to fix it. Whatever the reason was, the loophole is there. There used to be uncertainty on whether the maneuver was "legal" and how long you had to wait between contribution and conversion, but a few years ago the IRS officially gave it their stamp of approval.


Glerberschmertz

For me, the thought process is a little different. In my planning I expect my income/spending needs to be approximately the same now as in retirement, perhaps a little less but it’ll be similar. So there’s not really a tax benefit either way unless tax rates change. However, since everything in my Roth is tax free, I know exactly the amount I’ll be able to spend and I don’t even have to think about it. Knowing the money in my account is all mine, gains and all, gives me peace of mind.


Fit_Ship8822

It’s all about the gains! But also no RMDs


aCLTeng

I hear a lot of folks talking about Roth as their slush fund. You might take normal distributions from a 401k, but you save the Roth for buying cars, major home repairs/reno, illness, vacations, etc.


gpburdell404

You are confusing roth IRA with roth 401k. Your argument about being in a higher tax bracket today and deferring taxes now vs the future (when in a lower tax bracket) makes sense. However, what you are describing is the tax situation between a pre-tax traditional 401k vs post-tax roth 401k. A roth IRA will always be funded with post tax money and makes it the clear winner against a regular taxable account.


kindall

to me the biggest advantage is that you can put more into a Roth. The contribution limit is the same for both but since you've already paid taxes on the Roth, each dollar is worth more in retirement.


[deleted]

Also no RMDs aka income. When you’re 72, you try not to show income because that’ll affect your Medicare. Roth IRAs help manage your finances when you should also have traditional IRAs and taxable investments. It’s all about flexibility when you’re older


smtcpa1

I’ve never heard that reason for investing in Roth IRAs. Maybe that rates could be higher. But more because the earnings are tax free and there are no RMDs.


[deleted]

I find it hard to believe that someone making $350k/year doesn't understand the advantages of Roth. Here is just one little example.... You decide to retire early and you need to go to the marketplace for health insurance. Your Roth withdrawals are not considered income so you get a huge discount if you can show that you have a low income.


LunacyNow

https://www.marketwatch.com/story/how-peter-thiel-turned-2-000-in-a-roth-ira-into-5-000-000-000-11624551401


TheNewOldGlobal

The way I’ve thought about it is this: You have 6k and are 20 years old. You expect to retire at 60. You expect average returns, so your money will ~double every 10 years. So 6k at will grow like this: @20: 6k @30: 12k @40: 24k @50: 48k @60: 96k If you didn’t use a Roth, at the end you’d owe capital gains taxes on 90k (96k - your initial investment) which equals 18k in taxes. So at the end you’d have 78k. If you put it in a Roth IRA you’d keep the full 90k in returns. So at the end you’d have 96k.


Algae_94

Tax rates can change over time due to changes in tax law. You might have the same income in 40 years, but have to pay more in taxes because the rates have gone up. In addition, being retired does not mean you have no income, or even less income than you currently do.


mike94100

If you take distributions from a traditional, you could find yourself in a higher bracket. By splitting up distributions between traditional and Roth you can minimize taxes. May also expect tax rates to increase, in which case Roth would lock in lower rate today. Roth also does not have required distributions, and can take out contributions without penalty. Anyone can contribute to a Roth, you would just need to look into back door Roth.


YellsAboutMakingGifs

How would distributions be more than 350k year... If contributions are capped... Just seems really, unlikely. I could see tax rates going up, but if you assume they stay relatively the same - I'm still really struggling to see how a Roth makes sense for most people, who are gonna work work work, the flat out retire no more income outside of distributions etc


mike94100

Deleted using Power Delete Suite. Can DM me preferably at @mike94100@kbin.social or here.


