This article is the opposite of the truth (what's that? untruth?). A Roth IRA allows you to contribute MORE money. $4000 after-tax is more than $4000 pre-tax. On the other hand if you can't max them out them which one is better depends only on your tax bracket, and they are equal if you assume a constant tax bracket.

Glitch99 said:quaters said:
Traditional
$6,000 Initial Deposit
$6,000 Annual Contribution
30 years
8%
= $794,451.15
You can't contribute $6k to a Traditional IRA. Well, you can but if you do, $2k of it will still be after-tax money.

Your comparison would be $4k in a ROTH ($6k less 33% tax) vs $5,320 in a Traditional ($6k less 33% tax on the non-deductable $2k). Or $4k in a Traditional vs $2,680 in a Roth ($4k less 33% tax).

The biggest difference doesnt come from the tax-deductable/tax-deferred/tax-free stuff, it comes from what you do with the current taxes saved by deducting your contribution. Put $4k in your Traditional and invest the $1,320 tax savings in a separate taxable account, the combined end result will be better than a Roth (then the game of predicting tax brackets comes into play). But if you blow the tax savings and only invest that $4k, in the end the Roth will win every time.
If you contribute $6k to a traditional IRA, you will pay a 6% excess contribution tax on the extra $2k every year until you withdraw it. If you put $5320 in a TIRA, you will pay the 6% annual excess contribution tax on the $1320 every year.

To be fair, the person quoted in the article spoke of contributing to a Roth IRA as compared to a TIRA or 401k. You CAN contribute $6k to a 401k.

Another factor for many people to consider is the tax on Social Security benefits. Basically, the higher your AGI (Adjusted Gross Income), the higher the percentage of your SS benefits that gets taxed (until it reaches 85% of benefits). Taxable withdrawals from a TIRA increase your AGI, qualified distributions from a Roth do not. (Of course, this won't be a factor if you would already already have reached the 85% cap.)

You have to look at all sides. One year my husband was laid off for 4 months by putting in a tradition IRA it we ended up getting an extra $500 in our packets from EIC so sometimes traditonal is best. Also for someone in a lower tax bracket who can only put a small amount away its better to pay taxes later as you always get your standard and personal deductions before you pay taxes on anything.

yanks0114 said:I personally think there is an even bigger flaw. The author seems to assume that the tax brackets will be the same 20-30 years from now. Taxes are only going one direction, and thats up.

The higher future rates, the better the benefit of a non-taxable Roth IRA will be.

"To put $4,000 into a Roth, you have to effectively earn $6,000," because of taxes, Manarin said. "To put $4,000 into a regular [deductible] IRA, your take-home pay goes down by $3,000. What a huge difference," he said. "Let's turn it around: You put $4,000 in a Roth, that's the equivalent of putting $6,000 in a regular IRA. There's just no comparison."

I believe the 6,000 is equivalent after tax money. He says putting 4000 in a roth is like putting 6000 in an IRA. So its all an equivalency problem. Not how much money you would retire with.

Other thing that puzzles me is where they get that $6000 pre-tax equals $4000 after tax. In the highest tax bracket 33%, that's true but not for lower income households. At those high AGIs, you run into being limited by the contribution limits. Advantage Roth there (see below).

Anyway, most people will be in the 25% of below tax brackets. In the 25% tax bracket $4000 after tax = $5333 pre-tax. For people in the 15% bracket (argument for those who cannot put lots of money aside), that $4000 after tax = $4705 pre-tax. Not quite the same as $6000.

Now a more meaningful comparison is someone (say in the 25% tax bracket) putting $4000 in a Traditional IRA + $1333 in a taxable account vs $4000 in a Roth IRA. Assuming tax bracket is the same at retirement, the Roth IRA comes out ahead because all is invested in a tax-deferred account while with Traditional IRA, you cannot put more into it than the maximum.

Oh but wait, there is the 401k vs Roth IRA case where limit for 401k is much higher. Apples and oranges. The real comparison is 401k vs Roth 401k which was discussed on FWF just a few days ago. Again without speculating on what tax bracket you're gonna pay at retirement vs now (which is the real decider for most cases not close to max contributions) since the dollar amount limit is the same, you can make the exact same case as Traditional IRA vs Roth IRA.

Both of us are putting together $31k into our Roth 401k accounts per year (on top of $8k, $10k next year in Roth IRAs). In our tax bracket, that'd be $41.3k available for putting into our 401(k)s except we're still limited to $31k per year. The extra $10k would have to go into a taxable account. Assuming 15% capital gain tax every year on those $10k, eventually that'd mean Roth 401k ends up better unless taxes at time of our retirement are significantly lower than now.

It's pretty scary to see how much bias or inaccurate information is in the article OP linked. IMO the only piece of decent advice in it was that breaking a traditional IRA to put into a Roth IRA doesn't make any sense due to the penalties involved.

lorcha said:quaters said:In the example he is figuring a 33% tax bracket, okay fine not many fall in there.If you're in the 33% bracket, the point is moot, anyhow.

NO ROTH FOR YOU!No so fast. Only Roth IRA's have income limits, while Roth 401K's have none. The same logic applies to contributions to IRA's and 401K's, so the point is anything but moot.

theman2 said:And good luck staying in a low tax bracket during retirement with investment income, required minimum distributions from your retirement accounts, and minimal deductions (no dependants, mortgage interest, etc).What you are saying in the quote above is certainly true but it is also true that there are a lot of reasons that many people will find themselves in a lower tax bracket when they retire without sacrificing their standard of living. In your working years, you only spend a portion of your earnings and put away the rest. Once you retire, you won't have the need to put anything away, so you will be able to maintain the same standard of living as before on much lower taxable income.

There are also other reasons that you may very well find yourself in a lower tax bracket in retirement. You may very well live in a more expensive area now, which allows you to earn higher income. In retirement, you may choose to move to a lower cost area with lower cost of housing, lower taxes, etc...

Another reason that many people (even those who can afford to max out the roth) are often better off contributing to traditional accounts is because it gives them the ability to convert that account to a roth in a year where they are temporarily in a lower tax bracket. Most people experience those lower tax bracket years in their lives -- people go back to school, get married to non-working spouses, have kids, lose jobs, take sabbaticals, decide to work part-time, etc... Converting all or a portion of a traditional account to a roth in such a lower tax bracket environment can save quite a bit of money.

Please note that there is an existing active thread in which we have discussed all of these issues.

Ummm.... I use the roth as a risky savings account. I can get my deposits back at anytime... I invest 4k in, I can get 4k out. With the IRA...not so simple. tax tax.

What if you get a little lucky in your Roth. example:

google stock at 100/per share. Now you would have done very well...and no taxes.



But I do understand the benefits of the tax deductions which can send you into a lower tax bracket.