ACZoom  ·  Archive-2016

Now that there is a 401(k) for Roth, far more people may be eligible to invest in the Roth IRA. The decision to Roth or not is not always clear cut. Simple choices - like invest in Roth vs invest in a non-deductible IRA are clear - go with the Roth. Young, and in a low bracket? Go with Roth.

Lots of web sites offer calculators and other quick advice - but be careful, many assumptions have to be made to make this simple, and that may make the conclusions reached not worth much.

The best report I have seen on Roth is from Vanguard Center for Retirement Research, their Tax Diversification and the Roth 401(k) is a very detailed analysis of this issue. Other good links are available at the 401K Help Center Collected Wisdom on Roth 401k, two good links from there: How Valuable is the New Roth 401k Option? and Watson Wyatt Insider report - Pros and Cons.

Currently employed, but spending much less than your income, and planning to replace much less than 100% of your current income in retirement? Then a traditional 401K, with rest going into tax-advantaged investments for long-term capital gains, would be a better choice, since such a person will very likely be in a lower tax bracket in retirement. Income varying, with more income some years, less other years? Then investing in Roth or converting to Roth in lean years may be the way to go. In the end, unless there is a clear-cut decision either way, the best conclusion may be - for Tax Diversification, invest in both the traditional IRA, and the Roth. Just as it is important to spread your investments between offerings that don't all go up or down at the same time, it is important to spread your investments between paying taxes now, and paying taxes later. Roth is the way to pay taxes now, even if you are in high bracket now, who knows, with the US budget deficits and soaring public retirement and health costs, taxes could go higher in the future for everyone.

Additionally, Roth has other advantages in terms of required minimum withdrawals - of issue to only those who have saved far more than they need, but hey, a recent New York Times article suggested that may be happening to many, it may not be true that America is in a retirement savings-deficit!
YOUR MONEY; A Contrarian View: Save Less And Still Retire With Enough - appeared in print on Jan 27, 2007, in the New York Times.

Conclusion: no easy answer, just save starting as early as possible. In addition to IRAs, taxable accounts are also good - capital gains may be lower than regular taxes, so that may be much better than traditional IRAs where all gains are taxed at income tax rates. And do both - goal diversification, as well as tax diversification.