So, it is my strong belief that you need to fulfill your ROTH, $5500 per year. Once you put the money in, you are never taxed again. In the regular IRA, you will be taxed on any amount you with draw. That includes the dividends and interest that you make, and so even if the tax rates do not go up, you are paying more in tax because you pay on the gain. In the ROTH, you are not taxed on dividends and interest even if you quadruple your ROTH by compounding.
I believe we all need to make a habit of totally funding our ROTHs, and no just when we can. So, my advise is to forget the regular IRA. Instead, do the amount your boss matches into a 401k if you have one. Then the ROTH, and then, more into the 401k if you can. Eventually, you will be able to roll the 401k into your ROTH, at age 59 1/2, and after you pay the tax.
Your plan to invest your tax savings from the traditional IRA is a good one!
Of course it will benefit you over the years - - and not minimally. An extra $400 a year invested every year for the next 40 years will result in an additional (more than) $100K in your account.
Even if you never put another dollar into the account, your one time $400 contribution can easily be expected to grow to over $8500 by your retirement age.
Investing EARLY (like at age 27) beats trying to invest MORE LATER. Compounding of your investments over time is more important than trying to make massive contributions when you're 45 or 50. You can't make up for the lost time if you wait to invest until you are older.
Since you are young, it would be best to invest in both. When you invest in the 401k, your company will usually match up to a certain percentage of 5 or 6%. This is like getting free money. Also, investing in the 401k is pre-tax. With pre-tax money, every dollar pre-tax is equal to probably 60 cents. Huge benefit.
Find what your company matches, then put that amount in to the 401k. Then put a few extra percentage into the Roth.
I put 6% 401k (matched by my company) and 4% in Roth. Try doing that then learn to live off of what is left over. In 30 years, you should have several million dollars in retirement.
I was sort of in your situation 40 years ago myself.
I was faced with the following decision on developing a pension plan for my retirement years.
My choices were:
1. depend on a company pension plan
2. Place my money into a tax sheltered government program ( in Canada it was then only the RRSP)
My thought process was like this:
1. Who has more of an interest in people and their plight??? A government or a company.
How many times have you seen companies tampering with pension plans...just look at the retirees of General Motors and what happened in the 2008-2009 crash...You also read stories of companies in financial difficulty that stop making their contributions to their employee's plans.
A government (at least the Canadian gov't of the time ...and still basically do) should want to encourage saving for retirement by the individual....this reduces the stress on government social programs.
2. I am I going to stay with one company like my father and work for them for 35 years??
I knew that was impossible...back then company pensions were locked in...you could not get your money out until you retired....how did I know the company I worked for would still exist when I retired...in my lifetime I have had 5 different careers with 1-2 jobs in each career....I knew the government would still be around when I retired...I was not so sure of companies
I was able to retire at 54 because of the fact that I was able to save a significant amount of money in a government created tax shelter called the Registered Retirement Savings Program (RRSP) it is still around and recently been augmented by the Tax Free Saving Account (TFSA)...
In other words, government in Canada try to encourage saving for retirement. I know there is a lot of cynicism in the American government (to a certain extent that is true of all governments) but unlike companies that seem to have little loyalty to their employees anymore...governments have a vested interest in their populace.
So I would encourage young people to regularly contribute to a tax sheltered account and leave it there until you really need it. it can be the maximum that you are allowed or not...if you start now you will have a nest egg for the future if you manage it properly....It worked for me
I have both traditional and Roth. Just beause I dont know how my tax situtation will be and I personally have a little doubt that in 40 years I will be able to take from my Roth tax free. I am Cynical about this and the goverment. I am 27. However I do contribute more to my Roth a year.
I plan on taking the money I get back on taxes for the contribution to my traditional and add that back in my Roth. I will get 400 dollars back on my taxes for my contribution, and I will put that 400 in my Roth. Is this good? Will this provide any good benefit for me over the years. Or minimal?
