Roth IRA versus traditional

[Never_Again]

I figured that I would start some discussion here.

I am through getting my fresh start, and in time I will be starting some retirement accounts. At 39, it is definitely time to do this!

I will soon have a 401K at work, and it does have some match (up to $1000 per year), and I will be investing enough to get the match.

I will be putting enough after that to max a couple of IRAs, and then back to the 401K. This may take me a couple of years to get to this stage, but I will get there.

Here is the debate... Roth versus traditional. My income should qualify me for both. For those who don't know, a traditional IRA contribution is deducted from your taxable income, and you pay taxes on it when you withdraw it in the future.

A Roth IRA contribution is NOT deducted from your taxable income, so you pay taxes on it. However, all of the money, including the gains are tax free when you withdraw it.

Normally, most people will tell you that a Roth is a better deal. However, I am concerned about a politician seeing all of this tax free money out there, and saying that "we all need to make sacrifices," and imposing, taxes on the Roth deductions in the future.

In other words, is it better to take the tax break now, and invest that tax break, or to run the risk with a tax free Roth, that may not be tax free in 30 years? How many government policies are the same 30 years ago as they are today?

[Flamingo]

Risk is a personal choice. Whether or not something like that will occur in the future is unknown. Also, if it does occur, they cannot tax you twice on funds input into the account, they would just tax the gains.

[Willy13]

I really doubt they will touch Roths unless they are looking for big time trouble. It's easier for them just to raise regular taxes or just print more money and steal your wealth that way.

As far as taking the Tax break now, I'm willing to bet taxes will be higher later so a Roth sounds better to me. Now if you are taking a big tax hit now and think you will live a modest life later in a lower tax bracket, maybe a traditional IRA is better.

[Trixie007]

DH and I went through his mid-career retirement training through his work (a 3 day class) - they recommended maxing out matching contributions, then doing a fairly even mix on pre-tax and post-tax retirement accounts. In his case, he has 3 retirement income sources that are all taxable - SS (ha-ha), pension & 401k - so after maxing the matching contributions, everything up to the limit goes into pre-tax - then back to maxing out the allowable 401k contributions.

[ssdsco]

- they recommended maxing out matching contributions, then doing a fairly even mix on pre-tax and post-tax retirement accounts.

Being retired now I wish I could have done this. It gives you a lot more flexibility depending on what your tax bracket is as you go through retirement. You may start retirement with a part-time job and be in a higher tax bracket and having dollars in a tax free Roth would be nice.

I don't know about 50-50 though. Earning money for 20 years on dollars that would have gone to taxes in the case of a Roth has been powerful. There must be what if calculators out there somewhere.

[Trixie007]

That's tru enough. However if you look at it, it really ends up being a much higher percentage being invested in pre-tax retirement accounts, even following their advice.

step 1) max out matching contributions - a total of 12% of income going into 401k

step 2) (I goofed in previous post - meant to say after taking the max matching contr. everthing up to limit goes into after-tax -ie Roth) so I think that's about 6-7k/year combined to the Roth, although that may have changed since we took the class - and that's less than 10% of DH's income

step 3) go back to increasing 401k contributions to max allowed - I think that comes out to about 24-26% of DH's income, including the employers contribution

So, when we hit our target for investing for retirement, we'll be saving somewhere around 33-36% of DH's annual income, which would only really be about 20% of our combined income. I think. LOL, I'm a little fuzzy. Anyway, so then in retirement you pull the SS (ha-ha) and pension, and then pick and choose whether to pull $ from Roth or 401k in different years according to tax liability. Also, since the bulk of our retirement funds are in DH's name, I like to remind him that I don't believe in divorce, I believe in life insurance...

[Never_Again]

Flamingo, I believe that you might be correct, in that they probably only would tax the gains, as you have already paid the taxes on the contributions.

One caveat of the Roth is also that principal can be withdrawn at any time, so it is also a decent place for an emergency fund. The only problem is, that it can't be put back in, so you have lost that time forever. I believe that I will still be running an emergency fund separately.

You just have to love the power of compound interest. It is nice when you get it working for you instead of against you!

[Scott50]

I have a strong feeling that the tax and spend democrats are eyeing our 401K's as additional sourcs of govt revenue....

[Never_Again]

You could be right, but I think some of that thought comes from the "plan" that economist proposed about requiring everyone to invest their 401Ks in a government account with government securities that paid a "guaranteed" 4% or something ridiculous like that.

Of course, that is what was proposed (something like it) for social security? But remember, the government does not like to give something in their control to private citizens, but they are all about taking control the other way!

I doubt that anyone will touch retirement accounts in the near term! If they think that social security is taboo...

[fltoo]

Flamingo, I believe that you might be correct, in that they probably only would tax the gains, as you have already paid the taxes on the contributions.

One caveat of the Roth is also that principal can be withdrawn at any time, so it is also a decent place for an emergency fund. The only problem is, that it can't be put back in, so you have lost that time forever. I believe that I will still be running an emergency fund separately.

You just have to love the power of compound interest. It is nice when you get it working for you instead of against you!

Your last sentence, single handedly, is the most important statement EVER to never charge a cup of coffee, a candy bar, a tank of gas, etc. I would say never charge anything, which I plan to do in the future, but I realize that the credit card, no matter how evil, is here to stay.

[Logan]

I have a strong feeling that the tax and spend democrats are eyeing our 401K's as additional sourcs of govt revenue....

LOL...Where were all the critics when Bush racked up all the debt? 50 billion a month for a war and we're still searching for weapons of mass destruction.

The republican party is the cut tax and spend party.

GMAFB

[Logan]

Flamingo, I believe that you might be correct, in that they probably only would tax the gains, as you have already paid the taxes on the contributions.

One caveat of the Roth is also that principal can be withdrawn at any time, so it is also a decent place for an emergency fund. The only problem is, that it can't be put back in, so you have lost that time forever. I believe that I will still be running an emergency fund separately.

You just have to love the power of compound interest. It is nice when you get it working for you instead of against you!

My job just became disposable so we're shifting from a 401K to a ROTH since it can be withdrawn.

Logan

[LSUTiger32]

Love these reitrement discussions, wish more people came over to this forum. I would agree with some of the previous posts:

1. Decide what percentage of your income you want to invest. I am at 5% now for the match, working towards at least 15%.

Here is what my plan will be and I think this has been covered.

1. Max out work 401K for match. (5% in my case)
2. Max out Roth 401K. ($5,000 a year before age 50, $6,000 a year after....this will get me to about 11%)
3. Go back to work 401K or other individual retirement accounts for the rest. (As much as I can!)