Sunday, January 3, 2010

A Roth or a Traditional IRA?

My 401(k) is a traditional one. My employer contributes 6% of my salary to it. I can contribute whatever I want up to certain maximums ($22,000 which includes 'catch-up' provisions for those of us over age 50). I have the choice to add funds to the traditional 401(k) or to contribute to a Roth IRA or both.

I have always chosen to stick with the 401(k), largely because it reduces my taxable income.

Still, it is attractive to think that with a Roth, I could withdraw funds or not as I choose (whereas I have to start 401(k) withdrawals at age 70.5) and that those withdrawals would be tax free. (Not exactly, of course. Taxes were already paid when/if I made the deposits into a Roth.)

But this article convinces me that, at my age, and what looks to be my financial situation when I retire, it is too late for a Roth to help me. Certainly, it would be way too expensive to change over my traditional retirement savings to Roth accounts.

But for those with a 15 year or more timeline to retirement, the Roth may well be the way to go.


Finance Guy said...

While it might not make sense to convert 401k money to a Roth, it probably makes sense to start contributing to a Roth.

In your place, I would contribute the minimum needed to get the full company match. Any extra savings would go in the Roth.

Sharon said...

We have chosen to invest in the Roth 401K vs. getting the tax advantage. I figured that if we ever needed to get some of that money, we could without a tax penalty. (just the money we put in). We have about 15 years left before retirement, so it is a good deal. My husband's company puts in about 8%, but it goes directly in the traditional 401K.

MasterPo said...

I'm doing a tradional 401k and a ROTH IRA.

But I have to say that I am greatly fearful of the ROTH IRA benefits being taken away very very soon!

While I've thought about that for years (others have too), given how the current administration in DC is spendinG $$$ like a drunk sailor, how can they possibly allow the Golden Goose that is a ROTH (IRA or 401k) to remain?

There are literally billions of dollars in ROTH IRA's (and more when you consider tradional IRAs, 401ks, SEPs etc) that will go untaxed for years and years - if ever!

Given the national debt levels I just don't see how the pols can let this pot of gold be untouched for decades to come!

Even before Al Frankin became a Senator others in DC wanted to repeal the ROTH, as well as take over 401ks!

This may be a case of if it seems to good to be true...

I hope not. But... :-[

frugal zeitgeist said...

I have a traditional 401(k), a Roth 401(k), a Roth IRA, and a bunch of traditional IRA's that I'm converting to Roth this year since the income restrictions on conversions are gone. I'd convert the traditional 401(k) if I could, but I can't; instead, I'm only funding the Roth 401(k). I'm optimistic that I'll be in a higher tax bracket in retirement, so the more my money can grow tax-free, the happier I am. The tax hit I'm paying today is well worth it.