If someone wants to invest through an IRA, but for one reason or another can't deduct contributions to a traditional IRA, that person should always opt for the Roth IRA, right? I.e., the traditional IRA loses all the benefits discussed in this thread if the traditional IRA doesn't provide any tax deferral.
(Apologies for what I think is a dumb question to an obvious answer, but this thread got me all twisted.)
Yes, that is correct. Generally, there is no reason to contribute to a non-deductible traditional IRA if one can contribute to a Roth IRA. If one cannot contribute to a Roth IRA, they have the option of investing in the non-deductible traditional IRA one year and converting that amount to a Roth IRA the next year, or some year where they are in a lower tax bracket. This article describes where you might want to do either: http://www.fairmark.com/rothira/nodeduct.htm
calwatch said: ...If one cannot contribute to a Roth IRA, they have the option of investing in the non-deductible traditional IRA one year and converting that amount to a Roth IRA the next year, or some year where they are in a lower tax bracket...Is there a reason you said "the next year" for converting? Can I make a non-deductible contribution to a traditional IRA and convert it to a Roth IRA immediately in the same year?
geo123 said: WhatAWendy said: The conventional wisdom (401(k) to the match, then Roth to the max, then 401(k) with what's left) This is the conventional wisdom that's typically used for simpletons who can't properly analyze their own financial and retirement situation.
... The ONLY thing that matters in this case is whether the tax bracket is lower at the time you contribute the money vs. when you withdraw it.
Its not just the difference between your income now and your income at retirement. There is a secondary benefit to traditional 401ks if you either plan on going back to school or work in an industry with severe boom/bust cycles. Certain industries swing wildly enough that it is not unusual to make $200k one year, be unemployed 2 years down the line, and have recruiters banging down your door a year after that.
In some cases, you can withdraw from the trad. 401k in super-bust years, pay the penalty and come out on top.
govenar said: calwatch said: ...If one cannot contribute to a Roth IRA, they have the option of investing in the non-deductible traditional IRA one year and converting that amount to a Roth IRA the next year, or some year where they are in a lower tax bracket...Is there a reason you said "the next year" for converting? Can I make a non-deductible contribution to a traditional IRA and convert it to a Roth IRA immediately in the same year?
After doing some research, I guess you could. I just use "the next year" for simplicity's sake (so it wouldn't be mischaracterized as a recharacterization), but immediate conversion is allowed. Note the proportional rule though if you have other non-deductible traditional IRA contributions.
Here's an email conversation I had with a friend recently. You will see that there is more to the decision than just looking at current tax rates and estimating what it will be in the future. I still like the idea of 50-50 split because it gives me a choice during retirement which pot I want to take the money out of. If the tax rates get really high, I will take out Roth before Traditional and vice versa if they go low.
My Friend said: By the way, are you contributing to Roth 401k??
There is almost no circumstance where that makes sense, unless you expect a ridiculously massive future tax increase. I can explain why if you are interested…
I said: My main motivation for Roth 401k is the tax free distribution. Since I have a long retirement horizon, I argued that the overall gains in the 401k over next 20-30 years is going to be substantial. Saving tax on that seems to be a better option than saving tax on the principal contribution now.
Example: I have $100 pre-tax and assume 5% growth over 20 years; assume 30% effective tax rate which for simplicity I will assume does not change over this 20 year period. -- If I go regular 401k, I contribute $100 now which becomes ~265 in 20 years. -- To take a full distribution, I eventually get $185 -- If I go Roth 401K route, I contribute $70 post tax now which becomes $185 in 20 years -- To take a full distribution, I get the full $185
So it would seem we are neck and neck. However, the contribution limit for both is the same: $16500. So by going with Roth, I am able to dump $16500 which is almost $23500 pre-tax.
In the above example, if $100 also represented the contribution limit, I could dump the full $100 in Roth which would net me the full $265 after 20 years which is better than the Regular 401k by $80.
So unless I can do better than $80 in 20 years with the extra $30 I put in Roth in a regular brokerage account, it seems to me that the Roth would net me more.
In any case, my real motivation is to diversify since I have no clue what tax shenanigans in Washington will be upto in 30 years. I had a sizeable chunk in regular 401k and now my goal is to have roughly 50-50 in regular vs Roth so that half my ass is protected at all times.
My Friend said: The main flaw in your argument is your assumption of future OVERALL tax rate on your 401k/IRA withdrawls >= present MARGINAL tax rate.
