Roth IRA or not?

Discussion in 'Money Talk$' started by Andy T., Apr 2, 2008.

  1. Andy T.

    Andy T.
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  2. TomVols

    TomVols
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    I believe that if you are eligible for company matches and you have taken all of that you can in your 401K, then a Roth IRA makes sense. Marginal tax rates are at their lowest levels. Why not have some tax-free growth? Pay taxes now while you're working. Enjoy tax-free money at retirement.

    However, if you have a 401(k) and can get company matching dollars, take that route first. The tax savings and free money from your employer is too good to pass up. Generally, tax-deferred returns are a better ROI than the returns from a Roth. But as I said, with tax rates this low, why not take advantage of the Roth benefits, too?

    I recently read an article that said that Dems might try to someday tax Roth distributions (to pay for increased spending, etc.). Maybe. But are they that stupid, to go after retirees? Roth IRAs/401Ks are good choices, but I'd generally advise to wait until you've taken good steps towards tax-deferred contributions (esp with company matching dollars into a 401(k). But the good thing about Roth IRAs is you don't have the limitations as you do Traditional IRAs. You can still contribute to Roths at any age, and there are no minimum distribution requirements. Remember that IRA contribution limits per year apply to your aggregate IRAS, not each IRAS. You can't contribute $4,000 to one and $4,000 to another. You can only contribute $4,000 for all (unless you're old enough to do the catch-up limits).
     
  3. Andy T.

    Andy T.
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    FYI, the IRA contribution limit for 2008 is now $5,000 plus another $1,000 for people at least age 50. This limit encompasses all IRA contributions - Roth and traditional.

    Also, some employers are starting to offer a Roth feature in their 401(k) plans (this was permitted starting in 2006). They give employees a choice to make their contributions as traditional pre-tax deferrals, or in the form of a Roth contribution, or a mixture of both. The Roth contributions are matched just like the pre-tax deferrals. So for those employees that have this option, they will need to consider the pros/cons of a Roth contribution vs. pre-tax. They both are matched, so the next step is to see if the Roth makes sense.
     
  4. billwald

    billwald
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    Logically, if one plans to be in a higher tax bracket at retirement (higher up the food chain) then the Roth IRA makes sense. If one plans to be one of the retired poor, then a tax deferred plan is the better choice.
     
  5. TomVols

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    Correct. I mentioned the 2007 tax year limits because we're still in that limit year. You have until Apr 15 to contribute to an IRA for the 2007 tax year. If you're contributing for '08, it's the limit you mentioned. ESA's are still at $2,000 per year.

    This makes a little sense, but think about it: if you're going to have less money in retirement, you should have to pay taxes at retirement when you have less money coming in? I know it's conventional wisdom, but I just think it's not the best wisdom. If anything, it's an argument for tax-free distributions, not tax-deferred ones.
     
  6. TomVols

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    Some employers match less for Roth 401(k) plans. For example, they'll match dollar for dollar up to, say 5% on traditional 401(k)s, but 50 cents for every dollar to 5% on Roth 401(k)s. Be sure to examine the details of your employer's 401(k) offerings.
     
  7. billwald

    billwald
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    >if you're going to have less money in retirement, you should have to pay taxes at retirement when you have less money coming in?

    All money coming in isn't reportable income. Half the U.S. economy is under the table. Many police and fire plan on getting a disability pension. Or military disability.
     
  8. TomVols

    TomVols
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    Guaranteed benefits (defined benefit plans) are growing more and more scarce. Still, that makes even MORE sense to go ahead and pay taxes on the IRA monies now and owe nothing at retirement.
     

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