The Great Debate

[GGal]

I think the varying viewpoint of two different advisors is very interesting and worthy of much consideration.

Suzie Orman, who we can't help but be drawn to for that wild personality, has often suggested that it might be better to only contribute to a 401-K to the extent of the match, then put extra savings money into a Roth, then use any excess to pay off mortgage early, or invest in other savings. Her reasoning: we are likely to experience higher tax rates in the future, so why defer paying tax on the 401K contributions until a higher tax rate day.

Dave Ramsey, on the other hand, says put the max in the 401K, because you're using that temporary tax savings to add to the pile that's in the snowball, and that's what we're going for, is the snowball effect. Only after a 401K contribution is maxed out, he says, should we pay extra toward our mortgage.

I find this debate interesting, since I, like many other Americans, do not qualify for a Roth. Should I heed Suzie, and fear the future higher tax rate, and consider not maxing my 401K?

Or, should I heed Dave, and max my 401K contribution, and have a bigger snowball effect?

Should I consider rather, paying my mortgage off early?

For right now, I'm definitely going for the snowball effect. But I do shudder to think what tax rates might be in the next 30 years.

I'm not so much worried about my mortgage, because my home is on a resort lake, and I could sell it right now and use the equity to pay cash for a down-sized home, which I'll want to do anyway. Not to mention, my house payment is less than most people pay in rent.

But I definitely think the whole issue of whether or not to max out the 401K contribution is worthy of debate.

I suppose it should be decided on a case by case. Certainly, if I were eligible to contribute to a Roth, I would do that, after meeting the match on the 401K.

Dave's point also is this: some people don't get a match on their 401K. He says they are foolish if they let that stop them from contributing to the 401K.

I love Suzie, but I think sometimes she gets carried away by her own drama.

Dave is very practical, and I love that.

Changing the topic, where the heck are Griffin and ATCJeff and 350Z?

Am I going to have to learn to live without them?????

Boo Hoo!

[Guest2]

Suzie has crossed the boundries and is watched by some of my friends
who have never expressed an interest in Personal Finance and Budgeting.
I have to laugh when I think of her taking over the show; Mad Money.
:nuts:
But what should a person do after socking away every penny into the TSP
for the last 18 years. Isn't the debate over the Roth/TSP just for the ones
who have time on their side, the young bucks. Can making a re-evaluation
of my current TSP position benefit in ways I never thought of ?
:confused:
Ggal, I didn't have much to contribute, but to ask some questions. I know
there are threads, I have to catch up on, that go into this more in depth.
I was simply curious about your opinion concerning these questions.
:o
Should this be outside your intent of creating this thread, please forgive me.

[Silverbird]

Ok, I'm no expert but Motley Fool sez:

1) Get "Free" money from your job (Matching)

2) Roth IRA if you qualify - more control than company plan, tax free, no mandatory distributions. Tap Roth IRA last in retirement to keep tax free growth going
OR More into your company plan (keeping in mind the restrictions on TSP - but it's better than not saving more)

If your income is too high for RothIRA or want to save even more...
3) Traditional IRA

http://www.fool.com/retirement.htm?source=ifltnvpnv0000001

I admit I'm only putting in for matching right now so YMMV

[McDuck]

1) Get "Free" money from your job (Matching)



They all (Dave, Suzie, Motley) agree on this one.



2) Roth IRA if you qualify - more control than company plan, tax free, no mandatory distributions. Tap Roth IRA last in retirement to keep tax free growth going


I need to determine if I qualify.

Eligibility - Income limits

A taxpayer can only contribute the maximum amount liif their Modified Adjusted Gross Income (MAGI) is below a certain level (the bottom of the range shown below). Otherwise, a phase-out of allowed contributions runs throughout the MAGI ranges shown below. Once MAGI hits the top of the range, no contribution is allowed at all. The ranges, for 2008, are:
Single filers: Up to $101,000 (to qualify for a full contribution); $101,000-$116,000 (to be eligible for a partial contribution)The Modified AGI for Roth IRA purposes is used to determine how much can be contributed to certain personal retirement programs. The starting point to determine MAGI is adjusted gross income (AGI), which is basically total income minus certain adjustments.

Certain adjustments allowed in arriving at AGI are then added back to arrive at modified adjusted gross income. Deductions from gross income allowed in arriving at AGI (above the line deductions). For the 2006 tax year, some examples of the deductions from gross income allowable in computing AGI include:

* Certain business expenses of reservists, performing artists, and fee-basis government officials;
* Health savings account deductions;
* Certain moving expenses;
* One-half of self-employment tax;
* Penalties on early withdrawal of savings;
* Alimony paid;
* Deduction for contribution to an Individual Retirement Account (IRA);
* Student Loan interest deduction.

