JR Ewing
MuscleHead
- Nov 9, 2012
- 1,329
- 420
Yeah, if you or your household is over the Roth IRA income limit, you have no choice but to go with the traditional IRA. But you can still go with a Roth 401k IF you work for someone else, and IF they offer the Roth 401k.
Although everyone's situation is unique, a good rule of thumb to go buy regarding Roth vs traditional IRA/401k is to probably lean towards the Roth when you are younger and making less money, and are investing for maximum longterm growth. And to probably lean towards the traditional IRA/401k when you are older, making more money, and are getting closer to retirement.
For instance - you graduate college or trade school or professional school and start working in your chosen field at 25. You plan to retire at 60. You contribute $30k to a Roth IRA and $100k to a Roth 410k between the ages of 25-30 when you might be making $50-100k a year. You then have to switch to a traditional IRA at 31 when you get a promotion and start making $120k a year, but you can continue your Roth 401k.
That $30k in the Roth IRA will be tax free money that is all yours at age 59.5 - you can start pulling money out tax-free to live on, or you can just let it continue to grow to leave for the family or whatever. If you averaged 10% a year on that Roth IRA over those 35 years from 25 to 60, you now have close to $700k tax free.
If you contribute $5k a year to the traditional IRA from age 31 to 60, you'll have close to $900k in this one, but you'll have to pay some taxes and take some money out eventually.
Of course another good reason to use a traditional IRA or 401k when you are a relatively high earner - and you expect to be making less income in retirement off of your investment nestegg than you did at your job - is that you are likely to be in a lower tax bracket at the later date when you are earning less. So by deferring taxes now when you're making lots of money, and paying them in retirement when you're likely to be making less, you're likely to save $ you'll have to pay in taxes.
But if you pay those taxes up front when you're young, have several decades to grow your portfolio, and are presumably making far less than you'll be making by mid-career or the end of your career, you're likely to save considerable tax dollars that way as well - particularly when you consider how much you'll likely grow your portfolio from early career to retirement.
It is also perhaps a good idea to use the Roth 401k when youg, then consider switching or putting at least some into the traditional 401k as you get older, are earning far more money, and are getting closer to retirement.
The beauty of tax-advantaged retirement plans either way is that you don't have to worry about capital gains during your decades of accumulation prior to retirement - you can sell stocks when you think the time is right, and put that money into other stocks or other investments within the plan without having to worry about cap gains.
As for aggressive vs conservative investing, a GENERAL (not absolute) rule to keep in mind is that the more conservative you are, the less your gains are likely to be, even though you'll likely lose less money in bad times. The more aggressive you are, the more you'll likely make in good times, and the more you'll likely lose in bad times.
Although everyone's situation is unique, a good rule of thumb to go buy regarding Roth vs traditional IRA/401k is to probably lean towards the Roth when you are younger and making less money, and are investing for maximum longterm growth. And to probably lean towards the traditional IRA/401k when you are older, making more money, and are getting closer to retirement.
For instance - you graduate college or trade school or professional school and start working in your chosen field at 25. You plan to retire at 60. You contribute $30k to a Roth IRA and $100k to a Roth 410k between the ages of 25-30 when you might be making $50-100k a year. You then have to switch to a traditional IRA at 31 when you get a promotion and start making $120k a year, but you can continue your Roth 401k.
That $30k in the Roth IRA will be tax free money that is all yours at age 59.5 - you can start pulling money out tax-free to live on, or you can just let it continue to grow to leave for the family or whatever. If you averaged 10% a year on that Roth IRA over those 35 years from 25 to 60, you now have close to $700k tax free.
If you contribute $5k a year to the traditional IRA from age 31 to 60, you'll have close to $900k in this one, but you'll have to pay some taxes and take some money out eventually.
Of course another good reason to use a traditional IRA or 401k when you are a relatively high earner - and you expect to be making less income in retirement off of your investment nestegg than you did at your job - is that you are likely to be in a lower tax bracket at the later date when you are earning less. So by deferring taxes now when you're making lots of money, and paying them in retirement when you're likely to be making less, you're likely to save $ you'll have to pay in taxes.
But if you pay those taxes up front when you're young, have several decades to grow your portfolio, and are presumably making far less than you'll be making by mid-career or the end of your career, you're likely to save considerable tax dollars that way as well - particularly when you consider how much you'll likely grow your portfolio from early career to retirement.
It is also perhaps a good idea to use the Roth 401k when youg, then consider switching or putting at least some into the traditional 401k as you get older, are earning far more money, and are getting closer to retirement.
The beauty of tax-advantaged retirement plans either way is that you don't have to worry about capital gains during your decades of accumulation prior to retirement - you can sell stocks when you think the time is right, and put that money into other stocks or other investments within the plan without having to worry about cap gains.
As for aggressive vs conservative investing, a GENERAL (not absolute) rule to keep in mind is that the more conservative you are, the less your gains are likely to be, even though you'll likely lose less money in bad times. The more aggressive you are, the more you'll likely make in good times, and the more you'll likely lose in bad times.