Most people are going to move into a higher tax bracket as they get older. That means the tax deferral from a traditional IRA has a larger benefit. On the other hand, when you are in a very low tax bracket the Roth contribution is taxed at that lower rate.

So if you are looking to have “tax diversity” in your retirement funds, putting money into a Roth when you are younger and in a lower tax bracket makes sense. As you get older, you can add money to your tax deferred accounts to create tax diversity. Tax diversity has no practical consequences until after you retire and start taking money out. It doesn’t really matter when you contributed the money.

Questions
1) Am I allow to convert if I am still with the same employer or I would have to leave?
1) If i do convert, will this add to my gross income? What portion? I assume the taxable amount (company match)
2) What are the steps to convert needed to convert from my company Roth 401k to IRA Roth?
3) I know there is a 5000$ limit on the amount I can contribute to the Roth IRA, does this include rollover also? What portion will be part of the 5000$ limit? I assume the taxable amount (company match)?
4) This rollover, will this be consider a contribution where I can always take out the money or be consider part of earnings? I assume my portion that I contribute to the Roth 401k will be consider contribution into the account, but how about the company’s match? Am I allow to take this out anytimes as this is a contribution from the company?

Please HELP! I am trying to plan for graduate school few years out.

I think hardly anyone under 30 should be saving for retirement unless their employer is matching their money. But a Roth is a way to save money that you may or may not need without tying it up until age 59. If it turns out you never need it, great, you got a head start on your retirement fund.

It’s also possible that some future government will choose to sieze all IRA balances “for the good of the people.” You never know. Investing in anything but nonperishable food and the guns to defend it is always a risk.

Either way, my first rule of thumb was just talking about students. I’m not sure I can think of any “real jobs” that aren’t considered earned income.

I received a stipend as a graduate student, and it WAS considered earned income for Roth IRA contribution purposes — I actually asked a financial planner about this, and she told me that the fact that it was reported on a W2 (not some other form) was what made it “earned income.” It is not about whether social security payroll taxes are withheld.

There are many people who have earned income but are not required to pay social security taxes. Many graduate students are exempt from social security taxes when they earn money as part of a training program. I actually looked into this because I wanted to understand it, and it seems there is a law called the federal insurance contributions act that determines whether student workers pay social security or not. The gist of it is, if you are required to do work as part of your training program, you don’t have to pay social security payroll taxes. For example, I was paid to be a teaching assistant, which was required for my degree (no TA experience = no degree). So, the U. didn’t withhold social security taxes during the school year. They made that choice, probably based on federal law. It is actually fascinating, and there have been some recent legal changes w.r.t medical residency as to whether they are exempt from social security. Other groups, like public school teacher employees in CA, don’t (normally?) pay social security payroll taxes. Their income is reported on W2 forms (at least the teachers I know) and is certainly considered earned.

So there can be some major tax differences depending on each individual situation, even when the situations look very similar (and a graduate fellowship can be very similar to a research assistantship, as we know). I’m posting all this because I don’t want graduate students who read this to automatically assume that they aren’t earning income if social security isn’t withheld from their paycheck. That is not necessarily true. Your income can still be earned and you still might be able to have a Roth IRA.

I think a better rule of thumb would be that if the money is reported on a W2 as earned wages, it will likely be considered earned income, regardless of whether you are exempt from social security payroll taxes or not. Of course a tax professional could probably explain this much better than I can, but I thought I’d share my different experience with grad school stipend income.

Also, my experience has been that when rules change for retirees, people who are already retired (or close to being able to retire according to the rules) get grandfathered.

Tax rates were pretty crazy in the 1970s. How did they get that way? I don’t know, but I bet it could happen again, especially if health care gets socialized. And it’s even worse in lots of other countries.

I don’t know about other people, but if I were getting my (predicted) pension right now, I would be in the 15% tax bracket. I can’t imagine getting enough raises in the next 3 years before I retire to even get my full pay above the 15% bracket (after deductions), let alone my future pension.

I can, however, imagine tax rates going up. Look at the history of tax rates. And look at our national debt. I feel pretty sure taxes are not going down. (I’ve been wrong before about that, but not very wrong.)

Since I’m only 26 years old…a lot can happen between now and when I retire. Who know what taxes will be in 40 years or how they will be collected.

With a traditional IRA I get my tax benefit now, which can be invested and compounded. The gap between the tax benefit of a Roth and a traditional isn’t all that large if you do it right, but it takes out all the risk of tax changes out of your control.

The term “emergency fund” is used in a lot of different ways. Some people see it as sort of like life insurance, used only in the extreme. Others see it more like car insurance, a fund that gets used for “emergencies” like replacing the furnace. And others see it as more like health insurance, used regularly for small emergencies.

There is a built in conflict between the investment strategy for retirement (in 20+ years) and one that is appropriate for an emergency fund of any kind. If your ROTH “emergency fund” is in that last category, then you should probably invest in a money market fund. Its really a cash reserve. But even in the other two categories, you probably want a very conservative mix of investments.

For retirement, your money should always be in low cost index funds.

ETFs (if yes what kind?)
Dividend Stocks
Individual Stocks
etc.

If I can narrow down which type of investment is best then I’d be able to do more research