Deferred Comp vs. ROTH IRA

[hcho3528]

Hello, I am looking for more advice from all you financial guru's out there. I have a government job, where I invest into a pension that I can collect after 20 years, or at 50 years of age. I will have about 30 years in at 50, so it will be almost 100% of my yearly salary. In addition to that I have been putting away $700 a month into deferred comp which I have invested aggressively since I am 28, and still have a ways to go. I had almost 25k in there but in lieu of the recent market I am down to only 15k. The deferred comp collects without being taxed, until retirement. I am thinking of starting a ROTH IRA that is pre-taxed and is not when it is withdrawn when you retire. I am currently in a tax bracket where I will probably be able to continue to invest in the ROTH for another 10 years before I will be making to much. My question is, is it worth it for me to start investing into a ROTH considering I will be retiring at a tax bracket that will either be equal or higher than I am in as a working person now? Also, what will accrue more money, the deferred that collects without being taxed until the end, or the already taxed ROTH that is not taxed at the end? Any help would be greatly appreciated.

Thanks!

 

[MasterBlaster]

well I am only a sex-master and not a financial guru so take my response for what it's worth...

1) If your marginal tax bracket will be higher in retirement then a ROTH is the way to go.

2) If tax brackets are the same during the working years as when you take the money out...

the one dollar [earned, invested in a deferred tax plan, and then withdrawn in retirement and taxes then paid]

is exactly equal to :

the one dollar[ earned, paid taxes on when earned, invested in a ROTH plan and then withdrawn in retirement]

provided the term is the same and the investment rate gain is the same.

IF marginal tax rates go down in retirement then go with the deferred plan. If marginal tax rates go up in retirement then go with the ROTH.

3) Good luck with predicting your future tax rates and future tax policy some decades out ! However since your income will probably be at least what you make now then I would predict that your retirement income tax rates will be at least as high (or higher) than they are now. MY magic 8-ball says that for you perhaps the ROTH is the way to go.

 

[OAG]

Do a ROTH while you can and it should grow at the same rate as the deferred; the difference is you pay tax on today's ROTH at the current rate while the deferred will be taxed at your withdrawal tax rate (which you said you anticipate being mostly higher). That is assuming the Government does not change the ground rules. Oh yes I am far from a financial g either.

 

[hcho3528]

MB-Thanks for the good advice.
OAG-Good thought on tax now vs. in 30 years. So actually, the ROTH should perform better and probably taxed less considering inflation.

 

[jIMOh]

The fact you have a pension which might pay you 100% of pre-retirement salary, then having investments IN ADDITION to this suggests your tax rate in retirement will be higher than it is now.

ROTH wins this situation, hands down.
If income and tax brackets are the same, it does not matter/

The only way you lose (with Roth) is if you find a way to lower your tax bracket in retirement (relative to working years).

 

[Uncle Drew]

What type of account is the deferred comp? A 403(b) or a 457(b) are accessible without penalty upon SEPARATION from employment. Very RE friendly.

Isn't the earliest penalty-free withdrawal from an IRA 59.5 years old (not counting special situations like hardships).

I say do both!

UD

 

[kyounge1956]

What type of account is the deferred comp? A 403(b) or a 457(b) are accessible without penalty upon SEPARATION from employment. Very RE friendly. (snip)

I have a 457 also, and this withdraw on separation (not age) was news to me when I first heard about it on this forum a while ago. Does that apply only if the account is left with the 457 custodian or can you roll it over into an IRA and still withdraw before age 59-1/2? I need to double check but I think with mine it may be possible to roll over part of it and leave the rest where it is.

I say do both!

UD

I agree. What's not to like? I only wish the Roth ceiling was not so low. I'd put more in there if I could.

 

[Uncle Drew]

It has to stay with under the 457(b) plan. I cannot be rolled to an IRA or else it loses it's early withdrawal benefits.

 

[kyounge1956]

It has to stay with under the 457(b) plan. I cannot be rolled to an IRA or else it loses it's early withdrawal benefits.

I dunno how I did it but I sent the same post twice. So instead of sending a you "thanks" in your control panel I'll edit the second copy to say thank you here.

