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Roth IRA and Roth 401k versus Traditional IRA’s and 401k’s

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The decision between funding a Roth IRA or a traditional IRA is an issue of eligibility whereas the decision between a Roth 401k and a traditional 401k depends on what tax bracket you will be in when you retire- a higher or lower tax bracket?

In general, if you are single, and earn less than $116,000; or if you are married and you and your spouse make less than $183,000, you are eligible to contribute fully to a Roth IRA.

The more common decision for taxpayers though is between 401k’s, and whether to contribute to a traditional 401k with a corresponding tax deduction, or to forgo the immediate tax deduction and contribute to a Roth 401k. For instance, if you contribute $5,000 to a traditional 401k plan, you will receive about a $1,750 combined federal and state refund. The instant gratification of an immediate tax deduction sways many investors towards the traditional 401k route. Who doesn’t want an immediate $1,750 back from the government? Maybe this is your best option, or maybe this is a shortsighted decision. Stay tuned…….

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