IRA ROTH . . .

From Glenn Doherty: “I’ve been preparing to open an IRA, though I have also been taking full advantage of our company 401K. From what I’ve read of the pros and cons between the Roth and traditional IRA, a person in my position would be better off opening a Roth. What I was thinking of doing was to open a traditional IRA as well, since a portion of it — the standard deduction and personal exemption — will remain tax-free. So when I retire I would take just enough out of the traditional IRA to use up the deduction and exemption and then take the rest of any needed funds out of my Roth. Is this logic flawed?”

You’re young. Who has a clue what the tax system will be when you retire? What if the income tax is replaced with a VAT? Won’t Roth folk feel silly then. (They will have forgone tax deductions now to avoid paying income tax no one has to pay after all!) Not that this is likely. But the point is: who knows? The main thing is just to fund one or the other. Since the 401(k) will provide taxable funds, why not “diversify” with a Roth IRA?

This is especially true if you’re in a relatively low tax bracket, and would be a complete no-brainer if, being covered by a plan at work, your contribution to a traditional IRA were not deductible.

The Roth IRA will also prove to entail less paperwork and be eminently more flexible at withdrawal. Opening both a Roth and a traditional IRA is more work, and income you receive from the 401(k), not to mention Social Security and/or outside investments, is likely to use up the standard deduction and personal exemption anyway.


More from Glenn: “I always hear the phrase adjusted for inflation, as in my 15% gain was only 12% after it was adjusted for inflation. Is it only me or does this inflation number seem out of touch with reality? The number is derived from a consumer price index of things some of which I never buy; others bought at rates I never pay. I really believe a lot of things have been going down in price because of improved efficiencies in the marketplace. New distribution channels like the Internet have brought down prices for those of us that know how to look for them. Which brings me to a concept which I think more than offsets this thing called inflation. I like to think of it as a personal rate of becoming a more efficient consumer. Every year I become a better consumer because of increased knowledge of value and where to find it. From new distribution channels to better ways to buy, like bulk, each year I think my dollar goes farther, and thus makes me wonder if inflation is real or has any real meaning.”

As amazed as I am that scientists are able to measure changes in “world temperature” over the century within a fraction of a degree — how can they possibly do that? — so you have put your finger on at least some of the difficulties in accurately measuring inflation. Another would be the difficulty in measuring the value of improvements. A car may cost 3% more this year than last, but what if it’s safer? Or more comfortable? Or gets an extra mile to the gallon?

I do think the government should adopt recommendations for a better measure that would have cut the CPI by about 1% over the last many years and might cut it about that much going forward.

But beware of confusing your own CPI with a global statistic. The fact that you become a smarter shopper each year does not mean that the cost of the items you shop for are falling. You might also be spending less on gas each year, as you learn to inflate your tires for better fuel efficiency or drive with fewer starts and stops (lift your foot from the gas pedal well in advance of the light . . . glide . . . no need to brake . . . the light turns green . . . now accelerate from 15 mph instead of from zero). But does that mean the price of gasoline has dropped?



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