 

[FinanceDude]

Everyone should have a ROTH IRA, EVERYONE. In 2010, folks that make too much money to fund one can convert their IRAs to Roths and pay the taxes over 2 years, regardless of modified AGI.

Folks that CAN fund a Roth IRA should do it, a total no-brainer. Anyone who thinks that taxes will be as low as they are now in the future is foolish. We have almost the lowest marginal rates in history, along with the lowest corporate dividend, personal dividend, and capital gains rates maybe ever. Regardless of how Congress acts, rates WILL GO UP. The days of low taxes are over in the near future.........

 

[jIMOh]

Everyone should have a ROTH IRA, EVERYONE. In 2010, folks that make too much money to fund one can convert their IRAs to Roths and pay the taxes over 2 years, regardless of modified AGI.

Folks that CAN fund a Roth IRA should do it, a total no-brainer. Anyone who thinks that taxes will be as low as they are now in the future is foolish. We have almost the lowest marginal rates in history, along with the lowest corporate dividend, personal dividend, and capital gains rates maybe ever. Regardless of how Congress acts, rates WILL GO UP. The days of low taxes are over in the near future.........

My response to this is that it still depends. If a person is in 33 or 35% tax bracket now, but LBYM, it is very possible retirement withdraws fall into a lower tax bracket (where incomes of 25% or 28% exist now).

If a person is married and earns 300k, they are in the 33% tax bracket.
If they cut their income in half, they would be at 150k, which is in middle of 28% tax bracket. I would not bet the 28% tax bracket increases 5%.

If the 150k is cut in half (75k), the new income is in middle of 15% tax bracket. This is a huge drop in tax rates. I will not plan that the 15% tax bracket is increased 60% to 25%- as this increase would affect 75% of the tax payers.

I think blind advice to use a Roth is misguided at best. I use one, you use one, but it is very possible high income earners have a lower income in retirement and the Roth does not make sense.

 

[hcho3528]

So then my next question is that if I start a ROTH IRA, what is the max amount I can invest for 2008 after taxes? Also, can a 457 (b) deferred comp account funds be rolled over into a ROTH IRA? In doing this I would assume the amount would be taxed at the rollover, is that correct?

 

[FinanceDude]

I think blind advice to use a Roth is misguided at best. I use one, you use one, but it is very possible high income earners have a lower income in retirement and the Roth does not make sense.

Given the recent markets, I have seen a few folks converting IRAs to Roths because their investments are down considerably. if they DON'T have a Roth, they can't do that. Also, I have a Roth myself, and plan on converting a considerable portion of my IRA to Roth in 2010, when I can pay the taxes over 2 years and the limits go away, as I can't do this now. I did the same thing back in 1998, when they allowed 4 years to pay the tax.

Mark my words, the govt will get rid of Roth IRAs at some point. I just want as a much flexibility as I can have and make sure my Roth is grandfathered in before they pull the plug on me. Also, in retirement, if folks are taking pension payments and SS, how much control do they really have in their tax lives?

What about when RMD's start? There are NO RMD requirements in Roth IRAs.......

 

[FDCaptain]

I have a very similar pension situation and a 457b deferred comp plan. For what its worth I max out a Roth IRA and put the rest in the 457b. On some advice from this board I checked closer into the fees of my 457b, while not as bad as feared, they were much more than the fees associated with my Roth. You may want to check into that. Contributing to both provides more options at retirement.

 

[BigBob]

I agree with the others that recommend the Tax Diversification of contributing to a Roth. Much better to have several options when withdrawing.

 

[FinanceDude]

I agree with the others that recommend the Tax Diversification of contributing to a Roth. Much better to have several options when withdrawing.

That is exactly my point. I want choices when I retire, based on how each year turns out. If I have a nice chunk of money in a Roth, at least I have SOME control over my taxable income, because pensions and SS sure don;t give any.........

 

[MasterBlaster]

Wouldn't it be a scream if at some future date congress enacts an "excess withdrawal" tax on ROTH's.

There certainly is historical precident for that. I personally would be very wary of having all of my eggs in that basket.

 

[FinanceDude]

Wouldn't it be a scream if at some future date congress enacts an "excess withdrawal" tax on ROTH's.

There certainly is historical precident for that. I personally would be very wary of having all of my eggs in that basket.

I didn't say ALL..........