Let us assume you’re in the 25% federal and 9.3% state bracket right now. Also assume you file married now and in retirement.
Case1: Roth 401k: $16500/yr for 30 yr at 5% rate of return = $1.1 million. Taxable 401k: $0 Taxable regular account: $0
Case 2: Roth 401k: $0 Taxable 401k: $16500/yr for 30 yr at 5% rate of return = $1.1 million Taxable regular account: (34.3% x $16500)/yr for 30yr at 2% rate of return = $229k (Note, I’m assuming you’re a really bad post-tax investor!!)
For simplicity, let’s also assume you have 0% rate of return in retirement, and want to withdraw you money over 20 yr.
In Case 1, you get $55000/yr tax free. Done.
In Case 2, you get $11.5k/yr tax free from your existing taxable account + $55000/yr taxable from your 401k. After taking the standard federal deduction of $11.4k, and the personal exemption of $7.3k, you only pay federal tax on $36.3k. For a married couple at today’s rates, that is $4610 federal, or only 8.4% of $55000! Also, your state tax would be around $732, or 1.3% of $55000. So your grand total, after taxes, is $61158 which is better than Roth. Note your total would be even higher if your rate of return on taxable investments was > 2%.
You can tweak the examples as you wish, but the main point is your marginal tax rate today (25%) is WAY higher than your overall tax rate in retirement (9.7% in the above).
I said: That’s a good argument. I hadn’t thought of it from the perspective of marginal taxes before. I guess if one expects substantial non-401K income in retirement, then it begins to make more sense to go the Roth route.
In any case, I think I will stick to my 50/50 Roth/Regular philosophy since there are many unknowns in the future: tax rates, sources of income, retirement income requirement etc.
I agree with the sentiment, depending on whether you have a taxable pension in addition to Social Security. You don't want to "waste" the 15% tax bracket, which you might do if you contribute all of your retirement-related savings into a Roth at the 25%, 28%, or higher tax brackets. If your taxable pension plus the taxable portion of Social Security exhausts the 15% tax bracket, then you might want to move forward. Otherwise, when you retire, take out just enough from your traditional IRA or 401k to max out the 15% bracket (and meet any Required Minimum Distribution), and then meet the rest of your expenses from the Roth and taxable savings. For a married couple, standard deduction, both over 65, that comes out to about $88,000 of gross income at today's tax brackets.
i didn't read all the posts, but I had this same question before and headed over to diehards.org to seek further answers.
basically you don't know what will happen to tax brackets in the future or to how roth/trad ira's are managed. therefore it's a tossup. diversification is never bad so that's why i am looking at an even split between them. things to consider if you have $ in traditional
1) grad school in the future without job on the side = very low income 2) unfortunate, unplanned long layoffs = lower than planned income
these drastically take down your income, so it makes sense converting to a roth in those two scenarios (and am sure many other scenarios exist, but those are relevant to me) if you have the cash to foot the tax bill. hope this helps a bit.
scorched03 said: diversification is never badOf course it can be bad! In general, people have been rather appropriately conditioned to expect tremendous benefits from diversification. So, whenever this term gets thrown in, I always hear the same exact pro diversification arguments regardless of the context. Unlike the diversification that we advise people to adopt in the stock market, there are plenty of situations out there where it is simply inappropriate to "diversify." If you are considering a medical treatment with a 51% success rate and another one with a 49% success rate, you would not "diversify" by mixing up the treatments and would always go with the 51% one. If you are considering getting married, unless you are a mormon or have an open marriage, the key to happiness probably does not lie in proposing to "diversify" your relationship by spending 60% of your time with your favorite wife and 40% of the time with one that's still quite good but not exactly your favorite. I can go on and on. Yes, all these analogies are very far from perfect and all of them are vulnerable to various arguments. To be sure, I am not trying to equate splitting up money between Traditional and Roth account to an open marriage. The point is that extrapolating the same diversification arguments to various situations often does not work and that timing certain decisions instead of diversifying between them is sometimes the most optimal strategy.
