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Author: isogyre Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 75339  
Subject: Which is better: 401(k) or Roth IRA? Date: 10/5/2000 10:23 AM
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I have budgeted $6,000 per year for retirement savings. It is currently all going into my 401(k), and I contribute about twice as much as I need to in order to receive the maximum matching contribution from my employer.

Would it make more sense to contribute $2,000 per year to my Roth IRA and only contribute $4,000 to my 401(k)? I will still get the full employer match.

In other words, which is better: lowering my current taxes through higher 401(k) contributions or paying higher taxes now and maximizing my Roth IRA contributions?

I am not planning to retire for at least 40 years.
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Author: BGPenhollo Two stars, 250 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 25312 of 75339
Subject: Re: Which is better: 401(k) or Roth IRA? Date: 10/5/2000 2:08 PM
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isogyre posted..

"Would it make more sense to contribute $2,000 per year to my Roth IRA and only contribute $4,000 to my 401(k)? I will still get the full employer match.

In other words, which is better: lowering my current taxes through higher 401(k) contributions or paying higher taxes now and maximizing my Roth IRA contributions?

I am not planning to retire for at least 40 years. "


1st off, I have always felt that I should contribute to 401K at least what it takes to get the maximum employer matching. It sounds like $4,000/yr will garner the max that your employer will contribute to your 401K.

With 40 years to retirement, I am assuming you are fairly young (low 30's at best). Your marginal tax rate is probably low but in 40 years it is unlikely that your tax rate will be this low so..

Is it better to pay 15% or 28% (present marginal rate) today if you use a Roth or 28%, 31% or 39% 40 year from now if you use a traditional IRA.

BGP

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Author: JAFO31 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 25313 of 75339
Subject: Re: Which is better: 401(k) or Roth IRA? Date: 10/5/2000 2:22 PM
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BGPenhollo: "With 40 years to retirement, I am assuming you are fairly young (low 30's at best). Your marginal tax rate is probably low but in 40 years it is unlikely that your tax rate will be this low so..

Is it better to pay 15% or 28% (present marginal rate) today if you use a Roth or 28%, 31% or 39% 40 year from now if you use a traditional IRA."


Just to be devil's advocate, what if FIT is abolished and replaced by a natioanal sales tax?

"Is it better to pay 15% or 28% (present marginal rate) today if you use a Roth" and then still pay national sales tax 40 years from now if though you used a Roth IRA OR is it better to get a deduction at 15% or 28% (present marginal rate) today if you use a traditonal and then pay national sales tax 40 years from now if you use a traditional IRA.

Sometimes a bird in hand really is worth two in bush.

Regards, JAFO



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Author: rhecker One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 25325 of 75339
Subject: Re: Which is better: 401(k) or Roth IRA? Date: 10/6/2000 8:13 AM
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Just to be devil's advocate, what if FIT is abolished and replaced by a natioanal sales tax?

I've asked that question before, and I don't think anyone knows the answer. But I think you might be right if you're implying that you will have paid the tax on your Roth while a traditional IRA might suddenly become free money.

That's why I'm trying to do both. If income taxes still exist when I retire, then maybe half of my investments (in the Roth) will have been taxed at a lower amount. If income taxes don't exist when I retire, then maybe about half of my investments (in a traditional IRA or 401k) might become free.

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Author: BGPenhollo Two stars, 250 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 25327 of 75339
Subject: Re: Which is better: 401(k) or Roth IRA? Date: 10/6/2000 8:28 AM
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JAFO being the devil's advocate posted

"Just to be devil's advocate, what if FIT is abolished and replaced by a natioanal sales tax?

"Is it better to pay 15% or 28% (present marginal rate) today if you use a Roth" and then still pay national sales tax 40 years from now if though you used a Roth IRA OR is it better to get a deduction at 15% or 28% (present marginal rate) today if you use a traditonal and then pay national sales tax 40 years from now if you use a traditional IRA."


