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Roth vs Traditional IRA

post #1 of 8
Thread Starter 

Why does the Roth IRA seem more favourable?  I know the differences (most of them); I am wondering if people who opt for a ROTH also have a 401 which enable them to put tax-deferred contributions into a 401 and therefor do not need the traditional IRA to take advantage of this?

 

I don't have a 401 option, so I started a traditional ira, but the more I read the more I wonder about the Roth.

 

Thanks,

S.


Edited by SunRise - 5/11/12 at 5:34am
post #2 of 8

I've actually just begun researching this issue personally, as I have a 401k and a 403b that I need to convert and put somewhere more permanent.  Both are from positions I am no longer in.  So, I'm replying so I can sub to this thread and get in on the discussion and get some opinions and information. 

post #3 of 8
Thread Starter 

Perhaps the traditional means just that, traditionally, one would be in a lower tax bracket during retirement therefor taking advantage of deferred tax rate. BUT for people who are wise and have big investments and are in a higher tax bracket in retirement, the ROTH works better?

post #4 of 8

A Traditional IRA is tax deductable.  You are allowed to deduct the amount you put into a Traditional IRA the year you put the money in (well, actually up to the tax deadline of the following year, so for 2011 you could deduct it on your 2011 taxes as long as you put your contribution in by April 17, 2012).  When you take the money out during retirement you will be taxed at your current level.

 

A Roth IRA is not tax deductable.  You include the income (that you then put into the Roth IRA) in your taxable income for the year you made it.  When you take out the money during retirement, though, you do not pay taxes on that income.

 

Both ways you are taxed once on the income.  With a Traditional IRA you are betting that you will be in a lower tax bracket during retirement.  With a Roth you are betting that tax rates will have increased by the time you are in retirement.

 

Is that enough information for your needs?

 

Here is a quick overview:

 

http://beginnersinvest.about.com/cs/iras/f/tradvsrothira.htm

post #5 of 8
Thread Starter 
Quote:
Originally Posted by TiredX2 View Post
<snip>

 

Both ways you are taxed once on the income.  With a Traditional IRA you are betting that you will be in a lower tax bracket during retirement.  With a Roth you are betting that tax rates will have increased by the time you are in retirement.

 

Is that enough information for your needs?

 

Here is a quick overview:

 

http://beginnersinvest.about.com/cs/iras/f/tradvsrothira.htm

 

The bolded part answers my question. Thanks.

 

...And after reading that link, the income cutoff for investing in a ROTH is well stated here, usually there is a formula which I turn my nose too :).  A ROTH is also good for an emergency fund as there are no penalties to withdraw the base amount so that makes it favourable.

post #6 of 8
Quote:
Originally Posted by SunRise View Post

 

...And after reading that link, the income cutoff for investing in a ROTH is well stated here, usually there is a formula which I turn my nose too :).  A ROTH is also good for an emergency fund as there are no penalties to withdraw the base amount so that makes it favourable.

 

That's how I look at it as well.  I also figure that if we contribute to a Roth and need more money for college we can always remove part of the contributions and allow the rest of the contributions and the earnings to continue on.  Not ideal, but it makes it, IMO, a very attractive investment option (I definately think people should fully fund a Roth before starting a college fund--- not what I actually *did* mind you, but it is fiscally sound).

post #7 of 8
Thread Starter 

This ROTH IRA idea is newish to me (well all this investing is), as I always thought the tax deferred investment was the way to go. Learning these advantages/differences is really helpful.   The back up college $$ is a good point too.  SO its a chunk of money invested and earning, but is still accessible.    I may have jump on this, as my salary continues to increase, I dont want to miss out.

post #8 of 8

That link was pretty useful, and led to a little chart with yearly maximum contributions which was also useful.  Thanks, Tiredx2!
 

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