Reply to What is the deal with a Roth IRA?

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[quote=Anonymous][quote=Anonymous][quote=Anonymous]A few years ago, Congress created a work-around the income limits for contributing to a Roth IRA to help fund a tax cut. This workaround waived income limits for people who converted a traditional IRA into a Roth. It raised money in the near-term because the conversion itself was a taxable event. From a long-term perspective, however, it's a huge revenue-loser for the government since once the money is in a Roth it can never be taxed again (until Congress changes the law).

So, basically, people at about your income level, who earn too much to contribute outright to a Roth but suspect income taxes may be higher when they retire (because eventually we're going to have to get a handle on this national debt thing) have started to contribute to regular IRAs and immediately convert them to Roths.

Also, there are no income limits on Roth 401K contributions, I believe.[/quote]

OP here.  Thank you so much for this.  So, does the Roth 401K (TSP) function the same as a Roth IRA?  I'm confused because the money all goes tot he same place.  It seems difficult to track which of my contributions were taxed already and which were not?[/quote]

Right. It does.

The question is do you want to pay tax now or later.

Say you contribute $1,000 a month to retirement.

If you put it into a regular 401k, that saves you maybe $300 in taxes now, but you have to pay ordinary income taxes on it when you withdraw during retirement.

If you put into the Roth, you get no tax savings now, but any gains in your account are tax-free forever.

So the fundamental question is what tax bracket do you anticipate being in in you retirement. If higher than no, you want to max out your Roth and bite the tax bullet now. If lower, take your deduction now.[/quote]

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