Category: Finance

On Wednesday I stayed at the Isle of Capri Casino in Bossier City, LA on the way back from a trip. The nickle and quarter slot machines cleaned my wife and I out of $30 within 45 minutes. That would translate to $40 a hour, very expensive for such lousy entertainment!

Sheesh! The other two times I have gambled were in August 2001 at Cripple Creek, CO and December 2001 at Vicksburg, MS.

At Cripple Creek I let myself get caught up in the gambling mindset. As I fed each slot I thought of the neat things I could buy with winnings: a video camera, down payment on a house, etc. Whatever! Stepping back I saw what a crock the whole thing is.

Now I hate gambling. I can’t stand to see my hard-earned money disappear down the drain, even though my lifetime gambling losses add up to about $70. I know that the odds are stacked way against me. Even the games that have a modicum of skill, such as solitaire or blackjack, are still mostly chance.

The Roth IRA is a riskier investment vehicle than commonly perceived. Here are a few reasons:

• If Congress shifts any of the current income tax burden to some other tax, that could destroy Roth IRA’s benefits. A partial shift to a different kind of tax could reduce future income taxes, penalizing Roth IRA holders who contribute post-current-tax-rate income. Such a shift is not inconceivable. For example, shifting current income tax burdens to gasoline taxes (to reduce the demand for gas, theoretically increasing independence from Middle East oil or reducing CO₂ emissions) has been discussed and could easily become a reality some day. (I am not advocating this; just pointing it out.)
• Some predict that income taxes will rise in the future because Social Security and Medicare costs are going up, up, and away. Payroll taxes, not income taxes, fund these programs. It is possible that Congress could fund future shortfalls through increased income taxes. It is just as possible for Congress to simply increase payroll taxes. Roth IRAs give no advantage against increased payroll taxes because payroll taxes are not paid on retirement fund distributions.
• Taxes saved now via contributions to traditional IRAs, 401(k)s, or 403(b)s are saved at one’s current marginal rate. Assuming one draws a substantial portion of retirement funds from Roth IRAs, taxes saved in the future via a Roth are saved at a rate closer to an average rate. One’s average tax rate is always lower than one’s marginal rate.
• One’s post-retirement income is usually a step or two lower than one’s pre-retirement income. That pushes one’s future average tax even lower than one’s current marginal rate.

I could go on.

What it boils down to is with the Roth IRA, you are betting heavily on specific political outcomes (total unknowns!), and you are trading a well-defined current benefit (immediate deductibility) for an unknown future benefit. That sure seems risky, especially if your retirement date is 40 years away. I am aware of the side benefits of Roth IRAs (no mandatory distribution, can withdraw contributions at any time, etc.), but risk has a cost. Given the potential risk it sure seems like the Roth is an expensive way to get these benefits.

Slow: do it by hand.

Stupid: use a Coinstar machine. These machines charge around 8 cents per dollar. That’s a whopping 8% tax just for the privilege of letting a machine do it for you.

Better: some bank branches have change counting machines that will count your money for free. Call around.

Best: just take your spare change with you next time you go to the store. Use the self-checkout isle, and cram coins into the machine until you paid your bill.

When I do self-checkout, I first empty out all my coins, then I use $1 bills, then $5 bills, etc. This way I am guaranteed that whatever change is returned is the lightest possible combination of currency.

Last Thursday I saw a station with 93 octane gas at over $2 per gallon. Now two stations on my drive to work have $2.03 and $2.04 for 93 octane. I have never seen gas prices over $2 in my life.