Why I chose a Roth IRA over a Traditional 401K

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As soon as I started reading my Suze Orman books, I got really excited about saving for retirement.  I remembered when I was in high school I would frequently tell myself two things:

1. When I turn 21 I'm going to work as a waitress, because in this town, waitresses make bank!
2. When I turn 22 I'm going to start my retirement account and by the time I retire, I'll be rich!

I actually only accomplished one of those goals... until now!  For the first time in my life (age 27) I have become eligible to participate in my employer's retirement options.    Until August of 2010, I had never had a full time job except school, so if I did work for a company who offered retirement benefits, I didn't qualify. 

Participating in a retirement plan has always been important to me because by the time I'm 70, there won't be much left in Social Security, if anything.  You're welcome Baby Boomer generation.  I hope you're enjoying being retired at age 55 as well as that nice boat my Social Security Contributions paid for...

Imagine my disappointment when I found out my company doesn't match retirement contributions!  Aww man!  It looked like I was on my own to secure my future; that's a scary thought for a twenty-something!  I had briefly studied the differences between 401Ks and Roth IRAs but take it from me, I am NO financial expert.  In the end I decided that the Roth was the way to go.  If my company had offered a match, I would have no doubt chosen a Traditional 401K,  anyone who turns down free money is a dummy!  But they don't, so I chose a Roth IRA.   

Why?  First and foremost I have a few very important cards up my sleeve when it come to retirement... the first being time!  I am young, I am just starting out in the business world, and I'm not going to retire for close to 40+ years.  The other card I have to play is that my career will inevitably change.  Currently I work in an office at a borderline entry level position.  I know I won't work here for the next 40 years, and I know that my salary will eventually increase (I'm currently a Pre-Med/Dental student).  What this means is that:

• I can contribute whatever amount I can, and it doesn't have to be a large amount.  Even $50 a month is better than nothing.  Because time is on my side, that $50 a month will grow and earn interest for the next 40+ years!
• With the Roth IRA, I am paying money with my "after tax pay."  Why is this better for me than a traditional 401K when the 401K is paid pre-tax?  Well currently, because I am entry-level, and in a very low tax bracket (about 15%), I'm not actually paying that much in taxes.  When I withdraw my funds at retirement time, the tax is already paid, so I what I have in my retirement account is what I can use. 
• With a 401K I am contributing with my "pre-tax pay" which seems awesome (hooray no taxes!  Take that Uncle Sam), and subsequently would put me into a lower tax bracket (Less income = lower income tax bracket).  Seems ideal right?  Consider this...  Currently, I am practically in the lowest tax bracket possible, and with my career plans (dentist), I am pretty much guaranteed to make more money in the future, putting me in a higher tax bracket.  When I pull out my retirement funds, I will be taxed based on the bracket I am in at that time.  Many dentists are in an income tax bracket of 40+%!   

Let's think about this and get a better visual of this explanation, I am 27 years old. I currently have $4,800 each year to contribute to my retirement.  My current tax bracket is 15% and my future tax bracket will be about 40+%.  If I retire when I am 70 years old, the money I can actually use from:

• A Roth IRA account would be $1.7 million
• A 401K account would be $1 million

Both of these numbers are crazy.amazing.great, but which would you rather have?  Again there are things to consider such as inflation, potential matching, other issues, etc. but this example is just for demonstration purposes.

The Roth IRA may not be the best retirement fund for everyone, but because I'm young, because I don't make a lot of money and therefore don't pay a lot of taxes, and because I (hopefully) have lots of time left to work, it's better for me to stick with the Roth.  For those who are a little further along in life, a Roth may not be the best way  to go.  It's important to get educated about your options and most importantly, start contributing, whatever you can, TODAY!  Even if it's just couch change, or one days worth of Starbucks, or your first born child, wait, not that..  Well you get the idea.