The primary reason for putting money into 401K or traditional IRA account is for the current tax benefit. However, if the current tax benefit is small, it may not make a lot of sense to stuff money into your IRA account. Obviously, we don’t know what the future tax rates will be, but my best guess is that it will be higher, if not much higher than today’s tax rates & brackets. The reason is that the coming dues of social security & medicare services will simply drain the tax revenue base, and will require raising tax (and lowering benefits and probably print more money) to cover any shortfalls.
If you’re not paying much income tax, or your marginal tax bracket is not that high (below 20%), I would actually consider not saving in your pre-tax accounts, but instead saving those money in Roth IRA. A Roth IRA is an IRA that you pay tax now, but don’t pay tax later on the earnings. Comparing Roth IRA to individual IRA, it has a couple of benefits like no forced withdrawal, nor an age limit on the contribution.
While it may be extremely time-consuming to go over the 100+ pages of IRS Pub 590 document on traditional IRA & Roth IRA, you can use my tax calculator to figure out the contribution limit on your Roth IRA & traditional IRA accounts. The calculator may not contain all the necessary inputs, but for the most part, it suffices.
The decision over whether Roth IRA vs 401k/IRA is actually pretty simple. Excluding the factor of company match on 401k account, for investing in Roth IRA in respect to pre-tax dollars, you will be getting taxed now. And for 401k/traditional IRA accounts, you will be getting taxed (much) later. Assuming that the rate of return on investment is the same for both scenario, if the tax factors are exactly the same, then both decisions will come out equally. If you think tax rate may go up, or your retirement income may be quite high due to all the accumulated assets, then it might be better to just take some tax bite now instead of 30 or 40 years down the road.
