Tax Benefits.......?

Question

My current salary is 42k yearly of which I contribute 10% to an employee sponsored 401k plan. Would it be beneficial for me to open up a Traditional IRA or a Roth IRA?

Also, give the fact that I am contributing 10% into my 401k, could I still use my Traditional IRA as a tax deduction... thanks...

Answer 1

Unless you one of these two facts are true, you may want to consider Roth IRA.

A. You will retire within 5-10 years.

B. You expect your retirement fund will not grow or grow negatively.

Why? Although you do not get immediate tax deduction for Roth IRA, qualify distribution for Roth IRA is TAX FREE.

For people who contribute to their retirement accounts, many retireee are suprised their tax braket may be higher than when they are making money. That defeats the purpose of investing in deductible traditional IRA. (The empty nesters are without the children deductions and no more mortgage payments. That may lead to higher tax rate).

Finally, when you start taking out your taxable retirement fund (401k), you may want to supplment with tax free money (Roth IRA). Otherwise, traditional IRA may bump you up to the next tax rate.

Answer 2

I believe the Traditional IRA deduction starts phasing out around $50k and is gone at $60k for single people. So, yes, you could probably do a deductible Traditional IRA.

But......

If you are young enough, a Roth IRA may be a better deal in the long run. You don't get a tax deduction but, as of now, the withdrawls are not taxed when you retire. For younger people, the tax benefits on the back end outway the tax deduction you would receive now.