Once again, as several of others have explained above, blindly splitting up your retirement funds between Roth and Traditional accounts can often be costly and wasteful. Instead, analyzing each individual situation and then strategically allocating your retirement funds to maximize the benefits of account types tends to be a far more advantageous approach.
geo123 said: scorched03 said: diversification is never badOf course it can be bad! In general, people have been rather appropriately conditioned to expect tremendous benefits from diversification. So, whenever this term gets thrown in, I always hear the same exact pro diversification arguments regardless of the context. Unlike the diversification that we advise people to adopt in the stock market, there are plenty of situations out there where it is simply inappropriate to "diversify." If you are considering a medical treatment with a 51% success rate and another one with a 49% success rate, you would not "diversify" by mixing up the treatments and would always go with the 51% one. If you are considering getting married, unless you are a mormon or have an open marriage, the key to happiness probably does not lie in proposing to "diversify" your relationship by spending 60% of your time with your favorite wife and 40% of the time with one that's still quite good but not exactly your favorite. I can go on and on. Yes, all these analogies are very far from perfect and all of them are vulnerable to various arguments. To be sure, I am not trying to equate splitting up money between Traditional and Roth account to an open marriage. The point is that extrapolating the same diversification arguments to various situations often does not work and that timing certain decisions instead of diversifying between them is sometimes the most optimal strategy.
Once again, as several of others have explained above, blindly splitting up your retirement funds between Roth and Traditional accounts can often be costly and wasteful. Instead, analyzing each individual situation and then strategically allocating your retirement funds to maximize the benefits of account types tends to be a far more advantageous approach.geo123... your posts are valuable, to be sure. Your contributions to this shouldve-been-archived-4-year-old thread have not gone unnoticed.
While I agree with your closing paragraph ("...analyzing each individual situation and then strategically allocating..."), I repectfully disagree with the medical treatment only pick one approach. There are many situations when choosing two treatments makes sense (ie, medication PLUS exercise = healthy heart... Roth PLUS Traditional = healthy retirement). While you tempered your analogy with a "vulnerable to various arguments" comment, I suspect diversifying tax risk is good for at least 80-90 percent of those with the option.
jackcrawfish said: geo123... your posts are valuable, to be sure. Your contributions to this shouldve-been-archived-4-year-old thread have not gone unnoticed.Thank you for your kind words. They are very much appreciated.
While I agree with your closing paragraph ("...analyzing each individual situation and then strategically allocating..."), I repectfully disagree with the medical treatment only pick one approach. There are many situations when choosing two treatments makes sense (ie, medication PLUS exercise = healthy heart...The medication PLUS exercise example that you are using is NOT an example of diversification. Instead, it is an example of two complementary techniques that evidence based medicine has shown as effective. This is not what diversification is. Diversification is a technique that reduces the overall portfolio risk by allocating investments to asset classes that are not expected to move in the same direction.
In other words, diversification is categorically not effective if you allocate your investments among the same asset classes. For instance, a person who is putting 50% of his investments in a Fidelity S&P500 index fund and 50% of his investments in a Vanguard S&P500 index fund because he thinks that he'll get some benefit from this "diversification" is, to say it diplomatically, an extremely confused individual. Likewise, in your example, the reason that medication plus exercise is used to treat certain medical conditions has nothing to do with spreading treatment options among two different therapies.
The point that I am making is that it is categorically not true that "diversification is never bad." It is a tool and, just like every other tool, it is only effective if you understand its proper use and its limitations.
I suspect diversifying tax risk is good for at least 80-90 percent of those with the option.Respectfully, aside from the fact that there is no basis for such quantification, I suspect that it is just plain wrong. If you look at the US savings rate as well as at the data showing that baby boomers who save in a 401k have an average 401k account balance of $80,000 and that baby boomers have median total household personal retirement savings of $35,000, it should become fairly clear that the vast majority of at least baby boomers find themselves in a lower tax bracket in retirement than they do during their working years. If you find yourself in a lower tax bracket in retirement than you do during your working years, your Roth contributions are causing you to lose money.
Then again, as far as individual decisions are concerned, all these averages are meaningless. The only thing that matters is your specific situation and your expectations. If you are in a 35% tax bracket now, plus high state income tax but you expect to find yourself in a much lower tax bracket in retirement, you are an idiot if you are contributing any money to the Roth. On the other hand, if you are in a 15% tax bracket now and are at the beginning of your career and expect to make substantially more money down the road, you are an idiot if you are contributing to the Traditional account at all (assuming that you have access to Roth 401(k) if you want to contribute in excess of the annual limit imposed on Roth IRA's).
jackcrawfish said: There are many situations when choosing two treatments makes sense (ie, medication PLUS exercise = healthy heart... Roth PLUS Traditional = healthy retirement).Medication plus exercise is better than either one alone because (at least in part) it's more treatment total. If a doctor is deciding between just prescribing medication, or just recommending exercise, or both, it's not like giving the medication means less exercise than exercise alone. If, say, you were allowed to contribute up to $8000 to a traditional 401(k), or up to $8000 to a Roth 401(k), or both or neither, then clearly you would want to do both if you could afford it. But, in fact, making a traditional 401(k) contribution means not just using up some of your money but also some of your $16,500 annual contribution right. The medical analogy would have to be with something like a patient that the doctor thought had a very poor attention span, so he could only expect to keep his attention for 5 minutes a day; then the doctor would, maybe, have to decide to devote that 5 minutes to pill-swallowing, and it would be a little surprising if he decided to have the patient take fewer pills to leave time for a very small amount of exercise too.
