Will Trice <wwtrice[at]paragondynamics.com> writes:

- quote -

All else being equal (tax rates, rates of return, etc)
it makes exactly no difference what age one is whether
one ought to choose a Roth or a 401k. The math say so.

There are other factors, however, to consider - things
like mandated withdrawals for beneficiaries, age at which
one may take distributions, selection of investments available,
alternate uses for the money (ie. Roth contributions may be
extracted without penalty, etc).

However, age has no bearing on after-tax returns, as you said.

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Leigh Menconi wrote:

- quote -

Assuming you can get the same return in each vehicle, how would one
compute a "breakeven age"? What are you trying to get to break-even?

-Will

John A. Weeks III wrote:

- quote -

John,

You've said this before on this group, but I still don't understand it.
How does the OP's age factor into this? Are you making an assumption
about income tax brackets or something?

-Will

"nobody" <nobody[at]nowhere.com> writes:

Please don't top-post without trimming what you leave behind.

- quote -

Clearly. But lacking any knowledge of what future tax rates
will be, and lacking any knowledge of whether his overall
income will put him in a different bracket - up or down -
the only reasonable assumption is that it's the same in the
future. It could be higher, it could be lower, but at the
moment all we know is that it is now.


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Your working vs. retirement tax rate has an impact here. If you're going to
be in a higher tax bracket in retirement then a Roth provides a decided
advantage when it comes time to make withdraws. Tax rates are relatively
low now in this high deficit environment so it seems quite possible that
effective tax rates will be higher in the fututre even if your income is
less. A counterpoint to this might be that it's better to defer taxes today
and pay them later with dollars that will be worth less due to inflation.


<BreadWithSpam[at]fractious.net> wrote in message
news:yobhd8x6kxf.fsf[at]panix3.panix.com...
- quote -


======================================= MODERATOR'S COMMENT:
Please trim the post to which you are responding. "Trim" means that except for a few lines to add context, the previous post is deleted.

"hobbzilla" <hobbzilla[at]hotmail.com> wrote in message
news:1135354025.493309.195390[at]g49g2000cwa.googlegroups.com...
- quote -

What you have to keep in mind in all of this is that no one can tell us what
will happen in the future. The promise of the Roth is that all of the money
will come back to us tax free - contributions and earnings. This is
wonderful as long as we don't get what some really want - an end to the tax
system as we know it.

But consider this - what if we forego the chance to get a tax break now in
hope of free money later by using a Roth IRA AND congress changes the rules
later so that instead of an income tax we have a consumption or Federal
level sales tax? Then you will have taken no tax deduction now AND will get
to pay tax later when you spend the money you get back. This makes the Roth
a loser.

Also, keep in mind that when Social Security started the payments were
promised to be tax free and they were until Congress changed those rules for
us. Now, those getting social security have to pay tax on as much as 85% of
the SSA payments if their other income is high enough. What if Congress
changes the rules in 25 or 30 years? Will the Roth really be tax free?

Who knows? Only the Shadow Knows!

The important thing is to develop a reasonable working plan that you are
comfortable with and do your best to stick to it. Frankly, I don't think
we'll ever get rid of the Income Tax System as we know it, at least not in
my lifetime. I also believe that Congress will take away much of the tax
free"ness" of the Roth in the future. But that's just me.

If you can afford to set aside 10% of you gross income today and still
maintain your standard of living then you should set aside 11% or 12% - you
should save till it HURTS! It won't take long to get used to it. In six
months to a year it will be old hat. Then when you get your next raise, set
aside AT LEAST HALF of it - all of if at all possible.

Start saving now and your future will be secured - regardless of the
uncertainty of the tax code. Even if things to horribly wrong, you'll still
be better off than the ones who do nothing.

I'm of the general opinion that you get all the tax breaks you can NOW,
while we can. The future is uncertain and holds no real promises. But
leveraging the tax system that exists today, you can get some subsidies.
And consider this - suppose we do move to a flat tax or federal sales tax.
Those who used tax deferred savings will come out ahead - they saved tax
when they saved (unlike the Roth savers) and they saved tax on the growth.
They may have to pay tax when they spend but so will those that failed to
use the deferrals options available.

Build a plan - either on your own or with a pro, but build a plan. Then
fund it till it hurts.

Good luck,
Gene E. Utterback, EA, RFC

me[at]privacy.net writes:

- quote -

Um, then you decide between 401k, Roth IRA, regular IRA
based on other factors?

