How late is Roth (rather than pretax) still likely to help?
My simplest approach is to suggest that people go Roth when in the 15% bracket, and use pre-tax to avoid 25%. I outlined that strategy in my article The 15% solution.  The monkey wrench that gets thrown in to this is the distortion of the other smooth marginal tax curve caused by the taxation of social security. For those who can afford to, it makes the case to lean toward Roth as much as possible.  I'd suggest always depositing pretax, and using conversions to better control the process. Two major benefits to this. It's less a question of too late than of what strategy to use. Years before retirement isn't related at all to the Pretax IRA/Roth IRA decision, except insomuch as income typically trends up over time for most people.  If tax rates were constant (both at income levels and over time!), Roth and Pretax would be identical.  Say you designate 100k for contribution, 20% tax rate.  80k contributed in Roth vs. 100k contributed in Pretax, then 20% tax rate on withdrawal, ends up with the same amount in your bank account after withdrawal - you're just moving the 20% tax grab from one time to another.   If you choose Roth, it's either because you like some of the flexibility (like taking out contributions after 5 years), or because you are currently paying a lower marginal rate than you expect you will be in the future - either because you aren't making all that much this year, or because you are expecting rates to rise due to political changes in our society.  Best is likely a diversified approach - some of your money pretax, some posttax.  At least some should be in a pretax IRA, because you get some tax-free money each year thanks to the personal exemption.  If you're working off of 100% post-tax, you are paying more tax than you ought unless you're getting enough Social Security to cover the whole 0% bucket (and probably the 10% bucket, also). So for example, you're thinking you want 70k a year.  Assuming single and ignoring social security (as it's a very complicated issue - Joe Taxpayer has a nice blog article regarding it that he links to in his answer), you get $10k or so tax-free, then another $9k or so at 10% - almost certainly lower than what you pay now.  So you could aim to get $19k out of your pre-tax IRA, then, and 51k out of your post-tax IRA, meaning you only pay $900 in taxes on your income.  Of course, if you're in the 25% bucket now, you may want to use more pretax, since you could then take that out - all the way to around $50k (standard exemption + $40k or so point where 25% hits).  But on the other hand, Social Security would probably change that equation back to using primarily Roth if you're getting a decent Social Security check.
It depends on the relative rates and relative risk. Ignore the deduction. You want to compare the rates of the investment and the mortgage, either both after-tax or both before-tax. Your mortgage costs you 5% (a bit less after-tax), and prepayments effectively yield a guaranteed 5% return. If you can earn more than that in your IRA with a risk-free investment, invest. If you can earn more than that in your IRA while taking on a degree of risk that you are comfortable with, invest. If not, pay down your mortgage. See this article: Mortgage Prepayment as Investment: For example, the borrower with a 6% mortgage who has excess cash flow would do well to use it to pay down the mortgage balance if the alternative is investment in assets that yield 2%. But if two years down the road the same assets yield 7%, the borrower can stop allocating excess cash flow to the mortgage and start accumulating financial assets. Note that he's not comparing the relative risk of the investments. Paying down your mortgage has a guaranteed return. You're talking about CDs, which are low risk, so your comparison is simple. If your alternative investment is stocks, then there's an element of risk that it won't earn enough to outpace the mortgage cost. Update: hopefully this example makes it clearer: For example, lets compare investing $100,000 in repayment of a 6% mortgage with investing it in a fund that pays 5% before-tax, and taxes are deferred for 10 years. For the mortgage, we enter 10 years for the period, 3.6% (if that is the applicable rate) for the after tax return, $100,000 as the present value, and we obtain a future value of $142,429. For the alternative investment, we do the same except we enter 5% as the return, and we get a future value of $162,889. However, taxes are now due on the $62,889 of interest, which reduces the future value to $137,734. The mortgage repayment does a little better. So if your marginal tax rate is 30%, you have $10k extra cash to do something with right now, mortgage rate is 5%, IRA CD APY is 1%, and assuming retirement in 30 years: If you want to plug it into a spreadsheet, the formula to use is (substitute your own values): (Note the minus sign before the cash amount.) Make sure you use after tax rates for both so that you're comparing apples to apples. Then multiply your IRA amount by (1-taxrate) to get the value after you pay future taxes on IRA withdrawals. Also, consider the possibility of early withdrawal penalties.  