401k Early Retirement

This is a comparison between 401(k), Roth 401(k), and Traditional Individual Retirement Account and Roth Individual Retirement Account accounts.

Comparison

IRA: Roth vs. Traditional

The decision between choosing a Roth IRA vs. a Traditional IRA depends mostly on whether you are likely to be in a higher tax bracket in the future (in which case a Roth IRA is better) or a lower tax bracket in the future (in which case a conventional IRA is better). Roth IRAs also have a bit more flexibility in terms of early withdrawal. If your tax bracket does not change while you are working vs. when you retire, you will end up with the same amount of money in a Roth IRA as a conventional IRA for a donation less than the maximum allowable. If you save the maximum allowable amount in an IRA, and you stay in the same tax bracket , there is a tax advantage to the Roth-IRA. For instance, in 2007 the maximum traditional IRA for a 40 year old was $4000. Any additional investment above that would have to go into a different account. The following example illustrates the tax consequences:

Note that the same applies to choosing whether to contribute the same amount to regular or Roth 401(k) - either because you only want to contribute up to the employer match, or because you want to contribute up to the maximum amount. If, on the other hand, you are able and willing to contribute extra tax savings to Traditional IRA / 401(k), tax advantages of Roth IRA / 401(k) over Traditional IRA / 401(k) highlighted above will no longer apply.

References

1. ^ IRS Publication 4530
2. ^ IRS Retirement Article
3. ^ IRS Roth Chart
4. ^ ^{a b} "Publication 590". Internal Revenue Service . http://www.irs.gov/pub/irs-pdf/p590.pdf . Retrieved 2007-04-18 .  
5. ^ Roth Popularity

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