So I understand the theoretical difference, what I don’t understand is why this calculator shows that I’d be better off with a normal IRA.
Being out of school right now the plan is to use my income to begin building my future as well as saving for going back to school and trying again. With my current job, once they bump me up to 40 hours I’ll have a bit more than my current living expenses and so I’m planning how to prepare for a rainy day and for my eventual retirement. As of now the meager plan is to contribute $100 a month until I can afford to put in more, but going with this as the plan for the rest of my life until I retire it shows me as earning nearly $30k more with a regular IRA over a Roth IRA.
Because your "regular’ IRA is tax deductable. A Roth IRA is a good buy for those who think that they’ll be in a higher tax bracket when they retire as when they are working. :dubious:
If you’re NOT going to use the money for retirement, then don’t use an IRA- Roth or otherwise. Most of those who invest in a Roth IRA are really planning to use that $$ before they retire- and thus, in many caes there are better investment opportunities.
An IRA is a good idea for those who don’t have a retirement plan at work. Keogh & 401K plans are better for the self-employed.
It’s getting more & more rare to have a job where you can afford to invest in a retirement and where no retirement plan at all is offered. Now, “real” pension plans are fast going the way of the buggy-whip, but even temps are usually offeed a 401k plan after a bit.
Did you reset your current tax bracket to 15%? I imagine that will be your bracket if you are just starting work. It applies to a single person up to about $30,000 in income this year. If you are going to be over that, then the 28% bracket probably makes sense.
You may also reset your retirement tax bracket but predicting that would involve not just a little bit of voodoo.
If you invest starting as a 22-year-old, and hold the money until 62 or 72, most of the value of the IRA (Roth or regular) will be due to growth. So the original $100 investment might have grown to $400 or $500. That’s why some people suggest the Roth IRA, with tax-free distributions, would be a better bet.
You can put more $$ into a 401K, and it’s easier to do so- and the tax deduction is already figured for you, so yes. Isn’t a tax deduction of up to $15000 better than $2000?
Dewey- you make a point. But most of those investing in a Roth intend to either:
take the $$ out pre-age 59* OR
have the same tax bracket after retirement.
OR just heard it was better and don’t really know the difference.
:dubious:
Not if you aren’t planning to take all the money out. Since you can take all the principal out of a Roth without any penalties whatsoever, a Roth is at least as good as any other investment IF you aren’t going to be investing in another retirement plan anyway.
If you plan on using the principal AND earnings before 59, things become tricky, but it’s still not cut-and-dried. If you wait long enough you will most likely to still avoid taxes and or penalties on the earnings. And in the meantime your earnings are growing tax-deferred. What non-retirement investment lets you grow earnings tax-deferred yet still offers the returns of well-priced mutual funds?
But let’s assume you can’t avoid taxes and penalties. If you invest in a mutual fund in a taxable account that returns 10% a year and you are in a 15% tax bracket for 20 years, at the end you will have
%511.2 of your original investment.
On the other hand, if you invest in a tax-deferred account that returns 10% a year for 20 years and you pull all of it out* at the end and you are hit with a 15% tax rate PLUS a 10% early withdrawal rate you still will have
%529.5 of your original investment.
Of course, there are exceptions, such as if you are planning on having stellar returns for just one or two years before withdrawing and taking the 10% hit, or you have a much lower tax bracket while the money is growing, or you think you have opportunities in other retirement accounts that are advantageous versus the Roth.
*Assuming of course you stagger your withdrawals to get a %15 rate.
Well, remember- there are also various tax-free “pre-payment” plans where dudes can put $$ aside for various things like medical expenses, and there are special college plans. So IF you are thinking you are saving for one of them- consult your financial advisor, a Roth may not be your best plan.
And, assuming a 15% rate is a pretty big assumption! I assume a 28% rate, myself.
Maybe so, but if you go in at 18 and start rolling childhood investments (UGMA stuff) into a retirement account, and further don’t intend to get kicked into emeritus status until senile dementia sets in, I’m thinking Roth is a safe bet.