Roth IRA vs Traditional IRA

[Guest thomascyu]

For the next 4-5 years, I will be in residency training which means that my AGI will definitely make me eligible for Roth IRA contribution. However, when I finish my residency, my income might exceed the maximum AGI set for Roth IRA. Is it worth it to contribute for a few years knowing that I might not be eligible after 4-5 years?

Thank you for your reponses.

[John G]

Let me give you some examples:

Investing $2,000 in a Roth for next 5 yrs, then no further contributions. Total invested is therefore $10,000. Investments made in some broad based mutual fund (a mix of bonds and stocks earning 10% a yr) will yield $0.6 M (million) after 30 years, and 1.6 M after 40 years. The same money but invested in a more aggressive growth fund at 12% annual return will make your assets grow to $ 1.0 M in 30 years, and $ 3.0 M in 40 years. There are dozens of mutual funds with more than 20 years of history that have returns in the low teens. I think this is a reasonable scenario for someone investing in equities (stocks) with a slight bias towards growth. There are plenty of folks who have done better, and some clearly do worse... I look at this as the middle 50% result range. If you invest less than 2K per year just scale the numbers up or down proportionately.

Inflation knocks down the value of these results. For example, if inflation runs at 2.5% (a low number) then you cut the 30 year results in half to represent todays buying power.

All of the above, if done in a Roth, would under current rules could payout in later years tax free. If you use a traditional IRA as the vehicle, then you would pay ordinary income taxes on any distributions.

My return question to you: given the above scenarios, do you think it is worth pluging $10k over 5 years into a Roth?

Good luck with your residency.

[This message has been edited by John G (edited 03-24-2000).]