While you tempered your analogy with a "vulnerable to various arguments" comment, I suspect diversifying tax risk is good for at least 80-90 percent of those with the option.Wait, wait, wait.
First of all, for the reasons geo123 said, I think that the vast majority of people are much better off with 100% traditional/deductible contributions, because their taxable income in retirement will be extremely low; and, for lots of other people, like those who are and expect to stay well into the top bracket for their entire lives, it's clear they should want 100% Roth accounts, because it's much more likely (at the moment) that rates will go up than down, and because using Roth accounts gets you higher effective contribution limits.
Now, there will be people in the middle for whom it will make sense to end up with some mixture, but that does NOT mean they need to be splitting contributions in the same year. It probably means something like, make Roth contributions early in your career and in any down-income years, and make traditional contributions when you're in your peak earning years. Maybe, if you decide you want to end up with 2/3 Roth money and 1/3 traditional, that means something like making Roth contributions every year until you're 40 and then traditional after that, and then switching back to Roth if you go to part-time work in a phased retirement.
Finally, I don't agree that the possibility of taxes going down is a "risk" you need to protect against. It's the possibility of a windfall for traditional accounts, that you miss out on if you make Roth contributions (or conversions). But that's not a "risk," any more than it's risky to skip a day at the horse track. If you go with traditional accounts, you're exposed to tax rate risk, which may work out for you or against you; with Roth accounts, you have eliminated this risk. (As nycII pointed out, there could be lower income tax rates just because of a rise in non-income taxes, but those would be paid by everyone in any case; there is no real risk of taxes that discriminate against Roth IRA's, which would raise serious Constitutional problems.) It's more like if you were entitled to a pension denominated in some foreign currency, and they gave you the option to lock in current exchange rates. If you lock in, you know how much money you will get in retirement; if you don't, you're exposed to exchange rate risk. It might or might not be a good deal to take the lock-in, but it's definitely the safer option. If they let you lock in the exchange rate on part of your pension and leave the rest at risk, that would be less risky than leaving it all exposed, but not as safe as locking it in completely.
I thought of another way to think about the issue of risk and "tax diversification." It's not exactly the same thing, but I think it sheds some light on this.
If you had a bunch of money tied up in one stock (maybe because you worked there), and then you were given the opportunity to move as much as you wanted of that money to a second stock, everybody would say that you should split up the money. Whether it should be 50/50, or in proportion to their market caps, or the market caps of the sectors they represent, or some other way, is a complicated question, but you're going to want some sort of mix, to get the benefits of diversification: you'll lower your total risk, without necessarily changing your expected return. (Let's not get into issues of pricing models and different stocks' expected returns.)
But it's not that diversification saves you from all risk, or even necessarily very much. The point is just that it gives some benefit -- and it's free, beyond the cost of a couple of commissions, capital gains and other transaction costs which are probably minimal. If I have $1 million in one stock, and I can switch to have $1 million (or nearly that much) in a mix of 2 stocks, that's generally going to be a good move because I'm getting that improvement without costing myself anything (or almost anything) -- because I'm still getting just as much market value afterwards as before.
Now, suppose that wasn't the case -- that you were, for some reason, able to trade at prices that were far off of market prices. Just for example, let's say that you had 10,000 shares of Ford (market value as I'm writing this: about $10.65 per share), and you weren't allowed to sell it; but, then, you got the opportunity to exchange as much as you wanted of it for some other stock, not at market prices, but just share-for-share. If that other stock was Fannie Mae (~$0.38 per share), you're probably going to want not to exchange any; if it was Google (~$475), you're probably going to want to exchange all 10,000 shares. Diversification is nice and all, when the risk reduction is basically free because you're preserving market value; but not when it's costing you real money, like taking a mix would in this kind of situation.