Regular 401k early withdrawal (for non-qualified reasons) gets you a 10% penalty, in addition to tax, on the entire amount, even if you're just withdrawing your own contributions.  Withdrawing from a Roth 401k can potentially mean less penalties (if it's been in place 5 years, and subject to a bunch of fine print of course). Fast Forward 40 - 45 years, you're 70.5. You must take out ~5% from your Traditional IRA. If that was a Roth, you take out as much as you need (within reason) when you need it with zero tax consequences. I don't know (and don't care) whether they'll change the Roth tax exclusion in 40 years. It's almost guaranteed that the rate on the Roth will be less than the regular income status of a Traditional IRA. Most likely we'll have a value added tax (sales tax) then. Possibly even a Wealth Tax. The former doesn't care where the money comes from (source neutral) the latter means you loose more (probably) of that 2.2 MM than the 1.7. Finally, if you're planning on 10%/yr over 40 yrs, good luck! But that's crazy wild speculation and you're likely to be disappointed. If you're that good at picking winners, then why stop at 10%? Money makes money. Your rate of return should increase as your net worth increases. So, you should be able to pick better opportunities with 2.2 million than with a paltry 1.65 MM. "I humbly disagree with #2. the use of Roth or pre-tax IRA depends on your circumstance. With no match in the 401(k), I'd start with an IRA. If you have more than $5k to put in, then some 401(k) would be needed.  Edit - to add detail on Roth decision. I was invited to write a guest article ""Roth IRAs and your retirement income"" some time ago. In it, I discuss the large amount of pretax savings it takes to generate the income to put you in a high bracket in retirement. This analysis leads me to believe the risk of paying tax now only to find tHat you are in a lower bracket upon retiring is far greater than the opposite. I think if there were any generalization (I hate rules of thumb, they are utterly pick-apartable) to be made, it's that if you are in the 15% bracket or lower, go Roth. As your income puts you into 25%, go pretax. I believe this would apply to the bulk of investors, 80%+." "(I'm expanding on what @BrenBarn had added to his answer.) The assumption of ""same tax bracket in retirement"" is convenient, but simplistic. If you are in, for instance, the second-lowest bracket now, and happen to remain in the second-lowest bracket for retirement, then Roth and traditional account options may seem equal — and your math backs that up, on the surface — but that's making an implicit assumption that tax rates will be constant. Yet, tax brackets and rates can change. And they do. The proof. i.e. Your ""15% bracket"" could become, say, the ""17% bracket"" (or, perhaps, the ""13% bracket"") All the while you might remain in the second-lowest bracket. So, given the potential for fluctuating tax rates, it's easy to see that there can be a case where a traditional tax-deferred account can yield more after-tax income than a Roth post-tax account, even if you remain in the same bracket: When your tax bracket's tax rate declines. So, don't just consider what bracket you expect to be in. Consider also whether you expect tax rates to go up, down, or remain the same. For twenty-something young folk, retirement is a long way away (~40 years) and I think in that time frame it is far more likely that the tax brackets won't have the same underlying tax rates that they have now. Of course, we can't know for sure which direction tax rates will head in, but an educated guess can help. Is your government deep in debt, or flush with extra cash? On the other hand, if you don't feel comfortable making predictions, much better than simply assuming ""brackets and rates will stay the same as now, so it doesn't matter"" is to instead hedge your bets: save some of your retirement money in a Roth-style account, and some in a traditional pre-tax account. Consider it tax diversification. See also my answer at this older but related question:" My observations is that this seems like hardly enough to kill   inflation. Is he right? Or are there better ways to invest? The tax deferral part of the equation isn't what dominates regarding whether your 401k beats 30 years of inflation; it is the return on investment.  If your 401k account tanks due to a prolonged market crash just as you retire, then you might have been better off stashing the money in the bank.  Remember, 401k money at now + 30 years is not a guaranteed return (though many speak as though it were).  