Elle wrote:
- quote -

If they are married and live together, they are not likely to be
eligible even if filing separately (unless the 2005 rules are
significantly different from the 2004 rules).

-Will

"anoop" <ghanwani[at]gmail.com> wrote
- quote -

If their taxes are done "Married filing jointly," true.

If they file separately, one or both likely will be eligible to contribute
some amount to a Roth.

- quote -

I agree.

Elle wrote:

- quote -

At the income levels cited by the original poster (200k/yr taxable),
the couple wouldn't qualify for contributing to the Roth, unless
they managed to significantly lower their AGI by some other means.

Anoop

"FranksPlace2" <FranksPlace2[at]gmail.com> wrote
- quote -

Why wait until that "problem" arises? Why not diversify into other
tax-advantaged retirement plans so as to hedge bets? If you advocate
financial diversifying in general, doesn't it make sense to do so?

It's true one will find authorities on the web who, like Skip and you, will
advocate putting as much as the federal limit permits, and regardless of
employer matching, into 401(k) plans. But other authorities say to put only
as much as the employer matches into such plans; then max out one's Roth
IRA; then return to funding the 401(k).

See for example:
http://clarkhoward.com/library/tips/401k.html
" [P]ut in at least up to the company match, which is usually 6 percent.
Once you've done that, open a Roth IRA. Doing both of those things will help
you tremendously. Then, if you still have money left to invest, go back and
put more in your 401k plan at work."

http://money.cnn.com/2004/09/14/pf/expert/ask_expert/
"... [Y]ou're absolutely right to invest at least enough in your 401(k) to
get your employer's match. Doing otherwise would be like walking away from
free money. Once you've done that, I think it would then make sense to fund
a Roth IRA."

The reason is that, at retirement, the Roth IRA's earnings may be withdrawn
completely tax-free. The earnings are likely going to far exceed the
original (and so taxed) contributions, so the tax savings at retirement
potentially will be huge.

The media popular financial advisor Suze Orman also says what Clark Howard
says, though IIRC she typically adds observations like (1) tax rates are at
historical lows right now; (2) the government debt is high; (3) social
security and medicare are both likely to need more funding in the future.
Thus, she argues, it's more likely than not that tax rates will be higher
when a young couple today ultimately retires. Citations quoting Orman on
this:

http://www.washingtonpost.com/wp-dyn...7/08/DI2005070
801428_pf.html

http://biz.yahoo.com/pfg/e28socsec/art021.html

For the original poster, another advantage of a Roth IRA is that he/she can
withdraw contributions (but not earnings on the contributions) without any
penalty at any time. So if he/she must have the house, then the Roth IRA's
contributions are a partial resource for this.

Still another advantage of Roth IRAs is that the investor has more options
for putting his/her money to work. Mutual fund offerings by one's 401(k)
plan may be abysmal and/or highly limited, based on my reading of anecdotal
reports here and elsewhere.

I do agree with Skip that it's _extremely_ important to keep one's mitts out
of one's retirement accounts until actual retirement, if at all possible.
Live within one's means. Know your outcome and income well; have them on
spreadsheets. Don't buy more house than you can truly afford. Do not let the
banker potentially providing the loan tell you how much you can afford;
he/she has a conflict of interest in doing so. Instead, talk with objective
outsiders (like those here) who actually run the numbers and can talk
intelligently about expected future expenses.

Skip is right from a big picture, professional point of view.

By maxing out on your 401ks, you can defer taxes on say another 7% of
your income. ("...well below the maximum they could be contributing to
their 401Ks.")

At a 30% marginal rate, that makes available 2.1% of income for after
tax savings with no impact on current cash flow.

The risk with deferred taxes is that future tax rates may be higher
than present. But you can deal with that problem when it occurs.

Frank


HW "Skip" Weldon wrote:
- quote -

On 13 Aug 2005 13:30:05 GMT, "MichaelC" <mikecraney[at]sbcglobal.netwrote:

- quote -

With the caveat that none of us know nearly enough to advise this
couple, here is a generic idea:

First go to the maximum allowed into the 401k. That's probably not
enough for retirement, but we can't do everything at once. And I
would ask that they never touch that money until retirement.

In addition, I would suggest automatic monthly savings into dedicated
accounts for any goals important to them - education, future car
purchases, vacations, etc.

ONLY AFTER they had a sense of what life would be like on the
remaining net check (and doing so without *any* debt) would I revisit
how much house they could afford, and when.

-------
In case nobody recognizes this, it's called "living within one's
means". <grin

-HW "Skip" Weldon
Columbia, SC

I'm trying to think through the following scenario, and I'd appreciate some
comments.

Say a family is well into the 28% tax rate, possibly into the 33% tax rate
on the upper end of their taxable income. For the sake of discussion, let's
say the annual taxable income is about 200K. Let's leave the AMT problem out
of the discussion for the time being. Savings/investments are 100K, 85% of
which is in qualified accounts,

Having access to cash for, say, a downpayment on a new house is important to
them over time, although they don't have any pressing need for cash at the
moment. They're both contributing to 6% their qualified accounts to get the
full employer match, but that adds up to well below the maximum they could
be contributing to their 401Ks.

In general, it is a better strategy for them to (1) max out the 401K
contributions to the federal limit, knowing they can borrow against the 401K
if the need cash for a downpayment, thus lowering taxable income or (2)
stick to the 6% contribution to the 401K, sweep as much as they can into the
nonqualified account, with the intent of using that money for any cash need
that arises?

Thanks.

Mike