no matching retirement, then ROTH?

behaviorkeltonApril 30, 2007

If your employer doesn't offer matching funds for their 403b/401k, then does this usually wash out the advantages of a 401k over a ROTH?

In other words, is one about as good as the other when there are no matching funds involved? The generic advice seems to be: "contribute to the 401k until you have reached your employers matching limits, then contribute to your ROTH."

I'm in the ~25% tax bracket...I suppose the bottom half of the middle class (US).

The ROTH is easier to deal with.... I don't have to inform my employer or fill out special paperwork.

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steve_o

The money that goes into a Roth IRA is taxed before you put it in; the money that goes into a 403(b)/401(k) is taxed when you take it out. So, without a match, generally speaking*, it comes down to whether you think you'll be in a 25% bracket when it's time to withdraw the money. If you think it's likely that either you will be in a higher tax bracket because you're earning more money or if Uncle Sam will increase tax rates, then you're better off with the 403(b)/401(k).

* The other variable, though, is how you can invest in either. Some company funds require a certain percentage of your income go to the company's stock. Or they may have a lousy selection of "loaded" funds. Paying for the "privilege" of investing in company stock or a bad loaded fund can easily cost you what you could earn after taxes in an efficient Roth that gives you some flexibility in moving money around.

    Bookmark   April 30, 2007 at 10:31AM
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behaviorkelton

I expect to be on the "poor man's retirement plan" when I retire. Hopefully, the house will be paid off well before then and my expenses will be minimal. My luxuries are somewhat basic and cheap: a garden to toil in, cable TV, and the internet.

I think I have reasonable latitude in the 403b, just no matching..so compared to the ROTH, that's a wash.

I do expect to be in a modest income bracket when I retire.

My intuitions (not a reliable source) tell me that a 403b is better because money that would normally be taxed will be able to "work" for me. With the Roth, it just "seems" like there would be a huge disadvantage in contributing taxed money over the long haul....but perhaps I'm not seeing the big picture.

Kelton

    Bookmark   April 30, 2007 at 11:18AM
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chelone

We make sure we maximize our contributions to our ROTHs and we put as much as we're comfortably able into our company retirement plans (matched, but not greatly). We take advantage of tax-deferred contributions through our employers, but make sure the TAX-FREE aspect of the ROTH is maximized. We'd rather pay taxes now than at a future point in time, when we're sure taxes will be higher than they are now.

    Bookmark   April 30, 2007 at 8:11PM
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steve_o

Oops, I goofed. I should have said:

"If you think it's likely that either you will be in a higher tax bracket because you're earning more money or if Uncle Sam will increase tax rates, then you're better off with the Roth IRA."

Not enough coffee....

    Bookmark   April 30, 2007 at 9:19PM
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behaviorkelton

Thanks steve o ... your responses to this and other posts are much appreciated.

It sounds like one has to simply guess at the future scenario (my income or Uncle Sam's taxes).

    Bookmark   May 1, 2007 at 7:53AM
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steve_o

It sounds like one has to simply guess at the future scenario

Trust me, if any of us had a line on what was really going to happen in the future, we'd be out at the racetrack making real money rather than prognosticating about retirement plans. :-)

    Bookmark   May 1, 2007 at 10:14PM
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jlhug

Remember that taxable income has a bearing on how much of your Social Security may be taxable. Lower taxable income = potentially smaller taxable portion of Social Security.

Also, medical expenses that are deductible on Schedule A are limited to those in excess of 7.5% of AGI. Lower AGI = more deductible medical expenses (hopefully, you will never have than many medical expenses). You are more likely to have higher medical expenses in your senior years than you will while you are working.

That's based on current tax laws. Who knows what will happen in the future?

    Bookmark   May 2, 2007 at 8:50AM
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jkom51

jlhug has an important point - the limits for how much one can earn (dividends from investments) before being taxed on Social Security were NOT indexed for inflation, so this effectively raises your tax bracket severely.

Your Roth earnings are compounding tax-free, isn't that correct? You are only contributing with after-tax dollars.

The general "wisdom" is that if you are at least 20 yrs from retirement, then maxing the Roth first is preferable. Then contribute to your company retirement plan with as much as you can afford.

Note that if you are typical of most young workers, you will have gone through several employers as time goes on. Make the effort to consolidate your previous employer 401/403 monies into ONE single IRA. Believe me, your heirs will bless you for it, and it will be much easier for you to track your investment results overall.

It's a pain, I know - I just finished doing it...but worth the effort.

    Bookmark   May 12, 2007 at 8:34PM
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housenewbie

I like to split the difference between a regular and a roth ira, on the assumption that (A) I like the deduction now, and (B) they may well change the rules at some point and start taxing roth w/drawals.

I'd say unless there are some really great (and cheap) funds in your 401k (or 3b) then ignore it and invest on your own, in a mix of iras.

Of course, there's a larger amount that you can contribute to a 401k (15,000/year, i think) vs the ira (4,000 right now). So if you're looking to invest more than 4,000/year, you'll have to use the 401k.

    Bookmark   May 15, 2007 at 1:26PM
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