There is also the question as to whether fees will eat up some of your return and whether the funds your 401k invests in are good ones. I'm uneasy with the autopilot nature of the typical 401k non-strategy; it's too much the standard thing to do in the U.S., it's too unconscious, and strikes me as Ponzi-like.  It has been a winning strategy for some already, sure, and maybe it will work for the next 30-100 years or more.  I just don't know.  There are also changes in policy or other unknowns that 30 years will bring, so it takes faith I don't have to lock away a large chunk of my savings in something I can't touch without hassle and penalty until then. For that reason, I have contributed very little to my 403b previously, contribute nothing now (though employer does, automatically.  I have no match.) and have built up a sizable cash savings, some of which may be used to start a business or buy a house with a small or no mortgage (thereby guaranteeing at least not paying mortgage interest).  I am open to changing my mind about all this, but am glad I've been able to at least save a chunk to give me some options that I can exercise in the next 5-10 years if I want, instead of having to wait 25 or more. "The biggest and primary question is how much money you want to live on within retirement. The lower this is, the more options you have available. You will find that while initially complex, it doesn't take much planning to take complete advantage of the tax system if you are intending to retire early. Are there any other investment accounts that are geared towards retirement or long term investing and have some perk associated with them (tax deferred, tax exempt) but do not have an age restriction when money can be withdrawn?  I'm going to answer this with some potential alternatives. The US tax system currently is great for people wanting to early retire. If you can save significant money you can optimize your taxes so much over your lifetime! If you retire early and have money invested in a Roth IRA or a traditional 401k, that money can't be touched without penalty until you're 55/59. (Let's ignore Roth contributions that can technically be withdrawn) Ok, the 401k myth. The ""I'm hosed if I put money into it since it's stuck"" perspective isn't true for a variety of reasons. If you retire early you get a long amount of time to take advantage of retirement accounts. One way is to primarily contribute to pretax 401k during working years. After retiring, begin converting this at a very low tax rate. You can convert money in a traditional IRA whenever you want to be Roth. You just pay your marginal tax rate which.... for an early retiree might be 0%. Then after 5 years - you now have a chunk of principle that has become Roth principle - and can be withdrawn whenever. Let's imagine you retire at 40 with 100k in your 401k (pretax). For 5 years, you convert $20k (assuming married). Because we get $20k between exemptions/deduction it means you pay $0 taxes every year while converting $20k of your pretax IRA to Roth. Or if you have kids, even more. After 5 years you now can withdraw that 20k/year 100% tax free since it has become principle. This is only a good idea when you are retired early because you are able to fill up all your ""free"" income for tax conversions. When you are working you would be paying your marginal rate. But your marginal rate in retirement is... 0%. Related thread on a forum you might enjoy. This is sometimes called a Roth pipeline. Basically: assuming you have no income while retired early you can fairly simply convert traditional IRA money into Roth principle. This is then accessible to you well before the 55/59 age but you get the full benefit of the pretax money. But let's pretend you don't want to do that. You need the money (and tax benefit!) now! How beneficial is it to do traditional 401ks? Imagine you live in a state/city where you are paying 25% marginal tax rate. If your expected marginal rate in your early retirement is 10-15% you are still better off putting money into your 401k and just paying the 10% penalty on an early withdrawal. In many cases, for high earners, this can actually still be a tax benefit overall. The point is this: just because you have to ""work"" to get money out of a 401k early does NOT mean you lose the tax benefits of it. In fact, current tax code really does let an early retiree have their cake and eat it too when it comes to the Roth/traditional 401k/IRA question. Are you limited to a generic taxable brokerage account? Currently, a huge perk for those with small incomes is that long term capital gains are taxed based on your current federal tax bracket. If your federal marginal rate is 15% or less you will pay nothing for long term capital gains, until this income pushes you into the 25% federal bracket.  