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**Warning long post**

Greetings folks,

To add fuel to the 401(k) employer match vs. IRA debate, please allow me to put forth a situation.

1) John Doe is single and works for this company, which incredibly enough does NOT contribute any match to the 401(k).
2) John's cash compensation including bonuses etc. was $70k last year.
3) John did not participate in company 401(k), but instead put $2000 in an IRA, (not Roth) with a brokerage for the last several years.
4) John Doe's uncle died and left him an annuity of $20,000. Thus, he now expects to earn at least $90,000 this year.
5) This puts John Doe in a higher tax bracket, correct?
6) Not only that, he feels it is better for him to convert his IRA to a Roth, the sooner the better, and now he also has the means to pay the taxes on the conversion. Note that his AGI is less than $100,000.
7) His IRA is worth $20k plus right now.

Now, lets look at 3 scenarios. If you guys can come up with more, please do.

a) He continues not to participate in company 401(k) this year as well, converts his IRA to a Roth, and puts $2000 into his Roth IRA; he must pay taxes on all $110,000.

b) He continues not to participate in company 401(k), converts his current IRA to Roth, invests $2000 into a traditional IRA; his taxable income is $108,000.

In both, a and b, let us also assume that he rigorously invests $10,500 via a separate brokerage account. That's after tax money, still subject to Cap Gains.

c) He converts his IRA to a Roth, but starts participating in 401(k). Of course, the IRA investment is now not deductible, so he may as well put it into a Roth. But his taxable income now reduces to $99,500.

What is John Doe to do, in order to maximize returns, at the lowest possible taxation, now and in the future?


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