I've been mulling over Roth vs. traditional IRA, and though I can see the logic in Roth, I'm not sure if I'll be in a higher tax bracket when I retire. I'm assuming my wife and I will have paid off our house, paid off our kids college tuition, and with no real deductions I will try to minimize the amount of money I take out from my IRA - probably just enough to cover all health/medical care coverage, living & travel expenses, and maybe a car or two I wouldn't need the kind of income I'd had when my wife and I had kids to feed & mortgage to pay, so naturally my income bracket would be lower.

Thoughts?

 

Don't underestimate the amount of money you think you'll need during retirement if you want live comfortably.

I would suggest that you figure on spending [inflation adjusted by 3 percent a year] 80 to 100 percent of what your spending now [minus items like a mortgage etc if you will have them paid off]. Medical costs are certainly going to go up and things you do now, like mowing the lawn, you may want to pay someone to do as you get older.

All in all I think, if you're in your 20's or 30's that the Roth is the way to go. With the traditional IRA, all your investment PLUS gains will be taxed at ordinary income rates when it's withdrawn [and by law you WILL HAVE to start withdrawing money when you get old enough].

With the ROTH, nothing is taxed [you've already paid the tax on the contributions and any gains are tax free]; and there is NO mandatory withdrawl requirement.

But like most things in life it's a crap shoot...... nobody knows what the astute gentlemen and ladies that run this country will do to the existing tax laws and regulations..... except that they will change on a yearly basis. There was even some talk about eliminating the mandatory withdrawl requirement for Traditional IRA's...... I wouldn't hold my breath on that one.

 

"nobody knows what the astute gentlemen and ladies that run this country will do to the existing tax laws and regulations"

Above is exactly why you should contribute to both 401k and roth (or roth 401k if your employer offers it). Tax diversification.

 

so basically everyone here is saying don't do a traditional IRA but invest in a Roth IRA instead?

 

No..... you've got two different schools of thought here.

Traditional IRAs and Traditional 401ks are treated the same taxwise. You'll eventually pay taxes on everything [Invested money plus gains] when you take money out.

Roth IRAs and Roth 401ks are treated the same taxwise. You don't pay any taxes on what you take out [What you invest is taxed in the year you put it in and gains are NOT taxed at any time].

If you're doing this through your employer it will be the one of the 401k types. If you do it on your own it's one of the IRA types.

I'm in favor of the Roth types unless you expect to be in a significantly lower tax bracket when you retire. I think what "hpark" is saying is to hedge your bets and, if you can, do both a Traditional and Roth type.

 

Dumb question. Are traditional IRAs funded like a 401k with pre-tax income? Or are they funded with after-tax income and taxed at the time of withdrawal?

 

[QUOTE=Shinji,Feb 8 2007, 01:02 AM]Dumb question.

 

so you're saying i can contribute $2000 to an IRA and $2000 to a Roth IRA per year in addition to the $15K i sock away in my 401K? i didn't know that (thought it was either IRA or Roth, but not both). thanks!

 

Whoa ..... I'm NOT the one saying that.... I said: "if you CAN"...!!!

Some of the others, "hpark" for instance, are the ones saying to do both.

I'm no longer that familiar with how many too and how much you can contribute.... I do know there are some restrictions. If someone else here doesn't answer your question I'm sure that you can find it if you google something like "IRA contributions".


**Edit: Added**
The link below may help answer your question;

Saving for Retirement

 

the Bank of America website said you can contribute to both Roth & traditional Roth IRA up to $4k.