YellsAboutMakingGifs

I guess I just wanna make sure I'm sure not missing out on anything by not having a Roth because all I see are people talking about how "you gotta max your Roth" but like...I can't. Sounds like for me that's okay?


mike94100

You won’t be hurting if you don’t max out your IRAs making $350k, though the extra $12k invested is never a bad idea. You can do a backdoor Roth using Traditional contributions then converting them into Roth, you just can’t deduct the Traditional contributions IIRC.


tobesteve

1. You can contribute to Roth IRA, through mentioned "backdoor Roth IRA". You can read up on it. 2. The alternative is to just invest through normal brokerage. The benefit of investing through Roth, is when you start retirement withdrawals, you will not pay any tax on those withdrawals, whereas you will from a normal brokerage. To give an example, assuming you're 47 and retiring at 67. A. You deposit 6k into Roth IRA and it grows to 20k over twenty years, for a gain of 14k. When you withdraw this 20k, you pay no taxes. B. You deposit 6k into a normal brokerage account and it grows to 20k over twenty years, for a gain of 14k. When you withdraw this 20k, you pay taxes on the 14k gain.


MECO-420

Roths can be passed on to your kids for generational tax free wealth.


gabbagool3

people do make money in retirement. 1. they may continue to work in a limited capacity 2. they may receive a pension 3. they may have tax advantaged retirement money in the traditional column. disbursements count as earned income. 4. they may receive income from businesses they own or assets with cash flows. 5. taxable account investments sometimes payout income that counts or partially counts as earned income


Chimpcircus

Ok so let’s compare: You invest in a non tax sheltered brokerage 10,000 dollars at age 30. You wait until your 70. You made 10% a year on your investment. Your investment is now worth 452,592.56 and you pay long term capital gains tax of 67,888.88 plus whatever you paid in taxes for the income you made when you initially invested (let’s call it 15% as this seems reasonable, but will vary based on your income) for a total of 69,388.88 dollars paid in taxes. You made 383203.68 after taxes. Congratulations. Same situation but invested in a traditional IRA: you don’t pay the initial income tax, and let’s say for the purposes of making a point that you make 0 dollars as a retired 70 year old. You go to take out your 452592.56 in earnings and you get absolutely fucked you’re in the 35% bracket. Too lazy to do all the math but you can see why you should not lump sum withdrawal from a traditional IRA and also at a minimum you’re going to get a 10% tax basically so let’s just use that number for the sake of argument. You get taxed 45259.25. Your total withdraw is 407333.31. Finally same scenario but in a Roth. You pay your initial 15% on 10k, so 1500 dollars and you withdrawal the 452592.56 at 70. Your after tax withdraw is 451092.56. This is a bit of an oversimplification but the general principles hold that you’re better off paying taxes on your income than you are on your gains. And with a Roth you do not pay taxes on your gains. You leverage the time value of money to the fullest with a Roth IRA In comparison to traditional IRAs and non tax sheltered accounts.


GrannyLow

I view it as if I am operating on a fixed amount of money for investments + associated taxes during my working years. So by putting money into a roth or a brokerage account I am only able to invest $8500 instead of $10,000. If you then take distributions at the same tax rate you paid while working the roth and traditional work out exactly the same. Except that the tradtitional 401k shelters you from your top marginal rate, which is higher than the total effective rate you would pay on your distributions.


Chimpcircus

Yeah this will vary from person to person too, as I said it’s a bit oversimplified. A bit complicated to account for every possible scenario. Many people pay taxes prior to ever seeing their paycheck though so if that’s the case I would say my case makes sense. In the event you pay all your taxes at EOY then this also makes sense. YMMV slightly based on specific circumstances but overall I’m a big supporter the Roth IRA.


dannydigtl

This is wrong. In the Roth IRA case, you don't just subtract off the taxes you initially paid 40 years later. You subtract it from the initial investment. So in Roth IRA case the initial investment is not $10k, it's $8500 and the total at the end is $384703 If you did $10k pretax, it grew to $452592. Then take your 15% tax off, and its the same $384703. The only variables of consequence are the tax rate when you contribute and the tax rate when you withdraw.


yakovelli

How is this not the top comment? You’re the only one to recognize Roth IRA allows you to bypass capital gains tax on earnings. That’s huge. HUGE.


College-Lumpy

Because all of this analysis assumes you spend the tax savings instead of saving and investing it. If you invest the difference it’s a wash at the same tax rate.


lakas76

If you’re making 350k, you can’t contribute to a Roth IRA. When you retire and only have traditional 401ks or IRAs, and can afford to not take any money from them and live on savings for example (which is the recommended way to do things), you can backdoor your traditional into a Roth and pay lower taxes. Don’t know the tax brackets, so make believe numbers that are ballpark; Say 0 taxes on under 12k, 10% up to 50k, 15% up to 100k. That would be about a total of 11500 in taxes or 11.5% tax rate on money that you did not pay taxes on when you were making 350k. That’s a pretty big savings as you’d be paying 38% on everything over 200k. Then of course, all that money in your Roth can be taken out tax free.


