For the vast majority of people in normal circumstances, a standard IRA/401k is the right choice. Exceptions are people with temporarily low income such as students, people working only part of the year and such and the very wealthy who will have higher taxable pensions on retirement.

The reason is simple. It makes no difference standard or roth if the taxe rates are the same on the money you put in and the money you take out. This is just the associative rule of multiplication. However, you make your tax deductible contribution off of the highest tax bracket. You take money out at a range of tax brackets. Even if you end up in the 35 % bracket on retirement, that only means your last bit of income is taxed at that rate; most of it is at 10, 15 or whatever brackets exist at that time.

Another wrinkle, if you plan to retire to a state with no income tax, you don’t have to pay state income tax on your standard contribution and it comes out state tax free, while you pay state taxes for no reason on your roth.

http://www.mydollarplan.com/2009-roth-401k-and-roth-ira-limits/

http://www.zestegg.com/No401K.aspx

The article is called “but I don’t have a 401K, what about me?”

It does with the Roth as well.

Whether you put $3750 in a Roth and pay $1250 in taxes or the whole $5000 in a traditional IRA should be a wash if your maximum tax bracket is 25% when you deposit and when you withdraw. Remember you will pay taxes on the earnings in the traditional IRA. You won’t pay any taxes on the earnings in the Roth.

Or to make it clearer, if the $3750 in the Roth account doubles in value you will have $7500. The same rate of return on the $5000 in the traditional IRA will give you $10,000, but you will have to pay 25% tax on it. So the net is still $7500.

1) It is always better to go with the Roth IRA if you are contributing the maximum. This is because $5000 in a Roth will bring a better return than $5000 in a traditional IRA and the tax savings ($1250 for the 25% tax bracket) in a taxable account.

The exception is if the deduction changes your eligibility for other tax savings. For instance the tax credit lower income taxpayers get for retirement savings.

Something people have not mentioned is that retirement savings are usually protected in bankruptcy. So while the money in the Roth IRA is protected, the tax savings from a traditional IRA deposited in a taxable savings account is not.

2) You can withdraw the money you put into a Roth account. So you should never put any money into a taxable savings account that you don’t intend to spend within a year until you have maxed out your Roth contribution. A Roth IRA is a perfect place to start building that emergency fund everyone says you should have. If you don’t use it, you have a great start on retirement savings. If you need it, you haven’t lost anything by having it in the Roth instead of a regular savings account.

[...] JD takes another look at the Roth IRA vs. the Traditional IRA. [...]

Obviously, this assumes that you won’t be maxing out your Roth.

Can anyone comment on this?

Thanks for the help!

Traditional IRA has income limits as far as tax-deductibility is concerned. So if I do not get the tax benefits now and neither in the future, why do I need to go the IRA route. can I not just stick my money on my own in an asset class without the restrictions?

http://en.wikipedia.org/wiki/Traditional_IRA#Advantages

Sorry, i was partially wrong. You do get a portion of the money refunded… and if you make little enough money.

to quote the article for those with too little time:
“then a $1,000 benefit ($1,000 reduced tax liability) will be realized for the year. Because qualified distributions are taxed as ordinary income (the taxpayer’s highest rate), the long-term benefits of the traditional IRA are only comparable to those of a Roth IRA (whose qualified distributions are tax free) if the current year tax benefit ($1,000 above) is reinvested.”

from the Wiki article on Tax Brackets in the USA:

for 2007:
25%: from $31,851 to $77,100

So, as long as you make under 77K, then you get a portion of the money refunded.

Many people are forgetting about the Roth 401(k). It’s relatively new, and looks to combine the best aspects of the 401(k) and those we associate with the Roth IRA.

I would advise against that, becuase with a traditional IRA, you pay taxes NOW, and then AGAIN when you withdraw. @least with a 401(k), you are getting it with pre-tax dollars.

If it will help you feel any better: Think of it as a blessing that you are so well paid that you can’t contribute to a ROTH.

That said, the “Fair Tax” is unlikely to pass, and if it did, there would certainly be a provision for “Roth” retirement accounts whether they be 401k’s r IRAs.

Personally I invest up the match in my 401k’s, then max out roths for both the wife and I, and then if we still want to save some more will put more in our 401ks.

Ben @ Trees Full of Money

What you do NOT want to do no matter how risk-averse you are is wind up in a situation where you try to time the stock market. This is what Daniel says when he talks about the buy high, sell low mentality. If you are going to invest in stocks, you need to go all in and be able to stomach the ups and downs. If you can’t do this, stick to bonds.

@grimsaburger: when stock prices go down, it’s time to snatch ‘em up – they are on sale! If you are in it for the long term, the stock market is where it’s at. If you are in it for the short term, you should avoid the stock market. It sounds like you might have the typical “buy high sell low” mentality – it’s important to break free of that line of thinking in order to be a successful investor.

Surely this is getting way deep into hypothetical territory, for which I apologize…

My local economy is supported by commercial banking, tobacco farming, and biotechnology. But for every employee of a big company (myself included), there is a teacher, a farmer, a small business owner, and a small business employee. The conservative nature of my city allows us to thrive when the market is down.

If you have your finances in order, a recession is your time to thrive. The biggest returns in the market will happen as the market recovers from recession.

Now is the best time to buy a house, a car, start investing, etc…

Now, by the way, is the point at which I become acutely aware of how little I get about macroeconomics.