This might change, but right now means you can capture many capital gains without paying taxes on them. This is huge for early retirees who can manipulate income. You can have significant ""income"" and not pay taxes on it. You can also stack this with before mentioned Roth conversions. Convert traditional IRA money until you would begin owing any federal taxes, then capture long term capital gains until you would pay tax on those. Combined this can represent a huge amount of money per year. So littleadv mentioned HSAs but.. for an early retiree they can be ridiculously good. What this means is you can invest the maximum into your HSA for 10 years, let it grow 100% tax free, and save all your medical receipts/etc. Then in 10 years start withdrawing that money. While it sucks healthcare costs so much in America, you might as well take advantage of the tax opportunities to make it suck slightly less. There are many online communities dedicated to learning and optimizing their lives in order to achieve early retirement. The question you are asking can be answered superficially in the above, but for a comprehensive plan you might want other resources. Some you might enjoy:" If you're getting the same total amount of money every year, then the main issue is psychological. I mean, you may find it easier to manage your money if you get it on one schedule rather than another. It's generally better to get money sooner rather than later. If you can deposit it into an account that pays interest or invest it between now and when you need it, then you'll come out ahead. But realistically, if we're talking about getting money a few days or a week or two sooner, that's not going to make much difference. If you get a paycheck just before the end of the year versus just after the end of the year, there will be tax implications. If the paycheck is delayed until January, then you don't have to pay taxes on it this year. Of course you'll have to pay the taxes next year, so that could be another case of sooner vs later. But it can also change your total taxes, because, in the US and I think many other countries, taxes are not a flat percentage, but the more you make, the higher the tax rate. So if you can move income to a year when you have less total income, that can lower your total taxes. But really, the main issue would be how it affects your budgeting. Others have discussed this so I won't repeat. If you exceed the income limit for deducting a traditional IRA (which is very low if you are covered by a 401(k) ), then your IRA options are basically limited to a Roth IRA. The Cramer person probably meant to compare 401(k) and IRA from the same pre-/post-tax-ness, so i.e. Traditional 401(k) vs. Traditional IRA, or Roth 401(k) vs. Roth IRA. Comparing a Roth investment against a Traditional investment goes into a whole other topic that only confuses what is being discussed here. So if deducting a traditional IRA is ruled out, then I don't think Cramer's advice can be as simply applied regarding a Traditional 401(k). (However, by that logic, and since most people on 401(k) have Traditional 401(k), and if you are covered by a 401(k) then you cannot deduct a Traditional IRA unless you are super low income, that would mean Cramer's advice is not applicable in most situations. So I don't really know what to think here.) "This is an excellent topic as it impacts so many in so many different ways. Here are some thoughts on how the accounts are used which is almost as important as the as calculating the income or tax. The Roth is the best bang for the buck, once you have taken full advantage of employer matched 401K.  Yes, you pay taxes upfront.  All income earned isn't taxed (under current tax rules).  This money can be passed on to family and can continue forever.  Contributions can be funded past age 70.5.  Once account is active for over 5 years, contributions can be withdrawn and used (ie: house down payment, college, medical bills), without any penalties.  All income earned must be left in the account to avoid penalties.  For younger workers, without an employer match this is idea given the income tax savings over the longer term and they are most likely in the lowest tax bracket. The 401k is great for retirement, which is made better if employer matches contributions.  This is like getting paid for retirement saving.  These funds are ""locked"" up until age 59.5, with exceptions.  All contributed funds and all earnings are ""untaxed"" until withdrawn. The idea here is that at the time contributions are added, you are at a higher tax rate then when you expect to withdrawn funds. Trade Accounts, investments, as stated before are the used of taxed dollars.  The biggest advantage of these are the liquidity." Something that's come up in comments and been alluded to in answers, but not explicit as far as I can tell: Even if your marginal tax rate now were equal to your marginal tax rate in retirement, or even lower, a traditional IRA may have advantages.  