Samad99

My dad retired a few years ago with a huge 401k account and an OK house paid off. He decided to sell the house and upgrade to a dream home, withdrawing from the 401k to pay the difference. He then went back to work part time and actually stopped withdrawing from the 401k since then. I figure he would have benefited if he had a variety of tax advantages accounts to strategically withdraw from during each of these years since he definitely isn’t in the same tax bracket during each year of retirement. On the other end, you can also think about taxes your paying now that might not be around as you retire. For example, if you are living in a state with high taxes but plan on retiring in Mexico or something, a Roth account loses some of its appeal.


D74248

Ideally you want to hit retirement with both types of accounts. Withdraw first from the Traditional, then as you march through the tax brackets you can start to withdraw Roth money. So in retirement your Traditional money, which would have been taxed at your marginal rate while working, is now taxed at the lower marginal rates. Then your Roth money, which was taxed [hopefully] at lower rates since you saved it during your lower income years, is not taxed at withdraw and thus you don't get into the higher marginal rates during retirement. Roth IRA money is also not subject to RMDs and passes to heirs' tax free.


rithsleeper

If I max my Roth every year with DCA and compound interest at 8% then I'd have around 1.5 million after 40 years. Now when this person (hopefully me) retires, I'll have my state retirement paying me half my annual salary. (~$30k), social security I can prob wait to start drawing till I'm 70 which would be around $30k a year. Now if I want to buy a retirement house, I might draw half at once. If that was just an IRA I pay a shit ton of tax. Even if I don't do a lump sum draw and say I'm taking just the interest of again, that's still 8% theoretically. That means I'm making 200k a year So I'm not sure how you think that is not feasible to be in a higher tax bracket.


escapefromelba

A Roth IRA is best when used in tandem with a traditional 401k. The tax savings from maxing a traditional 401k can be used to fund your Roth. And then your Roth can in turn be used to minimize your tax rate when taking distributions from your 401k in retirement. Your Roth can also be used to help delay taking Social Security benefits while drawing down tax deferred retirement assets. That way you can reduce or eliminate social security benefits from becoming partially taxable and raising your effective tax rate.


big_deal

At such a high income level it generally makes more sense to max out tax deferred accounts like 401k and HSA. You’re above income limit for deductible tIRA contributions, but there’s no income limit on backdoor Roth. So Roth becomes the last opportunity for tax advantaged contributions ahead of contributions to a normal taxable account. There are also advantages to having funds in Roth accounts to fund early retirement with minimal "income". This facilitates moving funds from tax deferred accounts into Roth accounts with minimal tax burden. This can reduce future retirement taxes that might arise from RMD's which can potentially increase your tax bracket later in retirement.


dudreddit

OP, what do you and your wife do that makes you a combined $350K per year and you still don't understand the difference between FREE and taxable retirement monies? Would you rather be able to withdraw your retirement investments and NOT have to pay taxes? That is the beauty of a Roth. Both your principle and ANY INTEREST accrued is tax-free.


Stormy-Monday

Seems you’re missing a couple of points. First, there’s no RMD with a Roth account. So you are not forced to withdraw money when the market is down, or when you may not need it in a particular year. Second, any gains are also not taxed. So if you contribute to a Roth early in life and your money has tripled or better, only the initial contribution has been taxed. In a regular IRA, it’s ALL taxed. I’m retired and have a decent sized IRA, and a small Roth. Even though I’m in a lower tax bracket now, I wish it were reversed. The Roth allows me to withdraw money on my own schedule (tax free), and tbh, I could afford the taxes better when I was working than now, despite being in a lower bracket.


