Kevin, of Towson, is building his retirement nest egg and trying to decide between two investment options.
The 28-year-old has a tax-deferred retirement plan at work, but there's no employer match.
He has been advised to put his money into a Roth IRA. But he wonders whether the Roth is worthwhile if he's able to contribute money for only a few years before his rising income makes him ineligible.
What if he has, say, $10,000 in the Roth and then no longer can contribute? "Although I won't be taxed on whatever that compounds to when I'm 60, it doesn't seem like it would be worth it," he e-mailed.
It took T. Rowe Price Associates' financial planner Stuart Ritter a second to come up with the answer: "Use the Roth."
Rates may rise
Younger workers such as Kevin can contribute $4,000 a year to a Roth. Contributions begin phasing out at $95,000 for singles and $150,000 for married couples. The money goes in after taxes have been paid on it, and withdrawals are tax-free in retirement. And there's a chance that tax rates will be higher in the future, making tax-free withdrawals even more valuable.
Here's the math:
Say Kevin has $10,000 now in his employer's plan and $10,000 in a Roth. No additional contributions are made for the next 32 years. When Kevin is 60, the after-tax value of the Roth would be $87,153; the value of the tax-deferred account would be $79,247. That's assuming Kevin's income tax rate is 25 percent today and will be the same in the future. And that he earns an annual return of 7 percent on his money.
Workers can look at their own situations using Price's online IRA calculator at www.troweprice.com. (The tax-deferred, no-match retirement account is the equivalent of a traditional, deductible IRA.)
On the other hand, what if Kevin gets a job with an employer that provides a match? Given Kevin's youth, Ritter says, he should first contribute enough to the employer plan to get the match and then put extra money away in a Roth.
Fay of Dallas asks: What do you do with a 401(k) when you leave one job for another?
Workers have several options. And the last one should not really be an option at all.
First, leave the money in the employer's plan. It's easy. And this may be attractive to those who like the investments in their plans. The drawback: Workers forget about the accounts or don't monitor them, says Doug Robinson, a planner in Bel Air.
