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Author: MarkAP Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 121219  
Subject: Roth IRA vs. 401(k) Date: 2/19/1998 2:00 PM
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Anyone have any advice on whether to put money in a Roth IRA or a 401(k).

Or is it simply: if you'll be in a lower tax bracket upon retirement, go with the Roth, and if it's going to be higher, go with the 401(k)?

Of course, I'm talking about NON-matched 401(k) contributions.

Thanks!
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Author: IntenseAnalyst Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 2141 of 121219
Subject: Re: Roth IRA vs. 401(k) Date: 2/20/1998 6:20 PM
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Anyone have any advice on whether to put money in a Roth IRA or a 401(k).

Or is it simply: if you'll be in a lower tax bracket upon retirement, go with the Roth, and if it's going to be higher, go with the 401(k)?

Of course, I'm talking about NON-matched 401(k) contributions.


I would hope you could max out both. But if it is one or the other, I would go Roth. I don't see any benefit to non-matched 401(k) over Roth, but there certainly are more restrictions on qualified withdrawls.

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Author: rayvt Big gold star, 5000 posts Top Favorite Fools Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 2143 of 121219
Subject: Re: Roth IRA vs. 401(k) Date: 2/20/1998 11:48 PM
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<<Anyone have any advice on whether to put money in a Roth IRA or a 401(k).>>

In general, the best order is:
1) 401(k), enough to get the entire employer match.
2) Deductible IRA (if you qualify)
3) non-ded IRA or Roth IRA
4) resume the 401(k), up to the max.

This captures all the immediate tax benefits and free (employer-donated) money.

There is no way you can predict what tax bracket you'll be in at retirement, do I wouldn't let that be a large factor in your decision.

Regards,
Ray

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Author: KATinChicagoland Three stars, 500 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 2154 of 121219
Subject: Re: Roth IRA vs. 401(k) Date: 2/21/1998 3:33 PM
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<<Anyone have any advice on whether to put money in a Roth IRA or a 401(k).

Or is it simply: if you'll be in a lower tax bracket upon retirement, go with the Roth, and if it's going to be higher, go with the 401(k)?

Of course, I'm talking about NON-matched 401(k) contributions.>>

I hope to have pages addressing this issue on my web site within a few days. Here's a sneak preview.

In analyzing the overall performance of these alternatives, the first factor to consider is tax bracket now versus in retirement. You have stated the general rule--but in reverse! Generally you want to go with a 401k or deductible IRA if your tax bracket will be substantially *lower* in retirement because you get a large benefit when the money goes in and have a smaller "payback" when the money comes out. But the overall benefits of the Roth IRA often outweigh the benefit of a small rate shift (say, 31% to 28%), at least over the long term. If your rate will shift from 28% or higher down to 15%, you're getting a benefit from the deductible plan that's hard for the Roth IRA to match. (I'm omitting here an explanation of the various benefits of Roth versus alternatives which are well documented here and will be explained on my web site.)

Having said that, there are some special considerations when comparing 401k (rather than deductible IRA) with the Roth IRA. One is access to money. The 401k is both better and worse here: you may be able to borrow from it (can't borrow from an IRA, including Roth IRA) but you can't take distributions at will and every dollar you take out is subject to tax and possibly penalty. The Roth IRA rules do not provide complete freedom but are relatively generous. Another point of comparison is creditor protection--generally better for 401k than for IRAs (and possibly better for regular IRAs than for Roth IRAs). And a point that is often overlooked: investment alternatives. With an IRA you can pretty much do what you want (some limitations apply). You usually don't get that much freedom with a 401k. You may be stuck with choosing among some mutual funds that can be expected to perform below the return you would get if you invest your own IRA according to Foolish principles.

If that's too much to digest and you need a rule of thumb, here it is: try to max out everything, but if you can't, choose 401k when matching is available, otherwise choose Roth unless you foresee a *substantially* lower tax rate after retirement.

KAT in Chicagoland
www.fairmark.com
Tax Guide for Investors



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Author: TMFTaxes Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 2192 of 121219
Subject: Re: Roth IRA vs. 401(k) Date: 2/23/1998 11:54 PM
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[[Anyone have any advice on whether to put money in a Roth IRA or a 401(k).

Or is it simply: if you'll be in a lower tax bracket upon retirement, go with the Roth, and if it's going
to be higher, go with the 401(k)?]]

There has been a BUNCH of discussion on this very issue over the last number of months. You might want to go back and read some of those posts.

But it is not a simple question. You must make a number of assumptions and do a bunch of math. In fact, if you change the assumptions, you can make a case either way. So only YOU will be able to assess the situation in determine which assumptions are valid for you.

As for me, for a rule of thumb, I prefer tax DEFERRAL first, Roth second. But things may be completely for you.

TMF Taxes
Roy

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