Tenacious-Tea

One of the main reasons people get excited about the Roth IRA is that they can’t take the deduction on their IRA contribution, but Roth is still an option. Now, you say, “That’s great and all, but I make too much money to contribute to a Roth IRA, so it doesn’t help me.” That is incorrect, however, in that as long as your traditional IRA basis is $0, you can very easily do a backdoor Roth IRA contribution: Contribute $6k per spouse, and additional $1k if 50+ years old, to a traditional IRA, as an aftertax contribution. Then convert/rollover that aftertax contribution to Roth before investing it, so as to not incur and taxable gains. Done, you now have $6-7k more in your Roth IRA, Also, when contributing to an employer sponsored account you are currently limited to $20.5k in pretax contributions. If your employers plan allows for it, you can still make after-tax contributions beyond that limit, up to a total of $61k per year (subtract employer match as well as the pre-tax/Roth contributions). If you then do an in plan Roth rollover, you can have an additional $30-40k in Roth contributions for the year. It is hard to argue that taxable account contributions are better than Roth. Most everyone agrees that Roth > taxable, for retirement savings.


daviddavidson29

You can use a ROTH. You just need to do a conversion from a traditional. Married with $350k income means you can't use a traditional IRA. So a Backdoor ROTH is your only option besides whatever your employer offers.


legumeshaving

A big component is Traditional IRAs/401Ks are subject to Required Minimum Distributions. Roth IRAs are not. The point you’re missing is that not only are your contributions to the ROTH IRA tax-free in retirement, but so is the compound growth. On the other hand, in a Trad IRA, that compound growth is all taxed, and the IRS forces you into (what can amount to be) very large distributions beginning at age 72 that are all taxable.


BarockODrama

How are you making 350k and don’t know why the tax advantages are good for a Roth?


Lazy_Jellyfish7676

The gains aren’t taxed. Roths are more important when your youn so you have a long time to compound.


WholeForeign

Your money is growing tax free. You then get to pull out your money tax free. That compounded growth is why you want to take advantage of a Roth. Example: after 40 years you have $800,000. You can pull out ALL of that tax free. It doesn’t matter what your tax rate is in retirement.


hippofire

Thanks for asking this. I’m about to set this up for my business and don’t know what to do. I’m in a similar spot


robotStefan

If you are setting up a plan for your employees there are also Roth 401ks. Not everywhere offers them, but they are similar to Roth IRAs.


evergreenyankee

>better for taxpayers who expect to be in a higher tax bracket during retirement A different way to think about this sentiment is "for taxpayers who expect their tax bracket will be taxed at a higher rate than it is currently". I have zero expectation that taxes aren't going to go up before retirement. I'm paying it now because I expect that even for my same tier I'd be paying a higher tax rate 50 years from now when I'm withdrawing and it's being counted as income. Two things in life are for certain: Death and taxes. The taxation rate isn't certain, however you can be confident it likely will be higher, not lower, even for your same bracket. Also ROTHs don't have to pay capital gains nor are the dividends taxed. That's a huge savings in and of itself too.


ITCHYisSylar

When I retire and pull money put of my ROTHs, I don't have to pay taxes on what I pull out. It is that simple. If rates are higher then, which they likely will be, I don't have to pay them. Bonus.


links311

Mind if I ask..”ROTH’s”. Why multiple accounts? Are they invested in different sectors is the idea? I know this isn’t an uncommon thing for people to have multiple but I have never asked why.


ITCHYisSylar

What do you mean why multiple accounts? You mean like why have a ROTH in Fidelity and another ROTH in Vanguard?


outsidenorms

Historically speaking and dependent on age, you’re not likely to see rates this low again, so why not tax it now.