Me? I'd max out the 401k anyway, at least at my current
employer which offers a decent varity of investments, and
besides, a maxed out 401k lets you put away a lot more
money than an IRA of either sort, if you have enough
income to be able to afford to save that much. I max
out my 401k *and* my IRA.

Thankfully, the max one can put into an IRA has increased
a bit in the last few years and is on its way up a bit more.
Only a few years ago, the max one could put in was $2000 -
it'd be an awfully tight retirement that one could fund
on that little each year.

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I see this as several issues:

1) how to set money aside for retirement
2) how to withdraw money during retirement (and possibly other
pre-retirement choices)
3) how to pass money onto others when you die (beneficiary rules)

depending on how you analayze any of the three points, the Roth or 401k
may come out ahead.

The priority of
1) contribute to 401k up to match
2) contribute max to Roth IRA
3) contribute to 401k

might need a 2a) 2b) 3a) 3b) if the upper limits of the Roth Income are
close- meaning contribute to 401k to reduce taxable income (AGI) to
allow more contributions to Roth (if income is high enough to start
phasing out Roth eligibility).

if tax rates while working and tax rates in retirement are "equal",
then both vehicles are rated "equal". If tax rate in retirement is
higher, Roth should benefit you more, if tax rates in retirement are
lower, 401k should benefit you more. If you are not sure, use both
(diversify).

withdraw rules- 401k will start at age 70.5. Money could be taken
sooner with "substantially equal withdraws". 401k plans (some) allow
for loans and hardship withdraws for medical expenses. Roth IRA is
flexible regarding withdraws. Contributions can always be taken out.
Earnings **I believe** must be in account for 5 years prior to
withdraw.

benficiary rules- if you do not plan on passing the monies onto family
members when you die, this point is meaningless. I believe 401k/
traditional IRA has rules requiring when withdraws need to be taken
(and these withdraws are taxed). I believe Roth IRA can keep it's Roth
status when passing monies to someone else, with no withdraws
scheduled. I would verify these points, as I know it's a factor, but I
am unsure of what the rules are. I know the rules exist, but have not
researched them.

BreadWithSpam[at]fractious.net wrote:

- quote -

what if your employer does not match your 401k at all?

what then?

In article <XwUrf.10371$nm.5160[at]newsread2.news.atl.earthlink.net> ,
"Tess Millay" <elle_navorski[at]earthlink.net> wrote:

- quote -

Yes; I was considering the coming year, in which the limit
goes up to $1000, and should have been specific.

"Michael Siemon" <mlsiemon[at]sonic.net> wrote in message
news:mlsiemon-E65ECB.23430625122005[at]nnrp-virt.nntp.sonic.net
...
- quote -

Nit: The catchup is $500 per person for 2005. See
http://www.statefarm.com/lifevents/retrad.htm, among other
IRA sites.

In article <1135580070.172344.183780[at]g47g2000cwa.googlegroups.com> ,
"Bucky" <uw_badgers[at]email.com> wrote:

- quote -

That all IRA contributions, Roth or "traditional" have the same
limit(s) [which includes the "catch-up" provision. For 2006, this
means a $4000 IRA limit plus $1000 catch-up for those aged 50 or
older.]

BreadWithSpam[at]fractious.net wrote:
- quote -

I followed everything else you wrote, but I don't understand what you
mean here. $4000 Roth limit matches what?

"Bucky" <uw_badgers[at]email.com> writes:

- quote -

Logic is would lead you wrong.

The RothIRA limit simply matches the pre-Roth IRA limit.

In fact, in the short term, the government would prefer
you to put the money in the Roth, not the nonRoth or 401k,
since the government gets tax money right now rather than
later.

If your marginal tax rate is the same now and in retirement,
and your investment in a Roth and in a nonRoth grow at the
same rate, you end up with *exactly* the same amount of
after tax money later.

Suppose $1000 income available for investing, 25% tax rate
and a period of time over which an investment increases in
value by 10x (choose whatever rate of return and time
period you like for that):

Roth: Pay your $250 in taxes, invest $750
you have $7500 tax-free dollars to spend.

NonRoth: Take your $1000 and invest. It grows to $10,000.
Extract that $10,000, pay your $2500 in taxes and
you have $7500 after-tax dollars to spend.

There are *other* reasons why 401k vs Roth may balance
out better or worse than each other, but they mainly
involve either withdrawal schedules and beneficiary
issues, and inasmuch as those things may be very far
off for the young person who asked this in the first
place - and the fact that he can switch from the 401k
to the Roth later on anyway - there's no major value
right now which makes one significantly better than
the other, so long as he's at least getting the maximum
match from his employer.

