Roth vs. Pre-tax IRA

[LiftGirl]

So, my job is about to start offering a Roth 403(b). I already have a pre-tax 403(b), which I am putting 20% (not matched) into. Also, they take out 8% (which they match) for the pension plan (I am enrolled in the traditional plan with defined benefits, assuming the state doesn't keep deciding to skip paying into the pension fund). I'll be vested in August. I'm 26 years old; Scot is 37.

Scot went back to being a grad student, so he's not saving anything right now, but I figure that's ok, since I'm doing 20%. When he was working full time, he was putting 10% into a pre-tax 403(b). He's vested, but enrolled in a self-managed defined-contribution pension plan.

I am wondering if I should switch over to the Roth. I am young, and I feel that taxes have nowhere to go but up at this point. I'm easily at least 40 years from retirement. (I'm assuming that folks will be retiring later and later as the years go on, as they're living longer and longer).

We have no debt except our mortgage. It's a 30-year fixed that we are paying as if it were a 20-year mortgage. If we stayed in our house til it's paid off (not likely), we'd have another 15 years or so before paying it off.

I had Pierini in mind to answer when I wrote this, but anyone can chime on in. The more the merrier!

Thoughts?

Roths make sense for someone with your profile LiftGirl.

[Lady C]

You can do a combination of both. I think the max you can contribute is $15,000 annually to any IRA pre-tax. You can do some pre-tax and some ROTH.

[LiftGirl]

Thanks for your responses guys.

LadyC, what do you think is the advantage of contributing to both? Hitting the max is not an issue for me, as my salary is about twice the max, and I don't plan on contributing 50% Are there other advantages to using both besides being able to contribute more annually?

[Lady C]

Regular IRAs are fixed in the sense that you are penalized if you take the money out before you are 65. Then it is taxed at that rate (or 20% if before 65).

A ROTH on the other hand, is post-tax money so you can take money out at any time without being penalized. It is taxed at the rate in which it was put in which is usually higher than if post-65.

Long term I would imaging the regular IRA is better but that is just a guess.

Some minor corrections Lady C.

Distributions from IRAs are taxed just like any other ordinary income. The amount is stacked with your other income and enters into the calculation of your taxable income upon which your income tax is calculated. If you take a premature distribution before age 59.5 years, then you pay in addition to the income tax a 10% premature distribution penalty. Of course, there are exceptions to the penalty which I won't discuss here.

Roth distributions are not taxed, neither the contributions nor the earnings buildup, but there are some exceptions there which I will not discuss.

That's it today in the free advice department.

[luke.w]

Originally Posted by LiftGirl

40years from retirement
(I'm assuming that folks will be retiring later and later as the years go on, as they're living longer and longer).

in my mind retirement means "ready to die" really, it also doesn't mean "work your ass off" (of course working my ass off is my future, but thats just what "I" do and like doing).

I like that quote of the lumberjack, "I'll cut tree until I'm 75 and keel over, and call it retirement"

I figure since I'm strong and fit, and never plan to retire my fitness I'll be okay!!!

[LiftGirl]

Originally Posted by pierini

Roth distributions are not taxed, neither the contributions nor the earnings buildup, but there are some exceptions there which I will not discuss.

I thought with Roth, the contributions were taxed (you contribute with post-tax dollars), but not the earnings buildup and the distribution?

So say, if I put 5,000 (which would be taxable income) in it today, and when I retire in 40 years it has become 10,000, then I wouldn't be taxed on the additional 5,000 I already made. At least that's how I understand it.

[LiftGirl]

Originally Posted by Lady C

Long term I would imaging the regular IRA is better but that is just a guess.

The reason I am favoring the Roth is because I have probably 40 or so years until retirement. Hopefully, that's lots of time for my retirement money to be earning more retirement money. If I pay the tax now, I can pay on the small amount I'm contributing, instead of the larger amount I will withdraw in retirement. I think that's the idea behind the Roth. Also if taxes increase before I retire (it seems like taxes are always increasing) then I will have paid a lower tax rate on the money.

Originally Posted by luke.w

in my mind retirement means "ready to die" really

Ou contraire! My grandparents are retired, but just as busy as ever. Senior aerobics classes, traveling, exchange club, romeo (retired old men eating out) club, comptroller of the church, volunteering, visiting kids and grandkids, going to movies, going to the theater, I could go on all day. Point is, I want to be like them!

[Lady C]

Maybe I didn't say it clearly. Regular IRAs are taken out of your paycheck BEFORE they take taxes and deductions out. This gives you less income you are actually taxed. This is taxed when you remove the money. Hopefully at a lower rate since you are older. This gets a penalty if taken out early.

The ROTH is AFTER they have pulled out taxes. This means you are taxed on a higher income amount annually. There is no penalty for taking money out early since it has already been taxed.

I would do both. They both have advantages and disadvantage. This is individual so your hubby gets to do the same.

While it may not apply in your case currently LiftGirl, there are income limits that once exceeded deny you from making a Roth-IRA contribution.