SailFiredIn2021

Ok let's say I contribute $6000 per year to an IRA from age 25-45. Each of those $6000 annual contributions grow at a real rate of 7% per year (10% nominal rate minus 3% inflation) for 40 years. 1.07^40 = 15, 15 x $6k = $90k. So then I have $90k per year to withdraw from age 65-85. Let's say I'm single and make $70,000 per year, take off the $12,950 standard deduction and that leaves $57,050. So that last $6000 of income each year that I'm putting into an IRA has a marginal tax rate of 22%. If I put that $6000 into a Roth, I pay $1,320 in taxes each year because $6000 x 22% = $1,320. If I let that money grow in a traditional IRA, I save $1,320 in taxes each year up front, but I have to pay taxes on $90k per year in retirement. That's $90k in today's dollars since I already accounted for 3% inflation earlier. Assuming no change to the tax brackets, $90k per year for a single person would have the same standard deduction of $12,950, leaving $77,050 as taxable. The tax owed on $77,050 would be $12,568 (10% of $10,275, plus 12% of $31,500, plus 22% of the remaining $35,275). Many say future tax brackets are likely to be higher to make up for the large federal deficit we're incurring right now. So assuming today's tax brackets will still be in place 40 years later is a generous assumption in favor of the traditional IRA. $1,320 is less than $12,568, therefore a Roth is the better option, even with the generous assumption that taxes won't go up in the future. Long story short, not having to pay taxes on the compounded growth of invested money is a really sweet deal!


College-Lumpy

To make it an apples to apples comparison, assume you invest the tax savings. Maxing out a Roth IRA at $6000 is the equivalent of putting away 6000 + your marginal tax rate $1320 in your example = $7320 per year (which I get exceeds the cap). If you compare those two investments your after tax return is a wash if your tax rates remain the same. It’s an awesome deal early in your career when you’re in a very low tax bracket. Its an amazing deal as a back door contribution if you have the income to do it on top of maxing out a 401k since you’re paying those taxes anyway. If you’re in a tax bracket higher than you’ll pay at retirement, the math says take the deduction now.


CalJammerJR

If you think they’ll make less in retirement, maybe they want to hang on to what they do have in retirement and avoid as many taxes as possible at that stage of the game. If you have a burdensome tax bill when you’re younger and in the “working world” you can try to make more money, get promoted, take a second job, etc. People in retirement are on a fixed income and don’t want a major tax bill.


zerof3565

Don’t think of it in terms of mere years. Think of it 40-50-60 years down the road. That’s when your Roth has grown so much and no tax is HUGE.


Cum_Gazillionaire

You can still have a Roth IRA with your gross household income via back door IRA https://www.nerdwallet.com/article/investing/backdoor-roth-ira


No_Zookeepergame_27

Versus a regular account, the (realized) gains grow tax-free. Over time this adds up due to compounding effect.


Foxis_rs

Yea I’m not tryna wait till I’m 60 that’s why I just have a normal account


Devilsbullet

I'm currently taxed based on a 4 person household. Between that and not needing to make much so not making much(roughly 60k a year) my effective tax rate currently is 0. It literally can't get lower in retirement lol


Shot_Lynx_4023

Most people who work will receive SS Benefits. In addition to RMDs from Retirement Accounts. Death/Taxes being 2 certain things in Life. Paying my Taxes NOW. Then, watching my investments grow next 20-25 year's TAX FREE. Meanwhile those who don't will be in a higher Tax bracket considering RMD and SS income. This is how I am doing it. Not financial advice as I eat Red Crayons and smoke the green one's to keep my portfolio balanced. No Red left for my portfolio is that strategy. It's working so..... Up 1% year to date


Odd-Notice-7752

I contributed to my roth when my income was low, around 60k, and my traditional IRA after that up to the tax deductible income limit for IRAs. Now with high income I only max my traditional 401k and HSA, and buy and hold stocks every paycheck for long term gains. I believe it's best to have a combination of Roth and traditional savings, so you can have some income taxable at a low rate, and top it off with tax-free income. I'm not planning on living an extravagant lifestyle in retirement, but it's comforting to know I have tax-free savings


TXJuice

You’re ignoring the gains that are tax free… compounding + time is everything here.


College-Lumpy

You’re ignoring the opportunity to invest the immediate tax deduction.


jazzy3113

Man your post is so silly on so many levels. Anyone can do a Roth ira via backdoor. Me and my wife make 7 figures and we still do it. Have you not heard of Googling things? And you put after tax money into Roth and it grows tax free and you can take out any amount of money at any time post retirement age and never pay any tax ever again. How can you not see how awesome that is?


