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Author: RBMunkin 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 294  
Subject: Roth IRA vs. Tradtional IRA Date: 12/10/2003 1:30 PM
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Hi

I've often heard, and it made sense to me, that a Roth IRA is better for most people in the long run because all of your gains and contributions are tax free when you take them out. As long as you can afford not to get the tax deduction currently. But when I do the math in a simple example they seem to come out fairly evenly. Can someone see if I'm doing something wrong?

Let's say someone in the 15% tax bracket contributes $3000 per year and the investment makes 8% return on an average annual basis. And let's say it's invested for 20 years.

1. Roth IRA - You do not get the tax deduction of $450 ($3000 x 15% tax bracket) during the 20 years you are investing. The money grows tax free for 20 years to $147255.00. You can take that money out and not pay tax on it.

2. Tradtional IRA - you get to take a tax deduction and thus save $450 in taxes x 20 years = $9000.00. Because of the $450 per year tax savings you can invest $3450 per year instead of $3000. So that will grow to $169343. But then you have to pay tax on it. 169343 x 15% = $25401. So you have $143941 left. That is only a few grand less than the Roth Ira. Not a huge diffence percentage wise.

Any comments?
Thanks,
RBM




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