The decision between Roth and traditional 401(k)'s, or whether to convert a traditional IRA, is kind-of like this. Say that a person is 60, making more than he ever has, and now in the 33% bracket; he will probably retire in a few years, but doesn't have much saved for retirement, so he expects to be in the 15% bracket when retired (taking into account the rules on social security taxability and everything else). So, my advice would be, he should be saving in traditional accounts only (as much as can be deducted). Switching some of the money to Roth accounts is a kind of diversification, but it's not free diversification, like when you exchange equal market values. Each traditional 401(k) dollar is worth $.85 in spending power (at present value), while each Roth dollar is worth $1; but instead of being able to switch between them at those "market" prices, the IRS only lets him exchange at a ratio of 1.33 traditional dollars per Roth dollar. At those prices, switching some of the traditional dollars to Roth dollars is kind-of like the person that exchanges some of his Ford shares for an equal number of Fannie Mae shares (though it's obviously less extreme). (And, of course, this ignores the other advantages of Roth accounts, like freedom from required distributions in Roth IRA's and the ability to shelter more tax-adjusted money, which might push you the other way in this situation.)
The conversion decision, or the decision about which kind of account to contribute to, is like trading in a horribly inefficient market, or one where you are allowed to trade on inside information. Of course you don't know for sure what your future tax rates will be, but it's not that unusual to have a pretty good feeling that they'll be above, or below, your current marginal rate. The government lets you make that trade at a fixed, arbitrary price -- today's tax rate. If you have a good reason to think that's a good deal, take it, and if you have a good reason to think it's a bad deal, don't take it, and don't feel bad about giving up an opportunity to diversify when diversification would cost you real money.
(1) Is this accurate?Yes. Opencongress doesn't seem to have the final text of the enrolled bill, but I think at least this part -- sec. 2112 -- is unchanged. You can see the final text of the "enrolled" bill at thomas.loc.gov. Unlike many of the other tax changes, this is effective immediately. (2) Will it only be an option at employers that currently offer a Roth option?Well, they don't have to offer it today, but they have to offer it at the time that you want to do the conversion. And the plan will have to allow it, which none currently do (unless they were written anticipating that Congress would pass this).
The law doesn't specifically say that you are allowed to do this with money that you weren't otherwise eligible to take out of the traditional 401(k). If that's right, then the law means very little for most people: any money that you could now convert to a Roth 401(k), you could already convert to a Roth IRA, which you would probably prefer unless you particularly love your 401(k) investment options. I hope it's supposed to be implied that you can now convert even money that you can't withdraw (because you haven't turned 59 1/2, left the job, etc.); I haven't read any legal analysis about it yet.
My strategy is to put as close as the max of $49,000 ($16.5k employee contribution and $32.5k employer contribution) into 401K and put $5000 into my ROTH IRA when elegible (my income fluctuates year to year). I expect to have some low income years sometime in the next 30 years before I retire, so will definately roll 401K money into my ROTH IRA during those years.
taxmantoo said: geo123 said: What sort of potential changes are you referring to above?
Remember when "we'll never tax your Social Security checks"? Now up to 85% of your social security can be included in taxable income. There's nothing in the Constitution to prevent them from making your Roth taxable. Just the potential (almost zero) for the American Sheeple to get upset enough to take up arms and kill them for it.
taxes have decreased for so many years and deficites have increased
Keep in mind that if your employer is matching your contributions the monies contributed by your employer will continue to go into the traditional 401k either way, so looking at it from that perspective you don't really need to view your current $5k balance as "stranded". You will just have 2 separate accounts and there's nothing wrong with that. If you are in the 25% tax bracket or lower then I would for sure use the roth 401k. If you're in a higher bracket then that it might be more of a wash.
Note that the Roth eligibility phases out partially at $105k in income and completely at $120k.
These income levels may seem high now but you'll get there. If you're young and ambitious the roth might not be an option for you down the road anyway.
hejustlaughs said: Note that the Roth eligibility phases out partially at $105k in income and completely at $120k.
These income levels may seem high now but you'll get there. If you're young and ambitious the roth might not be an option for you down the road anyway. There's a way around that; see http://www.fatwallet.com/forums/arcmessageview.php?catid=52&thre... (though it's possible the laws related to this will change again later)
hejustlaughs said: Note that the Roth eligibility phases out partially at $105k in income and completely at $120k.
These income levels may seem high now but you'll get there. If you're young and ambitious the roth might not be an option for you down the road anyway.
That for a Roth IRA, right? I don't think such income limits apply to a Roth 401k.
