I don't know why they do it. The majority of them I've dealt with have pushed the Roth very strongly.
I always hear people say "your money grows tax-free" but if it's taxed on the back-end anyway, why is that a big deal?
So, if your company only matches 3% is there any reason to put in more than 3% for their match? Also, are most still going with US stocks or is more money being made on over seas stocks? I'm planning on retiring in about 23 years at 60 and am going Aggressive at the moment and the majority of my money is put into US stocks in Large/Mid capitalization.
Being very familiar with the profession, the only reason why they do it is because they really only need to know two things about you: How old are you and do you make any money. If the answer is young and not much, then the answer is roth 98% of the time. A tax deferral isn't going to be as beneficial as a huge tax free distribution in 30 + years.
If you can afford it. Any extra you are putting in essentially works like a regular ira. Tax deferral, not taxed on interest or dividends, pull it out when you're of age and pay ordinary income on it. It's like getting paid more later on the money you made today. If you don't need the money today, use it. You will come out much better in the end.
Presumably when you retire you'll have a much lower income, and correspondingly lower taxes. I feel like this is becoming less likely, ergo I try to keep that Roth maxed.
because it's better to be taxed on $60,000 (assumed annual amount you'll withdraw at retirement) when you're 65 years old, than on $100,000 (assumed annual amount you make now) when you're 40.
If you reinvest the tax savings into the traditional IRA, they should net out the same if you have the same tax rate. The decision should be made based on the tax savings you get today versus what tax consequences you expect at retirement. Age and how much money you make today would be the wrong way to look at it.
Since you aren't taxed until the end, it will allow your investment to grow with more money in the fund and lets your interest build linger. Secondly, your current income is lowered by the amount you contribute so your current year tax bill will be lower.
Three scenarios for investing $3,000 ... Traditional Deductible IRA earn $3,000 invest in $3,000 traditional, deductible IRA, earn 7% for 30 years $3,000 becomes $24,000 in 30 years remove $24,000 from IRA and pay $8,000 taxes (taxed as income at 33%) net $16,000 Roth IRA (or Traditional Non-deductible IRA) earn $3,000 pay $1,000 in taxes (taxed as income at 33%) invest $2,000 in Roth IRA earn 7% for 30 years $2,000 becomes $16,000 in 30 years remove $16,000 and pay no taxes net $16,000 Brokerage account earn $3,000 pay $1,000 in taxes (taxed as income) invest $2,000 in taxable brokerage account earn 7% for 30 years (ignoring divideneds) $2,000 becomes $16,000 in 30 years remove $16,000 and pay $2,800 capital gains tax (20% of $14,000 gain) net $13,200 (overstated since dividends are ignored) As you can see with the third option, you get taxed twice, once for the earned income and once for the capital gains. Now if you happen to die (before you make the withdrawal), your spouse (or your benefactors) will get a step in basis, and can withdraw the $16,000 and pay no capital gains tax. The $16,000 will count in your estate's net worth and could get estate taxed if you are worth $5 million. If you are worth that much, your lawyers will limit or eliminate your tax hit.
As others have said, there is a good chance your income tax bracket will be lower when you're older. That's assuming they don't have the system all jacked up higher in 20 years. My personal thinking is, if my tax bracket is lower when I retire then I want to defer the tax now. And if it turns out I make more money than I expect when I'm at retirement age, then the fact that I chose the wrong retirement option won't matter as much because I'm still ballin.
If you're self-employed, you should look into a SEP IRA. I did that the past 5 years and have had significant tax savings. I have an LLC taxed as an S-Corp. So, for example, my company (which is mine) gives me (as an employee) a SEP IRA contribution of $20k. Well, basically that is just my money right, so I'm not getting any sort of real benefit or matching. However, because that is a business expense I am now paying $20k less in taxes on the business side. So that's where it's more than worth it. Assuming your cash flow allows it.
those with 401ks, does the broker charge ridiculous fees? i don't have one, but I looked at my sister's yesterday. Every fund charged a 5.75% sales load and at least a 0.69% expense ratio. total rape.
We might be saying the same thing. Usually young people that are not making a lot of money will be in a higher tax bracket at age 59.5. If you come out of college at 22 and are in the 15-25% marginal tax bracket, let's hope you plan to be in a larger tax bracket at retirement. Someone who is 50 and is in the 32-35% marginal tax bracket, you have no choice. The income limit on the roth really prevents anyone from making a terrible decision. The reason an advisor might push the roth, is because it lets you make an educated decision at the very moment about what is best. You know make that contribution at the end of the year once you know what your tax bracket is. You know what you are paying. Where as with a traditional it leaves more up to guess work in 30+ years. Age and income come into play immensely. Where are you now, how long do you have to work, are you likely to make more money adjusted for inflation in the future. With someone young who doesn't make a lot of money, the answer is usually roth. They can't predict the future, but you sure can make the safest bet right now.
