Free Ebook.

Enter your email address:

Delivered by FeedBurner

« Free Money Finance March Madness, Elite Eight | Main | Interview with David Bach »

March 19, 2007


Feed You can follow this conversation by subscribing to the comment feed for this post.

I have a Roth IRA, but am having difficulty maxing them out. Because I'm a student, I have no income. Until I have a full time job, I'm just going to try to contribute what I can every month. Every little bit helps in the long run.

Reading stuff like this is such a good encouragement to keep putting money in my IRA :-D

No one pays 15% taxes per year when they are investing for the long-term.

Brett: Definitely. Put whatever you can into the Roth. I wish I had started my Roth IRA when I was back in school even if it meant not fully contributing. I started as soon as I was out, but it would have given me a couple year headstart.

I also agree that doing your 401k up to matching first makes the most sense.

What are people doing when the Roth IRA is not available? Are there other accounts where you pay tax now but do not pay tax in the future? The Roth 401k comes to mind, but that tends to have limited fund/stock selection and requires that your employer offers it.

That is BOGUS! If we assume that the compounding rate is the same for both pre- and post-taxed accounts, the tax advantage argument described here is BOGUS! That is because the article treats the $4000 the same in both cases (as both pre-taxed and post-taxed). If someone invested $4000 after taxes, he could have invested a larger amount pre-tax without it affecting his take home pay. Yes he would pay more taxes, but he would also earn more money. The ONLY way a Roth IRA has a tax advantage is if the tax rate when the money goes in is less than the tax rate that will be applied when the money comes out (not likely for older people). So if you start out paying taxes at a low rate (like when you are young), when your income increases to the point that your tax rate is more than the tax rate will be when you retire, you should stop contributing to the Roth IRA and start contributing the larger pre-tax amount to a post-taxed account.

Keep in mind the tax on the front end is income tax, could the tax on the back end be long-term capital gains (I don't know, but it would make a difference).

So, DO THE MATH! You are comparing apples and oranges and drawing a FALSE conclusion in favor of Roth IRA's when there are times a Roth IRA is an advantage and times it is a disadvantage.

The comments to this entry are closed.

Start a Blog


  • Any information shared on Free Money Finance does not constitute financial advice. The Website is intended to provide general information only and does not attempt to give you advice that relates to your specific circumstances. You are advised to discuss your specific requirements with an independent financial adviser. Per FTC guidelines, this website may be compensated by companies mentioned through advertising, affiliate programs or otherwise. All posts are © 2005-2012, Free Money Finance.