Comments on: Roth IRA Versus Traditional - Which is Better?

By: Patrick

Patrick — Mon, 14 Jul 2008 17:43:47 +0000

Tiffanie, it’s nothing to worry about. The main difference between the two types of IRAs is when the money is taxed.

Traditional IRAs are funded before the money is taxed from your paycheck and they are taxed when you withdraw funds.

Roth IRAs are funded with money that has already been taxed from your paycheck and withdrawals are tax free.

You can have both types of IRAs, but you can only contribute a combined $5,000 into both accounts per year (at least for 2008 max level; I think the limit increases next year).

A 401(k) is an entirely different investment plan and is not affected by your IRAs, so you can have both.

By: Tiffanie

Tiffanie — Mon, 14 Jul 2008 16:37:24 +0000

You seem like you know your stuff. Maybe you can help me out. I ended up with a Roth IRA and a Traditional IRA (long story, huge mess…wrote about it on my blog) and I’m wondering if that’s a bad thing. I’m currently unemployed and the Traditional is being funded by the money I had from my previous employer whereas I just opened the Roth and plan on making small contributions even though I’m not working. Is this bad to have both? And what happens when I get a job with a company sponsored 401(k)? I’m lost!

By: Rusty Manues

Rusty Manues — Fri, 13 Jun 2008 17:24:56 +0000

do you invest in a pre-tax 457 or a Roth 1st?

By: Justin

Justin — Thu, 10 Apr 2008 01:29:43 +0000

I *just now* (15 minutes ago) opened up a roth SDIRA account. Can you let me in on what benefits and downfalls are of a Self Directed Roth IRA account versus a regular Roth IRA account?

By: Patrick

Patrick — Sun, 17 Feb 2008 03:30:00 +0000

Charles, Thanks for the info. This is something I have never dealt with before, but I am sure it might apply to some of my readers. This is the first year I will have some self-employment income, and I have considered opening a SEP IRA, or some other retirement fund to stash away some extra funds. I need to wait to determine how much income I will have after taxes and expenses are paid.

By: Charles

Charles — Sun, 17 Feb 2008 00:28:41 +0000

Patrick,

I like the idea of tax diversification. If your reader does not have a corporate 401K but has business income, they should consider opening an individual or solo 401K. The individual has the same $15,500 or $20,500 limits (based on age) as a corporate 401(k) plus the ability to add a profit sharing contribution to the 401k. Also, amounts in 401k accounts from previous employers, SEPs, and other before-tax IRAs can be rolled into it. The only catch is that you have to be a solo employee (or the spouse). All of the major brokers and insurance companies have them. If you wish to have the full range of investments, a self-directed solo 401k from certain trust companies may fit the bill (this is what I have.)

By: Patrick

Patrick — Thu, 14 Feb 2008 20:31:06 +0000

Adfecto, you’re correct, I skimmed right over that. The main reason was that I couldn’t word it as well as you just did. ;)The other reason - there is just no way to tell what anyone’s tax rates will be in retirement. That still doesn’t mean I should exclude the info though. That is the reason Roth IRAs are my preference as well. Thanks for the comment.

By: Adfecto

Adfecto — Thu, 14 Feb 2008 19:23:24 +0000

You covered using a Traditional IRA to lower your current tax bracket which is great, buy you kind of glazed over one of the biggest benefits of a Roth IRA.

If you expect to be in a higher tax bracket in retirement than you are now the Roth IRA is a great investment vehicle. Your current bracket may be reduced by deducting mortgage interest, dependents, child care expenses, etc. If you are saving aggressively in your 20’s and 30’s with kids and a house it is very likely your taxes will be much higher when you are in retirement (15% now vs. 28-35% later). I certainly hope mine are! That doesn’t even factor in potential political and demographics changes that are likely to push tax rates up for everyone in the future.

This is the primary reason why a Roth IRA is best for most people.

By: Which is Better - The TSP or IRAs? | Military Finance Network

Which is Better - The TSP or IRAs? | Military Finance Network — Mon, 11 Feb 2008 12:10:35 +0000

[...] Traditional IRA: The main benefit of a Traditional IRA is that the money can be fully or partially deductible, depending on your situation. The money is invested before taxes are withdrawn, which can lower your adjusted gross income, and therefore give you a tax break now. The invested money will be taxed when withdrawn at retirement age, and there are stiff penalties for early withdrawal. [...]

By: Weekend Linkage - February 10, 2008 | The Suns Financial Diary | A Personal Finance Blog on Saving and Investing

Mon, 11 Feb 2008 03:41:01 +0000

[...] Money Life outlined pros and cons of Roth and Traditional IRA and discussed which one makes a right choice. If you found information on this Diary helpful, [...]