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.
"You may want to hold onto the $5000 and keep it in savings.  Interest rates are for crap, even in ""high yield"" accounts, so you can rightly not consider it investing.  You should be graduating college soon.  It would suck if an emergency crops up to prevent you from graduating.  I assume that you are going into a high paying career given your nice income from internships.   Your best investment is yourself at this point.  Completing your education, and obtaining your degree trumps all.  You could use that extra 5000 as a hedge/insurance policy/emergency fund to help insure you graduate.   Also you are likely to have some moving expenses once you graduate.  That 5K could be used to help cover those costs.   The worst case is you graduate with no emergencies, you get a nice signing bonus and relocation package, and you still have the $5000.  Well you still have until 15 April 2015 to put money in your ROTH for 2014.  This holds true for every tax year.   Given your current financial status, you are likely to find yourself soon contributing the max to your 401K and ROTH.  Once that happens, money beyond that can be invested into mutual funds stocks that are not tax advantaged, real estate, or some other choices.  Well then you have some things to think about." If you have the cash on hand to pay the tax on the amount you are transferring I recommend moving to a Roth IRA An IRA is tax-deferred. You put in pretax contributions in to an IRA, and you are taxed on that money (your contributions and interest earned) when you withdraw it at retirement, age 59 1/2.  The idea being that you will be taking less out per year in your retirement years, putting you into a lower tax bracket. The major problem is most people draw out as much or more a year in their retirement years than when they were working. A Roth IRA grows tax free You put after tax contributions into a Roth IRA, you have paid taxes on the contributions, and you are never taxed on the growth. When you draw the money out at retirement you don't pay any income taxes on that money. Let me give you an example: For this example we will use the following information for both scenario: We will invest $400 per month for a total of $4800. The current maximum is $5000 if you are under 50 years old $400 dollars after taxes is $300 Invest $300 a month, at age 65 you have 3,529,432 You owe no taxes on this money, it doesn't matter how much you take out a year. $400 dollars a month is taken pretax out of your paycheck. Invest $400 per month, at age 65 you have $4,705,909 You owe taxes of 25% as you draw that out for at total tax of 1,176,477 4,705,909 - 1,176,477 = 3,529,432 cash in your pocket The problem is if you draw out more than $82,400 (current 2010 filing single) per year you will be pushed to a higher tax bracket and take more of your money away. If you decide to buy a vacation home and you take out $250,000 to pay for it, that's counted as income for that year any you will be in the 33% tax bracket. Even if you can keep yourself to a low income the government forces your hand and makes you draw out more money at age 70, based on their tables, forcing you into a higher tax bracket "Age. Current marginal rate. Total saved so far. Current rate of savings. Joint or single filer. These are among the variables that go into making this decision. Without this, my answer is a general response. In general, you have one marginal rate today. (Unless you happened to be straddling a bracket limit).  In retirement, you have your marginal rate, of course, but also every bracket up to that level. It can make sense to save today pretax to avoid 25%, knowing this money will be withdrawn at an average 10 % or so in retirement.  Edit to clarify to the one who offers comment below to the contrary.  The 2015 taxtable for single filer:  A single person has a combined $10,300 standard deduction and exemption. This means that if he has no other income in retirement, a withdrawal of $47,750 results in a tax bill of $5156. This is an average 10.8% on that withdrawal. It also means that one can save nearly $1.2M before hitting the 25% bracket in retirement. With the numbers I offered, the next $1 is taxed at 25%. In general, if a new worker starts by using Roth, and goes to traditional to avoid slipping into the 25% bracket, they will have a nice mix of pre and post tax money.  In the end, it's not a long term binary choice. Each year, you can decide which flavor or mix of flavors to use. You can convert from traditional to Roth each year to ""top off"" the 15% bracket, so you retirement withdrawals never push you into the 25% bracket.  