That's because it's your effective tax rate that matters on withdrawls. (Based on TY 2014, single person, but applies at higher numbers for other arrangements): You pay 0 taxes on the first $6200 of income, and then pay 10% on the next $9075, then 15% on $27825, then 25% on the total amount over that up to $89530, etc.  As such, even if your marginal rate is 25% (say you earn $80k), your effective rate is much less: for example, $80k income, you pay taxes on $73800.  That ends up being $14,600, for an effective rate in total of 17.9%. Let's say you had the same salary, $80k, from 20 to 65, and for 45 years saved up 10k a year, plus earned enough returns to pay you out $80k a year in retirement.  In a Roth, you pay 25% on all $10k.  In a traditional, you save that $2500 a year (because it comes off the top, the amount over $36900), and then pay 17.9% during retirement (your effective tax rate, because it's the amount in total that matters).   So for Roth you had 7500*(returns), while for Traditional the correct amount isn't 10k*(returns)*0.75, but 10k*(returns)*0.821.  You make the difference between .75 and .82 back even with the identical income.  [Of course, if your $10k would take you down a marginal bracket, then it also has an 'effective' tax rate of something between the two rates.] Thus, Roth makes sense if you expect your effective tax rate to be higher in retirement than it is now.  This is very possible, still, because for people like me with a mortgage, high property taxes, two kids, and student loans, my marginal tax rate is pretty low - even with a reasonably nice salary I still pay 15% on the stuff that's heading into my IRA.  (Sadly, my employer has only a traditional 401k, but they also contribute to it without requiring a match so I won't complain too much.)  Since I expect my eventual tax rate to be in that 18-20% at a minimum, I'd benefit from a Roth IRA right now. This matters more for people in the middle brackets - earning high 5 figure salaries as individuals or low 6 figure as a couple - because the big difference is relevant when a large percentage of your income is in the 15% and below brackets.  If you're earning $200k, then so much of your income is taxed at 28-33% it doesn't make nearly as much of a difference, and odds are you can play various tricks when you're retiring to avoid having as high of a tax rate. This all comes down to time: You can spend the maximum on taxes and penalties and have your money now.  Or you can wait about a decade and not pay a cent in taxes or penalties. Consider (assuming no other us income and 2017 tax brackets which we know will change): Option 1 (1 year): Take all the money next year and pay the taxes and penalty: Option 2 (2 years): Spread it out to barely exceed the 10% bracket: Option 3 (6 years): Spread it out to cover your Standard Deduction each year: Option 4 (6-11 years): Same as Option 3 but via a Roth Conversion Ladder: Why not just deposit to a Traditional IRA, and convert it to Roth?  If you have pretax IRA money, you need to pay prorated tax (on what wasn't yet taxed) but that's it. It rarely makes sense to ask for a lower wage.  Does your company offer a 401(k) account?  To clarify, the existing Traditional IRA balance is the problem. The issue arises when you have a new deposit that otherwise isn't deductible and try to convert it. Absent that existing IRA, the immediate conversion is tax free. Now, with that IRA in place the conversion prorates some of that pretax money, and you are subject to a tax bill. "You have several questions in your post so I'll deal with them individually: Is taking small sums from your IRA really that detrimental? I mean as far as tax is concerned? Percentage wise, you pay the tax on the amount plus a 10% penalty, plus the opportunity cost of the gains that the money would have gotten.  At 6% growth annually, in 5 years that's more than a 34% loss.  There are much cheaper ways to get funds than tapping your IRA. Isn't the 10% ""penalty"" really to cover SS and the medicare tax that you did not pay before putting money into your retirement? No - you still pay SS and medicare on your gross income - 401(k) contributions just reduce how much you pay in income tax.  The 10% penalty is to dissuade you from using retirement money before you retire. If I ... contributed that to my IRA before taxes (including SS and medicare tax) that money would gain 6% interest. Again, you would still pay SS and Medicare, and like you say there's no guarantee that you'll earn 6% on your money.  I don't think you can pay taxes up front when making an early withdrawal from an IRA can you?  This one you got right.  