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Author: aj485 Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 5085  
Subject: Re: 401K is better than Roth IRA Date: 1/21/2007 9:07 AM
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As I have mentioned, you can't play this game forever. Eventually, you will exhaust your Roth, or you will die, at which point tax on the 401K will become due. And if you've pushed it off in this manner, then it may be taxed at even higher rates, making the case for the Roth even worse.

Actually, if the beneficiaries are set up on the account so the 401(k) doesn't run through the estate, any beneficiary can now roll an inherited 401(k) over to their own IRA. And if you do have some Roth funds left, they are tax free to the beneficiaries. Besides that, even if your beneficiaries are taxed at a higher rate than you, what do you care? You're dead, and they will still have more money than they had before you died. :)

The mistake people make is that they look at a particular year, or set of years. Run the calculation through the lifetime of the funds, and you will find that it works out in favor of the 401K in most cases (i.e. whenever your current marginal rate is higher than your retirement effective rate - it take alot of income to get to a 15% effective rate, and alot of income to get to a 25% effective rate). Of course, if your current marginal rate is 0% or 10%, then the Roth is right for you.

I think that using the current historically low tax rates to make decisions on what your future tax rates will be is optimistic at best. Just look at the history of tax rates - at times in the past, the highest marginal bracket has been over 90%. Given the debt that the US has, the deficits that we are currently running, and the obligations that have been committed to (i.e. Social Security, Medicare, I've been hearing about healthcare now, etc.) it is almost inevitable that the tax rates will increase. Therefore, any tax-free money that is available in the future in the form of a Roth will likely be that much more valuable.

Given that we have no idea what Congress will do in the future, it would probably be more prudent to fund both Roth and traditional 401(k)/IRA type accounts, as well as having taxable investment accounts so that you can pick and choose among your account types to tailor the amount of taxes you will pay instead of exclusively focusing on one type of account.

AJ
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