Roth IRAs are great retirement savings vehicles and are often touted as a better choice over a 401(k) for additional savings beyond the level of 401(k) contributions eligible for company matching. Some retirement savers are phased-out of Roth IRAs, and even those who are not should be interesting in finding out some of the reasons why a 401(k) might be a better choice than a Roth IRA, as shared by U.S. News.
Five Reasons to Choose a Traditional 401(k) Over a Roth
U.S. News & World Report
February 27, 2013
By David Ning
1) “There are more obstacles to withdrawing money early. “
And that’s a good thing? Well yes, at least from a savings for retirement standpoint. More obstacles, taxes, and penalties amount to less temptation to draw from a 401(k) account.
2) “You can deduct the contributions automatically from your paycheck.”
Most employers offer 401(k) plans, while few offer Roth 401(k) plans. To ensure full, automatic, monthly deposits, making a 401(k) contribution through a company payroll is a no brainer. The contribution amount never touches the retirement savers hands, making it impossible to spend or delay the savings. Automatic contributions are hands down a better method to ensure savings than manual contributions. This is the old “pay yourself first rule”, automated.
3) “You can move to a lower tax state before you withdraw the money.”
The article mentioned that moving to state with lower taxes is a seldom-discussed strategy, but here in Oregon, this is a relatively common practice. In Oregon, anyone with income over $7,750 will pay at least a 9% marginal rate, topping out at 11%, relocating across the river to Washington with no state taxes in retirement can be a very smart move.
4) “A Roth IRA conversion is possible during low-income years.”
With careful planning, a retirement saver has the potential possibility of converting the tax-deferred retirement account into a Roth IRA with paying little or even no taxes. This would require a conversion to take place in a period where the retirement saver had very low or no other taxable income. Considering a Roth IRA conversion during years with unusually low income can lead to significant tax savings.
5) “You could pay a lower tax rate in retirement.”
The logic here is the income deferred into a 401(k) would have been taxed the retirement savers top marginal tax rate, whereas it is likely at least a portion of withdrawals from the 401(k) will be taxed at a lower rate in retirement.