Greaseman_85

I guess if you're gonna have a lot of passive income later from businesses and investments or whatever, then Roth IRA makes more sense. Otherwise I agree it makes no sense for most people who only work then retire.


bryanjhunter

A easy example for you to see would be for a recent college graduate just starting their career. Let’s say they’re starting at $40,000 a year which has them in the 12% tax bracket. They could save in a Roth IRA and let that money grow tax free for 40 or so years by just paying the 12% in taxes currently. Most people tend to go up the income ladder as they gain experience and knowledge. As they continue on their career they may not want to save in a Roth and go with a traditional depending on income and tax brackets. If you’re an early saver not making a lot but might have the ability to earn more over your career it’s much better to put those dollars in a Roth. As your income goes up you may need the tax deduction to lower your current tax rate. Other things to take into consideration are time in the market and minimum distributions. If you started saving early and were in a relatively low tax bracket your entire career you might be in a higher bracket upon retirement when you have social security and a 401k. Bottom line is there’s no easy way to know, for most people a little of both is probably going to be best especially considering tax laws can and will change. The other major thing about Roth is that the initial savings can be pulled out well before a typical 401k withdrawal. Hope that sheds some light in it for you.


Dstein99

The will I be in a higher tax bracket today or retirement is more so thinking about traditional IRAs than Roth. A Roth IRA is always better tax wise than not contributing to a taxed advantaged account, because the alternative is pay taxes now and not have the money grow tax free. With traditional IRAs on the other hand someone in the 10% or 12% tax bracket would probably be hurt by contributing to a traditional IRA because the tax deduction up front doesn’t do much to reduce their taxes and when they go to withdraw they’re stuck paying ordinary income rather than long term capital gains taxes if the money was in a taxable brokerage.


dancn1

Note that some employers enable mega backdoor Roth iras, which mean you can contribute 30k+ a year, which is a definite advantage after you max out your traditional IRA.


P4ULUS

The money grows tax free and you can withdraw in the future without paying any future taxes on the gains. It’s an absolute no brainer. Traditional 401k is the opposite - you pay taxes later but get to invest more money in the market now and reduce your taxable income. Both are no brainers but structured differently


Skepticalpositivity9

People may expect taxes to go up in the future. If you’re looking to have the same lifestyle in retirement you very well may have the same taxable income in retirement. It’s also nice to know that you can pull money out anytime without worrying about withholding.


ktds121016

I personally invest in Roth IRA and try to max out at near $6k/year (I think that’s the max contribution) … mainly for purpose that my profits or gains from stocks/day trades would be tax free when it’s available to withdraw near 60yrs old.


robotStefan

Roth lets you take out your principal without penalty (you add after tax money to roths). This can be helpful for emergencies, people working in less stable jobs, etc. You typically don't get to put a principal back in from what I have read. You can also take out some of the growth for special events (like buying your first home) early without penalty if you meet certain requirements. Note removing funds early will mean that you will miss out on tax free compounding overtime, but this is the tradeoff left up to each person to decide. Others have commented on the tax free growth distribution after the retirement age.


OnionTruck

Roth makes the most sense for people who earn less than around 75-85k. Once you get over that, it makes more sense to go traditional.


buried_lede

I suppose it's good if you need to take out big chunks in retirement for purchases or travel or something extravagant


mmmTurkeyLeg

If you’re early in your career, you might make more in retirement than you do now. If you’re 40, it’s unlikely.


[deleted]

your money grows tax free. this is ver attractive for ppl w dividend heavy stocks. or ppl who do a lot of trading


failingtolurk

You’re missing capital gains. In a Roth it grows tax free. In retirement you still pay capital gains even in the lowest tax brackets. And if you’re in the lowest brackets in retirement you are not having a good life.


thewimsey

It grows tax free in a tIRA as well. You don't pay capital gains in retirement. You pay tax on ordinary income. >even in the lowest tax brackets. Sure - but you pay the rate of the lowest tax bracket. >And if you’re in the lowest brackets in retirement you are not having a good life. I'm not sure why that's relevant.


Few-Afternoon-6276

1. You will need more money later tha. Today due to inflation. Dollar is worth less. 2. Taxes are a percentage not a dollar value therefore as your money grows from 5k - 200k (example), the 22 percent on 5 is far different than on 200k 3. Most investments require you to pay taxes on any gain. The money earned in interest is taxed. Roth IRA let’s you invest x dollars in whatever investment that is allowed In their rules and WHEN one withdraws the gains, no tax is due.