Think of it this way. If you’re in the 28% bracket, contributing $15,500 in after-tax dollars to a Roth is the equivalent of socking away $21,528 in pretax dollars in a regular 401(k) because you’ll have to pay taxes eventually on the regular plan’s withdrawals. But you can’t put that much in a 401(k). To match the Roth, you’d have to put $15,500 in a your regular 401(k) and then invest the remaining $6,028 outside the plan. You’d owe income taxes on that $6,028, which leaves you with $4,340 in a taxable account (where taxes will drag down your returns).

The combined after-tax value of your 401(k) and taxable account would be smaller than the Roth’s tax-free balance.

One warning: If you switch your $15,500 from a regular 401(k) to a Roth 401(k), every other week your paycheck will be $167 smaller (at a 28% tax rate) because of lost tax savings.

The second wrinkle is changing tax rates. This example assumes that you’ll be in the same tax bracket when you retire as you are today. But if your rate is higher in retirement, a Roth becomes an even better deal because you paid taxes at today’s relatively low rate. If you fall into a lower tax bracket, paying taxes later would likely win out.

Mathematically, there’s no difference between getting a tax break at the beginning or end. All else being equal, you end up in the same place whether you pay taxes at the outset or in retirement.

To be a Roth IRA, the account or annuity must be designated as a Roth IRA when it is set up. A deemed IRA can be a Roth IRA, but neither a SEP-IRA nor SIMPLE IRA can be designated as a Roth IRA. Unlike a traditional IRA, you cannot deduct contributions to a Roth IRA. But, if you satisfy the requirements, qualified distributions (defined in Publication 590) are tax free. Contributions can be made to your Roth IRA after you reach age 70 1/2 and you can leave amounts in your Roth IRA as long as you live.

Details about Roth IRAs are contained in Publication 590, Individual Retirement Arrangements (IRAs) and include:

• Setting up your Roth IRA
• Contributions to your Roth IRA; and
• Distributions (withdrawals) from your Roth IRA.

Investing basics and lots of other tips are included at Get the Facts: The SEC’s Roadmap to Savings and Investing, information provided by the Securities and Exchange Commission.

“Managing Your IRA” video – a discussion on basic principles of investing. (3:00 min.)

Taxation of pension income – including distributions from Roth IRAs – is covered at Link and Learn Taxes, a self study course on the IRS web site.

More IRA Resources

• Publication 590, Individual Retirement Arrangements (IRAs)
• Publication 560, Retirement Plans for Small Business (SEP, SIMPLE, and Qualified Plans)
• Frequently Asked Questions regarding IRAs
• IRS Forms and Publications for your Roth IRA

Web Site Resources

• FirstGov.gov is a one stop portal to access all federal government public web sites.
• The latest retirement plan information can be found at www.irs.gov/ep.
• General tax information for individuals and businesses is located at www.irs.gov.
• Other retirement plan information can be found on the Department of Labor’s Employee Benefits Security Administration (EBSA) site.
• The Social Security Administration site has information on your Social Security retirement benefit to help you plan your retirement savings strategy.
• The Securities Exchange Commission (SEC) has many publications on investing and more.
• The Federal Deposit Insurance Corporation (FDIC) site explains how to determine whether your IRA account is covered by deposit insurance.