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Subject:  Re: Joining Retirement ideas Date:  1/3/2005  6:20 PM
Author:  Watty56 Number:  43860 of 88431

I have also heard the analysis that says that a Roth is much better than a 401k or Traditional IRA because the money will be tax free decades from now when you will be in a retired and in a high tax bracket.

I am skeptical that this will actually be the best case for most people because there are so many things that can come up that will cause even a well-planned retirement nest egg to be smaller than expected. Additionally, once you are in your fifties(or even fourties) and have amassed a significant amount of money then you may choose to retire early on a more modest income (and lower tax rate) rather than working until you are in your mid 60's and being even richer (and paying higher taxes).

Looking at it pessimistically and assuming that you make the wrong decision you could end up in either of these situations as the worse case scenario.

1) You have lots on money in a TIRA/401K type accounts and have to pay a higher tax bill before you go off on your spring cruise.

2) You pay your current tax rate now when you put you money into a Roth IRA but you end up short of money in retirement and end up withdrawing the many in meager years when you pay next to no taxes anyway.

Lots more downside in the second scenario.

It is really just a matter of guesswork on what will happen in your life over the next 40 years or so AND what the tax laws will be 40 to 70 years from now. In reality a mixture of accounts type will probably be best when you retire but I would concentrate on getting a good retirement “foundation” mostly in the TIRA/401K type accounts first.

One way to improve your saving plan is to commit to increasing your savings by one half of any future pay increases, even in an after tax taxable account if you max out all the possible retirement accounts. This is painless and has worked for a lot of people.


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