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Author: Watty56 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 76398  
Subject: Re: Roth vs. Traditional IRA Date: 9/2/2003 12:23 PM
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Can you explain the benefit to that versus putting the max in just the Roth (if you qualify)?

That is a good point about needed to take the IRA maximum into account. It many cases an unmatched 401K could be used just like a traditional IRA if it is available and the limits have been reached.

Here is some more detail about what I was talking about assuming that the IRA maximum is not an issue. There are three different scenarios with the following assumptions;

1) The contributions will reduce the take home pay by $2000
2) The marginal tax rate is 30%.
3) The money will be invested in the retirement accounts long enough to double four times to be 16 times the original amount.
4) There is not any other taxable income at retirement.
5) Everything is in current dollars.(no inflation adjustments)

Scenario 1 : Everything in a Roth

Contribution: $2,000
Final amt(x16) $32,000
Taxes $0
Rtirement income $32,000

Scenario 2 : Everything in a Traditional IRA

Contribution: $2,857
Tax refund $857
Final amt(x16) $45,714
Deductions $10,000
Taxable inc. $33,714
Taxes 30% $10,714
Retirement income $35,000

Scenario 3 : Evenly split

Roth
Contribution: $1,000
Final amt(x16) $16,000
Taxes $0
Retirement income $16,000
Traditional IRA
Contribution: $1,429
Tax refund $429

Final amt(x16) $22,857
Deductions $10,000
Taxable inc. $12,857
Taxes 10% $1,286
Retirement income $21,571

(note: lower tax 10% tax bracket even if the tax rate were still 30% there would be a $3,000 ($10,000*.3)difference)

Total Retirement income:$21,571+16,000=$37,571 which is about 17% more than scenario one.

This example is clearly a bit simplistic and could vary greatly depending on which assumptions are made.

Greg
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