Roth vs Tradional Math question

[ashown]

Dear All,
Couple months ago we posted a question 'Where to Invest' in this forum. We recieved many responses and we decided to invest money into IRA. So, Year long question Roth or Traditional: so, we came across few calculators, which would tell us how much money would you make with Traditional vs Roth.

Let's use some numbers. Assuming we are investing $5500 per year for next 27 years, we would invest $148,500 and with an interest rate of 5.5% would receive $342,284. Now, for Roth account, this will be a take home amount (ignoring other fees). However, for Traditional it would be $359,609 (assuming 25% tax bracket now, 15% at retirement, this is likely for us). The Traditional account will be charged $51,343 in taxes, but the 'Value of reinvesting tax savings' would be $68,668. So, $359,609 is estimated by adding difference of taxes and reinvestment value. In nutshell, we think, this result implies that Traditional is better.

Here is the question, we have maxed out the 401k contribution and have been investing in 529 for our son. Thus, how can we get the 'Value of reinvesting tax savings'? Although I agree that one would get more tax breaks with Traditional, unless he/she reinvest that money in market, one would not see the benefits. In our situation, reinvestment may mean investing money in stock/bonds/gold etc. I think, this math is misleading. Especially, when difference would be only $17k and I am not sold on Traditional account yet. That being said, it feels like Roth is more meaningful here. Can somebody shed some light on it or direct us to a thread? Are we missing something?

Thanks.
J & A

[scfr]

Although I agree that one would get more tax breaks with Traditional, unless he/she reinvest that money in market, one would not see the benefits.

Bingo! "What will you do with the tax savings?" is a critical question. As is "how long will those tax savings have time to grow?"

The Roth vs. Traditional question is one that many of us have to ponder every year. There are so many unknown variables, with one of the biggest ones being "What will the tax rates be during my retirement?" All we can do is make the best, educated guess that we can.

If a Roth feels more meaningful to you and you are eligible to contribute, then go with the Roth . . . this year.

I will offer the advice that you not just decide on the Roth and stick with it forever. Re-visit the question of Roth vs. Traditional every year. The laws will change, as will your tax bracket and age.

[bennkar]

Unless the math shows that a Roth IRA is the obviously bad choice, I always advise to have a non-negligible part of your retirement investments in a Roth (post tax) account. The ability to manage your withdrawals year to year to minimize your tax hit is a great advantage. If everything you have is pre-tax, and one year you find you need to withdraw an extra large amount, you can get hit with a large tax bill. That's the time you will regret not having some Roth type funds available to save you from the tax man.

[greenskeeper]

My strategy is to max out my roth, then at a minimum fund my 401k to the company match limit.

[snafu]

There are so many retirement scenarios to ponder.
* How do you currently envision 'retirement?' What age?
* Will the care you are taking now likely result in good health for the decades of retirement?
* Are there genetics links that suggest special awareness?
* Will you totally leave the workforce on your 50th, 60th, 65th birthday?
* Would you enjoy reduced hours, or consultation contracts?
* Will you buy a newer vehicle two years before planned retirement date so that it is free and clear of any loan?
* Will your home be mortgage free?

At present retirement is segmented into 5 yr and 10 yr segments.
* Will you most likely spend your 1st two years as empty nesters 'catching up?
* Do you like to travel and explore foreign cultures?
* Do you envision yourself involved in a hobby with earning potential?
* Would you downsize? Would you move to a more favourable climate?
More to ask yourself as you choose where to place retriement contributions


Experience has taught me that whatever I envisioned 5 years ago, is nothing like the reality I live today. Everything is changing rapidly and it's important to accept and adjust in my world. What do you think?

[ashown]

Thanks for your replies.

Dear Snafu, I agree that Roth vs traditional is a multivariable problem and I also agree that the answer may not be even possible. What I am trying to highlight/learn is the misleading math. All the questions you pointed out are appropriate; however, I think math to determine the choices is conveniently misleading.

Now, about your questions: we are maxing out the 401k limits and about to max out the IRA limit. So, the question is even if we wish to invest more money (depending on the answers to your questions), where can we invest it and get 'descent' returns after Uncle Sam takes his cut?

However, I agree that future will not be same as what I think about it today. Hence the reason, this effort to potentially reach to a thoughtful decision.

[LivingAlmostLarge]

a taxable account for flexibility. That's pretty much it. A HSA if you have it or maybe a college fund. But that locks up money for a specific purpose.