Anyway, I'm in the worst part of AMT right now, so it's 100% traditional 401k for me. (AMT is a regressive tax! Evil!)
You can be sure tax rates will be much higher in the future. I fully expect politicians and 10% annual inflation to completely destroy the health insurance industry and their proposal to "fix" the problem will be to socialize the entire health care system. As failed policies cause costs to continue to rise, the number of uninsured will increased and they'll claim that health care is so bad that the only solution is for government to provide it for everyone.
Socialized healthcare will require much higher tax rates than we have today... probably a top rate of 50%+. Additionally, the US government is keeping tax rates artificially low by running large, unsustainable deficits which will require higher taxes to repay.
mrkk said: taxmantoo said: geo123 said: What sort of potential changes are you referring to above?
Remember when "we'll never tax your Social Security checks"? Now up to 85% of your social security can be included in taxable income. There's nothing in the Constitution to prevent them from making your Roth taxable. Just the potential (almost zero) for the American Sheeple to get upset enough to take up arms and kill them for it.
taxes have decreased for so many years and deficites have increased
so I see at some point, taxes will start going up
so some of roth is definitely goodThis is not the way to analyze this. In fact, LH2004, who is now deceased, addressed this very point earlier upthread:
"Nonsense. When you're driving down the street, you're never certain that driving on the right is safer than driving on the left: there could always be potholes or hidden dangers on the right. That does NOT mean you should spend half the time on the left. Being on the right is safer (and otherwise better) in EXPECTATION; whether or not it turns out to have been right, after the fact, isn't the issue.
If you expect your tax rate to be the same in retirement as it is today, a 50/50 split is fine (but so is anything else). If you're currently, temporarily, in the 10% bracket, but expect to be in the 35% when you retire, which you expect will be 40% by then, you're a moron to use a traditional IRA or 401(k) AT ALL (if you have the Roth option). If you get some kind of one-time enormous income this year, from winning a lawsuit or something, that puts you in the top bracket plus AMT plus state taxes now, but you're about to retire and have almost no income except social security, then you're a moron to use a Roth AT ALL (if you have the traditional options)."
Just to follow up on the point above, even if you believe that tax rates in general will be higher when you retire than they are now (which, depending on your age and anticipated retirement age, could mean that you are trying to project tax rates 30 years from now, which is next to impossible), that information alone should not lead you to the conclusion that Roth account are necessarily more advantageous.
Suppose, for instance, that you are in a 28% tax bracket, which you expect to rise to 33% by the time you retire. This doesn't tell you anything in and of itself, as you would then need to determine how much taxable income you will actually have in retirement. If you are like the vast majority of the population out there you will find yourself with lower income in retirement than you do during your working years (which would still allow you to maintain the same lifestyle, as you wouldn't need to make any more retirement contributions or build up your savings). If, based on that analysis, it appears likely that you will end up in a 15% tax bracket, which you expect to rise to 20% by the time you retire, you are still WAY better off with traditional retirement contributions than with Roth contributions.
Likewise, as people have pointed out time and time again, when you make your retirement contributions, the money comes off the top, so the tax savings that you get are at your highest marginal rate. When you receive retirement distributions, however, you still have to have taxable income that fills those lower tax brackets, which is the reason that if you'll be in the same or even higher tax bracket in retirement, you can end up paying less taxes with traditional retirement distributions because most of them will fall into lower tax brackets on the way to your highest marginal one.
In other words, suppose that you are in a 28% tax bracket now, which you anticipate rising to 33%. If you make traditional retirement contributions, you've saved 28% of your entire contribution. When you retire, if you have very little or no taxable income other than your retirement distributions and SS, you'll still be paying taxes at the 10% bracket, 15%, 25% and 28%. Even if all these brackets rise by 5%, you are still better off with traditional contributions that saved you 28% up front.
hejustlaughs said: Note that the Roth eligibility phases out partially at $105k in income and completely at $120k.
These income levels may seem high now but you'll get there. If you're young and ambitious the roth might not be an option for you down the road anyway.As markb1024 pointed out above, the income limits above only apply to Roth IRA contributions and only if you are single. By the way, in 2011 the Roth IRA income limits for single taxpayers are $107K MAGI and the contribution is completely phased out at $122K MAGI. In 2012 the MAGI limits were increased by $3K.
If you are married filing jointly, your MAGI limits in 2012 are $173K MAGI and the contribution is completely phased out at $183K MAGI (in '11 MAGI limits were $3K lower).
There are no such income limits on Roth 401(k) contributions.
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