In my previous post I was trying to figure out what is best to do with the 10% of my paycheck that should be reserved for my 401(k), but can’t be for one full year.

The obvious solution was to begin contributions to my Roth IRA that I hadn’t been contributing to in the past year or so. However, I have been thinking about this situation in the back of my mind since making my last post and then it occurred to me. What would be the best use for this “extra” money? Right then it jumped at me: It’s the Debt, Stupid!

How many articles have I read about whether it’s better to contribute to a retirement plan (i.e. 401(k), Roth, others) or pay down debt.

The rule is to follow the percentages.

If you’re gaining 8% – 12% on your plan and your massive amount of debt is at an 8%+ interest rate then you have a leak that will prevent you from really making any sort of progress. Thinking back, I think it’s the reason that I stopped Roth IRA contributions in the first place. The 401(k) was at least supplying me with a company match – which made it worth adding to.

So, my plan for the next year is to increase my debt payments even more – that way by the time my 401(k) actually does kick in maybe I’ll be in a position where I can contribute even more than my 10% goal in an effort to play catch up on a year lost.

So the question now is, how much is enough? My “contribution” will be post-tax so I wonder if I can still make the 10% or not. We’ll have to see. I’ll try forwarding 10% of my pay to debt on my next paycheck and we’ll see if that effects my budget at all.

Well – the new job is going really well. There’s a lot of stuff to learn, but everyone is really nice and I feel that it’s a great fit for me.

The only thing that is bad so far is that it’s a one year wait for enrollment in the 401(k). Ouch!
I must have misunderstood during the interview process because I had thought that the one year referred only to when I’d be eligible for the profit sharing program (which is pretty sweet by itself).

Oh well – it’s too bad I can’t keep contributing to my old 401(k) which is still at the former job. But there are some positives (I guess):

1. Bigger overall paycheck now that my 10% 401(k) deposit isn’t being taken out
2. Opportunity to begin investing in my ROTH IRA again.

I haven’t received a paycheck yet from the new job so I’m honestly not really sure what the bi-weekly number will be, but I’m obviously looking forward to the raise being tangible.

According to a survey conducted by the Employee Benefit Research Institute, “Nearly half of all workers saving for retirement have savings that fall short of the $25,000 mark”.

This is why I don’t necessarily agree with Dave Ramsey’s idea of postponing contributing to your retirement fund.

• First of all, in most cases, there’ s an employee match (read: free money).
• Secondly, The good ol’ power of compounding interest will always work in your favor.
• And lastly, saving for your future becomes a habit, if not unnoticeable after a while.

It may not be nice to say this but this story actually makes me feel good. I’m only 26 and in pretty good shape with about $10K and growing in my retirement accounts. According to the “Rule of 72“, if I were to stop contributing now I would have $25K in less than 14 years – making me 40 and putting me in the “bad average” in this survey. So basically, I like my chances that I’ll be doing much better than that if I keep going as I am now.

It seems like a long time ago – and it probably was – when I decided to suspend my ROTH IRA contributions in order to focus on eliminating my debt.

But lately, while looking forward to the future, I’ve been thinking of the difference between a traditional and Roth IRA. More specifically, I’ve been wondering if when I re-start my contributions, will I still be in the right vehicle for me.

So in order to answer this question, I took a look at the difference between the two.

In a traditional IRA…

• The money you deposit is not taxed
• Besides the initial deposit – which is taxed – you minimize your taxable income through using a traditional IRA
• Earnings on your contributions are not taxed until withdrawn
• Any withdrawals before you turn 59 1/2 are subject to a 10% early withdrawal penalty
• Unless used for qualified exceptions
• You are taxed upon withdrawal

In a Roth IRA…

• Contributions are not deductible
• Earnings on your contributions are NEVER taxed
• Roth IRA offers tax-exempt earnings, not just taxed-deferred
• A traditional IRA taxes you on your gains once you make the withdrawal. The Roth never taxes you again post-contribution
• Any withdrawals before you turn 59 1/2 are subject to a 10% early withdrawal penalty
• Unless used for qualified exceptions

So, it basically comes down to tax me now or tax me later. This is where some information about tax brackets might come in handy…

Courtesy of 360financialliteracy.org

Generally, a tax bracket is the income tax rate at which you are taxed for a certain range of income. The income ranges vary, depending on your filing status: single, married filing jointly (or qualifying widow(er)), married filing separately, or head of household. Brackets are expressed by their marginal tax rate, which refers to the rate at which your next dollar of income will be taxed. There are six marginal tax rates: 10 percent, 15 percent, 25 percent, 28 percent, 33 percent, and 35 percent.

Year 2004 federal income tax rates for single taxpayers are as follows:

If Taxable Income Is:	Your Tax Is:
Not over $7,150	10% of taxable income
Over $7,150, but not over $29,050	$715 + 15% of excess over $7,150
Over $29,050, but not over $70,350	$4,000 + 25% of excess over $29,050
Over $70,350, but not over $146,750	$14,325 + 28% of excess over $70,350
Over $146,750, but not over $319,100	$35,717 + 33% of excess over $146,750
Over $319,100	$92,592.50 + 35% of excess over $319,100

So…to me (and again I could be wrong – please comment and correct me if I am) it seems that the more money you have, the more you can be taxed.

Therefore, wouldn’t it make sense to have your money grow tax-exempt so that your taxes are taken out at a bracket used for a person of lessor income, rather then later in life when you may actually be worth something…you know…in the financial sense?

Bottom line, I’m happy with my Roth.

Relevant Link: Kiplinger.com – Ride a Roth to Riches