Protecting your Retirement 401k vs Roth

N

Neodude

With all the stock market losses and government debt running in the trillions I have begun pondering the virtues of a 401k (or regular IRA) vs a Roth IRA, both for my own sake and that of my parent's bleeding portfolios.

On the one hand we have the 401k, which is a staple of many retirement plans. You put money in before you get taxed and it grows or shrinks tax free until you take it out at retirement, at which point the tax collector shows up at your door and takes his share.

On the other hand we have the Roth IRA, a less popular option, where you can deposit your money after Uncle Sam has taken his cut, but you get the added advantage of having the money grow tax free AND being able to withdrawn it tax free at retirement.

So my question to you: Which is the better option?

On the surface the traditional 401k seemed like a better option. The power of compounding works from a larger starting figure and assuming you retire in a lower income tax bracket you will probably come out ahead compared to the Roth IRA. But what I think many people don't take into account is that taxes are always going up. Looking at all the new debt the government has created and the social programs that it wants to enact, there is a high probability that the tax bite on the 401k will be much greater when you retire then what you had anticipated. Anyone else given this some serious thought?

-Neo
 
I think the rule of thumb is under 40 the roth IRA is expected to be a more powerful tool, because no one expect s taxes to be lower in the future.

But if you can should max out roth IRA, then 401k, especially if your employer matches, thats free money.

You should set aside an SHTF insurance policy that is wholly independent of any entiry

perhaps 10% of your savings


Government sponsered retirement plans maybe on the chopping block in some near future where the government is hungry for funds.

What happens is the government can decide to eliminate the tax breaks, or simply nationalize the funds, and pay you a fixed return.

See argentina,
http://www.nytimes.com/2008/10/22/business/worldbusiness/22argentina.html?ref=business

and House Democrats in Oct 2008
http://www.usnews.com/blogs/capital-commerce/2008/10/23/would-obama-dems-kill-401k-plans.html


All the major pensions fund are seriously in the hole (state and private), if we cannot close the gap, this is not beyond the realm of possibility. Believe it or not, those close to retirement will expect to be made whole at the expense of the younger workers.
 
I've been thinking about doing exactly the same.

You may want to read up on it first...

http://www.rothirarules.net/roth-ira-vs-traditional-ira.htm

http://www.rothirarules.net/roth-ira-investments.htm

http://www.rothirarules.net/self-directed-roth-ira.htm

http://www.rothirarules.net/best-roth-ira.htm

they have some good info on roth ira, basic do's and don'ts, investment options, etc

cheers

Quote from Neodude:

With all the stock market losses and government debt running in the trillions I have begun pondering the virtues of a 401k (or regular IRA) vs a Roth IRA, both for my own sake and that of my parent's bleeding portfolios.

On the one hand we have the 401k, which is a staple of many retirement plans. You put money in before you get taxed and it grows or shrinks tax free until you take it out at retirement, at which point the tax collector shows up at your door and takes his share.

On the other hand we have the Roth IRA, a less popular option, where you can deposit your money after Uncle Sam has taken his cut, but you get the added advantage of having the money grow tax free AND being able to withdrawn it tax free at retirement.

So my question to you: Which is the better option?

On the surface the traditional 401k seemed like a better option. The power of compounding works from a larger starting figure and assuming you retire in a lower income tax bracket you will probably come out ahead compared to the Roth IRA. But what I think many people don't take into account is that taxes are always going up. Looking at all the new debt the government has created and the social programs that it wants to enact, there is a high probability that the tax bite on the 401k will be much greater when you retire then what you had anticipated. Anyone else given this some serious thought?

-Neo
More...
 
I've looked into this as well, and i think the answer as to which is better, pre-tax contributions taxed at the back end, or post tax contributions taxed at the front end, depends on factors which can't be known years in advance.

I can tell you this, however, and that is that if you are a skilled trader with a track record of consistent trading success in both up and down markets, and few qualify, then a self-directed Roth that you trade is the way to go. A possible big advantage to the Roth, assuming you expect to have a well funded retirement, is that you don't have any minimum withdrawal requirement at age 70.5, whereas with a pre-tax IRA (i.e., traditional) you do, and i believe you also do with a 401K or 402b, but please correct me if i'm wrong about the latter. I rolled my 403b into a traditional, self directed IRA years ago, and have not regretted it. (Rolling may be more flexible when all of the contributions are yours and none are your employers.) I also have a Roth and have done some conversions of traditional to roth which are taxable events.
 
the withdrawal issue is a big point. with a traditional ira you must set up a schedule to withdraw all of the money and pay ordinary income taxes on it before you die.
with a roth you can choose to withdraw the money tax free as you need it or pass it on in your estate if you choose to.
if your traditional ira is down because of the market this might be an oppertunity to switch it to a roth and pay tax on a depreciated balance. then if it recovers some day you will come out ahead.
 
On one side, you have private citizens (the "rich") with fat retirement accounts. On the other, you have government wealth redistribution plans (Social Security, Medicare, ADC etc) in serious trouble and voters demanding ever increasing handouts.

That's not an environment condusive to a safe retirement dependent upon one's 401Ks and/or IRAs.
 
Quote from Neodude:

401k... You put money in before you get taxed and it grows or shrinks tax free until you take it out at retirement, at which point the tax collector shows up at your door and takes his share.
More...

It is a very complex issue and may become more complex here in California. :confused:

There are rumblings in Sacramento, CA that some of the politicians want to tax 401k contributions when you put the money in, instead of when you take it out. :mad:

Many folks build up sizable 401k balances working here in CA and then retire in NV. Under the current set-up, the $ escape CA taxation all together. :)

To help cover the CA budget shortfall, the worker contributions going into the 401k would get taxed up front. That way, if the worker escapes to NV for retirement, CA state government got some of the tax it feels is due.:eek:

If the worker stays put and retires in CA, then only the gains would be taxed.:(

Example: CA worker contributes $100k over 20 years and the 401k grows to $400k. At retirement, the worker escapes to NV. The state of CA gets $0 tax revenue.:D

With the change in law, in the above example, CA would get 9.3% or $9300 up front when the contributions were made before the worker escapes to NV.:mad:

If the workers stays in CA and retires, CA would tax the gains in the account of $300k as the $ are taken out.:mad:

A very complex situation...:confused:
 
in england there are other benefits to pension saving. the first is salary sacrifice when you earn $200,000 a year you could agree to be paid $180,000 a year and the employer pays $20,000 into your pension you only pay national insurance on the $180,000 and so does the employer saving you ni as well as the tax relief. in england it is covered in the rpsm registered pension scheme manual rpsm 0510 1340 to be precise. if you can get this to the tax up front will be the best option as you reduce you ni as well as you tax relief. look into it. also in england we have lifetime allowance when you can only save 1.65 million with tax relief after that you pay tax no relief you can get round this with an efrbs employer financed retirement benefit scheme. your employer puts assets into trust and pays to when you retire on the assets you do not the employer does so you do not get hit with the tax and can get top ups for the allowance. pensions are very powerful i suggest you look at the rpsm american equivalent and salary sacrifice i know that people who pay ex wifes money get it.
 
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