Has anyone done the math do figure out which is better? I'm aware that traditional IRA contributions are done pre-tax and future distributions are taxed. Roth IRA contributions are done post-tax and distributions are not taxed. I'm trying to figure out which is the best to put money in.


A financial planner told me he recommends regular IRAs. He said since the money is pretax you can put more money into it, therefore, you have more money to gain growth/interest on. From posts I've seen in investment threads here, however, it looks like many here prefer Roth IRAs. I don't know if it's better to take the tax advantage now or wait until later.

IDK the answer but good you came here because those in the biz who give advice do what is best for them, not you.

Someone will soon chime in.

This is not advice, but why not have the best of both worlds if a 401k or equivilent is available to you?

The financial planner I work with suggested an approach where you have a balance of both pre and post tax. I did all traditional for 15 years, now I am doing all Roth until I get balanced. There are pros and cons to each, depends on the tax rates when you retire, which are hard to predict.

Assuming you are in the same tax bracket when you earn the money as when you withdraw the money in retirement, you will end up with the exact same amount of money regardless of whether you use a tax-deferred IRA or a Roth IRA. You are just changing when you pay the taxes.

The hard part is that you may not be in the same tax bracket. When you are young and presumably earning less money you could be in a lower tax bracket so using a Roth could be better because you might be in a higher bracket when you are retired and withdrawing the money. But if you are in your prime earning years a tax deferred IRA might be better because your tax bracket might be lower when you pay the taxes in retirement. But then you have to take into consideration deductions that you may lose when older.

You cannot predict the future. Tax rates, your income during retirement, changes in tax laws, and importantly your health all play a role. Go with what you think is best and when you get closer to retirement adjust accordingly.

When you reach the age of 70 and one half you must make mandatory withdrawals from your IRA. The penalty for not taking out enough money is FIFTY PERCENT.

The most important thing is to invest regularly while you are young.

All depends on your assumptions about the rate of tax applied when the money comes out and your assumptions about the growth rate between the time of the contribution and the time the money comes out. Present tax rates are relatively low and my assumption is that they will need to be higher in the future. But, how much higher?

The other consideration is, if the money is never needed by you, it can be passed to a beneficiary at your death tax free in the case of the Roth while the pretax IRA comes out taxable over varying time periods depending on who the designated beneficiary(ies) is or are.

In addition, Traditional IRA's have Required Minimum Distributions (RMD) required once you hit 70.5 while the Roth does not. If you don't need the money, the RMD is just forced additional taxable income when the money has to come out.

Have to have facts and assumptions in order to compute the differences. As a generality, younger people will benefit more from the Roth and high income people will also benefit more from the Roth because it's likely they won't need the money in their lifetime.

I have seen some calculators out on the net but have not reviewed or analyzed any of them.

I don’t trust that distributions from a Roth wont be means tested for taxation at some point in the future.... I make more money now than I will in retirement as well. So, pretax deductions make more sense in my world.

Some good info in here: https://sigforum.com/eve/forums...0601935/m/1760066254

quote:

Originally posted by sasquatch28:
This is not advice, but why not have the best of both worlds if a 401k or equivilent is available to you?

What are the advantages of the 401k? I do have that available to me.

quote:

Originally posted by cooger:

quote:

Originally posted by sasquatch28:
This is not advice, but why not have the best of both worlds if a 401k or equivilent is available to you?

What are the advantages of the 401k? I do have that available to me.

Contributions to your company 401k often get matched up to a certain point by the company. And your contribution lowers your taxable income....it comes right off the top.

quote:

Originally posted by 6guns:

quote:

Originally posted by cooger:

quote:

Originally posted by sasquatch28:
This is not advice, but why not have the best of both worlds if a 401k or equivilent is available to you?

What are the advantages of the 401k? I do have that available to me.

Contributions to your company 401k often get matched up to a certain point by the company. And your contribution lowers your taxable income....it comes right off the top.

Ahhh, my employer doesn’t match 401k contributions.

The issues is you have to use the crystal ball to determine what your tax rate will be when you retire compared to the tax rate you currently are paying. We are now $21T...not Billion, not Million...Trillion (1,000,000,000,000,000) in the hole as a nation. Taxes MUST go up and more than likely, there will be a downturn in the stock market seeing as it has been a bull market for 10 years now. As much as I would like it to, we can't keep this pace of spending without something imploding.

