Contribute to Traditional vs Roth IRA??

Keep in mind that it may not be so sismple. You do not know your tax rate for the time you will be withdrawing the money. There is a good chance that your home will be paid off so there will be no mortgage deduction. Youir children will be independent so there wll be fewer exemptions. A lifelong contribution to an IRA has a good chance of becoming a large investment with a large required minimum withdrawal.

Dick

That formula is already wrong for the (I suspect significant majority of) people who have enough cash lying around that they can make the full $4000 contribution whether or not they get a current year tax deduction for it.

EXCELLENT comment. I am "in retirement", and my LARGEST cost of living is the Income Tax that I must pay on my TRADITIONAL IRA. There was no ROTH for me. Cal Lester CLU

(btw, I am NOT complaining ! ! ! ! !)

Are you saying this because of the AGI phase-out of the deductibility of traditional IRA contributions? Even so, the argument still applies to

No, I'm saying it because the original poster said, in essence, "you could put P into a traditional IRA or you could put P(1 - tax rate) into a Roth IRA."

That immediately breaks down for anyone who can afford to make a $4000 contribution whether or not they get a tax deduction for it. Because that person's choice is between making a $4000 contribution to a traditional IRA or a $4000 contribution to a Roth IRA and *not* between making a $4000 contribution to a traditional IRA or a $3000 contribution to a Roth IRA.

Not exactly, your options are $4000 in a traditional IRA or $4000 in a Roth IRA + $1000 in up front taxes. So the traditional IRA is:

Traditional = P(1+r)^N (1-Tout) where P=$4000 (as stated by the OP)

But with the Roth, you pay an extra $1000 in taxes that doesn't get to grow with the rest of your money, so we'll subtract the tax and its potential growth off the ending account value:

Roth = P(1+r)^N - P(Tin)(1+r)^N

This reduces to the OP's equation:

Roth = P(1-Tin)(1+r)^N

Of course, you could argue that the $1000 in taxes could not have grown at the same after-tax rate as the funds invested in the Roth (because they would be taxed). Then the Roth would have a slight advantage over the traditional IRA when Tout=Tin as long as you're investing more than $4000(1-Tin) in the traditional IRA.

-Will

Does choosing a traditional IRA give you some optionality? Can you convert to a Roth IRA in a year where your income (and thus tax bracket) is low, for example when you are unemployed or going back to school?

I know very little about IRA rules, the implied statements in the above questions could be wrong.

You have to take into consideration about the tax rates. Current tax rates are historically low and may move up in the future. You should also question whether you want to be paying taxes in your working years when right now its at low tax rates rather then deferring it till your retirement years when you dont know what the the tax rates are and you are not working.

Yes, you can. If your AGI (with a couple of modifications) is less than $100,000 (for filing Single or for Married Filing Jointly [no typo -- it does not double to $200,000]), you can convert traditional IRA monies to a Roth IRA (the conversion itself does not count toward the $100,000 limit). Full income tax applies, but there is no 10% early withdrawal penalty. In any year where you are eligible to convert, you can convert as much or as little as you want. People filing Married Filing Separately are not allowed to do conversions.

I believe that my original posting applies also to conversion of a Traditional IRA to a Roth IRA. Just think of P as the amount of money in your traditional IRA which can be converted to P(1-Tin) in a Roth IRA.

Nate Liskov

"Nathan Liskov" wrote:

I don't believe this is true. In this case, if the money to pay the taxes comes from the Roth and you're under 59.5 (did I get the age right?) then an extra 10% penalty is due. If not, then P(Tin) will certainly not grow at the same rate as the Roth, the same situation as Rich described when deciding between maxing a Roth or a traditional IRA.

-Will