6/13/2013 11:00 PM ET|
5 reasons 401k's trump Roths
With all the retirement savings options out there, it's sometimes difficult to know which is best for you. If you're comparing Roth IRAs and 401k's, read on.
There are many wonderful reasons to invest in a post-tax retirement account such as a Roth IRA. But tax-deferred retirement savings vehicles such as traditional 401k's and IRAs that let you put money aside before Uncle Sam gets his share deserve a serious look too. Here are several advantages of saving in a pre-tax retirement account you should take into account before you decide that a Roth IRA is right for you.
You can deduct the contributions automatically from your paycheck. Until the Roth 401k becomes more popular among employers that offer 401k's, the easiest way for most employees to save for retirement is through payroll deductions toward a traditional 401k.
By paying yourself first you don't have a chance to forget about the contributions, nor can you actually spend it because you won't ever touch that money.
Having the contribution automatically invested instead of manually hitting send seems like a small convenience, but it’s amazing how much of a difference this simple adjustment can make. Try it, because it works.
Another advantage of having money in a 401k is that your assets are better protected. It's just harder for creditors and lawyers to go after assets in your 401k, so use that to your advantage.
You can move to a lower tax state before you withdraw the money. A seldom talked about strategy when deferring taxes is to move to a no income tax state by the time you retire and have to withdraw from your portfolio. This way, you might be able to skip paying state taxes on your retirement account withdrawals. Moving is a huge decision that involves much more than just the state tax rate, but the option is at least available for those who choose the tax-deferred route.
A Roth IRA conversion is possible during low income years. This maneuver requires careful consideration, so work with a competent accountant who is familiar with the procedure. If you do this correctly, you may be able to avoid paying taxes on your contributions all together in some cases.
Roth IRA conversions are taxed at ordinary tax rates, so you can choose to convert part of your tax-deferred assets in years when your income is low to avoid paying a high tax rate. If you have no other income for the year, part of your conversion will even be converted to a Roth tax free. Next time your income drops, remember to look into this because it could significantly boost your nest egg.
You could pay a lower tax rate in retirement. You avoid paying the top marginal tax rate on every dollar of your contributions to a pre-tax account, but not every dollar of your withdrawals will be taxed at the top rate. Thanks to the progressive tax system, the lower range of income is taxed at a lower rate, and the tax rate moves up as your income increases. That means a portion of your withdrawals will be taxed at the lowest rate, while part of it will be taxed at a higher rate.
On the other hand, contributions would have been taxed at your top rate, so don't just try to compare your tax rate during your retirement and working life to determine whether you should choose a tax-deferred account.
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The IRS has always placed more restrictions and limits on Roth IRA participation, such as maximum income thresholds for contributions and conversion eligibility. It's in their interest and not yours to do that. In other words, since the government is trying to prevent you from investing in a Roth, that's probably a good indication a Roth is better for you if you qualify.
I prefer a combination of ROTH and 401(k) so I can manage my tax liability in retirement.
IF tax rates are identical in contribution years and withdrawl years, AND rates of return are identical, there is NO economic difference between ROTH and traditional 401(k). It's all about guessing tax rates. Who thinks they are going down?
I think a lot of this is BS...
First off you can get about 8,000-10,000 more choices in a ROTH or IRA then you can in a 401 anything....Maybe not in all IRAs ??
As soon as you can roll any 401K into a Rollover IRA.
Low income or retirement years, use Conversions to a ROTH. from reg. IRAs
(that might have been mentioned.)
Take advantage anyway you can, to delay or defray taxes....Get the right advice.
And do your research.
First, it's good to hear contrary points of view to the many favorable things published regarding Roths. I am a strong believer in the Roth concept and have converted all my accounts into a single Roth IRA.
To respond: "There are more obstacles to withdrawing..." I know of NO obstacles to withdrawing the money (that is, the money that you put in and NOT the earnings on or the appreciation of that money). It is your money and you have already paid the taxes on those contributions.
"You can move to a lower taxed state...." I live in Florida and have, honestly, not considered that reasoning. If you live in a high tax state, I suppose that could be something to consider.
"Roth conversion is possible in low income years..." If you have any size retirement account, at all, you can be nearly certain that you will be in a high income year. That is the reason that one should be contributing to a Roth (if you can) over time so the tax bite is bearable.
"You could pay a lower rate in retirement..." I am with 'Presto' on this one. You will NEVER pay a lower tax rate than you are paying today. That is one of the few things that one can count on. And, even if you could pay a lower tax rate, the genuine pleasure that you will get as you see this money increase, tax-free over a couple of decades, will more than make up for any backward glances you might take.
Carefully make your choices and live (and possibly pay) with them.
If anyone thinks tax rates will be lower in retirement years, they better wake up. The reality is that we are becoming a socialist nation and the govt. is trying to grab everything anybody has by raising taxes to the hilt.
Thank you deadbeats, parasites, liberals and democrats for ruining this country.
Besides a lot of these fluff "advantages", one true advantage of a 401(k) over a Roth is that you are allowed to start penalty-free withdrawals from a 401(k) at age 55. For an IRA, the minimum age is 59-1/2. Something to keep in mind for those considering early retirement.
Overall a Roth is usually a much better deal. But due to the ridiculously low cap on annual contributions, a Roth alone is not enough to sustain a Top 20% lifestyle in retirement (if you live for 15-20 years as will become the norm). If the government raises middle class taxes in the future, it should be accompanied by a significant raise in the Roth contribution cap.
First rule in tax law....take the deduction now while it still exists. It can go away. Then, once you max out the 401K (with matching, in some cases), think about a personal Roth. At least you can get the 5 year waiting period started. BTW, the 5 year rule only applies to the first $1 you contribute.
401k vs Roth Ira
1] you have no clue when you compare $ for $ and bracket converting your prior 401k assets.(check prior year conversions.
2] you have to basically pay additional tax on income and growth while income and growth is tax free on Roth assets
3] if your a decent trader you should beat 99% of mutual funds after expenses.
4] your decedents also get to keep the funds tax free.
5] check the new retire tax rules roth 401k is better than a 401k.
6] a roth ira is better than the others if your a decent investor as you don't pay fees.
Do you really think that the broke federal government is going to let you have Roth IRA dollars tax free someday?? LOL They've already held meetings to talk about the idea of absorbing all retirement savings into social security... LOOK it up, it's a fact.
I'll take my chances with the tax savings now. Never bet against the house, you'll lose.
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