When you file your taxes, your IRA contributions for the year are totaled up and are deducted from your gross income for tax purposes. There's no tax effect when you make the contribution. Would it not be better to contribute that $5500 to my IRA and if I didn't need it, great, let it grow but if I did need it toward the end of the year, do an early withdrawal? So what do you plan your tax withholdings against?  Do you plan on keeping it there (reducing your withholdings) and pay a big tax bill (plus possibly penalties) if you ""need it""?  Or do you plan to take it out and have a big refund when you file your taxes? You might be better off saving that up in a savings account during the year, and if at the end of the year you didn't use it, then make an IRA contribution, which will lower the taxes you pay.  Don't use your IRA as a ""hopeful"" savings account. So if I needed to withdrawal $5500 and I am in the 25% tax bracket, I would owe the government $1925 in taxes+ 10% penalty. So if I withdrew $7425 to cover the tax and penalty, I would then be taxed $2600 (an additional $675). Sounds like a cat chasing it's tail trying to cover the tax. Yes if you take a withdrawal to pay the taxes. If you pay the tax with non-retirement money then the cycle stops. how can I make a withdrawal from an IRA without having to pay tax on tax. Pay cash for the tax and penalty rather then taking another withdrawal to pay the tax.  If you can't afford the tax and penalty in cash, then don't withdraw at all. based on this year's W-2 form, I had an accountant do my taxes and the $27K loan was added as earned income then in another block there was the $2700 amount for the penalty. So you paid 25% in income tax for the earned income and an additional 10% penalty.  So in your case it was a 35% overall ""tax"" instead of the 40% rule of thumb (since many people are in 28% and 35% tax brackets) The bottom line is it sounds like you are completely unorganized and have absolutely no margin to cover any unexpected expenses.  I would stop contributing to retirement today until you can get control of your spending, get on a budget, and stop trying to use your IRA as a piggy bank.  If you don't plan on using the money for retirement then don't put it in an IRA.  Stop borrowing from it and getting into further binds that force you to make bad financial decisions. You don't go into detail about any other aspects (mortgage? car loans? consumer debt?) to even begin to know where the real problem is.  So you need to write everything down that you own and you owe, write out your monthly expenses and income, and figure out what you can cut if needed in order to build up some cash savings. Until then, you're driving across country in a car with no tires, worrying about which highway will give you the best gas mileage." "Your real question, ""why is this not discussed more?"" is intriguing. I think the media are doing a better job bringing these things into the topics they like to ponder, just not enough, yet.  You actually produced the answer to How are long-term capital gains taxed if the gain pushes income into a new tax bracket? so you understand how it works.  I am a fan of bracket topping. e.g. A young couple should try to top off their 15% bracket by staying with Roth but then using pretax IRA/401(k) to not creep into 25% bracket.  For this discussion, 2013 numbers, a blank return (i.e. no schedule A, no other income) shows a couple with a gross $92,500 being at the 15%/25% line. It happens that $20K is exactly the sum of their standard deduction, and 2 exemptions.  The last clean Distribution of Income Data is from 2006, but since wages haven't exploded and inflation has been low, it's fair to say that from the $92,000 representing the top 20% of earners, it won't have many more than top 25% today. So, yes, this is a great opportunity for most people.  Any married couple with under that $92,500 figure can use this strategy to exploit your observation, and step up their basis each year. To littleadv objection - I imagine an older couple grossing $75K, by selling stock with $10K in LT gains just getting rid of the potential 15% bill at retirement. No trading cost if a mutual fund, just $20 or so if stocks.  The more important point, not yet mentioned - even in a low cost 401(k), a lifetime of savings results in all gains being turned in ordinary income. And the case is strong for 'deposit to the match but no no more' as this strategy would let 2/3 of us pay zero on those gains.  (To try to address the rest of your questions a bit - the strategy applies to a small sliver of people. 25% have income too high, the bottom 50% or so, have virtually no savings. Much of the 25% that remain have savings in tax sheltered accounts. With the 2013 401(k) limit of $17,500, a 40 year old couple can save $35,000. This easily suck in most of one's long term retirement savings. We can discuss demographics all day, but I think this addresses your question.) If you add any comments, I'll probably address them via edits, avoiding a long dialog below."