Roth IRA vs. Index Fund

[k_to_the_v]

Lets say you were maxing out your 401k, and you are not eligible for any additional pre-tax retirement accounts.

Let's also say even with the max 401k you are in a 25% tax bracket. You expect to be in a much lower tax bracket after retirement. Would you invest your after tax dollars in an index fund with a low expense ratio (such as VTSAX @ 0.05%) or in a Roth IRA with (slightly) higher expense ratio (.17).

This is one where the math has me stumped. I'm currently doing the former (non-retirement index fund), based on the low expense ratio and the ease of access. Just wondered what the great minds on the MMM forums have to say about this.

I realize I am leaving out plenty of details, such as age, expected ER age, etc. If that would make a difference, I'll fill in the blanks but wanted to start with a more hypothetical approach.

[Cwadda]

You can't just do a Roth with VTSAX?

[NotJen]

You can own VTSAX in a Roth IRA.  I don't understand the question.

ETA: I own VTSAX in my Roth IRA at Vanguard, and VTIAX in my general investing (taxable) account at Vanguard.

[k_to_the_v]

Is the expense ratio the same if you set up a Roth vs. just investing directly? When I looked at their Roth options it seemed the expense ratio was higher.

That's the issue I'm having. If the expense ratio is the same regardless of investment method, then I agree its a complete no brainer.

[NotJen]

The ER is higher if you can't buy the Admiral shares right away, but once you pass the $10k mark, you'll be upgraded to Admiral shares and pay the lower ER.  I personally wouldn't worry about paying more for a year or so until you reach that point.

[adgmustache]

Even if you had to pick, the difference in expense is just 0.12%.  If your effective tax rate is that low, you have one hell of a CPA!

[k_to_the_v]

Well, then let me just say "duh". Move along, nothing to see here, lol.

I am currently investing in a Fidelity total market account that has a lower expense ratio than the Investor version of the Vanguard fund until I reach the 10,000 required for the Admiral fund. So I'm aware of those expense ratio differences.

Despite the fact that I feel supremely stupid (can we call it a blond moment), I'm glad I asked. Like I said, the decision is a no brainer if the expense ratios are the same with either investment method.

[zurich78]

Even at a higher expense ratio, I think Roth is the way to go.  I mean, tax free growth?  Move investments around without concern for capital gains?  Ability to withdraw contribution in an emergency at no penalty?  All seems like a no brainer for roth to me even if the expense ratio was higher.

[zolotiyeruki]

Even at a higher expense ratio, I think Roth is the way to go.  I mean, tax free growth?  Move investments around without concern for capital gains?  Ability to withdraw contribution in an emergency at no penalty?  All seems like a no brainer for roth to me even if the expense ratio was higher.

I dunno--if the hypothetical retirement income is in the 15% tax bracket, it doesn't matter from a tax perspective which vehicle you use.  The traditional investment *does* have two advantages over the Roth:  1) unlimited contributions, and 2) you can withdraw both contributions and earnings without penalty before retirement age.