Personally, I like the idea of paying NO TAXES (Roth IRA) when I retire. However, like I said, you have to make assumptions based on what you believe your crystal ball is telling you. I know for sure what the tax rates are today and highly doubt mine will go down since I broke the six figure mark last year and have 20 years left. In the future as I inherit a working farm from my parents, load up my financial portfolio, etc. I would guarantee my tax rate will go up. So for me, paying taxes now via Roth is the way to go.

you don't need an IRA or a Roth if you can answer this question with certainty. You can just sell your advise for big money. As others have said its all future tax rate based and that's a crap shoot. Me I'm with jcsabolt2 rates have to go up. get as much into a Roth as you can. There is no guarantee that it will be available in the future.

Most of what I've had explained to me says 100% Roth IRA/401k is better for almost everyone. And if it's not best for you, you'd know it already because you're in a weird tax situation.

quote:

Originally posted by jcsabolt2:
The issues is you have to use the crystal ball to determine what your tax rate will be when you retire compared to the tax rate you currently are paying. We are now $21T...not Billion, not Million...Trillion (1,000,000,000,000,000) in the hole as a nation. Taxes MUST go up and more than likely, there will be a downturn in the stock market seeing as it has been a bull market for 10 years now. As much as I would like it to, we can't keep this pace of spending without something imploding.

Personally, I like the idea of paying NO TAXES (Roth IRA) when I retire. However, like I said, you have to make assumptions based on what you believe your crystal ball is telling you. I know for sure what the tax rates are today and highly doubt mine will go down since I broke the six figure mark last year and have 20 years left. In the future as I inherit a working farm from my parents, load up my financial portfolio, etc. I would guarantee my tax rate will go up. So for me, paying taxes now via Roth is the way to go.

If it is inevitable that taxes will go up like you say, then why do you think that Congress will not try to tax Roth IRA's in the future?

As 6guns pointed out, some companies make a matching contribution to a 401(k). However that does not appear to be cooger's case.

There are also income limits for both Roth IRA's as well as for the tax deduction for a Traditional IRA. So those need to be taken into account as well.

Depending on your income level, it may make sense to make a contribution to a 401(k) instead of an IRA because of the pre-tax nature of the contribution.

Over the years I’ve always put the 401k 1st, especially with a Com match to some point.

The next is the Roth IRA, last the traditional IRA.

I have some in each, never felt the need to ‘convert’ my traditional IRA.

There are other elements, adequate insurance, 529’s for kids, etc.. Of course individual specifics matter, some company 401 plans are less desireable with poor investment options.

quote:

Originally posted by K0ZZZ:
Most of what I've had explained to me says 100% Roth IRA/401k is better for almost everyone. And if it's not best for you, you'd know it already because you're in a weird tax situation.

That is not true. A Roth is only better for people in a low current tax bracket, or who will be in a high income situation after retirement. A Roth is suitable for someone who is a 25% federal rate now, but will be in a 15% or lower bracket in retirement.

But if the socialists take over, federal tax rates may be much, much higher in the future. The taxpayer in some Scandinavian countries pay about a 60% income tax rate on about $60K of income. That's not the marginal rate on the "tippy top" of their income; that's the overall effective tax rate. Free stuff ain't cheap.

Two other things to consider;

The democrats have proposed taxing the balances (not just withdrawals) in both Roth and Regular IRA accounts. There is an enormous amount of money held in tax deferred accounts, and the progressives don't think it's fair that the tax man has to wait to collect. Additionally, will IRA/Roth balances be subject to Elizabeth Warren's proposed wealth tax?

If your Roth looses value, the loss is only deductible as a miscellaneous itemized deduction subject to the 2% of AGI limitation. Which means many (most) people will get no benefit for the after tax money that they lost.

If your employer matches your contributions, then you should participate. If there is no match, just consider a taxable brokerage account for a significant portion of your retirement savings. How many people do you know that lost their job, took money out of their IRA and had to pay an additional 10% tax? In a regular brokerage account, you can deduct capital losses, and pay at the 15% capital gain tax rate on your gains and dividends.

There is no easy answer to this question.

One difference not yet mentioned is that with a Roth IRA, you/your heirs NEVER have to take the money out. There are no Required Minimum Distributions.

Update: I'm wrong about the NEVER part. See revised repost on page 2.

This message has been edited. Last edited by: mikeyspizza,

quote:

Originally posted by cooger:
A financial planner told me he recommends regular IRAs. He said since the money is pretax you can put more money into it . . . .

Said financial planner does not know what he's talking about. Contribution limits are the same - for 2019 - $6k if under 50, $7k if 50 or older.

Maybe he meant that with a Traditional you would have more income left over to spend now:

Paycheck = $100
IRA Contribution $20
Tax Rate 10%

Remaining spendable income after taxes and IRA contribution

Traditional - $72, Roth - $70