Deferred comp vs. Roth IRA

**disneysteve** · 12-31-2009, 06:16 AM

I tend to agree that taxes can only go up as we've been enjoying historically low rates for some time now and all of the government spending has to be paid for eventually in the form of higher rates.

Tell us about your deferred contribution plan. Is there any company match to your contributions? How is the money invested? How much do you currently save for retirement? Keep in mind that you can only put $5,000/year in the Roth so if you earn more than 33K, you're going to need both plans in order to be putting away the recommended 15% of income for retirement.

**Yogi** · 12-31-2009, 06:26 AM

Hi Disneysteve,

My company does not match. They contribute 5% of my income per pay period into my pension. I have nothing to do with that, no match offered, etc. I am fully vested in my pension and can take it with me if I change jobs, but that's the extent of the control I have over it.

I currently put away an additional 7% into my deferred comp. I reduced that amount a little this time last year because I knew I would be buying a condo in 2009 (which I did). The deferred comp account is with ING, invested in one of those target funds for 2045 (anticipated retirement year).

Now that the dust has settled from my condo purchase I'm ready to revamp my savings strategy.

I have enough surplus in my savings account to fully fund the Roth IRA for 2010 and still have 11k left over in cash. But I probably would not be able to fully fund the Roth IRA year after year unless I stop the deferred comp contributions.

I guess what I think I want is one good, padded, heavily-contributed-to savings/investment account, not two thin ones.

I don't REALLY need to lower my taxable income, I'm right in the middle of my tax bracket and able to deduct student loan interest, etc. So that is another argument in favor of stopping my deferred comp contributions and just letting what I've contributed continue to grow without further (or with minimal) contributions.

My withholdings are just right... I do get a refund at tax time but only because of deductions. I just about break even (get a couple hundred back) without deductions.

Other things to note - I have no consumer debt. Just my mortgage and student loans. I make plenty of extra payments toward the principle on both of those.

Steady income, no kids, I do love to travel so I like having flex money for that. I have money to save but I don't want to be saving so much that I can't have any fun.

**disneysteve** · 12-31-2009, 09:02 AM

You put 7% into the current plan and say that you wouldn't be able to fully fund a Roth unless you stopped that. Since the Roth max is $5,000, that means you earn about $71,500. Here's what I'd suggest. Stop the extra payments to the mortgage and possibly to the student loan (depending on the interest rates). Increase your retirement savings to a minimum of 10% of income with a goal of getting it up to 15% between raises and debt reduction (once the student loans are paid off). Fully fund a Roth with 5K and put the rest in the current deferred comp plan.

**kork13** · 12-31-2009, 12:42 PM

Originally posted by Yogi View Post

My withholdings are just right... I do get a refund at tax time but only because of deductions. I just about break even (get a couple hundred back) without deductions.

It's a minor suggestion, but you should try to about break even INCLUDING deductions -- you want your final taxes due to be as close to zero (or even owe some money). That way you are able to have control of as much of your money for as long as possible. Last week I ran an estimate for my taxes this year, and I'm expecting to owe ~$75 this year, which is great IMO.

**Jessica_A** · 01-01-2010, 09:38 AM

Yogi,

I wouldn't necessarily jump to converting to Roth IRA. With the recent economic situation I would actually advise against any cash investments. Instead I would look into hard assets, things like gold, land even real estate. They will hold their value a lot better over time.
Anyway, this may help you: (what to stay away from, basic do's and don'ts, etc): rothirarules.net/roth-ira-rules.htm

Originally posted by Yogi View Post

I am thinking of stopping contributions to my deferred compensation plan (contributions taken out of my pre-tax pay) in favor of redirecting that money to a Roth IRA (after-tax contributions, not taxed at time of withdrawal).

I guess my (irrational fear) is that when I retire (2040ish) the taxes will be so high that my money, taxed upon withdrawal, won't be as much as I need it to be.

With a Roth IRA you eat the taxes that you're subject today but if taxes skyrocket in the next 20-30 years the withdrawals will be protected from that.

I don't REALLY need to reduce my taxable income... I'm not close enough to the next highest tax bracket to worry about it, really. If I were close enough that I wouldn't be able to deduct my student loan interest without lowering my AGI somehow I might be concerned, but I'm not at that point.

Am I making sense? What are your thoughts?

**disneysteve** · 01-01-2010, 11:34 AM

Originally posted by Jessica_A View Post

I would look into hard assets, things like gold, land even real estate.

Are you seriously suggesting that someone invest their retirement savings in gold and real estate? I certainly hope nobody would ever follow that advice. I could list numerous reasons why it is a bad idea but lets just stick with the fact that gold is at a record high which is not the time to be investing in any asset. This is the time to be dumping gold holdings - remember the goal is buy LOW sell HIGH, not the other way around. As for real estate, we've all seen what happened to that market in recent years. I can't imagine anyone still thinking that is a place to make money at this point.

**Yogi** · 01-04-2010, 06:45 AM

Thanks guys. A lot to think about.

I appreciate all the suggestions. I never thought about stopping the extra mortgage and student loan payments, that's something to mull over as the interest rates on both are great and the payments are well within my budget.

I guess I worry about ALL my extra savings going into the Roth and having to choose between fully funding that OR replenishing emergency savings (should I have to dip in) but not both.

Ah well, I guess it's not such a bad problem to have overall.

Again thanks. This site is a great resource.

Deferred comp vs. Roth IRA