Roth vs Regular IRA vs 401K

Regrettably the days when one could reduce their tax liability in a high income year by putting money into an IRA are gone. Using an IRA to level income has virtually been eliminated, since the deduction amount for a regular IRA ratchets down as taxable income goes up. One can still contribute to an IRA, but for most the tax benefit the year of or for the previous year is gone.

Thus, the regular IRA has taken a back seat to the Roth IRA. The Roth does not and has never allowed for a deduction the year before or the year of contribution. However, assuming conditions have been met, there is no taxation of money withdrawn from a Roth IRA.

The question then arises, should money go into a Roth, Regular IRA, 401k, 403b, non-qualified stocks/bonds, etc. Even though there are exceptions, if an employer matches money placed in a 401k, 403b, retirement account, etc., don’t pass that up. There are different levels of match, but many are dollar for dollar, which are the most lucrative for the employee.

With a regular IRA, the objective is to withdraw the money much later when it is taxed at a significantly lower tax rate than what would have been paid without the deduction. If taxation at 25% is averted up front and only 15% is paid when withdrawn, the regular IRA makes sense. However, if all or a significant portion of the money going into a regular IRA gets no deduction, a regular IRA is usually not the best option.

Stock/bonds can also be a better choice than a regular IRA if no up front deduction was allowed. Gains from money in a regular IRA, even if no initial deduction was allowed are taxed as ordinary income when withdrawn. However, long term gains from stocks/bonds are taxed at a lower rate.

The Roth IRA has become popular, with the maximum contribution income limit of $95,000 for singles and $150,000 for a couple. Those who anticipate little reduction in taxable income during retirement especially like the Roth IRA. With the Roth withdrawals do not need to start at age 70.5. Finally, money in a Roth is not assessed estate tax and withdrawal by heirs is less restrictive than for a regular IRA, 401k or 403b. For more information on a Roth IRA refer to: http://www.fairmark.com/rothira

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