I should have illustrated my point with an example. Your point 1 is a given, but that's not what I was talking about. Your point 2 is more what I was talking about. Let me illustrate with a simple example. Assume the following: A person making $12.50 an hour works for 100 hours. He has $1250 in earned income This person wants to contribute his entire earnings to an IRA He's currently in a 20% marginal tax bracket He'll retire in a 20% marginal tax bracket He has a choice of contributing to either a deductible Traditional IRA or a Roth IRA The IRA investments will be identical, each earning a nominal 5% return each year with all gains reinvested. Which IRA contribution will net him the most after-tax money X amount of years down the road when he retires? Let's use 5 years as it doesn't matter how many years, the results are the same. Most people would say, yes the Roth! He'll have more after tax money to spend if he invests in the Roth because he gets to take the money out tax free! OK, let's do some math: $1250 pretax earnings. After taxes (20%), $1000 is put into the Roth, and $1250 is put into the deductible Traditional IRA. The $1250 is pre-tax so he gets to put all of his earnings in. After 5 years, the Roth IRA account has $1276.282 dollars. The deductible Traditional IRA account has $1595.352 dollars. But remember, Uncle Sugar has a claim on some of those Traditional IRA dollars and he's in the 20% marginal tax bracket when he retires and takes the money out. So he withdraws all of the money from his Roth IRA and he has $1276.282 dollars in after tax money. So he withdraws all of the money from his deductible Traditional IRA and he has........wait for it.........$1276.282 dollars in after tax money. And that's what my point was. For people who are roughly going to be in the same tax bracket when they put the money in as when they take those corresponding dollars out, the end result (those after tax dollars you actually get to spend) is the same. If maximizing those future after tax dollars is your primary concern when choosing between a Roth or a deductible vehicle, it won't matter much if you're paying the same in taxes on both ends.
And I really wasn't trying to correct you or anyone else. It's just that I think many people get stressed out (literally) trying to make a decision as to what is best based upon predictions and information that is imperfect at best. All you can do is try to make sound financial decisions based on what you know now and go with it. If one is even considering investing in an IRA or 401K in the first place, they're already ahead right there
Well I was wrong, and I should have been corrected, so I thank you for that. I guess I just have it in my mind that it would be nice to know that the money you do have left when you retire is ALL yours. It makes planning for your financial well being easier.
Yesterday, going through the mail stacked up during vacation, I found an updated 401k plan description from an ex-employer. One important upcoming change is that the NUA option -- a reason I haven't transferred the assets to an IRA -- is being destroyed. The company stock option will be removed, company stock will be liquidated and moved to another fund. At least they are giving three years warning.
Sorry if it was a good stock. But NUA is often not the best thing to do anyways. It might make sense for me, but unless I do it immediately, Obama may increase long term gains tax, reducing benefit. NUA is on borrowed time with Congress too, because it conflicts with the trend to encourage employees to diversify investments away from company stock (ie; to prevent Enron syndrome).
