When to go Roth IRA vs. Traditonal vs. Increase 401k Contributions

2

25inIrvine_IHB

New member
I'm trying to set up my investment strategy for next year and with all my debts about to be paid off I am trying to decide where to increase retirement savings. I am pretty much in the middle of the 25% tax bracket so with bonuses and/or contributions, I would still be in that bracket.



A. Increase Contributions to Roth IRA - I already have a Roth IRA going. So I could increase my contributions to this. I started this mainly cause in case I needed it, I would be able to withdraw the 10k for my first home purchase. But my goal is to not touch this at all when purchasing a house.



B. Open Traditonal IRA - don't have one set up. Not sure whether it would benefit me more now to be taxed less now or let the after tax dollars grow in Roth and never be taxed again. Can I take out the 10k in this one for first home purchase or is that just Roth?



C. Increase Contributions to 401k - Already on my max contribution for employer match. So I wouldn't get any employer contributions by increasing this. However, just like the Traditionaly IRA, I would be reducing my taxable income this year.



So I guess the biggest question would be should I be reducing taxes now, or should I be going with after tax dollars so that it grows tax free?



Any tips, comments, or suggestions would be greatly appreciated. Thanks!
 
one thing to remember about roth vs ira in regards to the 10k for first home purchase -- you can withdraw 10k penalty free, but not TAX FREE.



for ex:

you contribute 4k of after-tax money to your roth ira. you can withdraw 4k without penalty for your 1st home.

you contribute 4k of pre-tax money to your trad ira. you can withdraw 4k without penalty, but you still have to pay income tax on the 4k as well.
 
[quote author="24inIrvine" date=1230012101]



Any tips, comments, or suggestions would be greatly appreciated. Thanks!</blockquote>




Moving out of your parent's house should be priority #1
 
[quote author="acpme" date=1230013040]one thing to remember about roth vs ira in regards to the 10k for first home purchase -- you can withdraw 10k penalty free, but not TAX FREE.</blockquote>


For a Roth, you can withdraw all <strong><em>contributions</em></strong> tax free and penalty free, for whatever reason.



The 10K rule that you mention only applies to the Roth's <strong>earnings</strong>.



Example-



You contribute 5K in year-one and make 10K in proceeds (100 shares of stock A goes from $10 to $30). You can withdraw $15K without any penalties if you use it for the purchase of a home. Or, for any other reason, you can withdraw $5K (the amount you contributed) without penalties or tax.
 
Haha well crap. Don't have to worry about those 10k in earnings after this year :)



But thanks everyone, sounds like Roth is the way to go due to flexibility.



And Ten, I'm working on it! Hard to go from the mindset of paying 0 for rent to paying anything for rent.
 
[quote author="24inIrvine" date=1230015829]

But thanks everyone, sounds like Roth is the way to go due to flexibility.</blockquote>


Not only that, but if you are young, you should benefit remarkably from not paying taxes on the compound interest accumulated over the long-term. In my opinion, the long term tax benefits + flexibility make Roth contributions the clear winner for young workers. Max it out if you can.
 
[quote author="24inIrvine" date=1230015829]Haha well crap. Don't have to worry about those 10k in earnings after this year :)



But thanks everyone, sounds like Roth is the way to go due to flexibility.



And Ten, I'm working on it! Hard to go from the mindset of paying 0 for rent to paying anything for rent.</blockquote>


It's not all dollars and cents.

Try not to think of it that way.

Look at the opportunity cost of what you?re giving up???girls!
 
+1 on maxing out as soon as possible while you're young. once you hit 116k as a single or 169k as a married couple, you can no longer contribute to a roth. it sounds like a lot but for a two working professionals in OC most would hit the limits very early on in their careers.
 
I second acpme's suggestion. If you're 24, you should consider maxing out your 401(k) and IRA contributions. Compounding interest over the years will give you a much larger lump sum when you retire.



Read this book for some sound financial advice:

<a href="http://www.amazon.com/Bogleheads-Guide-Investing-Taylor-Larimore/dp/0471730335">http://www.amazon.com/Bogleheads-Guide-Investing-Taylor-Larimore/dp/0471730335</a>
 
[quote author="24inIrvine" date=1230030381]ahhh.. girls



The cause and solution to all of men's problems</blockquote>




I thought the saying was 'The cause and problem of all men's solutions'
 
[quote author="24inIrvine" date=1230012101]I'm trying to set up my investment strategy for next year and with all my debts about to be paid off I am trying to decide where to increase retirement savings. I am pretty much in the middle of the 25% tax bracket so with bonuses and/or contributions, I would still be in that bracket.



A. Increase Contributions to Roth IRA - I already have a Roth IRA going. So I could increase my contributions to this. I started this mainly cause in case I needed it, I would be able to withdraw the 10k for my first home purchase. But my goal is to not touch this at all when purchasing a house.



B. Open Traditonal IRA - don't have one set up. Not sure whether it would benefit me more now to be taxed less now or let the after tax dollars grow in Roth and never be taxed again. Can I take out the 10k in this one for first home purchase or is that just Roth?



C. Increase Contributions to 401k - Already on my max contribution for employer match. So I wouldn't get any employer contributions by increasing this. However, just like the Traditionaly IRA, I would be reducing my taxable income this year.



So I guess the biggest question would be should I be reducing taxes now, or should I be going with after tax dollars so that it grows tax free?



Any tips, comments, or suggestions would be greatly appreciated. Thanks!</blockquote>


Regarding question B.) Please be aware that you will not be able to deduct the traditonal IRA contribution on your taxes when you have a 401k and your MAGI is more than 63,000 (single filer) If this is the case, the roth is the best option between the two IRAs. If your income is below the theshold, I would still do the Roth. 1.) I believe tax rates will be higher in the future (and possible your income too), and 2.) if you are young and just starting out in your career you could see a big increase in income over the coming years. For this reason, now might be the only opportunity to put away money in an account that won't be taxed in retirement (AGI limits on Roths).

Wether, you should increase your Roth or 401k is a little tricky to answer without more information. I have seen many 401k plans with awful investment choices and the tax benefit does not outweigh the poor performance you are stuck with. (Plus, what I said before about the lost opportunity to do a Roth) Furthermore, if you think there is a chance you will withdrawal the money GO WITH THE ROTH. If you take a loan from your 401k to put a down payment on a house, you will have to pay the loan back immediately if your employment is terminated. That's a big risk given the current employment market.
 
Thanks McDonna, I was not aware of that situation. This may or may not be the case with me, not sure how next year will go exactly. But just in case I'll go with the Roth.



So lets just say hypothetically, someone makes 100k as a single filer and has a 401k. He can't reduce his taxes anymore by contributing to a Traditional IRA?





And Stuff It, while I do like your quote I do think that brings a chicken and the egg problem :)
 
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