Note - the math above tragically ignores The Phantom Tax Rate Zone caused by the taxation of Social Security benefits. For a young person, I don't know that I'd advise counting on this benefit, but if you believe in fairy dust, unicorns, and the like, you should be aware of how the government currently plans to tax you. This situation leans strongly toward the Roth. Until congress decides to use Roth withdrawals as a trigger to tax or reduce your benefits, in which case, just using a taxable account will be all that's left.  2 years ago, I wrote a blog post The 15% solution which walks the reader through the process of optimizing their savings from a tax standpoint. The choice of investments is another matter, this simply addresses the pre-tax post-tax issue." "Keep in mind, there are too many variables to address in a single post. I could (and might) write a full book on the topic. One simple way to comprehend your perceived observation. In the 25% bracket, you have $1000 of income and two choices. Net out $750, and deposit to Roth, or deposit the full $1000 to the traditional IRA or 401(k). Sufficient time passes for the investment to grow 10 fold. For what it's worth, 8% at 30 years will do that.  The Roth is now worth $7500 tax free. The traditional 401(k) is worth $10000 but subject to tax. At 25%, we're at the same $7500.  For those looking to invest more than a gross $18,000, the Roth flavor is an effective $24,000, as post tax, this is $18,000. I wrote a bit more on this in the whimsically titled The Density of Your IRA. This is really a top 10%er issue, as it takes quite a bit of income for the $23,000 combined IRA and 401(k) limits to be a problem.  In my writing, the larger case to be made is for taking advantage of the tax rate difference between the time of deposit and withdrawal. A look at the 2016 tax rates is in order.  Let's stick with 25% while working. Now, at retirement, but before social security, as that's another story, the couple has $20,600 in standard deduction and exemption, and both the 10 and 15% brackets to enjoy.  Ignoring any other deductions, potential credits, etc, let's look at a gross $80,000 withdrawal.   The numbers happen to work out to an average 10%, with the couple being in a marginal 15% bracket. A full 25% or $20,000 tax would be the break-even to the ""same bracket in/out"" analysis, so this produces a $12,000 benefit.  This issue is often treated as if there were 2 points in time, the deposit, and the withdrawal. For most people, that may be the case. Keep in mind, current law allows a conversion to Roth any time in between. This gives an opportunity to make a deposit while in the 25% bracket, and convert in any year the marginal rate drops back to 15% for whatever reason.  Last - I can't ignore the Social Security problem. Simply put, when half of your Social Security benefits plus other income exceed $25,000 ($32,000 if married filing joint) your benefits start to become taxable, until 85% of your benefits are fully taxed. This issue is worthy of multiple posts by itself. It's not a deal killer, just another point to consider. A very high income earner might be beyond these levels already, in which case the point is moot. A low income earner, not impacted at all. It's those who are in the range to navigate this that would benefit to take advantage of the scenario I presented above and spend down pre-tax accounts, while planning to use the Roths when Social Security starts. This should make it clear - it's not all or none. Those retiring with $2M in 100% pretax, or $1.5M 100% in Roth have both missed the chance to have the optimal mix." "Assuming my math is correct and that I'm not missing something about Roth investments, it appears to me that either option will work out exactly the same if you will be in the same tax bracket in retirement. This is true only if your average tax rate in retirement is the same as your current marginal rate. I'm surprised none of the answers mention this since it is the crux of your question!  If you can deduct an IRA against your income taxes, it is almost always better option than the Roth equivalent. Marginal rates should not be compared to average rates or you will form all sorts of inaccurate conclusions. ""If you are in a lower tax rate in retirement traditional is better"" really means, ""if your average tax rate in retirement is lower than your current marginal rate, traditional is better"" - which for the overwhelming majority of Americans is the case. Consider the following. Let's say your intend to contribute $1000 in one year (making $2k) and withdraw it the next that is your only income in that year. Your tax brackets look like: This is quite simplified but for this purpose will illustrate precisely why comparisons like you are making are very misleading. In this case you can put $1000 in and pay no income tax at all (because you deduct it). You then withdraw $1000 the next year. The first $500 you withdraw you pay no taxes on and the next $500 has a tax rate of 15%, for a total tax of of $75. However - this is a tax against your entire withdrawal of $1000, so your average tax rate (this is important! average is different than marginal) is only 7.5% and you are left with $925. In this case you can only contribute $850 to the IRA because you are taxed against the money at your marginal rate (15%). When you withdraw it, you don't pay any taxes and are left with the entire $850 $850. This is less than the above, because you are taxed the whole amount at your previous marginal rate. If however your tax rate in retirement was 30% for everything above $500, only then are the two scenarios equal. Your marginal tax rate in retirement has to be very high relative to your current tax rate for the Roth to ever catch up and be better. If you are able to deduct an IRA contribution, it will almost always be the best option. The average federal income tax rate on middle class families has not changed dramatically enough over the past 50 years to be above normal marginal tax rates - even at the 15% federal tax bracket, your marginal rate is still higher than the highest average tax rate for the past 50 years by at least 3% and normally significantly so. The reason I make this point about middle class marginal rates is that the majority of ""taxes might be higher in retirement!"" is very unlikely to be the case in a meaningful way given the past 50 years. However if you are in the top tax rate you are paying historic low tax rates (by a factor of nearly 3), but also observe you can't do either IRA since you must make $400k/year. The difference for middle class is no where near as noticeable. Keep in mind if you can't deduct, there is no reason to not contribute to the Roth. There are other factors contributing to the traditional/Roth decision. This answer only addresses the specifics in your question." I wasn't 100% on which columns of the scale you were referring to, but think I captured the correct ones in this comparison, using the scale for BA and MA (MA scale starting 2 years later, with decreased income reflected for first two years), applying a 1% cost of living increase each year to the scale or to prior year after the scale maxes out and assuming you borrow 40k and repay years 3-10, then the difference and cumulative difference between each scenario:  So it would be about 16 years to start coming out ahead, but this doesn't account for the tax deduction of student loan interest. Some things in favor of borrowing for a MA, there are loan forgiveness programs for teachers, you might only make 5-years of minimum payments before having the remainder forgiven if you qualify for one of those programs. Not sure how retirement works for teachers in WA, but in some states you can get close to your maximum salary each year in retirement. Additionally, you can deduct student loan interest without itemizing your tax return, so that helps with the cost of the debt. Edit: I used a simple student loan calculator, if you financed the full 40k at 6% you'd be looking at $444 monthly payments for 10 years, or $5,328/year (not calculating the tax deduction for loan interest). "The Finance Buff discusses why the Roth 401k is often disadvantaged compared to a Traditional 401k in the article The Case Against the Roth 401k, including the following reasons (paraphrased): Contributions to the 401k come from the ""top"" of your highest tax bracket rate but withdrawals fill in from the ""bottom"".  For example, suppose you are in the 28% tax bracket.  Every marginal dollar you contribute to the Traditional 401k reduces your tax burden by .28 cents.  However, when withdrawing, the first $10,150 of income is tax-free (from standard deduction and exemption, 2014 numbers; $20,300 for married couples, joint filing).  The next dollars are at the 10% tax bracket, and so on.  This is an advantage for the Traditional 401k only if you earn less when withdrawing than you did when contributing, a reasonable assumption. Avoid High State Income Tax. There are many states that have low or no state income tax.  If you live in a state with a high income tax, paying tax now through the Roth 401k reduces the benefit of moving to a state with a lower income tax rate. Avoid triggering credit phaseouts. Many tax credits (e.g. student loan interest, child tax credit, Hope credit, Roth IRA eligibility, etc.) begin phasing out as your income increases.  Contributing to the Traditional 401k can help you realize more of those credits when you starting running up against those limits. As described in the article, if these items don't apply, contributing to the Roth 401k can be a valuable component of tax diversification." Unfortunately, it's a simple 'no'. Once the IRS has your money, you need to wait until early next year to settle up. He can increase his allowances via form W4, and have less money withheld from pay checks the rest of this year, but no chance for a lump sum return before tax time.  For sake of a comprehensive answer, early withdrawals are subject to a 10% penalty along with regular income tax. It sounds like the son is in the 15% bracket, and a total 25% would have been the right number to choose.