Upward adjustments that modify AGI are generally made by disallowing deductions for passive activity losses, to include all rental losses, not allowing adjustments taken for tuition, fees, student loan interest paid, IRAs, nor the deduction for paying one-half of self-employment tax. Deductible money placed in a 401(K) is allowed.

Additionally, MAGI is raised by including interest earned from U.S. Savings Bonds that were used for higher education expenses (which is usually excluded income for simple AGI purposes).

[McDuck]

other hand, says put the max in the 401K, because you're using that temporary tax savings to add to the pile that's in the snowball, and that's what we're going for, is the snowball effect. Only after a 401K contribution is maxed out, he says, should we pay extra toward our mortgage.


http://www.daveramsey.com/media/image/nav/header_top_left2.jpg

Getting out of debt will not happen overnight; it takes time.
Here are the Baby Steps that will get you started:

Step 1. $1,000 In An Emergency Fund
Step 2. Pay Off All Debt With The Debt Snowball
Step 3. 3 to 6 Months Expenses In Savings
Step 4. Invest 15% Of Income Into Roth IRAs And Pre-Tax Retirement Plans
Step 5. College Funding
Step 6. Pay Off Your Home Early
Step 7. Build Wealth And Give!

(Note: If you receive a company match in your 401(k), 403(b), or TSP; invest in those plans, up to the match, first. Once your contribution equals the company match, fully fund a Roth IRA for you and your spouse. If you’ve maxed out your contribution to your Roth IRA and still have money to invest, invest the rest in your 401(k), 403(b), or TSP.)

[EW_ret]

I've read the quoted paragraph a number of times and it's unclear what is meant by "Deductible money placed in a 401(K) is allowed." This sentence appears incomplete and should be clarified if the 401(K) contribution is allowed as an addition, or a subtraction. The money one contributes to TSP is not included in gross income. Does this sentence mean the contribution to TSP is allowed as a subtraction, and is not added to AGI to get MAGI? I have always interpreted it this way, but others have insisted you should add your TSP contributions to AGI to arrive at MAGI.


... Upward adjustments that modify AGI are generally made by disallowing deductions for passive activity losses, to include all rental losses, not allowing adjustments taken for tuition, fees, student loan interest paid, IRAs, nor the deduction for paying one-half of self-employment tax. Deductible money placed in a 401(K) is allowed.

Additionally, MAGI is raised by including interest earned from U.S. Savings Bonds that were used for higher education expenses (which is usually excluded income for simple AGI purposes).

[Birchtree]

I've always looked at the issue at hand this way. The first law of finance is that it takes money to make money. You can build a larger balance in a 401K type plan faster than you can in a Roth IRA. After 2010 there will be no qualifying limits to open a Roth IRA. I would be concerned later on about transfering funds from a TSP account into a Roth IRA - it takes planning but can be done - that way when the required minimum distribution kicks in your balance will be lower and less painful with taxes.

[luv2read]

I've always looked at the issue at hand this way. The first law of finance is that it takes money to make money. You can build a larger balance in a 401K type plan faster than you can in a Roth IRA. After 2010 there will be no qualifying limits to open a Roth IRA. I would be concerned later on about transfering funds from a TSP account into a Roth IRA - it takes planning but can be done - that way when the required minimum distribution kicks in your balance will be lower and less painful with taxes.
Roth IRA's are not subject to the minimum distribution rules. That's one of the advantages over traditional IRA's. See IRS PUB 590.

http://www.fool.com/Money/AllAboutIRAs/allaboutiras.htm

[Birchtree]

My point was that it takes forever to build a base inside a Roth IRA the regular way. Moving money out of TSP on a scheduled basis into a Roth IRA will save you and your beneficiaries a lot of taxes. B ecause there is no rmd in a Roth you have greater flexibility in determing your tax bracket and how that may impact ones' other investment income. I believe laws have been implemented and if not they will be that will allow direct roll over of 401K type funds into a Roth IRA rather than first going into a traditional IRA and then transfering into the Roth IRA.

[luv2read]

My point was that it takes forever to build a base inside a Roth IRA the regular way. Moving money out of TSP on a scheduled basis into a Roth IRA will save you and your beneficiaries a lot of taxes. B ecause there is no rmd in a Roth you have greater flexibility in determing your tax bracket and how that may impact ones' other investment income. I believe laws have been implemented and if not they will be that will allow direct roll over of 401K type funds into a Roth IRA rather than first going into a traditional IRA and then transfering into the Roth IRA.
There are but they are ordered. See Pub 590 and the link provided.:)