|
DebtFreeGuru.com's - Tip of the Week - Monday, July 28, 2003 |
|
|
If you can't read this newsletter or it's in any way garbled, just click the Reply button and type a brief note explaining that you can't read the newsletter. We'll get you one you can read right away! (Always feel free to forward) |
|
|
My Money Center "...a new thought company" If you or someone you know is struggling or unable to meet your obligations Contact Me for a FREE no obligation evaluation to see if one of the My Money Center Programs is right for you! Or Call 813-354-2563
Click here to order your credit report, credit monitoring service or Credit Scoring Analysis!
•
My
Personal Invitation |
(Please
read my commentary at the end of this article!)
Roth vs. 401(k) My company doesn't match contributions to my 401(k). Should I put my money in a Roth instead?
I
participate in my 401(k) at work, but my company doesn't match any of what
I contribute. I'm considering dropping out and doing a Roth IRA instead.
Do you think this is a wise course of action? William Moebs, Gasport, NY
Gee, what a shame your employer is being so chintzy. Most 401(k) plans offer at least a partial match. Maybe a short polite memo to your human resources department signed by a group of employees would help -- hey, it couldn't hurt. Until then, there are a few things to consider.
Which tax bracket will you end up in? With the 401(k), you're investing pre-tax dollars (an immediate tax break), and then pay tax when you withdraw your money. With the Roth, you forego the immediate tax break but pay no tax upon withdrawal.
Assuming the same returns, generally, you're better off with a 401(k) if you expect that you'll be in a lower tax bracket at retirement. The reason is that you will be avoiding taxes on your contribution and your earnings at a high rate and then paying taxes at a lower rate when you withdraw your funds. In effect, you're arbitraging tax rates.
If you expect that you'll be in a higher tax bracket later in life when you withdraw the money, then you're probably better off in the Roth.
If you expect to be in the same tax rate, then it's pretty much a wash. A match almost always tilts things in favor of the 401(k). Some people have a hard time believing that this is the case. So if you would like a specific example that compares the growth of the same contribution in both a 401(k) and a Roth IRA at various tax rates, click here.
There
are some other factors But there are other factors to consider. Once you reach age 70 1/2, you've got to begin withdrawing money from your 401(k) account (or, as the case may be, from your IRA rollover account, since many people eventually transfer their money from a 401(k) to an IRA rollover).
If you fail to do that, or if you withdraw less than the government-mandated minimum, you could be hit with a sizeable tax penalty. Meeting the IRS's required minimum withdrawals isn't a problem for most people, since they need money from their 401(k) to live on during retirement.
But if you think you would like to leave some of the money in your retirement accounts to heirs, then a Roth IRA could be the better bet. There are no minimum withdrawal requirements for Roth IRAs. You can let the money compound tax-free as long as you like.
Remember too, though, that there are some practical matters you should take into account -- namely, will you be able to save enough by contributing to a Roth alone? You're now limited to a $3,000 maximum contribution to a Roth IRA, although that maximum rises to $4,000 in 2005 and then to $5,000 in 2008, after which it's adjusted for inflation. (If you're 50 or older, you can also make catch-up contributions of $500 a year, an amount that rises to $1,000 in 2006.)
What's more, you can contribute the max only if you meet the Roth's income eligibility rules. If your income is too high, you may not be able to make the maximum contribution.
If the amount you'd like to save exceeds the amount you can stash away in a Roth, you may want to throw some money into your 401(k) even without a match.
One final thing to consider is convenience. The beauty of a 401(k) is that the money goes into your account before you get your greedy little lunch hooks on it. It requires a lot more discipline to invest the funds on your own.
So while many people may plan to fund a Roth, some of them never quite get around to it. If you think that might be a problem for you, then you might want to stick with your 401(k).
After
all, even if it turns out a 401(k) isn't as good a deal for you as a Roth
IRA, it's certainly a better deal than not putting the money away at all.
Commentary
by John Moore From my perspective a Roth gives you tax-free withdrawals without being forced to begin withdrawals at age 70 and a half. Thus giving you more control and less concern about future tax rates.
The Roth is an ideal vehicle for your younger children, especially if you have your own business and can employ your children. They have less concern about tax deductability of contributions because of their lower or no tax rates, a longer time window so they don't have to worry about not having saved enough. And if you start their program early enough you may have set them up for their retirement life!
If your children started their Roth at age 27 and contributed the maximum until age 67, they would have accumulated about $2,000,000.
If you started for them at age 14 and only contributed through age 18 with the maximum and then stopped all contributions, it would grow to about $2,500,000.
If you started for them at age 8 with $500, then increased by $500 each year reaching he maximum contribution at age 13 and then you or they continued with the maximum contribution until age 67, they would accumulate over $9,000,000.
In either case, it would be TAX-FREE!
Both excellent reasons for having your own business so you can employ your children young and you'll have given them a sound financial footing to begin their retirement planning. |
|
DebtFreeGuru.com - Tip of the Week - Monday, July 28, 2003 • PO Box 3782 • Clearwater Beach, FL • 33767 • Voice/Fax: 813-354-2563 • Copyright 2003 DebtFreeGuru.com All Rights Reserved. |
|
|
Please
Forward this to Everyone You Care About! It's
Your Money – Keep More of It! DebtFREEGuru.Com
is proud to offer: Conscious Prosperity: The
Secret to Simple and Lasting Personal Wealth By
John Moore - $49.95 - 312 Information Packed Pages! A part of all proceeds is donated to the Ministerial Endowment Fund created to provide financial assistance to ministerial students while in school! Generous Bookseller Discounts for Bookstores! We've partnered with PayPal to facilitate you ordering online! FREE Shipping! - !Order Now! It's
Your Money – Keep More of It! |
|
|
Here's What People Are Saying About Conscious
Prosperity: "Your practical approach to debt resolution has made a difference in my life and in the lives of several members of this congregation. If anyone wants to know how to apply spiritual principles to become debt-free, I'll be glad to send them your way." - Rev. Thomas W. Shepherd, Sr. Minister, Sunrise Unity Church, Citrus Heights, California and author of Glimpses of Truth "People
in our congregation are using John Moore's program to literally change
their lives. His workshop attracted a large crowd and prompted calls to
"bring back that 'debt-free guy!"" "Thanks, John! Your workshop was the best of any kind we've attended
in 36 years of marriage. You
gave us a step-by-step way to manage our money, and now we're debt-free
and watching our savings grow."
"We did not have to cut way back to succeed. The only thing that we had to do was stop spending on credit. We have gone from 12 debts to 4, soon to be 3. We are looking forward to NO DEBTS! Amazing program. Simple and doable!" – Holly and Mark G., Dietitian and Registered Nurse, Tallahassee, Florida |
|
The Author John S. Moore has been facilitating financial planning, cash management, investment and personal growth workshops throughout the United States for more than twenty years.
In hundreds of workshops over the past 10 years, John has taught thousands of people how to live a debt-free, stress-free lifestyle. He teaches primarily at Unity, Religious Science and Science of Mind churches, as well as other churches, schools and corporations around the United States. |
|
Copyright © 2003 John Moore • PO Box 3782 • Clearwater Beach, FL • 33767 • Voice/Fax: 813-354-2563 • |