The issue concerning Roth versus Traditional primarily hinges on what one believes their Income Tax Rate will be in the future. And obviously, a Trad IRA will beat a Roth IRA if Fed Income Tax is abolished and if elephants fly, umbrellas becoming worthless as well.

When IRA's were first introduced, I was leary of the great saving concept that I could make tax deductable contributions today and when I retire, I would be making less money and therefore paying less taxes on my withdrawals.

I saw that as the load of Bull it was. In the 70's my salary never exceeded $15,000. This Fool was smart enough to see 30 years ago that I'd be lucky if I wasn't paying $15,000 in taxes by 2015 at retirement.

What sold me on the Trad IRA was the fact that for 40+ years, I was actually using the Govt money (Taxes I didn't pay) to grow my retirement.

For me, now that the Roth is available, I will only contribute to the Roth because even with 15 years left I believe the gains not being taxed will make up for paying the taxes going in.

So if a National Sales Tax happens then all my planning is for naught.

As my pop always told me...

You pay your money and you take your chances.

BGP



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Author: rjm1 Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 25356 of 75339
Subject: Re: Which is better: 401(k) or Roth IRA? Date: 10/6/2000 9:34 PM
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I have budgeted $6,000 per year for retirement savings. It is currently all going into my 401(k), and I contribute about
twice as much as I need to in order to receive the maximum matching contribution from my employer.

Would it make more sense to contribute $2,000 per year to my Roth IRA and only contribute $4,000 to my 401(k)? I
will still get the full employer match.

In other words, which is better: lowering my current taxes through higher 401(k) contributions or paying higher taxes
now and maximizing my Roth IRA contributions?

I am not planning to retire for at least 40 years.



First I would put 2000 in an IRA since you do not lose anything in the 401k. That gives you more controll over the investment. You do lose the ability to borrow and the earlier retirement age but I would still go for the IRA.

Next I would go for the ROTH. One benefit is that you can take your 2000 out without penality.

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Author: Mark0Young Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 25358 of 75339
Subject: Re: Which is better: 401(k) or Roth IRA? Date: 10/7/2000 1:59 AM
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First I would put 2000 in an IRA since you do not lose anything in the 401k. That gives you more controll over the investment. You do lose the ability to borrow and the earlier retirement age but I would still go for the IRA.

Next I would go for the ROTH. One benefit is that you can take your 2000 out without penality.


I hope that was caused by a poor editing job.

The maximum one can contribute to an IRA, either to a conventional IRA or to a Roth IRA or combination thereof, is $2,000 for any one tax year.


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Author: Mark0Young Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 25359 of 75339
Subject: Re: Which is better: 401(k) or Roth IRA? Date: 10/7/2000 2:08 AM
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Would it make more sense to contribute $2,000 per year to my Roth IRA and only contribute $4,000 to my 401(k)? I will still get the full employer match.

If you expect your retirement tax rate to be lower than your current tax rate, the 401(k) would be better.

If you expect your retirement tax rate to be higher than your current tax rate, the Roth IRA would be better.

If you don't know, and if you don't expect to make use of special features of your 401(k) (borrowing capabilities? Maybe--it depends on the specific plan) and the Roth IRA (contributions could be withdrawn at any time, but not the earnings; also estate issues), then the general recommendation is:

1. Contribute to your 401(k) up to the matched amount. (Don't say "No" to free money without a good reason.)

2. Contribute to the Roth IRA up to your ability or legal limit. (Since a Roth IRA can be opened at any of a variety of custodians, including brokerages and mutual fund families, one can often find better investment options this way than within the confines of one's 401(k).)

3. If you still have money to invest, contribute to the 401(k) up to your legal limit.

4. If you still have money to inveset, invest in some form of tax-friendly investment (e.g., individual stocks, a tax-managed mutual fund, or an index stock fund; index funds typically have some distributions but less than typical actively managed stock funds).

This assumes that you are already financially on sound footing: no consumer debt, one has an emergency fund with the equivalent of 3 to 6 months of living expenses.

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