- quote -

Those may, in fact, be considered strikes *against* the Roth
inasmuch as accesibility may lead to temptation to spend
his retirement money rather than let it sit and grow.

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On Sat, 24 Dec 2005 06:07:25 -0600, Bucky <uw_badgers[at]email.com> wrote:
- quote -

Assuming a 25% tax bracket, that would actually end up 3% contribution
plus 1% tax, unless the OP can afford to pay the tax on the whole 4% (ie,
6% 401k, 4% Roth IRA, 1.25% tax on Roth contribution).

- quote -

Although, the Roth contribution is taxed initially, the gain is not taxed
at all (unless distributed before qualified), and periodic distributions
are never required like at age 70.5 with 401k or traditional IRA. This is
where the flexibilty comes in. If you need a lump sum during retirement
(for pleasure or medical expenses) that sum from a Roth would not be
taxed, but such a distribution from 401k would be taxed (possibly throwing
you into a higher bracket that year).

The risk waiting to get into a Roth is whether the regulations allowing
contributions to a Roth will be renewed in 2010. The tax advantage of a
Roth could disappear if the feds ever totally go to a national sales tax
or VAT in place of income tax.

Based on current tax rates, my marginal rate retiring about 13 yrs from
now may be no lower than now (maybe higher with less workers). So I am
maxing out my 401k and Roth IRA and gradually converting IRA money to the
Roth, paying the tax on that now, and not on future gains.

anoop wrote:
- quote -

ok, you got me there. But it sounded reasonable at first. =)

- quote -

Right, basically, the unknown factors will probably outweigh the known
factors. The known factors is this: Roth IRA has very flexibility
rules. And with Roth IRA, you will be taxed at a known rate (probably
around 25-30%). If you do 401K, you do not know what rate you'll be
taxed when you withdraw. It could be lower, it could be higher. But
25-30% is relatively low, so it's not a bad deal to "lock in" the tax
rate. So unless you're pretty confident that your retirement tax rate
will be lower than now, most people are better off with Roth IRA.

Bucky wrote:

- quote -

I don't think this is a good argument. The limit on the traditional
IRA
is also $4000 and it doesn't have any advantages of the Roth.

Some things to consider between Roth IRA and 401(k) as I see them are:
- If one is in a high tax bracket, one might prefer the 401(k) since
one gets an upfront tax deduction. Also when one retires one
might be in a place that doesn't have state tax.
- However, when one gets into a really high tax bracket, one
may not be eligible for contributing to the Roth.
- Having a very small balance in the Roth may subject one to
more fees from the IRA custodian because of the way certain
funds are set up. There usually aren't low balance penalties
in a 401(k).
- If one is currently in a very low tax bracket, the Roth IRA seems
like a slam dunk.
- If one is in a high tax bracket and is still eligible for the Roth,
and can't max out on both, then the choice between the two
is far less clear. It depends on way too many factors (how
the investment performs, future tax rates, future legislation,
where one plans to live in retirement, etc.)

Anoop

hobbzilla wrote:
- quote -

I'd put the remaining 4% in the Roth IRA.

Here's one way to look at it. The annual contribution for 401K is
$14,000. The annual contribution for Roth IRA is $4,000. Now why do you
suppose the limit for Roth IRA is much lower than 401K (even if you
tax-adjust to be a fair comparison)? Logical reasoning would lead you
to conclude that it is because Roth IRA is more advantageous, so they
limit your participation accordingly.

Basically, Roth IRA has much more flexibility than the 401K. The
biggest one is that you can withdraw contributions at any time without
penalty. And there are other cases where you can withdraw earnings for
certain things too.

"John A. Weeks III" <john[at]johnweeks.com> wrote in message
news:john-C30C7B.15010723122005[at]corp.supernews.com...
- quote -

I like to think of my Roth as the money I'll use to pay the taxes on the
401K withdrawals when retirement time rolls around. Someone did an analysis
about what the breakeven age was, below which it was more advantageous to do
the Roth after contributing the max to the 401k to get the matching and
above which it made more sense to just keep contributing to the 401K past
the matching point. It seems like it's a few years older than me, so it's
probably somewhere in the late 40s but not quite 50.

Leigh

Before you can get a good answer what is your current tax bracket and how
long before you retire?

"hobbzilla" <hobbzilla[at]hotmail.com> wrote in message
news:1135354025.493309.195390[at]g49g2000cwa.googlegroups.com...
- quote -